Adapting Well to New Circumstances?
In this essay, part of our Navigating Economic Change series, Nicholas Crafts offers a panoramic account of the last century and more of economic shocks to the UK, assessing how well the economy has adjusted to new circumstances, and drawing out implications for our country’s current predicament.
Introduction
The UK economy faces several significant challenges in the next 10 or 20 years. These include the transition to a post-Covid economy, adjustment to Brexit, moving toward net zero and assimilating artificial intelligence. The combined effect is likely to entail major structural change. In the short term, we must also cope with the consequences of the war in Ukraine which has delivered a stagflationary shock similar to those which bedevilled the 1970s.
We have, of course, confronted the need to adapt to changing circumstances in the past. The objective of this paper is to examine several of these previous examples to provide a historical perspective on the UK’s ability to deal with new challenges that mean that business as usual is not a good option. My central concern will be to examine the implications of the UK’s institutions and policy responses for long-run productivity performance while also considering the adjustment costs that were incurred.
The UK’s performance on long-run productivity growth has varied significantly over time. Both labour productivity and total factor productivity (TFP) growth peaked in the so-called ‘Golden Age’ after World War II but at other times both have experienced periods of stagnation. Over the last decade or so in particular labour productivity growth has been very weak by the standards of the last 200 years.
The episodes of major change that are reviewed are taken from the economic history of the UK during the past 150 years. In chronological order, they are the Second Industrial Revolution, the Great Depression, the transition from war to peace after World War II, the Thatcher reforms, and the ICT revolution. A review of the UK’s track record is interesting in any case but also provides important context for thinking about how to deal with the challenges of the near future. A key point to bear in mind is that when change is required the starting point is not one of tabula rasa. The legacy of the past is felt in various ways. Institutions have been called the ‘carriers of history’ because they are notoriously hard to reform and may even be exposed to path dependence. But other aspects of the economy’s past also affect the ability to respond to new opportunities or threats. These include its industrial geography, its inheritance of human capital, the set of feasible policies at a given moment in time, and awareness of the lessons from the past.
The UK’s record in successfully adjusting to these various periods of structural change is, not surprisingly, quite mixed. From the successes and failures, it is possible to extract some pointers as to whether we are likely to cope well with the challenges of the 2020s, to note some past mistakes which should not be repeated, and to highlight areas where reform is necessary.
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The Navigating Economic Change essays are written by a range of leading economists and national experts and reflect the views of the authors rather than those of the Resolution Foundation, the LSE or The Economy 2030 Inquiry.
They have been commissioned and edited by Gavin Kelly (Chair of the Resolution Foundation and member of the Economy 2030 steering group) and Richard Davies (Professor at University of Bristol and fellow at the LSE’s Centre for Economic Performance).