Luke Bartholomew 0:06
Hello and welcome to Macro Bytes, the economics and politics podcast from abrdn. My name is Luke Bartholomew and as you may have noticed there, we have a new name; Macro Bytes, to go along with our new corporate name, so please don't be confused if you see a name change in your podcast stream or anything like that, it is still us. And I'm delighted to say to help us launch our new name, we are joined by a very special guest today in Duncan Weldon. Duncan is the UK Economics Correspondent at The Economist having previously held numerous roles in economics, journalism, policy, and financial markets. And most importantly, he is the author of a newly published book on UK economic history called "Two hundred years of muddling through: the surprising story of Britain's economy from boom to bust and back again". I've just finished the book and I can say it it absolutely fantastic. I learned a lot so I'm delighted that Duncan is with us today. I'm really looking forward to the conversation. So Duncan, thanks very much for being here.
Duncan Weldon 1:12
Thank you for having me.
Luke Bartholomew 1:13
Pleasure. So I think as good a place to start as any is with the title of the book itself and this idea of muddling through, it sort of strikes me that there's maybe a trope of UK economics commentary that, you know, at best, there's something strategic, and at worst, frankly, something shambolic about UK policymaking. Without wishing to deny that premise, I suppose my question is do you think that's unique to the UK? Or is that, you know, maybe some bias that comes from us being close observers and if we were French economy watchers, we think that policymaking was just as muddled there?
Duncan Weldon 1:53
Yeah. I mean, I agree. I mean if you're looking for a shorthand description of UK economic policy of the last 200 years, often shambolic, and usually unstrategic isn't a bad place to start. I mean, if you look at the last 200 years of economic history, and I count five economically consequential Prime Minister's more start, now, is it uniquely British. You know, I'm sure things feel more shambolic when you watch it closely. But I think sort of this approach of muddling through of not having a longer term vision is, if not uniquely British, at least, distinctly British. I think that's partially because of the structure of the British economy. You know, it's a very small, liberal, decentralised kind of place, it's much harder to sort of shunt it off into a different direction in a coordinated way than it is in some of the European economies, let alone some of the Asian ones. And I think it's also a result of history, in that we industrialised first, we became rich much quicker than anyone else, you know, on the earth. And I think when you're the first industrial nation, when you've taken off in a fairly uncoordinated way, that sort of embeds this sense that we don't need much coordination, you know, things happen, it'll probably be okay. But I do think, you know, 150 years old, from industrialisation, it's sometimes a bit more shambolic than you'd like it to be.
Luke Bartholomew 3:29
Sure. And I'm sort of interested in your answer there being only five really consequential Prime Ministers cause I think it's fair to say one of the key themes in your book is the importance of political economy. And obviously, that's music to our ears as a politics and economics podcast. So perhaps you could sort of give us some sense of how you see the relationship between politics and economics playing out?
Duncan Weldon 3:51
Yeah, I mean I like to think about things in what I think of as a political economic framework. And what do I mean by that? What I mean is trying to understand what's happening in a macro economy, particularly over the medium to longer term - without looking at sort of the wider political system, social developments, you're going to miss a lot, you're going to get a lot of things wrong, and simultaneously, trying to understand what's happening in politics without being aware of what's happening in the economy around it, you're going to get a lot of things wrong. So I sort of think about the trade-off between political developments, economic developments, how the two feed off each other. And so policymakers are quite important to my story in the book, but I think, you know, in my job as a journalist, I've spoken to a lot of policymakers over the last 15/20 years and I think policymakers tend to misunderstand how they affect the economy. They tend to overestimate what they can achieve in the short term, but at the same time, underestimate the sort of the long term impacts they can have. So it's this sort of, you know, confusing picture of politics and economics feeding off each other, and the people at the centre of it, sometimes not quite understanding their own role.
Luke Bartholomew 5:09
So it struck me that the politics that you were especially interested in, or thought mattered more, less with politics of elections, Prime Ministers, manifestos, and more what I suppose some people would call the structural fundamentals of politics clashing interest groups and sort of the sense that those interest groups over time have potentially changed, at one point would be class based and now it's perhaps about employment in the public and private sector, whether you're a property owner or whatever it might be. But is that a fair reading that really to understand political and economic developments, you need to be looking at those kind of interest group struggles?
Duncan Weldon 5:49
Yes, I think that's right. I mean, I think, you know, economic outcomes are rarely the straightforward sort of interrelationship of a neatly drawn demand line and a supply line on a graph, power matters. If you want to understand economic outcomes and distributions and how these things are all decided, then you need look back to the sort of power of different interest groups over time. You know, that's how I understand much of the last 200 years of British economic, and ultimately political history, it's about the old landed interest, you know, they dominated the economy, and they're dominated political structures, and then the economy starts to change, you get the growth of industrialisation, you get the cities, you get these new powerful owners of capital in the commercial and industrial middle-class and they muscle their way into the system. And from the late 19th century into the 20th. You see, labour, your smaller labour becoming a much more stronger political voice, you see more of the returns from growth going to the workforce. Now, what's interesting, these things are often much easier to spot in hindsight than at the time. And one really interesting thing in British politics at the moment, is the rise of what you might call an almost post economic interest group. And what do I mean by that, I mean, sort of people either retired or nearing retirement with often quite decent pensions, they're living off or are going to live off, you tend to own that property. There are more and more of these people as we age, they are more likely to vote than anyone else so they have disproportionate political power. And with reasonable secure incomes, and with reasonably secure housing, they're almost disconnected from what's happening in the economy on a day to day basis, and how your political system managers, a powerful interest group who are interested in what's happening in the economy, well, that's a, that's a new challenge.
Luke Bartholomew 7:50
So this idea that power really matters and distributions are sort of mediated as much through institutions as they are through supply and demand. I mean, the example that really struck me in the book that you talked about, and I think it does potentially have important lessons or implications for today, is this period that you described as the Engels’ pause right? And this is, I'll let you describe it in more detail, but essentially, we had this idea in economics, that productivity growth and wage growth are pretty closely tied together. And this is a period where that seemed to come apart.
Duncan Weldon 8:23
Yeah. So you know, traditionally economics, you know, very, very traditional theory, marginal wages should equal marginal productivity, as productivity levels rise, workers should see their see their wages rise. Now, it's a theory, but it's a really good example of power mattering. So if you think back to the industrial revolutions in turn of the 1800s. Now, Britain undergoes this huge economic shift, we get modern productivity growth for the first time, we get modern economic growth for the first time, much faster growth on more sustained basis than the economy had ever experienced. But what's sort of fascinating is for the first three or four decades that industrial growth at the start of the 19th century, you see the economy growing, you see the profit share growing, you see the returns on capital growing, but workers don't really get many of the fruits of that at all. I mean, you know, real wages are pretty flat, even though the economy is growing. In fact, this is the time you've got, you know, talk of satanic mills, it's the time you've got the luddites smashing machines and it's the time that Marx and Engels write the Communist Manifesto. You know, they sit down in the 1840s, they look at three or four decades of data in Britain and they say what this new capitalism means is rising profits, flat wages, this can't last. And it's one of those sort of historical ironies that just as Marx and Engels write the Communist Manifesto, the relationship they've been documenting changes, and in the second half of the 19th century you see wages pick up really sharply. But it’s a 30 or 40 year period, and you know, it's very easy when you're going through a time of rapid technological change to say, well, in the long run, everything's going to be fine. But the short run can last 30 or 40 years?
Luke Bartholomew 10:13
Well, I think that very nicely brings us to why I think this might be relevant to today because obviously we hear a lot of talk about rapid technological change, this idea of maybe robots eating all the jobs and perhaps in the long run that does mean productivity growth is higher and that means more to share between everyone but in the short run, which can last a long time, there are important distributional matters to be solved so I wonder what is your sense around the degree that the UK labour market and broader institutions are well placed to deal with any structural transformation that might be coming our way?
Duncan Weldon 10:50
Yeah, I mean, when I talk about institutions, I very much use the economic historian definition of institutions, that's not necessarily like an organisation with the front door you can go knock on it. When I say institutions, I mean, not just physical institutions with front doors you can knock on, I mean, sort of the wider rules of the game and the norms of behaviour, how the economy runs itself. The fascinating thing about Britain is many of our institutions really developed in the 19th century into the early 20th, in reaction to the Industrial Revolution. Now we're undergoing what some people think of as an ever Industrial Revolution, certainly potentially rapid technological change and the question becomes, are our old institutions fit to cope? I mean, you know, mankind has yet to develop a technology, which has increased unemployment in the long run, yet the fears have been there a long time, the fears are there in the 19th century, they are there when industrial robots appear in factories after the Second World War there, when the microchip is developed in the 1970s. It's yet to happen yet.
Luke Bartholomew 12:05
But as we were saying, those periods of adjustment can last a long time, can feel very painful for people living for the cause for us to have the spoils of productivity growth to share around that actually has to be productivity, growth, right? And it strikes me that for as much as there's been a lot of concern about huge technological transformation, technological unemployment that comes through that the bigger issue that the UK economy has been facing recently as that productivity growth has been truly awful when in the I think there's a passage in your book where you sort of pre-empt what you think future economic historians will think looking back in 50 years and think that the biggest story of the economy has faced is why productivity growth has flat lined for so long. So I mean, do you have any thoughts or an explanation as to why the UK productivity growth has been so poor?
Duncan Weldon 12:50
Yeah, I mean I'd say, you know, if you wanted to publish a popular economics book, before the pandemic, writing something about how the robots were going to take all of our jobs was probably the best idea. Now, it's presumably something to do with the pandemics and lessons from that, I don't know, it's not quite my space. But you look at the data in the UK in the 2010s. And what did you see? You saw very low unemployment, higher and higher employment rates and abysmal productivity. I mean, this is literally the opposite problem to the robots taking our jobs. Literally the opposite in fact, I say in the book at one point, if you look at car washes and what's happened to car washes in Britain over the last 20 years, you go back 20 years, car wash meant an automatic roller machine next to a petrol station forecourt. Nowadays, two thirds of car washes are not an automatic rolling machine next to a petrol station forecourt, it's a bunch of men with some sponges and a bucket. I mean we are taking the robots jobs, we've become less capital intense in some parts of the economy. Quite what drove that? Well, you know, if I could answer that I should have written a book on what caused the productivity crisis. But there's no doubt a bit of mis-measurement there. But I think one important factor in Britain in the last 20 years has been incredibly weak labour bargaining power. And I think, you know, when firms are deciding do they want to take on potentially risky, expensive capital investment, which is often a sunk cost is if they can substitute, if they can use people. Instead of machines who are easier to hire and fire in a liberalised labour market, they will and I think that is one of the explanations now and I think the really interesting thing in the 2020s is going to be do we have a bit of a tighter labour market? You know, just both here and in the United States and are firm's going to react by ramping up capital investment?
Luke Bartholomew 14:56
So it sort of strikes me with that answer that you're hinting a little bit to the idea that perhaps just if we run the economy a little bit hotter, if growth were a bit stronger, and labour markets are a bit tighter, then perhaps productivity growth would have would have taken care of itself. Are you sympathetic to those kind of arguments?
Duncan Weldon 15:14
I am, I am sympathetic to the argument that running the economy hot will increase wage growth and rising wage growth will prompt capital investment and therefore productivity. I'm also aware, having just written a book on British economic history, that policymakers always buy this argument when they start running the economy hot. And often the result is not booming capital investment, it's higher inflation than you wanted. And it's one of these ones where you've got to keep a really close eye on the data if that's what you're doing.
Luke Bartholomew 15:45
So it's funny that you should say that, you know, there's a lot of people that want to sort of buy into this argument that if only we run the economy hot, then the supply side will take care of itself because it sort of strikes me that one of the themes in your book is what I might call the institutional conservatism of the Treasury and, you know, it strikes me that that's exactly the opposite of the kind of arguments that they want to hear and certainly, I don't think they would buy the argument that poor demand management for the 2010s had a particularly important role in determining productivity. So I mean, just more generally, I mean, do you have some thoughts about the way in which Treasury has impacted sort of the long sweep of UK economic history?
Duncan Weldon 16:25
Oh, absolutely. I mean, you know, the Treasury is an unusual department. You know, it's an unusually dominant finance ministry compared to our peers, and if there's long roots, but you know, it's in the 19th century, the Treasury arises to be the most important part of Whitehall, and all sorts of institutional arrangements developed in Britain don't develop elsewhere, such as departments having to, okay, they're spending plans annually with the Treasury. And that gives the Treasury a chance to put its tentacles around Whitehall. And in the 20th century, the Treasury comes to the leading economic ministry, as we have an economic policy. Yeah, that's not really, it's a 20th century thing and having an economic macroeconomic policy. But the Treasury despite being our leading economic ministry, is still fundamentally a finance ministry. Treasury civil servants rise by keeping a firm hand on public expenditure to department where the ability to say no is more important than the ability to say yes. You know, lots of it's shaped by Gladstone, Prime Minister four times, Chancellor twice before that, very dominant figure in the Treasury, his idea of, you know, what the Treasury is about, its about controlling public expenditure, making sure debt doesn't get out of hand, being against clever weasels, really, if at all possible, trying to keep it out of economic management. That spirit of Gladstone, like 160 odd years on, still sometimes lives in the Treasury building.
Luke Bartholomew 17:58
I guess, one area where Treasury famously didn't get its way early policy went against what Treasury was looking for would be with Brexit, right, and you talk a fair bit in the book about how important you think opening up to the competition from the EU was in the UK supply side turn around in the 80s and 90s. I mean, so do you have a sense that now that we've left that those benefits start to be undone? Or are they locked in in some way? How should we think about those impacts?
Duncan Weldon 18:29
Yeah, I mean, so you have a long view story of the last 70 odd years of British economic history in the 1950s, 60s, 70s, you see this relative decline in Britain versus Western Europe and then starting in the mid-80s until 2008, you see a catch up. Our productivity growth is a lot weaker than Europe's in the 50s and 60s, and you can debate what causes that you can say it's difficult industrial relations, you can say it's a weak investment, you can say it's poor corporate leadership and any number of reasons what people call the British disease. But one reason sitting behind it all, I think, was a lack of competition and a lack of dynamism in the British economy. Britain went from being an enormously open free trading economy at the centre of the global economic system, to becoming a more insular place to importing less exporting less in the 50s and 60s. Government policy, you know, from the 30s onwards, was talking about rationalisation, about cartelising bits of the economy to get the efficiencies of economies of scale of nationalising some parts of it and it just became a less competitive, dynamic place. And wherever it was weak industrial relations, weak investment, poor training, poor management, whatever it was the reasons these problems were like to fester was because there wasn't enough competition. Joining the European Economic Community brought in more imports, and you expose that somewhat tired firms to new competitors. It gave access to a bigger marketplace for exporters prompting them to try and do better and I think that is the decisive supply side policy of the last 30 years. You know, the Thatcher reform certainly helped. But I think sitting behind it all is joining the EEC that became the EU. Now leaving that, the government's got a choice. We don't quite know where they're going to come down on it yet. But does leaving the EU ultimately mean a bit more protection for British firms from foreign competition? Yes and no - if they go down the route of protecting British firms, then I worry that sort of our lack of dynamism of the 1950s and 60s will start to seep back into the economy.
Luke Bartholomew 20:49
So I think where you may have left the book had the pandemic not come along, is with this thought that Brexit is far from done you leave the EU, there are deep questions of how you want to use the new, quote, unquote, freedom. And you've also talked before about the sort of the path dependence in the sense in which sort of it is very difficult to fundamentally shape up the structure of the economy. So I mean, do you think it is possible that a new economic model can be born in the 2020s? Or are we sort of still, for better or for worse, stuck with the same broad institutional patterns that we've seen for pretty much the sweep of history?
Duncan Weldon 21:28
You're right, can you in an ideal world, I would have finished the book with the Brexit vote is an ideal natural chapter and book-stop. And then a pandemic happens. So I ended up with a longer epilogue than I originally intended. Yeah, I mean, even if the pandemic hadn't happened, the 2020s, I think it'd be this hugely important, decisive decade for Britain, one because Brexit has happened and we've now got to make choices about what our trading relationships with the rest of the world look like. And we now have much more freedom if we want to use it, things like state ahead, not being constrained by single market rules, then questions as to how we're going to use these powers. Plus, we know that it's in the 2020s, that the decarbonisation we need to hit our 2050 net zero targets are going to happen, they're going to be big questions. And then on top of that, you've got the pandemic, which may or may not, what looks like has supercharged some existing trends, whether that's towards online retail, a bit more hybrid working, changing some of the economic geography of cities. So these are all big, big challenges. Now, is Boris Johnson going to become an economically consequential Prime Minister? I mean, probably, to the extent he was Prime Minister when Brexit happened. The question is, is he going to use this political moment to do what an Attlee did? What a Thatcher did, what Lloyd George did, act in his historical time and push Britain down another path? Or is he going to just do the name of the book keep muddling through and my worry is, he seems more of a muddler than, than a Thatcher or an Attlee.
Luke Bartholomew 23:13
So whilst the pandemic might have meant that the epilogue needed to be a little bit longer, I guess one upside for you is that comparisons to economic history have suddenly become rather more in vogue at the moment. Immediately after the pandemic struck there was talk that perhaps we would come out of this into a new roaring 20s. Although it's far from clear, Britain really did have a roaring 20s. And now as inflation is picking up, and indeed, shortages are being discussed at the moment, there's now talk of perhaps it's the 1970s, and stagflation. So my final question – is there a period of time in in British economic history which you think sort of resonates most closely with what we're facing today? Or is this a completely different set of challenges?
Duncan Weldon 23:56
Well, I think you know what I've learned is it's much easier writing about the past than talking about the future. So I think that the comparison with the 70s at the moment, it's interesting to look at, you know what it's like, the moment inflation gets to where inflation is now, still historically quite low, people start talking about a high inflation period, like the 70s. And I think the comparison with the 70s doesn't hold. To the extent that 70s wasn't just about inflation, it was about everything that could go wrong going wrong in quick succession, from bad policy to a housing market boom to a huge energy price shock, all of that, the breakdown of the Bretton Woods system bringing currency volatility in your when we're not in that moment. And I think the economy has actually undergone quite big profound shifts since the 1970s, you know. In the 1970s more than 50% of workers were unionised compared to about one in five today. The labour market is a much more liberal, flexible place than it was in the 70s. Supply chains are much more global, you know, I mean, it's really hard to see the dynamics of that kind of sustained inflation we got in the 1970s repeating. I think what we're probably looking at is something like the 1930s. If I had to pick a decade, in terms of the outlook for the next few years, is going to be really variable across the UK, you're going to have some people who are doing really well, you know, the pandemic hasn't particularly disrupted their jobs, if anything, it's made it easier, because they're commuting a bit less, they feel they've got a bit more income, as things open up again, they will be going out to spend and probably feeling richer than they were. And then you've got other people who are more exposed to rising prices, working in sectors which haven't fully recovered yet, for whom things are not going to be great. And that's sort of the picture of 1930s Britain, it wasn't a miserable time for everyone. There were enough people doing well, that the government kept being re-elected. But it really depended, who you were, where you were in the country, and what sort of job you were doing. And I think the 2020s might feel like that, with vastly different outcomes for workers and people in different sectors in different parts of the country.
Luke Bartholomew 26:13
Brilliant. I think that is a fantastic place to leave it. So thank you so much to Duncan for joining us today. His book is 200 years of muddling through and as you would have been able to tell from that conversation it was extremely rich with insights and I can wholeheartedly recommend it. And thank you everyone for listening today. Please do comment, like and subscribe on your favoured podcast platform. And we look forward to speaking to you all again soon. Thank you very much.