Am interested to know the consequences of how a better British performance during the period from 1973 to 1896 ITTL would have helped the British not fall completely behind Germany and the United States during the Second Industrial Revolution between 1870 to 1914, since it seems the British approach to the Panic of 1873 below played a role in causing them to fall behind (and led to the Long Depression, etc).
Let me preface my post by saying this: to an extent, it is an inevitable (barring any destruction or damage of U.S. and German economy) that the U.K. economy will grow more slowly than the U.S. or German economy. By that point in time, the British economy was the most mature of the bunch while the U.S.A. and Germany were at an earlier stage of economic growth, starting from lower levels of industrial output, and benefiting from British capital and technical experience. They were going through the same stage as the U.K. was in the earlier nineteenth century and their percentage growth-rates were inevitably higher than that of the comparatively 'mature' British economy of the late nineteenth century.
Furthermore, the Long Depression is not really what causes Britain to fall behind. Looking at the 1873—96 period, often referred to as the 'Long Depression' or Great Depression, we can actually see a cyclical behaviour more benign than that of either the long-term UK average or the position of other countries during the 1870-1913 period. There were six output recessions during this period (1878—9, 1883-5, 1891-3, 1899-1900, 1902-3, 1907-8), which were all short and mild, with a maximum output loss of 3.8% in the wake of the 1907 American banking crisis. The label 'The Great Depression' was given to the 1873-96 period by contemporaries, reflecting their belief in worsening economic conditions compared to earlier periods (mostly due to the massive fall in price). But with the economic knowledge we have today, we can confidently say that the deflation in the Long Depression was a good thing because these price falls were caused by increased productivity from tech advances.
What really causes the U.K. to fell behind the U.S.A and Germany is the failure to modernize the economy as rapidly as the Americans and Germans. The U.K. lost a lot of ground with the U.S. and Germany in terms of new innovations connected with electricity, the motor-car and chemicals. There are several hypotheses explaining as to how this happened. The theories are: entrepreneurial failure, a mis-aimed capital market, a weak British education and technical training and an over-reliance on 'self-regulating markets' and an unwillingness of the state to intervene.
The first theory refers to the idea that British entrepreneurs failed to embrace technological advances to create cost-effective technologies as quickly as the Americans. However, this is a theory I personally don't like. As Henry Ford discovered, American technology was not compatible with the British setting and most of the British decisions with choice of technology have been deemed rational by many economists. Moreover, Britain had committed a considerably greater proportion of her resources than the U.S.A. or Germany to industries such as textiles, coal, iron, and shipbuilding, with consequently greater problems of obsolescence, scrapping and re-equipping.
The second theory refers to the availability of external financing for new, modern industries (like chemical and electrical engineering). Due to asymmetric information (capital markets being unable to determine how viable an industry is), the British capital market favored foreign investment over investment into these new industries. Without external financing, these new industries cannot undertake as many risky innovative projects as the Americans or Germans. It has been argued that a pro-active government could have created legislation on auditing and disclosure of information that would have reduced uncertainty of investment and thus boosted the confidence of the UK capital markets to give finance to these new industries. However, it seems that some MPs with vested interests thwarted efforts at reforming company law.
The third theory refers to the relative superiority of American human capital over a British one. The Americans invested more in secondary and tertiary education than Britain. Thus, when the technological progress became more scientific, the British were increasingly disadvantaged. The United States notably had a higher R&D spending and more engineers and science graduates to continue searching for innovations. If the UK had done the same, their human capital might have been able to boost growth by coming up with more productive methods suitable to the British setting.
The fourth theory refers to the general unwillingness of the British government to intervene in the economy. Britain might have benefited from infant-industry policies designed to boost new, technologically progressive industries which were to some extent crowded out by the strength of Britain's traditional export sectors. This proposition seems unpersuasive, however. Primarily because the political economy of tariff protection was such that the proposals that had the most political support, such as those made by Chamberlain, would have actually tended to divert activity towards traditional sectors such as agriculture and textiles rather than new growth industries.
in addition to the
Great Depression of British Agriculture IOTL from 1873 to 1896.
There's no helping this one. Unless the Native Americans somehow throw the colonizers off their soil, the opening up of virgin territory abroad and the fall in rail and shipping rates will pretty much drastically increase the supply of food in the U.K. Since demand for food is an price-inelastic (regardless of how much the price of food has changed, you are not going to dramatically change your level of consumption because you need a minimum amount to survive and have a maximum amount you can stomach) and food is homogenous (no difference between U.K. and U.S. corn/wheat/cereal/whatever), the price of agricultural products outside of animal produce was going to collapse. Still, British livestock farming was profitable and could (and did) survive.
