Barry Eichengreen: Lesson of British decline is need for US political unity

IN THE United States, the scent of decline is in the air. Imperial over-reach, political polarisation, and a costly financial crisis are weighing on the economy. Some pundits now worry that America is about to succumb to what they term the "British disease."

Doomed to slow growth, the US of today, like the exhausted Britain that emerged from the Second World War, will be forced to curtail its international commitments. This will create space for rising powers, such as China.

In thinking about these prospects, it is important to understand the nature of the British disease. It was not simply that America and Germany grew faster than Britain after 1870. After all, it is entirely natural for late-developing countries to grow rapidly, as is true of China today. The problem was Britain's failure in the late 19th century to take its economy to the next level.

Britain was slow to move from the old industries of the first Industrial Revolution into modern sectors such as electrical engineering, which impeded the adoption of mass-production methods. It also failed to adopt precision machinery that depended on electricity, preventing it from producing machined components for use in assembling typewriters, cash registers, and motor vehicles.

The rise of new economic powers with lower costs made employment loss in old industries such as textiles, iron and steel and shipbuilding inevitable. But Britain's signal failure was in not replacing these old 19th-century industries with new 20th-century successors.

Is America doomed to the same fate? Answering this requires understanding the reasons behind Britain's lack of technological progress. One popular explanation is a culture that denigrated industry and entrepreneurship. Over the long course of British modernisation, the industrial classes were absorbed into the establishment. From the mid-19th century, the best minds went into politics, not business.

Now we supposedly see a similar problem in the US. In the words of David Brooks of The New York Times: "The US has drifted away from the hardheaded practical mentality that built the nation's wealth in the first place… America's brightest minds have been abandoning industry and technical enterprise in favour of more prestigious but less productive fields like law, finance, consulting."

In fact, this supposed explanation for British decline has not stood the test of time. There is no evidence British managers were inferior. Indeed, expanding the pool of potential managers beyond the children of a firm's founders had precisely the opposite effect.

In today's America, too, it is hard to find evidence of this purported problem.

A second popular explanation for British decline focuses on the educational system. Strong universities produced philosophers and historians, but too few scientists and engineers.It is difficult, however, to see how this argument applies to the US, whose universities remain world leaders, attracting students in science and engineering from around the world - many of whom remain in the country.

Still others explain British decline as a function of the financial system. British banks, having grown up in the early 19th century, specialised in financing foreign trade. In fact, actual evidence of any such British bias in favour of foreign over domestic investment is weak. And, in any case, that history, too, is irrelevant to the US today, which is on the receiving, not the sending, end of foreign investment.

A final explanation for Britain's failure to keep up makes economic policy the culprit. Britain failed to put in place an effective competition policy. In response to the collapse of demand in 1929, it erected tariff walls. Sheltered from foreign competition, industry grew fat and lazy. After the Second World War, repeated shifts between Labour and Conservative governments led to stop-go policies that heightened uncertainty.

Herein lies the most convincing explanation for British decline - its failure to develop a coherent policy response to financial crisis. In short, Britain's was a political, not an economic, failure. And that history, unfortunately, is all too pertinent to America's fate.

• Barry Eichengreen is professor of economics and political science at University of California, Berkeley.