Notesale: Turn your study into money

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Lecture 5 & 6
Overview:
Shipping
Railways
Domestic banking
International banking
Conclusions
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Overview
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(3) Britain’s productivity performance better in services than industry before 1914 in levels terms
i
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whereas in manufacturing the USA had a 2:1 productivity lead, in services Britain had a small productivity lead
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(4) Between 1870 and 1914, productivity growth more rapid in services in the USA and Germany than in Britain
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To some extent, process of
catching-up inevitable as release of labour from agriculture in USA and Germany led to:
-Urban agglomeration
-Increased specialisation in services
(5) In some sectors: system of low-volume, high-margin business organised on a network basis under threat from
system of high-volume, low-margin business organised on hierarchical basis
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(6) Key factors underlying growth of high volume, hierarchical forms of organisation in service sector were:
-Developments in communications technology which reduced problems of asymmetric information and allowing closer
contact between principal and agent in merchant/financial operations E
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telegraph and telephone
-Growing volume of economic activity, which permitted greater specialisation in services, hence allowing task
simplification and easier monitoring of employee performance
(7) Extent to which low-volume, high-margin business based on networks remained viable varied between sectors
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Growth of high-volume business began on railways, spreading rapidly to other parts of transport and
communications sector
(8) To the extent that human capital was specific to a particular organisational form, Britain ‘locked-in’ to network form of
organisation
This was strongest at a time when technological change favoured hierarchical forms of organisation
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Tech change favoured US this period - GB doing as well as
it can but with diminishing returns?
(9)
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Shipping
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(10) Merchant shipping a major GB success story from 1850s to 1914
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With decline of US
fleet during Civil War, most serious challenge to GB dominance before WWI came from Germany, yet Germany’s share
of world merchant fleet remained well below 10% versus Britain’s share of nearly 1/3
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(11) Shipping output grew at annual rate of 3
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5% in total transport and communications, and 1
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Labour force in shipping grew at only 0
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a
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9 % p
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TFP growth less rapid at 1
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a
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Ships are becoming bigger, faster,
more efficient (some of which is capital - lots of it is TFP growth, so Brit doing well here
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Pessimists often try to interpret retention of old technology as evidence of ‘entrepreneurial
failure’, but British merchant marine v
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British sailing still using wooden ships well into C20 even though
they’ve been using steam for 50 years
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(13) Harley (1971) shows that British ship owners rationally switched from sail to steam at different moments on different
routes because of differences in relative cost conditions
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Main technical advance in
steam technology was reduction in coal use, important because steamships had to carry own coal, which reduced
capacity for carrying freight
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Steam ships req a lot of coal which takes a lot of tonnage, so less space
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Steamships established on 3,000 mile Atlantic voyages to northern USA by early 1870s and on 5,000 mile voyages to
New Orleans for cotton by mid-1870s
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But again, this advantage to sailing ships fell over time
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So not Ent Fail: using old tech where most profitable and new tech
where most profitable
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(15) Boyce (1995): Success of British shipping based on networks
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Requires flexibility: Brit has networks & therefore info
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e
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Pre-WW1 Brit was hub of connections and
shipping needs these connections - not a product that can be produced as well without them
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*More a case of the changing environment becoming more orientated to play to US competitive
advantages
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/ Regularity permitted establishment of permanent bureaucracy
performing repeated tasks that could be routinely monitored
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/ Improvements in communications technology (telegraph, then telephone) made possible
continuous links with overseas offices, reducing need for initiative on part of employees and allowing continual
monitoring
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Sailing everyday gives incentives for hierarchical management product structure
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Nevertheless, to extent that Britain’s competitive
advantage based on exploitation of system of entrepreneurial networks, emergence of large scale hierarchical form of
organisation was an adverse development from Britain’s perspective
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Greater development of large scale hierarchical form of
organisation in liner sector than in tramping sector also consistent with more serious threat to Britain’s position pre 1914
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(19)
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Railroads
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(20) Modern railway age, with iron rails and steam locomotives, began in Britain during 1820s
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In 1870s US rail network just getting started - GB meanwhile has built all important big railways domestically
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Two sides of rail industry = freight (handling coal + MGs + grain) + passengers
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(22) With output growing at 2
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4 % per annum, productivity actually declined over
period 1871-1911
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Rail sector fell
bend in international and absolute terms
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(23) Sluggish productivity performance on Britain’s railways contrasts with rapid productivity advance on US railroads
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a
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(24) Paish (1902) attributed this poor GB performance Ent Fail, failing to notice ways of doing this better
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Kaldor) GB has first mover disadvantage in rail, it is overbuilt & others learns
what happens
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This example used by
Frankel (1955) in his formalisation of the problem of technical interrelatedness and investment in a mature economy,
showing you don’t necessary want the best technology available to you
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Even if this point conceded, general argument remains valid for other
types of rolling stock and locomotives
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Productivity stats assume whole of sector is doing
badly
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-We could argue that one of most significant effects of fragmented structure of British railways was a lack of
development of an effective managerial hierarchy - lack of hierarchical management and lack of vertically integrated firm
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(28) Were railroads managed as well as possible, then? Crafts, Leunig and Mulatu argue not: Low TFP growth in the
sector (UK 1
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1%, between 1890-1910) & there was highly variable performance across companies
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Everyone sees railroads as having under performed - lack of productivity indicative of lack of competition perhaps?
Difficult to get competition in railroads: big EoS in rail and high sunk costs - natural monopoly
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No “forced exit” for weak firms; “Entrepreneurial failure” is once again tied to non-competition (as in chemicals)
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(30)
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Domestic Banking - commercial
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(31) Domestic Banking
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In 1825 all commercial
banks in England and Wales were private, by 1900 private banks outnumbered by joint stock banks
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Branch banking consisted of lots of retail banks within a structure
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Post 1900 = joint stock banks: shareholders capital at risk
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Aggregation increased HH index
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Previous paranoia from South Sea bubble
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e
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telegraphs, networks… improve, which are critical for banks as they settle
accounts
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Shareholders whose banks are insolvent are only on
the hook for what they’ve put in - bankruptcy not possible at shareholder level
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(34) Growth in scale of British banking system accompanied by an increase in stability
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To some extent, greater stability was a result of greater scale, since large banks had greater potential than small banks
for pooling risks
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Collins (1988) argues that growing professionalisation of banking also played a role: E
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the establishment of
professional bodies
(Institute of Bankers in Scotland (1875) & English Institute of Bankers (1879))
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(35) Emergence of stable oligopoly of ‘Big Five’ in banking raised possibility of collusion and avoidance of interest rate
competition
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Griffiths suggests that Treasury and BoE acquiesced in these collusive agreements because they found it easier to
implement interest rate policy when dealing with small number of cartelised banks
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Difficult to enforce regulation if there are few players
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(36) Did banks fail British industry?
Contrast often drawn here with German system of universal banking, seen as highly supportive of German industry
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(37) Many writers have argued that universal banking system systematically more supportive of industry than specialised
system, however, evidence in favour of this is weak: Often based on crude observation of faster industrial growth in
Germany than in GB, for which there could be many explanations
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Banking
system often cited as a reason for Brit Failure, but Germans could be catching up for different reason: Gerschenkronian
catch-up
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g, merchant banks) will be bigger
than equivalent German one - UK capital market at centre of world, stock markets are much more developed
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(38) As with other services, finance provided on much greater scale in Britain than in Germany pre 1914, permitting
greater specialisation and sophistication
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Once accepted that English
commercial banks part of more specialised system, their behaviour more understandable (i
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cannot criticise them for
failing to make long term investments in British industry, since not their function)
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(39) But we can assess how supportive they were of industry by examining short term lending behaviour: Little evidence
here to suggest English banks less supportive than continental counterparts
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Were banks and industry very hostile? Not really - little evidence that
British banks aren’t doing their jobs: Brit banks are doing a perfectly good job of supporting industry
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(41) Overseas investment preferences:
Often argued that British investment banks favoured overseas assets at expense of domestic industry: Evidence to
support argument does not stand up to close scrutiny - any lack of external finance for industry can be attributed more
plausibly to lack of demand than to lack of supply
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Doesn’t seem to be a bias against British
industry: no divergence in looking at rates of return
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If such a market imperfection had existed, we would expect it to show up in rates of return, but
Edelstein (1971) shows that no such bias existed
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g
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So, although actual risk of
overseas investment higher, not necessarily perceived as such: Possible reason for preference for overseas investment
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These were City of London’s ‘Golden Years’ (Kynaston, 1995)
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Discount houses also heavily involved in this international business, as inland bill of exchange replaced largely by
overseas bills: Another aspect of City’s international dimension was overseas banks: headquartered in London but acted
as clearing banks overseas, particularly in Empire
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Became clearing house of the world: British banks centre of merchant bills/ commercial paper, which
circulated with London at heart
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Given information asymmetries, this was a business where information networks were particularly important:
Chandlerian hierarchical management structures not appropriate for international finance pre 1914
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Not
much advantage to having large Chandlerian factories/ firms - Brit comparative advantage suited to small, specialised
firm
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British overseas banks able to build up strong network based system that capitalised on Britain's dominant role in world
trade
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) gave Brit info advantage globally
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International banking is Britain’s No
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(48) Strong and growing link with Empire, particularly White Dominions: Share of White Dominions rose from 57% in
1860 to 71% in 1913, while share of Continental Europe fell from 3% to 2%
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Also helped arrange loan issues for governments on London K market,
although merchant banks played larger role in this business
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Trade intermediation such as currency conversions are done in Brit: other countries dependent on London for
financing
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(49) City networks
Cassis (1994) collects information on bankers and bank directors from 10 private banks, 20 merchant banks, 7 discount
houses, 13 joint stock banks, 14 overseas (colonial) banks and BoE
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Network is a
social network in London as well as an international network
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(50) Intergenerational family tie strongest among private bankers and merchant bankers with 87% of sample sons of
bankers, effectively running family firm
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B
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Gentlemanly Capitalism: tight
connection between landed gentry and private banks
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(52) Directorships
Were banking elite able to dominate industry through network of interlocking directorships? More than half the sample
had no more than 2 other directorships & only 5% sat on 8 or more boards (at any one time)
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Private bankers no more likely than anyone else to sit
on boards of directorships
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Confirms links between
aristocratic and banking circles
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(54) Networks
Picture that emerges is one which often appears in literature on entrepreneurial failure: Family firms / Public school and
Oxbridge education / Marriage into aristocracy
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But here, dealing with a thriving part of the economy… Conclusion: network form of organisation continued to be well
suited to international finance in the pre 1914 period
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Banking, shipping, high spec
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(55)
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Conclusions
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(56) Britain in overall productivity leadership position in late C19 not because of high productivity in industry but because
of high productivity in services (and small agricultural sector)
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Services productivity advantage is absolute but getting eroded
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(57) GB also facing problem of adjustment to ‘industrialisation’ of services
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(58) Variety of experiences:
-Railways: origin of big business in services
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-Shipping: Britain still dominant in shipping pre 1914, especially on empire routes: Indication of potential future
problems with the emergence of large scale lines organised on hierarchical basis
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Rational use of sail/steam (as depicted by Harley)
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Banks were specialised, diversified and did will in supporting Brit Industry

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