How the U.K. Became One of the Poorest Countries in Western Europe
Britain chose finance over industry, austerity over investment, and a closed economy over openness to the world.
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The past few months have been rough for the United Kingdom. Energy prices are soaring. National inflation has breached double digits. The longest-serving British monarch has died. The shortest-serving prime minister has quit.
You probably knew all of that already. British news is covered amply (some might say too amply) in American media. Behind the lurid headlines, however, is a deeper story of decades-long economic dysfunction that holds lessons for the future.
In the American imagination, the U.K. is not only our political parent but also our cultural co-partner, a wealthy nation that gave us modern capitalism and the Industrial Revolution. But strictly by the numbers, Britain is pretty poor for a rich place. U.K. living standards and wages have fallen significantly behind those of Western Europe. By some measures, in fact, real wages in the U.K. are lower than they were 15 years ago, and will likely be even lower next year.
This calamity was decades in the making. After World War II, Britain’s economy grew slower than those of much of continental Europe. By the 1970s, the Brits were having a national debate about why they were falling behind and how the former empire had become a relatively insular and sleepy economy. Under Prime Minister Margaret Thatcher in the 1980s, markets were deregulated, unions were smashed, and the financial sector emerged as a jewel of the British economy. Thatcher’s injection of neoliberalism had many complicated knock-on effects, but from the 1990s into the 2000s, the British economy roared ahead, with London’s financial boom leading the way. Britain, which got rich as the world’s factory in the 19th century, had become the world’s banker by the 21st.
When the global financial crisis hit in 2008, it hit hard, smashing the engine of Britain’s economic ascent. Wary of rising deficits, the British government pursued a policy of austerity, fretting about debt rather than productivity or aggregate demand. The results were disastrous. Real wages fell for six straight years. Facing what the writer Fintan O’Toole called “the dull anxiety of declining living standards,” conservative pols sniffed out a bogeyman to blame for this slow-motion catastrophe. They served up to anxious voters a menu of scary outsiders: bureaucrats in Brussels, immigrants, asylum seekers—anybody but the actual decision makers who had kneecapped British competitiveness. A cohort of older, middle-class, grievously nostalgic voters demanded Brexit, and they got it.
In the past 30 years, the British economy chose finance over industry, Britain’s government chose austerity over investment, and British voters chose a closed and poorer economy over an open and richer one. The predictable results are falling wages and stunningly low productivity growth. Although British media worry about robots taking everybody’s jobs, the reality is closer to the opposite. “Between 2003 and 2018, the number of automatic-roller car washes (that is, robots washing your car) declined by 50 percent, while the number of hand car washes (that is, men with buckets) increased by 50 percent,” the economist commentator Duncan Weldon told me in an interview for my podcast, Plain English. “It’s more like the people are taking the robots’ jobs.”
That might sound like a quirky example, because the British economy is obviously more complex than blokes rubbing cars with soap. But it’s an illustrative case. According to the International Federation of Robotics, the U.K. manufacturing industry has less technological automation than just about any other similarly rich country. With barely 100 installed robots per 10,000 manufacturing workers in 2020, its average robot density was below that of Slovenia and Slovakia. One analysis of the U.K.’s infamous “productivity puzzle” concluded that outside of London and finance, almost every British sector has lower productivity than its Western European peers.
Thus, the U.K., the first nation to industrialize, was also the first to deindustrialize. Britain gave rise to the productivity revolution that changed the world, and now it has some of the worst productivity statistics of any major economy. What was once the world’s most powerful globalized empire has now voted to explicitly reduce global access to trade and talent. Since Brexit, immigration, exports, and foreign investment have all declined, likely reducing the size of the U.K.’s economy by several percentage points in the long run.
Americans who have visited the U.K. may not recognize the portrait I’m painting. That’s probably because they’re familiar with London, not the country as a whole. As the economics writer Noah Smith notes, London’s financial prowess has concealed the overall economy’s weakness in innovation and manufacturing. Or, as the economic analyst Matt Klein puts it, “Take out Greater London—the prosperity of which depends to an uncomfortable degree on a willingness to provide services to oligarchs from the Middle East and the former Soviet Union—and the UK is one of the poorest countries in Western Europe.”
Today, Britain seems trapped between a left-wing aversion to growth and a right-wing aversion to openness. On the academic left, the U.K. has lately been home to a surging movement called degrowtherism, which asserts that saving the planet requires rich countries to stop seeking growth. On the right, the electorate is dominated by older voters who care more about culture wars than about competitiveness. “In 2019, when Boris Johnson and the Conservative Party won a big majority in the House of Commons, most people of working age did not vote for them,” Weldon told me. “I’m pretty sure that’s the first time that’s ever happened. You have this post-economic, older, economically insulated voting bloc that could afford to be anti-growth almost as a luxury, because they don’t have to care about economic outcomes.”
The U.K. is now an object lesson for other countries dealing with a dark triad of deindustrialization, degrowth, and denigration of foreigners. Having offshored industry in favor of finance, its economy wasn’t resilient. The resulting erosion in living standards made the public desperate for something to blame. Blame-seeking conservatives spotted bogeymen abroad. Brexit cut off the economy from further growth and set the stage for a rolling political circus.
The U.S. has a different menu of problems from the U.K.’s. But here too, politicians are navigating an industrial sector in structural decline, a political left that is often skeptical about the virtues of economic growth, and a political right that is organized in part around hating foreigners. Enemies of progress can criticize the legacy of industrialization, productivity, and globalization. But the U.K. shows us what can happen when a rich country seems to reject all three. Rather than transforming into some post-economic Eden of good vibes, it becomes bitter, flailing, and nonsensical.