It is worth taking a step back to the early 1900s to better understand the state of the British economy on the eve of World War II.

The Rise of New Competitors.
The Industrial Revolution gave the British Empire a huge advantage over other Western nations in the development of manufacturing. However, in the second half of the 19th century, these countries also embarked on the path of industrialization, and two of them managed to do so at an accelerated pace, overtaking Great Britain itself around 1900: according to Cameron and Neal (2005), by 1890 the United States had become the world's leading industrial power, and two decades later, Germany had also taken the lead in Europe.

According to Allen (2011), paradoxically, it was the progress made by British industry in its attempt to further strengthen its competitiveness that led to the spread of new methods of industrial production outside the United Kingdom. In his view, one of the reasons why the Industrial Revolution took place in Britain and not elsewhere was that the mechanization of industrial processes was much more convenient there than elsewhere, due to the high cost of labor and the low price of coal. However, as technological improvements over the decades led to significant improvements in the efficiency of steam engines, their introduction became profitable even where wages were lower or coal less cheap.

The rise of new industrial nations was then facilitated by a widespread return to protectionism in the second half of the 19th century. As Bairoch (1996) points out, while Britain's policy of promoting free trade was highly successful in the 1860s, in the following years the United States and continental Europe began or resumed imposing high tariffs on their manufactured imports. This policy shift allowed the industries of these countries to operate in their respective domestic markets protected from the competition they had previously faced from the more advanced British industry, thus facilitating their development.

Their rise was also aided by the fact that they began industrialization later than Britain. As Kemp (1997) points out, this delay allowed them to equip themselves with more modern equipment than in Britain. The advantage they gained could of course have been lost if British entrepreneurs had responded to the advance of these new competitors by renewing their production facilities to equip themselves with the most advanced technologies available. However, they moved very slowly in this direction and were thus unable to prevent significant shares of the world market from being taken away from them. According to Kemp, this inertia can be explained by the fact that for a long time it was more profitable to maintain old plants, the costs of which had been fully amortized, than to replace them, which would have allowed them to maintain their market position but would have required new investments.

The failure to renew the industry
This last argument illustrates how the reduction and, in extreme cases, the elimination of the gap between Great Britain and other Western countries was determined not only by the latter's ability to progress, but also by the former's inadequate defense of its primacy. In this regard, we can also cite the position of Barratt Brown (1977), who argued that in the late 19th century, British industrialists were discouraged from investing in technological improvements to their plants by the continued availability of cheap labor, guaranteed by the influx of Irish immigrants. Another factor contributing to backwardness has been identified as the reluctance of British operators to innovate not only the techniques they used, but also the organization of production to make it more efficient through the creation of large vertically integrated enterprises. According to Jha (2007), this was due to the dependence of British industry on international trade (i.e., on its colonies, which were indispensable as suppliers of raw materials and as markets for its products), which made the companies operating there vulnerable to events that occurred in other countries and were therefore beyond the control of the government in London. This led them to maintain a lean and flexible structure that allowed them to respond quickly to unfavorable changes: a condition that had the effect of reducing the possibilities for integration between the different parts of the industrial structure.

This conservatism, both technological and organizational, can also be attributed to the propensity of financial operators to prefer foreign investment, as Barratt Brown reports: this may have meant that, despite the exceptional development of the financial sector in Great Britain, the capital available for industrial use was scarce and therefore expensive. This tendency can be attributed to the existence outside the country of safer and more profitable investments than those represented by investments in domestic industry, such as those (mentioned by Barratt Brown himself) in foreign government bonds; but in truth it is difficult to understand to what extent the international projection of British finance was the cause of the failure to renew the manufacturing sector, and to what extent it was a consequence of this phenomenon, since it was precisely the loss of competitiveness of domestic industry vis-à-vis foreign industry that may have led City operators to prefer foreign investment. This view is supported by Arrighi (2008), who argues, on the one hand, that it was the decline in profitable investment opportunities in domestic industry that led to capital flight from the country, and, on the other hand, that the latter phenomenon aggravated the former, since British capital seeking more profitable investments than those available at home was particularly attracted to the country - the United States of America - that was developing most rapidly (and therefore posed the greatest threat to British industrial hegemony).

A final point to emphasize, noted by Cameron and Neal, is the modest technical preparation of British entrepreneurs and managers, due to the low value placed on scientific subjects in the British school system. This factor became increasingly important in the last decades of the 19th century, when the so-called "second industrial revolution" based on steel, chemical and electrical technologies developed: in the phase that then began, scientific research played a much more important role in industrial progress than in the past.

The expansion of public intervention in the economy
Despite the decline of its industrial dominance, Great Britain for a long time remained faithful to its traditional policy of defending free trade, without adapting to the protectionist and interventionist tendencies of the newly industrialized countries. However, this policy was forced to change with the outbreak of the First World War, which made it necessary to strictly regulate production and trade in order to ensure military and food supplies. Berend (2008) describes this shift in British economic policy, reporting the introduction of controls on economic activity and even the nationalization of entire sectors from 1914 onwards, as well as the introduction of tariffs to protect domestic agricultural and manufacturing production. At that time, the demands of the war also led to such an increase in public spending that the amount of currency in circulation increased almost tenfold: a phenomenon that forced the abandonment of the gold standard for the pound sterling, which had helped to maintain its value and thus promoted its use in international transactions. After the war, attempts were made to return to the previous situation by reducing customs duties and re-establishing the link between the currency and gold, in the hope of restoring international trade to pre-war levels and keeping Great Britain at the center of the world financial system (even at the cost of penalizing domestic industry, which suffered from the revaluation of the pound); but these policies were crushed by the great crisis of the 1930s, which led the government to once again adopt the line of strong public regulation of the economy, in line with what was happening in other countries. After the Second World War, this interventionist trend became even more pronounced in terms of state ownership of enterprises, with the nationalization of various sectors and individual operators considered strategic for the country's economy (such as coal mines, railways, electricity production, air transport, the Bank of England, and part of the oil and aviation industries). Tariff protectionism was again abandoned in favor of membership in organizations that promoted free trade between member countries: in fact, from 1960 to 1972, Great Britain was a member of the EFTA (European Free Trade Association), which it had founded together with other countries not belonging to the EEC, before becoming a member of the EEC itself at the latter date (the French veto on its accession having been lifted).
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Source: Publication No. 19 of February 2014 of the Library of the Senate of the Italian Republic