UK’s economic woes are basically social

By Edward Hadas
August 14, 2013

Four decades ago, everyone knew that the UK had a social problem. Class divisions stunted the development of a substantial, well-educated middle class, leaving the economy in a strangely Victorian state – divided between a gruff working class, which was prone to strikes and obstruction; and the incompetent elite, which seemed unable to adjust to the end of Empire.

Times have certainly changed. Britain is now prosperous and predominantly middle class. Union strangleholds have given way to flexible labour markets. The country is a magnet for global talent, drawn by a cosmopolitan culture, not to mention the use of the leading global language. High value-added international services are its speciality.

But something is still wrong. A country with so many advantages should be doing better. Think Switzerland – another country of social peace, high skills and a post-industrial economy. The Swiss run a hefty trade surplus. The country has a very low unemployment rate, low inflation and a fiscal surplus. The nation’s biggest monetary challenge is to keep the currency from rising.

By those counts, the UK looks almost like an anti-Switzerland. Both the inflation rate and the fiscal deficit are uncomfortably high and hardly falling. Unemployment remains a serious problem and there is a fairly substantial current-account deficit. The flexible labour market has not led to strong export growth, despite a 20 percent fall in the currency’s value five years ago.

What’s the problem?

In narrow economic terms, I think the best explanation is what might be called a Double Dutch disease. The Netherlands found out a half-century ago that substantial easy revenues from resource extraction distort the economy. They inflate the currency, seduce politicians and demotivate would-be entrepreneurs. The UK, a net fuel exporter through the 1980s and 1990s, had a Dutch-style energy windfall in North Sea oil. In the following decade, a strong position in cross-border finance allowed it to double up on potentially debilitating cashflows.

However, inadequate responses to these economic distortions did more damage than the distortions themselves. Successive British governments wasted much of the oil and gas bonus and failed to set policies which might counter the dangers that come with the national equivalent of a rich heir’s trust fund. Similarly, when the financial sector was flying especially high, members of the establishment mostly bent over backwards to favour the business. They rarely worried that the sector’s huge profits and extravagant pay might degrade the rest of the economy.

In short, the elite which should have looked out for the national economic interest too often squandered opportunities or served themselves rather than the common good. This is the behaviour of a self-satisfied and out-of-touch ruling class.

It looks like the old inefficient order has not totally disappeared. Instead, it has lived on in a muted form. That impression is only reinforced by the prevalence of what I call imperial dreaming. Too much of the British political establishment sees the UK as a country with a distinct and superior political and economic vision. It’s something about tolerance, free trade and the virtues of competition, and surfaces in political talk of Britain “punching above its weight” and “commanding influence”. But the details hardly matter, since almost no one outside of the country thinks the UK has much to teach.

Too many intellectual resources have been offering smug lectures to an empty global classroom. The effort would have been better spent on improving relations with the rest of the European Union or improving the most dysfunctional housing market of any major developed economy.

It is not just the residue of the elite which has persisted. While most old working class families have migrated upwards socially, there has also been a lot of social decay. The portions of the UK population which are undereducated, overly dependent on government benefits or prone to anti-social behaviour are among the highest of all developed economies.

Although there are many programmes to attack such problems as persistent joblessness and teenage drinking and pregnancy, the residue of old class conflicts has been an obstacle. The desire not to give the rich special treatment has distorted both education and healthcare – increasing cost far more than quality. Much of the country’s fiscal weakness, and probably a good portion of its inflation, can be traced back to high spending on social programmes – which would be lower without the baggage of history.

I don’t want to exaggerate. The trends are clearly away from a Marxist dystopia of class conflict. The country’s aristocratic and proletarian burdens are shrinking each generation. You can still identify people’s social class by the way they talk, but mostly that class is firmly middle.

Indeed, the British middle class has expanded so much that as an economy and a society the UK looks more like its European neighbours today than like itself 50 years ago. That is good news.

9 comments

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UK remains a semi-feudal society.

Posted by nobody2000 | Report as abusive

Very much the same in the USCA. All good comes with bad. One thing the high tech communications of the 21st century are showing us is that the aristocracies of the world really are not any better than anyone else. Just that they have advantages others don’t. I think the time in human history for them is waning. They will be around for another century or two world wide, but always disappearing.

Posted by tmc | Report as abusive

PS- It’s nice to see the multi-comment format. Thanks Reuters. And Mr. Hadas is most deserving of it too.

Posted by tmc | Report as abusive

Mr. Hadas, I know it is would be a poor career move, but if you ever decide to run for high public office you have my vote! Your unique and reliable insight on many subjects is a source of optimism that there is intelligent life on Earth.

Posted by OneOfTheSheep | Report as abusive

The Brits gave up all industry under Thatcher and replaced it with a economy mostly dependent on financial services. The problem with this is that financial services *should* exist only as an helper to main street. The tail had come to wag the dog. Now they are trying their best to get back to where they were in 2008, which ironically was an unsustainable place built on global bubbles and distorted economic practices. They are slowly waking up and in the harsh light of day are seeing that the Emperor has no clothes. Britain need to get back to basics, which naturally means booting Cameron and his money printing toadies. Even then, it will be a long and difficult road back to being on the up.

Posted by BidnisMan | Report as abusive

As an American, I disagree with the statement that the U.K. does not have much to teach, as well as with the statement that the U.K. does not have much influence outside of itself. We Americans often get credit/blame for the fact the English has become the world language of business. However, that happened because English had already been spread to the four corners of the Earth by the British Empire. English would not be an important language in South Asia, Australia, Africa or North America if it had not been carried there by the British. Some may criticize this is a legacy of imperialism (or, in the case of North America, colonialism — to recognize a Victorian-era distinction), but English has remained an important language because people have found it useful. In addition, it may be precisely because Britain released the imperial grip that the English language remained popular, in addition to its being commercially useful because of the increase in the stature of the United States following World War II. Furthermore, there is a worldwide English-speaking culture of which the United Kingdom is a very significant part, even though it has only 60-65 million of the 350-400 million native speakers of English on the planet. Some people may think of that as natural, since English is from England; however, there are at least 300 million native speakers of English in North America alone (note the use of a geographic rather than a political term to designate the location). Think of the ambit of British cultural influence as emcompassing every place where kids read Harry Potter in the English language for fun instead of as an exercise for their school English class. Finally, note that the recent Edward Snowden electronic surveillance revelations — published by Britain’s Guardian newspaper — show that the United Kingdom remains a substantial power in the shadow world of espionage — something that rarely comes to light in public. This should not surprise anyone, because of the long tradition of expertise in that area. The last time there was a queen named Elizabeth, the kingdom was saved from invasion by the Spanish Armada, not solely because of the bravery of Sir Francis Drake and not solely because of treacherous weather in the English Channel, but more importantly because the English had a extensive espionage network that learned of the Spanish invasion plans and was able to dispatch a fleet which, though vastly outnumbered, was able to delay the Armada long enough for the treacherous weather of the English Channel to do the rest. The story is not unlike that of the Battle of Britain, where the British had a secret electronic surveillance weapon (radar), which they are able to use to effectively deploy their outnumbered air force without their enemy ever figuring out how it was done. While there is a lot of political incompetence among the British elite, it is clear that there is also a long tradition of having at least a few people who know what they are doing.

Posted by Bob9999 | Report as abusive

@Bob9999,

Well said!

Posted by OneOfTheSheep | Report as abusive

I see Mr. Hadas’ point about double dutch disease.

The dysfunctional housing market is common across the English speaking world – arguably it is now even worse in New Zealand than the UK though of course on a smaller scale.

It strikes me the root causes of Britain’s economic decay and dysfunctional housing market are cultural and demographic; the Anglo-Saxon world has slid an a torpor of demographic, economic and cultural over-maturity, collectively losting enthusiasm for continued development and urban expansion, despite that meaning those at the bottom of the economic scale struggle to keep a roof over their heads while those further up the scale are forced to allocate up to half their net income to doing so (all quite needlessly).

There are a lot of very well educated, very civilised people in Britain (as well as a lot of lumpenproletariat), and I agree the country should be in a economically stronger state than it actually is now. A detailed social and economic comparison with Switzerland would be really interesting.

Posted by FromTheForest | Report as abusive

This is a good and thought provoking article. The trouble with identifying that some of the causes of British economic malaise are social is that it immediately poses more and more questions ; let me know if you write a book on it!

However, one the key themes of the argument “the elite which should have looked out for the national economic interest too often squandered opportunities or served themselves rather than the common good” dies because this is a fundamental flaw in most decisive democratic systems. Politicians spout nonsense and ‘kick the can down the road’ on any difficult or contentious issues.

I disagree that much of the belief in a “Britain punching above her weight” is necessarily an elitist viewpoint. It’s something spouted for the consumption of the masses with limited international experience because it makes them feel good –always puzzled me why anyone should care (I must be more of the Swiss persuasion). It’s directly akin to Americans spouting their ‘justice system is the greatest in the world’ –I can think of a lot of countries I’d rather have a legal tangle in.

All countries have a national self-image disconnect, and in all of them politicians exploit it because they know they are reinforcing and existing prejudice. Prejudices, of course, are
emotional and based on ignorance.

I agree with Bob9999 though –there are plenty of things Britain can teach but our polity will only start to do when there appears to be no alternative.

The EU referendum is a classic example; for years other members have sort of agreed with many of the British positions but not enough to actually change their stance on anything, with a potential withdrawal there are very different noises coming from Berlin and Rome and most of Central Europe too.

I am waiting for the honest political debate sustainably funding and running the NHS and pension system … I am not holding my breath.

Posted by Alisdair | Report as abusive