Stagnation, Deindustrialization, and the Decline of Anglo-Saxon Economics

Sixty-four years ago, in The Stages of Economic Growth, the economist and political theorist Walt Rostow, a senior advisor to presidents John F. Kennedy and Lyndon B. Johnson, laid out a theory of the stages nations go through to achieve full development: 1) traditional society, 2) preconditions to take-off, 3) take-off, 4) the drive to maturity, and 5) the age of high mass consumption—the era America entered after WWII.

What Rostow could not have foreseen in those heady days would be a sixth stage for some of the nations that had attained stage 5: gradual decline, especially in productive forces. A number of Anglo-Saxon economies arguably have now advanced to this stage. They include Australia, Canada, Great Britain, and potentially the United States. All are now saddled with slow or even negative productivity growth, and their GDP growth is being kept afloat mostly with extremely high levels of immigration, while their advanced, traded-sector industries are hollowing out.

At first glance, these nations’ economies have little in common. They are different sizes and in different parts of the world. But they share an important trait: They all operate using the same Anglo-Saxon economic model as their playbook—something that the Asian Tigers, including China, never embraced. Until they reject Anglo-Saxon capitalism and replace it with a new model that could be termed “producerist economics,” we can expect more of the same: a gradual decline in the relative economic status of Anglo-American economies.

Oxford Reference defines Anglo-Saxon capitalism as “A system of capitalism characterized by extensive market coordination by economic actors and relatively neutral patterns of governmental market regulation aimed at maintaining property right institutions without privileging particular social actors.” Among its core tenets:

▪ All legal economic activity has equal value—for example, manufacturing potato chips is no different than manufacturing computer chips.

▪ Maximizing the sum of private interests is the national interest.

▪ Market failures are few and far between, and almost always less consequential than government failures.

▪ All business activities that maximize profits are welfare-maximizing, contrary to the idea that companies might maximize short-term value creation at the expense of net-present value (e.g., long-term profits).

▪ Anything that gets in the way of free markets is welfare-reducing, which explains the focus on flexible labor markets (e.g., opposition to minimum wages), open immigration, few financial regulatory controls, and an antitrust regime the supports competition, rather than scale and innovation.

▪ Unfettered globalization, even one-sided free trade, is welfare-maximizing.

▪ Financial trading is the epitome of value creation.

▪ And small government is best.

Starting in the 1980s, under Reaganism in the United States and Thatcherism in the United Kingdom (similarly championed in Australia by Bob Hawke and in Canada by Brian Mulroney), the Anglo-American sphere embraced this playbook. Indeed, as Oxford Reference notes, “advocates of the Anglo‐Saxon model note the strong economic performance of the UK and especially the US during the 1990s to bolster claims that the ‘liberal market’ model of capitalism is superior…”

It may well have been that Anglo-Saxon economics was superior to the social democratic Continental European model. But in a world now powered by a new wave of IT-driven innovation and where the Asian development model focuses on gaining global market share in advanced industries—a form of “Listian” developmental capitalism, patterned the writings of 19th century German-American economist Friedrich List—Anglo-Saxon economics is no longer suited to the times. Indeed, it appears to be leading the Anglo-Saxon nations to a post-Rostowian stage of slow decline.

Using a measure of industrial specialization known as a location quotient (LQ), we can see just how far behind the Anglo-Saxon capitalist economies have fallen. For national economies, LQ is a ratio calculated as an industry’s share of a country’s economy divided by the industry’s share of the global economy. An LQ of 1 means that a nation’s output in an industry is on par with the global average.

ITIF’s Hamilton Index uses this measure to assess 40 nations’ relative performance in 10 advanced and strategically important industries: pharmaceuticals, electrical equipment, machine equipment, motor vehicles, other transportation equipment, computers, IT services, chemicals, basic metals, and fabricated metals.

In comparison to other countries, Anglo-Saxon capitalist countries stand out for their extremely poor performance. Their overall location quotients in 2020 (the latest year for which data are available) were all below 1, with Australia scoring 0.46 (less than half the global average share of advanced industries); South Africa 0.57; Canada 0.58; the United Kingdom 0.67; and the United States 0.87. (Figure 1.) Moreover, four lost ground from 2008 to 2020: South Africa lost 0.25 points in that period; Australia dropped 0.07 points; Canada and the United Kingdom both fell by 0.05, while the United States gained a modest 0.02 points from the growth of its IT and information services sector (e.g., Microsoft, Google, Meta, etc.).

Compare that performance to five Listian Asian nations, China, Japan, Korea, Taiwan, and Singapore. Their location quotients were all well above the global average in 2020 at 1.47, 1.21, 1.77, 2.10, and 1.67, respectively. Collectively, these five economies’ LQs were 80 percent greater than the Anglo-Saxon five—1.45 versus 0.81.

Figure 1: LQs of select Anglo-Saxon and Listian economies in ITIF’s composite Hamilton Index, 2020

We see similar results when looking at productivity growth. Over the last five years, the five Anglo-Saxon economies saw an average combined labor productivity growth rate of just 4.3 percent, while the five Listian nations saw productivity growth of 19 percent—more than 4 times greater.

The reality is that the Anglo-Saxon capitalist economies have become hollowed out shells of their former industrial selves. The United Kingdom now specializes in tourism, higher education, and finance. With their massive energy and minerals sectors, Canada and Australia are fast becoming what Alexander Hamilton warned the United States must avoid becoming: hewers of wood and drawers of water. And while the United States still maintains capabilities in some advanced sectors, especially software and information services, its prospects in many “hard” industries and some emerging ones look, frankly, weak compared with the rapid advances China has made in a wide array of advanced industries.

The Anglo-Saxon economic model was riding high from the 1980s through the early 2000s, in part because it was a needed corrective to what had become the sclerotic Keynesian and social welfare economic system of the post-war period. But just as the Anglo-Saxon model replaced Keynesianism, it too must now be replaced: by “producerist economics,” under the following tenets:

▪ All legal economic activity is not equal—potato chips are far less strategically valuable than computer chips.

▪ Maximizing the sum of private interests does not equal the national interest.

▪ Market failures are widespread, particularly in advanced industries, and smart government policies are necessary to effectively address them.

▪ Businesses need to focus more on net-present value creation (e.g., long-term profits).

▪ Intervening in markets to support entrepreneurs and corporations can be welfare-expanding.

▪ Unfettered globalization is welfare-reducing unless it is based on all nations playing by the same rules.

▪ Financial trading should be shrunk and put in the service of non-financial enterprises.

▪ Active, strategic government that works to boost innovation, productivity, and competitiveness is best.

In short, Anglo-Saxon economics has focused on the overall economy, markets, and prices, but not on the process by which entrepreneurs, firms, and industries use technology to boost growth and national power. Producerist economics focuses on enabling producers to succeed, especially in advanced, traded-sector industries.

That is the formula policymakers in Anglo-Saxon nations must embrace if they want to avoid withering in a post-Rostowian stage of decline. It is particularly important that policymakers embrace producerism, because the alternative now on the table in Anglo-Saxon economies—left-wing, progressive, anti-business economics—would drive these nations not just into stage 6 on Rostow’s scale, but to stage 7: economic ruin.