Theme: Political Economy | Content Type: Blog

Don't be Fooled: UK Industrial Strategy has a Long History of Picking Winners

Richard Woodward and James Silverwood


Ivan Bandura

| 5 mins read

Conventional wisdom asserts that industrial policy in the UK expired shortly after Margaret Thatcher’s arrival in 10 Downing Street. As our recent Political Quarterly article demonstrates however, nothing could be further from the truth.

Despite governments repeatedly declaring that the state shouldn’t ‘pick winners’ through selective interventions to promote favoured firms and sectors, Conservative, Labour, and Coalition administrations since 1979 have all done precisely that.

The industrial strategy of the May government, published as a white paper in November 2017, adopts a similarly Janus-faced stance. This document insists that “the role of government is not to pick favourites” but elsewhere pinpoints a series of industries, from automobiles to artificial intelligence, worthy of state support.

Further, the white paper is conveniently silent about financial services sector, the industry to which successive UK governments have backed the most generously.

The (long) history of picking winners

The practice of picking winners has a long lineage. The UK’s experiments with this policy began in the 17th-century, making it an early pioneer of industrial strategy.

Unlike other countries, which concentrated their efforts on civilian manufacturing, the UK’s industrial strategy since the seventeenth century has emphasised financial services and arms manufacturing. The genesis of state support for these sectors is located in an English financial revolution, itself the result of military defeats to the emerging naval and commercial power of the Netherlands between 1652 and 1674.

These setbacks culminated in the 1688 Glorious Revolution as English parliamentarians conspired in the successful invasion by William III whose economic reforms would underpin UK hegemony for the next 250 years.

Citizen investors in the state

The most important reform was the Bank of England’s creation in 1694. The key purpose of the Bank, the issuer of the world’s first government bonds, was to channel investment from citizens towards the state. In a forerunner of what Edgerton calls the warfare state, the innovation of public debt provided the financial means to rebuild military capacity. Investment into defence manufactures delivered battlefield superiority, especially in naval power, that would build the British empire.

Government patronage was also bestowed on the City of London. As David Kynaston’s magisterial history demonstrates, the City’s development into a global financial centre depended on the state’s systematic and sustained support. Simultaneously, the slave trade and expansion of commerce alongside the British empirefacilitated the emergence and expansion of a number of ancillary services such as insurance.

Manufacturing gets a short shrift

The manufacturing sector meanwhile was largely excluded from this global financial network. Britain’s manufactures instead financed their economic activity through reinvesting profits, inherited wealth, and loans from family and friends.

The result was inadequate capital investment in the technological modernisation of industrial production putting UK manufacturers at a competitive disadvantage with scientifically superior American and German industrialists.

The promotion of financial services over civilian manufacturing contributed to the growing dominance of services in the UK economy. By the Victorian period the service industries of finance, distribution, transport and communication were the principal sources of UK economic growth.

20th century industrial strategy followed a similar pattern with military concerns providing significant stimulus for ‘picking winners’. The Treasury granted direct subsidies to support the development of new industries with the potential for future military application such as civil aviation.

The interwar period did see a growing willingness to countenance state support to civilian manufacturing, a trend that persisted after the second world war. Britain’s manufacturers enjoyed a post-war renaissance. However, by the mid-1960s, the revival began to dissipate. The growth of UK manufacturing output lagged behind international competitors and, from 1966, manufacturing’s contribution to employment began to fall.

Back to the future

The economic upheavals of the 1970s frequently credited with spurring radical change in UK industrial strategy. In reality, UK industrial policy went back to the future. Defence manufacturers and financial services have always attracted state support. This is vividly portrayed in the decision to mortgage the nation’s public finances to bail out the City of London, while continuing to allow the civilian manufacturing to wither in the face of global competition.

While Theresa May’s industrial strategy has novel features, including delivering a welcome focus on the role industrial strategy might play in improving productivity and solving the ‘grand challenges’ of the future, it stands within a much longer tradition than generally appreciated. Whatever else it may achieve, it is unlikely to dramatically alter the UK’s economic landscape.