‘Hindsight is a wonderful thing’: we are so often told to look back at our past mistakes, in order to make improvements for the future. With a crippling economy, after the devastating impacts of Covid, the current cost of living crisis, and the added market turbulence, following the controversial mini budget, now, more than ever, this advice seems essential. After attending the LSE Lecture ‘Play it again Clem? Lessons from the 1940s for Post Covid Britain’ by Nicholas Crafts, I was inspired to do some more research into the UK’s post-war economic boom, and evaluate its successes and downfalls.
What was the post-war consensus?
The Post-war consensus was the period between 1945-1979, whereby the main political parties in the UK agreed on major policy areas. There was a common objective: to increase social welfare and economic growth, at a time where there was a global economic crisis after the war. The free-market forces had failed the economy, and there was a general consensus on the need for state intervention, causing the shift from a Laissez Faire economy, to a mixed economy.
Of some of the policies adopted at the time, the one I found most intriguing was Butskellism, which had the support of both Labour and the Conservatives at the time. It aimed for continued economic growth via different strategies. For example, full employment: With a large labour force, there will inevitably be more productivity, more goods and services being produced, more goods and services being traded, and overall economic growth. Unemployment has a strong correlation to poverty, and so by aiming for full employment, there would be less inequality through reduced poverty. Moreover, having full employment would mean that as more people were able to pay income tax, and less people would need benefits, this improves the government’s budget. However, full employment could also lead to wage inflation, and in turn lead to inflation, itself.
The Beveridge Report of 1942 highlighted the 5 giants (squalor, ignorance, idleness and disease) that needed to be extinguished, in order to achieve some level of prosperity. And thus, the welfare of the state was formed.
"The object of government in peace and in war is not the glory of rulers or of races, but the happiness of the common man."
The words above are from William Beveridge himself: a rather lengthy subtitle, you might think, but it sums up his viewpoint quite aptly. Contrastingly to the previous Victorian poor law, Beveridge’s aim was not to force the poor into workhouses, work long hours to earn minimal wages, and essentially, trap them into a vicious cycle of generational poverty, it was to reduce poverty, by investing into universal welfare, that is, by redistributing wealth and tackling inequality. This was achieved by a state financed initiative called National Insurance, with flat rate payment contributions from employers and employees. Benefits such as child and unemployment benefits and state pensions were thus established, to help protect the most vulnerable in society.
The question is, was this golden welfare state really all that golden? Although the concept ,in theory, seems to be immaculate, the way it was delivered, could arguably have been better. Upon closer analysis, the ‘benefits’ that were being given were below Beveridge’s own poverty line. Against the rising inflation (particularly of the 70s), the ‘pensions’ were inadequate. Poverty still very much existed: 11.8% of working class households in York in 1950 lived below the poverty line.
Breaking down the success of UK’s post world war economy
Indeed low unemployment levels were achieved, there was rapid economic growth, a newly installed welfare state and less poverty, and this much should be praised, but how much of it was really down to the policies previously discussed? How much of it was down to ‘Keynesian Economics’ and Beveridge?
In his lecture, Crafts identified how the UK’s economic growth was in part accelerated by global economic growth. With other countries getting richer, this was inevitably hugely positive for the UK's EXIM structure. Additionally, the US Marshall Plan (a political strategy whereby the US made overseas investments in European countries to form allies) meant that the equivalent of about $30 billion in today’s money, was given to the UK, in order to rebuild the economy, and prevent the spread of communism. And although the UK’s economy saw growth, France, Germany, the USA, saw higher rates of growth, and was overtaken by the 1970s as a result.
Furthermore, the unprecedented inflation was another significant problem. The dilemma of a high economic growth rate is that people have more disposable income and therefore spend more money, resulting in an increased demand. In turn, this leads to exponentially rising prices, as firms cannot keep up with such high demand. As aforementioned, inflation became so high that the pensions and other benefits provided by the welfare state became inadequate. The Stop-Go policy, by the Conservatives, aimed to tackle this problem, by raising interest rates to discourage spending, and encourage saving, when economic growth is too fast, to slow down inflation. Wages were restrained and taxes became higher, but this resulted in the cost of productivity growth foregone. If wages are restrained, yes it reduces the amount of people spending in the economy, and yes it helps to decrease inflation, however, it also decreases the incentive for people to work. If there are no possibilities of bonuses, why should someone work harder? In fact, arguably, this may have reignited the idleness that Beveridge wished to extinguish. The Stop and Go policy was not effective in the long term, it created volatility, in an economy which needed stability. The danger of reducing interest rates, restraining wages and increasing taxes was a continued fall in demand, meaning that firms struggled to make profits, leading to people being pushed into unemployment, which overall, led to poverty.
So what do we do now?
Unfortunately, unlike in the post 1940s, as an economy, we cannot rely on other country’s economic growth to propel our own. On a global scale, economies have been hit by covid, by the Russia-Ukraine conflict, by the rising energy costs. And being one of the most well-off nations in the world, we can’t exactly ask for a US Marshall Plan 2.0.
Covid has proven that free market forces are prone to failure by unprecedented circumstances, and so the state must intervene. Although the country is heavily in debt, austerity, or at least extreme austerity should not be the state’s solution. Naturally, reducing government spending in education, benefits, the NHS etc., leads to economic stagnation, a rising cost of living, increasing inequality and rising unemployment. According to Oxfam’s case study ‘The true cost of austerity and inequality’, austerity’s ‘emphasis on cutting public spending as opposed to increasing taxes’ increases ‘the hardship faced by people on low incomes, whilst allowing the richest to bear a comparatively small burden of the pain.’
Unlike the 2008 period of austerity, where social cuts were made, it is imperative that the government invests more money and ideas into social insurance. As Crafts mentioned, ‘the post-1945 period does not offer a blueprint either for reform of the welfare state’. Covid showed us that social insurance shouldn’t just be a redistribution of wealth, as Beveridge suggested, there should also be investment into social care. Better facilitated hospitals, more trained doctors, more vaccine production facilities, would’ve all led to a mitigation of the immense impact of Covid. This is ‘social insurance’.
In the future, many more problems that could cause the free-market to collapse could arise: future pandemics, cyber attacks, climate disasters, the list goes on. It is important that enough money is kept to the side to deal with these situations, and it is important for there to be a plan. In the case of a climate disaster, does the UK have extreme-weather resistant buildings, enough flood defences in the most vulnerable areas, enough money in the weather forecasting and monitoring system to prevent the extreme damages of a climate disaster? Does the UK have the facilities to rehome millions of evacuees, rebuild thousands of destroyed houses, plans to quickly restart the economy? It’s not just finances: do we have enough workforce in the construction sector? Asking these questions helps to gauge our current situation, and what needs to be done to improve it.
To see economic growth, we must increase productivity. Now, in the 1940s, with a heavily industrial economy, increasing productivity was easier to measure, and to enforce. More labour + longer hours = higher productivity. However, in a now heavily service-focussed economy, unfortunately, more labour and longer hours worked are not enough to solve this problem. We need to adapt to the times and use artificial intelligence to our advantage, which can make lengthy arduous processes quick and efficient. We need to increase our human capital overall. How? Via investment into education and training. Perhaps a whole new education system is what we need. In Germany, there is an element of choice: students can attend vocational focussed schools, academic-based schools, and schools which offer both academic and vocational training. Perhaps we should take inspiration. More specialised education means that children with different strengths and weaknesses can all succeed in different sectors. As a result, we’ll have a more qualified workforce, and a higher human capital.
Crafts emphasised the need to stick to the free market (despite the need for state intervention) to increase competition: we need more innovation, we need creative destruction, we need more entrepreneurs. Tax incentives to encourage new product development, investment subsidies to businesses, policies to stop monopolies from dominating the market are all ways that this can be made achievable.
From looking back at our past, we can prepare for what the future holds.
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