L1102 Lecture 6:

The Mixed Economy

Nick Crafts
 British Economic Policy:
1900 vs. 1950
• Laissez Faire → Mixed Economy

• Globalization → Bretton Woods

Compromise

• Gladstone → Keynes

• Oliver Twist → William Beveridge

 Supply-Side Policy Errors

• Policy was constrained by pursuit of full

employment through wage restraint based on
trade-union cooperation

• Key policy concerns include: taxation, trade

policy, competition policy, nationalization,
industrial policy

• Adverse effects greater than elsewhere in

Europe because errors more serious (Tanzi, 1969;
NEDO, 1976; PEP, 1962) and/or damaging interaction
with institutional legacy
 The Structure of Taxation
• A tax system more conducive to growth would
have had lower marginal rates, a broader base,
and greater reliance on indirect taxes

• Value-added tax not introduced until 1973

• Top rate of income tax = 97.5% in 1950, 88.75%

in 1973

• Corporate tax rate always at least 40%

A Chronology of Trade Policy
• Pre WW1: Free Trade
• 1921: Safeguarding of Industries Act
• 1932: General Tariff on Manufactures
• 1947: GATT
• 1960: Join EFTA
• 1963-7: Kennedy Round
• 1973: EEC Accession
• 1992: EU Single Market
 Average Tariff Rates
on Manufacturing (%)
16
14
12
10
8
6
4
2
0
1935 1960 1968 1986

Source: Kitson and Solomou (1990);

Morgan and Martin (1975)
 Trade Costs Index
(Jacks et al., 2011)

UK- UK- France- Italy-

France Germany Germany Germany
1929 100 99 99 110
1938 121 122 133 112
1950 122 142 112 127
1960 122 115 91 101
1970 110 105 73 79
1980 74 66 55 61
 1970s’ Trade Liberalization and
Productivity Performance
• Higher tariffs correlated with price-cost margins
at the sectoral level (Hitiris, 1978)
• Openness promoted TFP growth in catch-up
model for manufacturing sectors post-1970
(Proudman & Redding, 1998)

• As trade costs fell, so did price-cost margins

• Reductions in protection in the 1970s promoted
de-industrialization and productivity growth
 1.4

1.2

1.0

0.8

0.6 Manufacturing markup

Trade costs: UK-France
Trade costs: UK-Germany
0.4

0.2
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Manufacturing Sector Mark-Up and Trade Costs

Crafts and Mills (2009)
 Nationalizations
• Included:

1945-51: Airlines, Coal, Electricity, Gas,

Railways, Steel

1970s: British Aerospace, British Leyland,

British Shipbuilders, Rolls Royce, British
Steel (1967)
 Post-War Nationalization
• Market-failure explanation/justification (natural
monopoly, externalities) according to Millward
(1997)

• Coal was an obvious exception

• Reasonable to believe in nationalization as

response to market failure given what was known
at the time (Shleifer, 1998)

• NB: 1970s’ nationalizations were rescues of

failing businesses
Nationalized Industries in the 1970s
• Very poor financial and productivity performance
(Vickers & Yarrow, 1988); costs were excessive

• Did not follow pricing and investment rules; state

had ownership without control (NEDO, 1976)
• Accounted for 19% of UK investment, 7% UK
employment and 10% of UK GDP

• Subsequent privatization revealed previous

inefficiency
Profitability (ROCE, %)

Public Industrial &

Corporations Commercial
Companies
1970 5.6 16.8

1975 3.1 14.6

1979 3.6 18.3

Source: Vickers and Yarrow (1988)

Productivity Growth in Nationalized Industries
(% per year)

Y/L TFP

1968-78 1978-85 1968-78 1978-85

Airlines 6.4 6.6 5.5

Coal -0.7 4.4 -1.4 2.9
Electricity 5.3 3.9 0.7 1.4
Gas 8.5 3.8 3.3
Railways 0.8 3.0 -1.4 1.3
Steel -0.2 12.6 2.5 12.9
Telecoms 8.2 5.8 2.4

Source: Hannah (2004)

 Competition
• Depends on entry threats as well as market
structure so is influenced by trade policy and
regulation
• Antidote to the corporate-governance and
industrial-relations institutional legacies
• Competition promotes better management
practices (Bloom & van Reenen, 2007)
• Absence generates rents from market power
that can be dissipated through effort bargains
that undermine productivity (Blanchflower et al., 1996)
 Competition in Golden-Age UK
• Undermined by nationalization, protectionism
and largely ineffective competition policy
• Average manufacturing CR3 rose from 26% in
1935 to 41% in 1968 (Clarke, 1985)
• At least 35% manufacturing cartelized in late
1950s (Broadberry & Crafts, 2001)
• Supernormal profits large and persistent in UK
but not in West Germany (Geroski & Jacquemin, 1988);
PCM much higher in UK than WG (Crafts & Mills,
2005)
 Competition and Productivity
Performance

• Competition strongly positive for productivity in UK

firms without dominant shareholder (Nickell et al., 1997)
• In the 1970s and 1980s greater competition
increased innovation (Blundell et al., 1999; Geroski, 1990)
• Restrictive labour practices were accepted by firms
where competition was weak (Zweig, 1951); inefficient
use of labour a serious issue where competition
was weak in 1970s case studies (Prais, 1981)
 UK Competition Policy
pre- and post-WW2
• Pre WWI: no anti-trust policy but free trade

• 1930s-1950s: cartelization and protection

• 1956: Restrictive Practices Act

• 1965: Monopolies and Mergers Commission

• 1973: Fair Trading Act, join EEC, Kennedy

Round in place
 1970s’ Competition Policy
• “Public interest” the key test; allows efficiency
defence

• Competition authorities investigate, burden of

proof on them; ministers decide

• Relatively few investigations, no penalties, no

redress; typical remedy is ‘stop it’

• Mergers proliferated virtually unchecked but did

raise productivity as had been hoped
 Restrictive Practices Act (1956)
• The one competition-policy reform during
the Golden Age with teeth
• Had significant impact on productivity
• 1954-63 compared with 1964-73:
productivity increase in non-colluding
sectors unchanged but in formerly-
colluding sectors rose by 1.8% per year
(Symeonidis, 2008)
 A Chronology of
UK Industrial Policy
• 1930s: responding to decline of old staples in a
managed economy

• 1950s to 1970s: ‘The Mixed Economy’. Much

use of horizontal and selective policies;
investment subsidies and picking winners, weak
competition policy

• 1980s to 2007: ‘Thatcher & Sons’. Emphasis on

horizontal policies; competition policy
strengthened significantly
UK Industrial Subsidies, 1946-90

Source: Wren, 1996

 Selective Industrial Policy
• Aimed to raise investment and TFP growth with
focus on manufacturing industry or to save
manufacturing jobs

• Picking winners or bailing out losers in face

of asymmetric lobbying? (Baldwin & Robert-Nicoud, 2007)
• 1970s’ experience says it’s the latter

• Substantial outlay on (protectionist) industrial

subsidies
1970s’ Experience
• Strong bias towards subsidizing ailing industries, e.g.,
shipbuilding (Wren, 1996) also reflected in pattern of tariff
protection (Greenaway & Milner, 1994)

• Subsidizing hi –tech national champions failed in civil

aircraft (Gardner, 1976), computers (Hendry, 1989), nuclear
power (Cowan, 1990)

• Rates of return on NEB portfolio very poor (Hindley &

Richardson, 1983)

• Investment subsidies a costly mistake – huge deadweight

loss and little or no impact on investment (Sumner, 1989)
 Conclusions
• Strong evidence of government failure

• To some extent this was a result of ‘failed

experiments’

• But it also reflects vote-seeking, the constraints

of the post-war consensus, and the absence of
state-aid rules

• Overall policy framework not conducive to good

productivity performance