Michael Hogan’s The Marshall Plan (2008) provides a rich historical view of the program which provided technical assistance and funding to the war-torn countries in Western Europe and Japan. At the end of the war Germany was divided into four zones of occupation by the victorious Allies (Russia, France, UK, US) and Japan was also occupied by the US. The infrastructure of the defeated Axis powers had been systematically destroyed by strategic bombing between 1942 and 1945 and the Red Army had occupied most of Eastern Europe and moved the Polish border (and its previous inhabitants) two hundred kilometres to the west. The US had assumed that European recovery would progress with limited bilateral support but by early 1947 it was clear that this was not the case.
As 1947 dawned, however, there were very few signs that American strategies were promoting a stable recovery in Europe. By that time, the US had expended over $9 billion in a variety of aid programs on the Continent. But European industrial and agricultural production still lagged behind pre-war levels. Despite strenuous efforts by some European countries, capital equipment and plant facilities remained hopelessly obsolete or in need of wholesale repair from war damage. (Hogan Page 30)
In addition to the difficult economic situation, there were disagreements within the Allies on whether the Rhineland and Saar should be occupied by France, how Germany should be governed, how the Soviet Union and occupied Eastern Europe should be dealt with, and how Communist influences in France and Italy should be responded to. The Americans also disliked the UK Labour Government’s policies on social welfare and nationalisation of key industries as well as their insistence on maintaining the Sterling Area which they felt were slowing down reconstruction. During the first months of 1947 a consensus emerged within the US administration and key senators from both parties which became known as the European Recovery Program or more popularly, the Marshall Plan. Within the BLS, this was also called the US Productivity Program (Dolfman et al).
As part of the preparation for implementing the Marshall Plan, Paul Hoffman, the newly appointed administrator expressed great concerns about the ability of the UK economy to use the investments proposed by the US Productivity Program. As reported by Gottwald (1991), before signing off on the plan, he asked James Silberman, from the US Bureau of Labour Statistics (BLS), to review the current state of productivity in UK and French manufacturing. Silberman’s report, based on visits thirty-five factories to the automobile, radio, electrical, machine tool, apparel, footwear, and textile industries in May 1948 was presented to Stafford Cripps (then chancellor of the exchequer in the post-war Labour government) and its conclusions were as unwelcome as they were damning.
Silberman conducted a remarkable, highly-disciplined, four-week tour involving visits to thirty-five British factories, and including talks with every level of factory management, notes on products, manufacturing methods, equipment, and presentations to top British officials. On completing the visits, he felt he had witnessed an antique world. Expecting to see equipment, processes, and procedures similar to those in the States, he saw instead factories as they were in America at the turn of the century. (Author’s emphasis)
Most industrial plants used the already antiquated system of belt-driven machines powered by a central motor. There were few jigs, fixtures, or power hand tools. Forklift trucks and pallets were rarely available to ease the movement of heavy loads or to save space by vertical stacking of pallets. Even the American-owned GM, GE, and Hoover plants were not appreciably different. The British seemed to have little idea of the progress made by American industry after the turn of the century. Silberman concluded that his existing judgment in British industry on the prospect of purchasing new plant and equipment with Marshall aid would result simply in reproducing the existing state of their technology, the continuation of a craft rather than a productivity-oriented society.
Cripps was one of the few politicians with any high-level managerial experience, having served as the minister of aircraft production from November 1942 to May 1945. He was well aware of the need to increase the productivity of UK industries and had already set up the British Institute of Management in 1947. He argued strongly for the Marshall Plan and for active UK participation; this resulted in the Anglo-American Productivity Council (AAPC) which organised a comprehensive programme of visits by UK management and trades unions to a wide variety of American firms. At the end of the Marshall Plan in 1952, the Conservative government created the British Productivity Council to continue this productivity work.
Diffusion of the US Productivity Program
Table 1 below shows the effects of the diffusion of the US Productivity Program.
GNP Annual Growth Rate (%)
Table 1: The effects of the diffusion on GNP annual growth rates
This data is taken from Peter Hennessey’s book (Hennessey, 2019) and shows relative performance for a good part of the same time period. Japan grew almost three times faster than the UK, our closest European neighbours nearly twice as fast. It is a story of relative failure which demonstrates that diffusion of other people’s inventions, even when offered for no charge, is not a free lunch. The chart shows wide differences in diffusion and the following sections look at five of the leading economies, UK, France, Germany, Italy, and Japan.
Diffusion of the US Productivity Program – UK
In 1979, Graham Hutton was asked to write a paper to assess Britain’s economic progress since the start of the Marshall Plan in 1948. In a short paper written for the Institute of Economic Affairs (Hutton, 1980) he wrote:
Since 1953, in 26 years, Britain has fallen from second place in the economic growth and productivity stakes to 20th place among the 24 leading industrial nations of the Western, or Free world. That is a catastrophic performance (Author’s emphasis).
According to Hutton, output per worker-hour in manufacturing industries in 1977 was £2.70 in the UK, £4.50 in France, and a massive £7.10 in Germany. His paper went on to argue that whilst UK manufacturing industries compared poorly in productivity terms with their European competitors, the position of the public sector and services sector (which at that time accounted for 50% of GDP) was even worse. Absence of measurement of public sector productivity and difficulties in measuring private sector services industries suggested little or no productivity growth at all.
In early 1952, Hutton, a well-respected UK economist, had been asked by the British Productivity Council to write a book entitled We Too Can Prosper, with the subtitle ‘The Promise of Productivity’. The book was published in 1953 (Hutton, 1953) and became a best-seller. In it he enthused that management, workers and government could work together to increase productivity and prosperity, stating that the differences between the US and UK in productivity matters were primarily cultural.
The UK did indeed embrace the Marshall Plan and when it formally ended in 1952, the then Conservative government created the British Productivity Council (BPC) to continue the productivity work. The BPC published a large number of books and training materials which stressed the importance of Work Study and co-operation between management, unions, and the government. This term brought together Industrial Engineering, which had been traditionally implemented in manufacturing industries since Taylor’s time, and the newer discipline of Organisation and Methods (O&M), which was pioneered by John Simmons and colleagues at Lyons and other leading UK Firms and Government institutions. The BPC was active between 1952 and 1980, when it was defunded. The UK did get positive results from the AACP and the Marshall Plan by achieving several decades of higher rate of productivity and growth post 1950 than had been achieved since the 1920s. The problem was that UK growth rates were half those achieved in continental Europe, and only one quarter of those achieved by Japan.
According to Hennessey, Macmillan had understood Britain’s relative growth failure in the late 1950s and had already decided that joining the Common Market, as it was then called, was necessary to expand UK markets. De Gaulle vetoed this in the early 1960s and the UK did not join until 1973 under the leadership of Edward Heath. The oil crisis in 1973 led to the highest post-war rates of inflation, a miner’s strike which led to the ‘three-day week’, as electricity was rationed, and the ‘winter of discontent’ in 1978 which led to piles of rubbish on the streets and the unemployment of one million workers. The political consequences of this failure were that the Labour Party lost the 1979 election to Margaret Thatcher’s Conservative Party, who quickly implemented Friedmanite policies imported from the US in tandem with President Reagan.
Diffusion of the US Productivity Program: France
In France another economist, Jean Fourastié, had also been involved in the post-war recovery as a member of the Commissariat Général du Plan, an advisory body set up by De Gaulle after WW II and which reported to the government of France from 1946 to 2006.
The aims of the Commissariat were: (1) to develop national production and foreign trade, particularly in those fields where France is most favourably placed; (2) to increase productivity; (3) to ensure the full employment of manpower; (4) to raise the standard of living and to improve the environment and the conditions of national life. This plan is commonly known as the Monnet Plan after Jean Monnet, the chief advocate and first head of the General Planning Commission. In pursuit of its objectives, the General Planning Commission set production targets for 1950 according to the resources that were then expected to be available, starting with six crucial sectors: coal mining, steel, electricity, rail transport, cement, and farm machinery. Later oil, chemicals, fertilizers, synthetic fertilizers, synthetic fibres, shipbuilding, and other sectors were added. The Commission’s plan emphasized expansion, modernization, efficiency, and modern management practice. It set investment targets, and allocated investment funds and reported on results. (Wikipedia, downloaded July 14th 2023)
Fourastié wrote a best-selling book in 1979 called TheThirty Glorious Years (Les Trentes Glorieuses), which celebrated the extraordinary success of the plan in delivering annual GNP growth rates of 5% which transformed the country. During that period France developed and implemented the largest fleets of nuclear reactors in Europe and led the growth of Airbus, the strongest commercial aircraft industry in Europe and a rival for Boeing in the US. Monnet also played a founding role in European political and economic integration as the first chair of the European Coal and Steel Community which was the precursor to the Common Market founded in 1956.
Diffusion of the US Productivity Program: Germany
The productivity performance of the West German economy was even better than that of France, growing GNP at 5.7% a year according to Hennessey. Before WW II Germany had been a powerful industrial country with quite similar to the UK as Rostas (Op. Cit.) had observed. Germany had a number of large firms with dominant positions in chemicals, electrical engineering, automobile manufacturing and aircraft all of which were boosted in the 1930s by an intense re-armament programme. At the end of WW II, the country had been reduced to rubble by three years of ‘strategic bombing’ by the RAF and USAAF, occupied by the four victorious powers (US, UK, France, and the Soviet Union) and permanently lost East Prussia and Silesia.
Before the end of the war, the Morgenthau plan proposed the complete de-industrialisation and disarmament of Germany and its division into a small number of predominantly agricultural states. This planned was very quickly dropped by the occupation powers, as they realised that the costs of rebuilding the country and feeding the German population would be astronomic. Only the Soviet Union called for reparations by shipping all industrial plant from East Germany to the Soviet Union, where much of it lay until it rusted. The American, French, and British zones concentrated on feeding the remaining population and putting them to work on clearing bomb damage and reconstructing the roads, railways and factories that had been destroyed to get them working again.
In this work they were aided by two extraordinary individuals (Gethard, 2021) Walter Eucken and Ludwig Erhard. Eucken had argued for a free-market economic system with an independent central bank and a strong social welfare system which mirrored quite closely the New Deal settlement developed by Roosevelt. It also matched quite closely the objectives of the Marshall Plan as explained by Silberman in his retrospective (Op. Cit.).
In the first phase of the Marshall Plan, it was tacitly agreed that the benefits of productivity increases would be shared among owners (in the form of higher profits), workers (in the form of higher wages) and the consuming public (in terms of lower prices). When the program was continued and expanded in 1953, the US Congress required that a formal agreement be signed between the recipient government and the Marshall Plan and eventually between the government and the participating enterprise. This was intended to prevent a repetition of early patterns of industrialization in Western Europe, which had achieved their ends by mechanizing production, limiting output, maintaining prices, and firing surplus workers, a process the unions were determined not to repeat. (Silberman para 1.21. page 8)
Ludwig Erhard was strongly anti-Nazi but survived the war and was quickly recognised by the US military occupation force as highly able. He was appointed by them as Finance Minister of Bavaria and was quickly co-opted into the military administration. During this time, he planned the new German currency, the Deutsche Mark and on the day of its introduction also abandoned price controls which had been in force since 1933 and maintained by the Allies and instituted a number of tax cuts to increase consumption. According to Gethard (Op. Cit.):
Erhard was brought into the office of US General Lucius Clay, who was the commanding officer overseeing the occupied western half of Germany. Clay told Erhard that his advisors informed him that the German’s drastic new policy would be a terrible mistake. Famously, Erhard responded, ‘Don’t listen to them, General. My advisers tell me the same thing’.
Erhard was so successful that he became Germany’s Finance Minister under Chancellor Adenauer and also embraced the Marshall Plan which contributed to the post-war recovery. Unlike the period after WW I, there were no reparations payments from Germany and the Rhineland and Saar regions, the heartland of Germany’s coal and steel industry were gradually returned to German ownership under the supervision of the European Coal and Steel Community (ECSC) which had the support of France, Belgium, the Netherlands, Luxemburg, and Italy.
The Marshall Plan also provided political support from the US government for the ECSC though the OECD established after the war to work with the US and European countries to support the implementation of the Marshall Plan. In the German case, as with France, extremely able people and new institutions combined to create what the Germans still call the Wirtschaftswunder – the German economic miracle.
Diffusion of the US Productivity Program: Italy
In her study of the impact of the Marshall Plan on Italian firms, Giorcelli (2019) studied the impact of the US Productivity Program in Italy. This was announced in 1950 and 6,605 Italian firms were selected as being eligible to apply. During 1951, 3,264 firms applied and were evaluated. Firms could also choose which parts of the program to apply for. The program included study trips which lasted from eight to twelve weeks and could be complimented with new machines to be provided by the US firms. The Productivity Program loaned the funds for the machine purchase, repayable over 10 years at a 5.5% interest rate (which was significantly lower than the 9% rate available from Italian sources). In addition, study trips for Italian engineers to learn how to best operate the new machines were also arranged. All firms that participated in the Productivity Program were subject to a three-year monitoring period by US experts.
On average, eligible firms were multi-plant organizations with 48 employees, assets of $1.6 million, and sales of $1 million (in 2010 USD), that had been in operation for 12 years. Almost all firms were family owned, 43% of them were also family managed, and only 13% were exporters.
The outbreak of the Korean War resulted in a budget cut to the Marshall Plan, which resulted in only half the firms which applied for the program being accepted. This enabled Giorcelli to compare the performance of firms which participated with the ones that did not. The results were striking:
Total Factor Productivity (TFP) of firms that got the management training went up by 15.0 per cent and the combined management and technology transfers went up 21.7 percent, respectively, within 1 year since the intervention, compared to firms in comparison provinces. The difference in TFP between the two groups of firms constantly increased and, after 15 years, it amounted to 49.3 percent and 86.3 percent, respectively. (author’s emphasis).
This increase in firm level productivity contributed to Italy’s 5.1% annual GNP growth as reported by Hennesey.
Diffusion of the US Productivity Program: Japan
Bianchi and Giorcelli (2020) also reviewed the implementation of TWI in combination with Deming’s teachings in Japanese industry. The TWI program was a voluntary government-sponsored program that offered free in-plant management training to US firms involved in war production between 1940 and 1945. It encompassed interventions in three main areas, called J-modules. The Job Instructions (J-I) module taught supervisors and managers how to establish standard procedures for operations, the Job-Relations (J-R) module how to manage and motivate workers, and the Job-Methods (J-M) module how to introduce improvements to current production processes.
One of the firms that was able merge Deming’s teachings with TWI was Toyota, whose senior production engineer Taichi Ohno had already studied the Ford production system in Detroit. He had understood that that the economies of scale achieved by Ford were based on the output of 8,000 cars per day, whereas in 1950, Toyota could only produce 2,500 cars per year. Ohno realised that the best way to manufacture in volumes far smaller than were common in the US or even Europe was the increase the ‘flexibility’ and utilization of the key elements in their manufacturing systems – equipment, workers, and suppliers. Ohno also sought to lower, as much as possible, equipment needed for in-house personnel, factor or warehousing space, and variable costs such as in-process or finished goods inventories. (Giorcelli Page 19.)
Based on his extraordinary experience in post WW II Japan as part of the Marshall Plan, W. Edwards Deming taught that productivity measurement is not the same as productivity improvement. He stressed, based on his personal experience with large numbers of productivity projects in many firms, both public and private, that before any improvements were to be attempted, the work activity systems must first be specified, and the changes in system state must be reported on using statistical quality control methods. He sets out the firm level approach and its consequences as a sequential process which is illustrated in Figure 1 below.
Figure 1: The Deming Chain Reaction (Deming, 2018)
Deming says that ‘this chain reaction was on the blackboard of every meeting with top management in Japan from July 1950 onwards’.
Under Deming’s guidance, Japanese industry, which had been completely decimated in WW II, recovered to drive the Japanese economy to deliver 10% annual growth in GDP from 1950 to 1970. During the 1980s another group of scholars from MIT (Womack and Jones, 1990) studied the Toyota Production System, the implementation of which had enabled Toyota to overtake General Motors as the world leader in automobile production. They explained and communicated Toyota’s lessons to the global automotive industry under the banner of ‘LEAN’ production. They summarised the benefits of LEAN as follows.
Lean production is ‘lean’ because it uses less of everything compared with mass-production – half the human effort in the factory, half the manufacturing space, half the investment in tools, half the engineering hours to develop a new product in half the time. Also, it requires keeping far less than the needed inventory on site, results in many fewer defects and produces a greater and ever-growing variety of products. (Womack, p. 11)
Why Did the UK Fail to Diffuse the US Productivity Program as Successfully as its Rivals?
Figure 2 below shows UK productivity from 1860 to 2018. Out of the sixteen decades from the Great Exhibition, the two best decades for productivity growth occurred between 1950 and 1969 and the third best decade was the 1920s. The much-maligned 1970s (Crisis, What Crisis?) and the much-praised 1980s (North Sea Oil and Big Bang), turned out to deliver the same levels of productivity growth as each other.
Figure 2: UK labour productivity history since 1860.
There are a number of possible explanations for this relative failure. The US and the UK both implemented highly focused national economic systems during the war, during which the allocation of labour and capital, as well as innovation expenditure were tightly managed to deliver victory against the Axis powers. This was combined with careful management of domestic consumption and prices to deliver successful war time economies. The UK also implemented strong rationing of basic foods and transportation from the start of the war, which did not end until the early 1950s.
Correlli Barnett (1955) documented how the UK wasted the post-war opportunity presented by the Marshall Plan and Hutton confirmed this (Op. Cit.). But Fourastié (Op. Cit.) was able to do the opposite by celebrating Les Trentes Glorieuses, which clearly owed something to the French implementation of their national economic system after the war under De Gaulles’s direction and Monnet’s management.
We know that highly sophisticated scientific management / work study systems were implemented in the UK munitions industries by firms without any prior experience in these industries, and that work study for manufacturing industries and organisation and methods (O&M) for office work were also strongly supported by the British Productivity Council and British Institute of Management, both established by Cripps after the war.
The problem for the UK may have been that these innovations were only implemented by a small number of frontier firms and not diffused as widely as in the other countries in the Marshall Plan. As recently as 2018, Haldane (Op. Cit.) was suggesting that the ‘long-tail’ of poorly performing UK firms was partly responsible for the UK Productivity Puzzle.
Another contributory factor might be that the UK never implemented the third leg of the US Productivity Program which was the delivery of regular productivity reporting at shop, firm, and industry levels. This lack of reporting is still the case today.
A final contributory factor, which was quite explicitly made by Hutton in 1980 (Op. Cit.) was the large growth in public services since WW II. In the internationally agreed System of National Accounts (SNA) for public services inputs are equated to outputs, which means that public services productivity is not measured at all. Dunleavey argued that this was a great mistake given that these services now accounted for 20% of UK GDP which was roughly equivalent to Manufacturing, Construction and Utilities industry sectors and set out a number of recommendations to measure outputs directly in the same way as private services. This turns out to be both possible and desirable as was argued by the Donegal County manager in his submission to the Irish local government department (McLoone, 2010).
The Atkinson report (2005) recommended that public services productivity be measured by how effectively inputs were converted into outcomes rather than outputs and this recommendation was accepted by Government and implemented by ONS as a satellite account so there is still no accurate reporting on how inputs are transformed into outputs in public services.
Scaling and Diffusion
One way of looking at an economy is to look at how successful its firms are at scaling. By scaling we mean the normal growth in revenue, profitability (and ideally productivity) which a firm can report in its annual accounts. Economists already use scale factors like revenue growth and productivity growth to distinguish between high-growth firms, three consecutive years of revenue growth; and frontier firms, the one percent of firms who achieve productivity growth rates greater than 10% per annum. Management teams, particularly those in large publicly listed firms, are very focused on delivering consistent growth in revenue and profits, and a small number of frontier firms also talk about their growth in productivity and the innovations which drive these increases.
At national level, governments are also interested in scale but are even more interested in diffusion. As Haldane (Op. Cit.) pointed out, from the productivity perspective, the UK has a long tail of poorly performing firms. If we look back at the US Productivity Program, we can see that this comprised a rich set of intellectual property and associated intangible assets which had already demonstrated diffusion in the US economy during WW II. Following the end of the war, it therefore made perfect economic sense for the US Government to offer these intangible assets to their Allies and provide them additional financial support to implement them. As we have seen, the US Productivity Program was very widely diffused in most countries to which it was offered and supported extraordinary GDP growth for nearly 30 years. US Allies used the proceeds from economic growth to purchase US exports and invest in US Firms, thereby directly benefiting the US itself. The US, by following the tripartite distribution of its own productivity growth, managed to ensure that real wages matched real productivity growth until 1980.
From a macro-economic perspective, countries which have firms which are scaling successfully and implementing the most advanced managerial methods and tools (of which the US Productivity Program is an excellent example) and distribute the proceeds of productivity growth to workers, customers and investors, have the highest sustainable rates of growth because higher wages drive higher consumption which results in higher demand for products and services to which firms respond by scaling their businesses.