The British Seeds of American Decline

When American and foreign observers speculate about American decline, as they often do, they tend to draw parallels between the United States and the Roman Empire. But parallels between a modern, industrial, urban, nearly-monolingual nation-state and a loose collection of tribes with an agrarian economy are worthless.

A more apt comparison is between the America of the early 2000s and the Britain of the early 1900s. Is the United States repeating the United Kingdom’s decline, but on a larger scale?

In one area, the answer is clearly no. A century ago, most of the consumers and resources of the British Empire were located outside of the British Isles. The loss of India and other colonies turned Britain overnight from a power of the first rank into a medium-sized nation-state.

In contrast, the United States is the third-most populous nation in the world. And while it has far-flung military bases, its demographic, industrial and commodity resources are located inside its own borders. Unless the lower 48 states go their separate ways, the United States will never experience anything like the dissolution of the British Empire and other colonial empires, including the Soviet Union.

In four other areas, however, the parallels between yesterday’s Britain and today’s America are striking and disturbing.

1. Deindustrialization

Britain was the world’s first industrial nation, pioneering the transition from agrarian to industrial society. From the beginning of the industrial revolution, however, other countries — including France, Prussia/Germany and its former American colonies — sought to catch up and surpass the leader.

Beginning in the 1840s, Britain adopted free trade and preached it to the rest of the world. It assumed that, if other countries followed suit, Britain would have a seller’s market in high-value-added manufacturing, thanks to its temporary monopoly.

The particular charm of the concept lay in the idea that Britain, at the same time, would enjoy a buyer’s market in food and raw materials like cotton, as other countries competed to sell to Britain, producing global commodity gluts and driving down the price of inputs needed by British industry.

However, the “national economists” of the early 19th century knew exactly what Britain was up to. These were men like the economist Henry Carey and the statesman Henry Clay in the United States and the “historical school” economists of Germany, with the German-American economic theorist Friedrich List serving as a cross-continental connection.

While these thinkers and statesmen held out free trade as a distant ideal to be pursued among countries at equal levels of development, they were also economic development realists. They argued that, in the process of catching up to Britain, other countries needed to foster their own “infant industries.”

That required protective tariffs and subsidies, just as itself had done between the Middle Ages and the 1840s. These were shed only when British industry had developed a near-dominant position in world trade. Accordingly, by the late 19th century, both the United States and newly-united Germany were industrializing with state support behind a wall of tariffs.

One response in Britain, backed by industrialists such as the British politician Joseph Chamberlain, was the movement for “imperial federation.” This envisioned the conversion of the home islands and the “white dominions” like Canada and Australia into a protected market, much like the tariff-walled markets of the United States and Germany.

As F. E. Smith observed in 1906:

We give to our rivals a free market of 43,000,000 persons in the United Kingdom to add to their own free market. Thus the United States possess an open market of 82,000,000 persons in the United States, plus an open market of 43,000,000 persons in Great Britain, making, altogether, 125,000,000. Similarly, Germany possesses an open market of 43,000,000 in Great Britain.

As against this, we possess only such residual of our open market of 43,000,000 as the unrestricted competition of foreign nations leaves unimpaired…. We call ourselves free traders, but we have never secured free trade for ourselves; we have merely succeeded in enlarging the area within which our protectionist competitors enjoy free trade.

The financiers of the City of London a century ago thus benefited from unilateral free trade, which allowed British rentiers to profit from investments in the United States, Germany and other countries even as British industry decayed under the onslaught of protected American and protected German industry.

When Britain finally adopted a version of imperial federation during the Great Depression, its industrial base — once the finest in the world — had already been hollowed out by state-sponsored American and German mercantilism.

Today, the United States is playing the role of Britain a century ago, while China, other East Asian mercantilist regimes and Brazil, seeking to industrialize rapidly, are using many of the same techniques that the United States and Germany used, which in turn are the same ones which Britain employed before the 1840s.

It was then, and is now, a mix of tariffs or non-tariff barriers, state-channeled credit, free land, low wages and the transplantation of foreign intellectual property, sometimes by theft.

In today’s United States, however, the financiers who advocate passivity in the face of foreign techno-mercantilism are joined by CEOs of U.S.-based multinationals that have outsourced much of their production. They are keen to take advantage of the subsidies and techno-industrial complexes provided by China and other mercantilist regimes, an option not available to British manufacturers a hundred years ago.

2. Financialization

A century ago, British financial interests prevailed over manufacturing interests by arguing that, even if Britain ceded key industries to rising powers like the United States and Germany, the City of London would remain the financial hub of the world economy. The folly of this strategy was evident as early World War I, during the course of which the United States surpassed Britain as the world’s largest creditor.

Following the First World War, New York shared primacy in global finance with London, and the supremacy of New York was secured by World War II. (Historically, industrial primacy has been followed by financial supremacy, and there is no reason to doubt that if China dominates global manufacturing it will also dominate global finance within a generation or two, demoting New York to a second-tier position, along with London, Frankfurt and others.)

It is no coincidence that both Britain and its offspring the United States have led the world in “financialization” — the proportion of the economy devoted to the finance, insurance and real estate sectors.

The trade surpluses of techno-mercantilist regimes were recycled, not by buying British or American physical products or investing in British or American physical infrastructure. Rather, they bought complex and, as it turned out, booby-trapped financial products created by the financial engineers of Wall Street and the City of London.

3. Dysfunctional Education

Another feature that the contemporary United States shares with Edwardian Britain is an educational system that is ill-suited to the demands of a modern, advanced technological society. As Corelli Barnett showed a few decades ago in a brilliant series of books on British decline, notwithstanding Britain’s role as the first industrial nation, British society inherited an aristocratic disdain for sources of wealth other than rural estates and investment income.

American society has been much more open to self-made businessmen. But even in the United States true status is attached to the highly-educated professional — the lawyer, manager, doctor or professor.

By comparison, the nouveaux riches are frowned upon, particularly if the source of their wealth stems from “dirty” industries such as manufacturing and energy — and not from “clean” industries like software and social media.

At the same time, Britain and the United States lack the strong guild traditions of continental Europe and East Asia, in which skilled craftsmen are valued. In the Anglo-American world, industrial production has traditionally been the province of a poorly-educated peasant-bred working class, recently extracted from American and foreign farms and, for some decades now, supervised by well-paid, college-educated “managers” or overseers.

This division within the workforce is reflected in both the United States and Britain by the division in higher education between prestigious liberal arts colleges and universities, on the one hand, and low-status vocational colleges like America’s community colleges and Britain’s “redbricks” or polytechnics.

It is also reflected in the tolerance by Anglo-American elites of poor primary and secondary schools. In contrast, in Germany, vocational training and apprenticeships are an essential part of the economic model — not ghettoes into which society’s failures are shunted.

4. Short-Termism vs. Long-Termism

Following the end of the Cold War, there was a vigorous debate over rival “models of capitalism,” pitting the Anglo-American or Anglo-Saxon model against a continental European “Rhineland” capitalism and an East Asian model.

Japan’s post-bubble troubles and the Germany’s unification-related struggles (when the Federal Republic absorbed the former East Germany) led many to announce prematurely that the Anglo-American model had won. With the benefit of hindsight, we now know that the prosperity of Britain and the United States was based on an asset bubble.

One of the features distinguishing Anglo-American capitalism from other kinds of capitalism is the short-termism produced by the ideology of “shareholder value.” It heralds the ideal of firms existing only to maximize the short-term income of investors.

Corporate managers are encouraged to shut down operations, dismantle the factory and sell the assets. If they can make more money for shareholders in the short run that way, this is deemed to make “economic sense.”

This mentality is entirely alien to countries which have maintained more productive industrial bases — from Germany, with its Mittelstand of multi-generational, family-owned enterprises, to China, with its state-owned enterprises. The continental European and Asian countries tend to agree with the logic of Friedrich List, who argued that wealth today is less important than the capacity to produce wealth over the long term.

Today Britain, the first industrial nation and the world’s first superpower, is a deeply distressed economy with a hollowed-out productive sector and a swollen financial balance sheet. Can America avoid Britain’s fate? Yes, it can — but only by learning from successful nations outside the Anglosphere.

The gift of respect for individual liberty, limited government and the rule of law are priceless inheritances from Britain to the United States and other nations of the world. But in the past, the United States has flourished by adopting and naturalizing institutions developed outside of the Anglophone world.

It took on the French military system of interchangeable parts (known rather inaccurately as “the American system of manufacturing”), the Prussian public school system, the research university and government-backed research and development from Imperial Germany and “just-in-time” manufacturing from modern Japan.

If the United States does indeed repeat the experience of British economic decline, it will be the result not of destiny, but of a choice not to learn from others and its own history.

Editor’s note: This article is adapted from Land of Promise: An Economic History of the United States (HarperCollins) by Michael Lind. Published by arrangement with HarperCollins. Copyright © 2012 by Michael Lind.