10. Growing, Fast and Slow
Britain was the birthplace of continuous economic growth, and has been growing more or less continuously for the last 350 years, since around 1660. But while growth has never stopped, it has proceeded at very different speeds over the last few centuries. Some eras — such as the period after the Industrial Revolution — saw very modest growth, while others — such as the second half of the 20th century — saw rapid, sustained growth.
These periods of fast and slow growth have had a huge impact on our standard of living*, and it’s worth asking why growth has happened at different speeds. This question is especially pertinent today, because Britain’s economy has since 2008 been going through its slowest period of growth in almost a century. Understanding what causes slow growth might help us either speed it up or else learn to live with it.
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So when were these eras of fast and slow growth? The chart below gives an overview — it rather crudely divides the last 300 years of the UK economy into chunks of 60 years or so, and shows the rates of growth in GDP per person through each period. The orange line shows the average rate of growth for each of these periods, with the average growth per year for each period in the box underneath. The dotted grey line shows the long-term trend growth rate for the whole period from 1710 to now (about 1% per year).
Let’s briefly go through each of these eras. From 1710 to 1760, in the years before the industrial revolution, the UK’s GDP per person grew by an average of 0.4% per year. That is very modest growth by today’s standards, but it was faster than the economy had ever grown before over a long period of time.
Then, the industrial revolution began around 1760, and the growth rate actually slowed down for the next 60 years, to about 0.2% per year. That’s surprising — industrial revolutions are supposed to accelerate growth, not slow it down — and we’ll return to it later in this piece.
Then, around 1820, the UK economy begins its first period of really rapid growth, with GDP per person rising by 1.1% per year on average until around 1880. The end of this period was also, you may recall, the first time worker’s wages began to really increase after the industrial revolution.
From 1880 until 1939, the UK economy followed a far more bumpy path, with the average growth in GDP per person slowing to 0.7% per year. The 1920s, in particular, was a very bad decade in Britain, but the wider period was also characterised by slower growth in living standards and saw Britain lose its place as the world’s wealthiest nation.
The period from 1939 until 2008 saw an unparalleled boom in living standards in Britain, just as it did in so many other countries around the world. GDP per person grew by 2.2% per year, on average, making this by some distance the most prolific period of economic growth in UK history. UK GDP per capita more than quadrupled in this 70 year period, allowing us the living standards we enjoy today.
However, since 2008, the long post-war boom has stalled dramatically in Britain, with growth in GDP per person averaging around 0.4% per year from 2008 to 2019. The Covid crisis has worsened this further — UK GDP per person is now some way below its level in 2007, and its recovery remains uncertain. This abrupt slow down in economic growth since 2008 may be a prolonged blip, like the 1920s, or it may signal a long-term slowdown in the economy. Either way, it is a reminder that economic growth can be slow as well as fast.
It’s also helpful to consider GDP per capita alongside population growth and real wages; the chart below combines all three. It’s a reminder that the most rapid population growth took place during the 1700s and 1800s, and slowed down after around 1914, whereas the biggest growth in wages and living standards took place after 1940.
What explains these periods of fast and slow growth? In particular, why did growth slow down immediately after the Industrial Revolution, and why did it then accelerate after 1820? I can’t provide definitive answers here, but I want to set out a few of the possible explanations.
Let’s begin with a quick reminder of what causes lasting economic growth. It happens when something new — new technologies, new investments, new ways of organising the economy — increases the amount each person can produce (as long as there is someone to buy the extra stuff). Since the industrial revolution, economic growth has had a habit of being self-perpetuating. This is partly because technological breakthroughs (like the steam engine) tend to pave the way for further breakthroughs (like trains and steam ships). Also, capital invested in new ventures normally generates a return, which means there is even more money to reinvest, further growing the economy. (Note that this self-perpetuating quality does not apply to land-based, zero-sum economies, where growth is limited by the fixed supply of land).
This virtuous cycle of growth, driven by innovation and capital investment, can be extremely powerful, but it is not infallible. Like all cycles, it can be broken. There are four broad ways we can explain periods of slower economic growth.
First, it could be a period of limited technological innovation — there are few new ideas which raise productivity or create new opportunities in the economy. This is certainly true of the pre-growth economy before 1660, but it doesn’t feel a plausible explanation for the period of slow growth after the industrial revolution.
Second, it is possible that the new innovations of the day aren’t actually that useful. This argument is most famously expressed by Robert Gordon’s “toilet test”, the idea that humanity has invented nothing as useful as a flushing toilet for a long time now. In this case, you might have a lot of innovation, but not be adding much value to people’s lives. Generally speaking, it’s hard to raise living standards with things that don’t improve people’s lives.
Third, society might not have worked out how to use the technological innovations yet. When transformative new technologies are introduced, it often takes time to put them to useful, commercially viable uses. Businesses need to time to emerge and mature, workers need time to develop the skills to use the technologies, and consumers and society needs time to adjust. Think of the challenges of today’s self-driving cars, for instance — not just a problem of technology, but of how to make them fit into a system where most cars are human-controlled. Adjustments to new technologies can be painful, and they don’t always succeed at all.
Fourth, there might be chronic weak demand, which prevents the economy reaching its productivity frontier. This is not just about regular booms and busts — every period in history has its recessions and recoveries — but periods where an economy remains below its full productive potential for a long period of time, and cannot fully use all of its resources. Such depressions can harm long term growth, because after a while the economy sometimes adjusts to its new, stunted circumstances. Unemployed workers can lose their skills or their health. Businesses can stop investing or disappear altogether. After a long period of economic turmoil, it can be hard to separate demand problems from supply problems.
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So why was per capita economic growth so slow after the industrial revolution, from around 1760, and why did it accelerate so much from 1820 to 1880? I think the most likely explanation is that it took time for the economy to fully catch up with the technological breakthroughs of the late 1700s. We know that the period between 1760 and 1820 saw a wave of new, productivity-enhancing technologies introduced, mechanising manufacturing processes and greatly expanding the amount each worker could produce. But these technologies would not have rolled out to every business immediately, and nor would they have been perfected and exploited straight away.
We can see that by looking at the data on industrial growth, which will also tell us another important, non-industrial part of the story. The chart below shows how output in the three broad sectors of the economy — agriculture, industry and services — grew from 1760 until 1840, and tells a couple of stories.
One story is that industrial output grew by 2.7 times over those 60 years, which is pretty dramatic until you remember that the population also grew by around 1.8 times. After 1820, you can see that the growth in industrial output gets far quicker — it doubles in just the next 20 years. The really rapid growth in industrial output, driven by all of the new technologies of the industrial revolution, begins after 1820.
The second story from the chart is that agriculture and services, the other parts of the economy, did not grow rapidly relative to the population. In fact, agricultural output declined slightly relative to the population, while both agriculture and services grew more quickly from 1700 to 1760 than from 1760 to 1820. Between them, agriculture and services still made up at least 65% of total employment in the economy, and so their relatively weaker growth helped slow the growth of GDP per person after 1760. The industrial revolution may have transformed the industrial sector, but it was not yet enough to lift the whole economy.
So why then did growth take off after 1820? A big part of my story is that the breakthroughs of the industrial revolution finally began to reach maturity, and industrial output in particular began to grow exponentially. Another wave of innovations were developed, helping maintain the pace of growth. After 1820, production grew, share prices rose (suggesting companies made bigger returns to their investors) and investment increased. The virtuous cycle of economic growth worked powerfully.
There is one other change after 1820 which is worth dwelling on: a big rise in global trade and in British exports. This helped British industry to expand, but also led to significant growth in the service sector after 1820. While exports had grown steadily ever since 1700, the pace of growth more than doubled after 1820 to a rapid 4.4% a year. This followed in step with a growth in overall world trade, as the table below shows.
There is almost certainly a link here with the defeat of Napoleon in 1815. Britain and France, which controlled much of Europe during the early years of the 1800s, sought to blockade one another (while other trading nations such as the Netherlands faced blockades), reducing the scope for unfettered global trade. While the immediate aftermath of Waterloo was a deep recession — Britain’s GDP fell by 11% between 1815 and 1819 — it was followed by a sustained boom in global trade, which helped Britain and several other nations to grow faster.
Increased exports help an economy because they provide an external injection of demand. This would have been especially important in Britain where productive capacity was growing rapidly — export markets gave far more scope for selling the extra industrial output. Exports only made up a relatively small share of total demand — even by 1880 domestic demand still exceeded exports by over 4 times — but this share would still have been vital in helping demand to grow. Exporting can also help keep industries competitive, because they have to compete with the best businesses from around the world. The model of export-led growth, pioneered in Victorian Britain, has been repeated several times in the 20th Century, by nations including Japan, South Korea and more recently China.
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So what can we learn from this analysis about today’s slowdown in growth? It is not unprecedented, for one thing — there have been plenty of periods of slower growth in the past, before the long post-war boom. It is probably too early to say whether it is a decade-long blip — like the 1920s, for instance — or the start of a longer period of stagnant living standards. It is possible that society is adjusting to the many disruptive technologies emerging today, and that these will later lead to a renewed boom. Or maybe most of these new technologies will turn out to be of limited value to society. It is also possible that the root of our current problems might be a chronic lack of demand, which we have confused with weaker productivity growth. Of course, it could be a combination of all of these issues — that’s normally the way with economies.
The most important lesson, though, is that economic growth is not inevitable. It needs a host of conditions to happen quickly: technology and innovation, for sure, but also strong demand and a society which is able to adjust to the latest breakthroughs. If we want to return to the fast kind of growth, we may need to be a bit more deliberate about it.
* To give an example of how important annual growth rates are: at 1% annual growth, an economy will double in size every 71 years; at 2%, it takes 36 years; at 4% it takes just 19 years to double.