The way to save our industries from the museum

In a dank hamlet clinging to the side of the Rossendale valley in the heart of Lancashire stands a monument to the county's once mighty cotton industry. The Helmshore Textile Museum is a working mill. The spinning equipment there, made nearby in 1903, was taken direct from surrounding mills when they closed, direct from manufacturing to museum.

It would be hard to find a more suitable symbol of the penalties British industry has paid for its lack of investment over the years. By 1816, capital investment in the cotton industry in Manchester and its environs is thought to have reached pounds 20m, equivalent to about pounds 1bn today.

Waves of new technology triggered additional expenditure but by the 1930s the basic techniques in use had stopped changing. When the mills closed in the 1970s much of the machinery in use was about a century old.

Yet further technological upgrades might have saved the industry from its destruction by cheap foreign competition. Two decades ago it was still a labour-intensive business producing pretty much commodity items - its standardisation ironically encouraged by government grants for certain types of equipment in the 1940s.

Although wages were low compared with the rest of manufacturing, the industry could not compete with low-cost competitors in southern Europe and the Far East. Investment in new technology might have allowed the industry to survive and grow, even though the traditional jobs would still have disappeared.

There are other British industries that have survived only because foreign owners have made the necessary investments. The car industry is one, consumer electronics another. Japanese and Korean companies have seen investment opportunities where British owners have not.

It is hardly surprising, then, that the Labour Party has identified investment - in human as well as physical capital - as the key issue for the country's long-term growth prospects. On the face of it, the figures are pretty damning and it is natural to suppose they have something to do with the weaknesses of Britain's economic performance. As the table shows, average UK investment growth, whether total investment or business investment, has lagged behind the average in other industrial countries.

Labour's emphasis on the importance of investment has been criticised by the chief economist at City investment bank UBS, Bill Martin. Mr Martin argues that the idea that higher investment can permanently raise the rate of growth, ignores the fact of diminishing returns to capital. Empirical research tends to support the conventional economic assumption that the rate of return on investment will fall the more of it there is. In these circumstances, higher investment will boost output growth only temporarily - very welcome, especially as what is temporary to an economist, can be many years in real life, but not a panacea for the nation's economic ills.

The clash between this dismal conclusion from conventional economics and New Labour's common-sense instinct that investment matters, can be resolved by acknowledging that it is not just extra investment,but the efficiency with which it is used that explains economic performance.

In industry, more efficient ways of using capital and labour are likely to be embodied in new equipment. It is much easier for managers to alter working practices by introducing a new machine than to march to the shop floor and tell everyone to start doing everything differently.

Economist Nick Crafts has concluded that the UK's relatively poor economic performance in the 1960s and 1970s was due to inefficiency. In a recent study he wrote: "The earlier failures had their roots in British institutions, and the Thatcherites were given an unusual political window of opportunity to attack them." He has concluded, though, that there are still big question marks hanging over the efficiency and technological capability of British industry, despite the Thatcherite attack on unions and workplace inflexibility.This is a conclusion that also has a clear appeal for Labour, although it would focus on a different set of institutional failures.

Labour has turned the spotlight on the inefficiencies of the UK's capital markets in financing industry - and rightly. Many business people will privately agree that their institutional shareholders take a short-term view, and that they would prefer to pay out less in dividends, although most also think it is unimportant so long as they retain enough profits to finance those investment projects they think are needed.

Politicians across the spectrum also agree on the failure of the education system to deliver a good education to the majority of children. Most Britons start their working lives with low basic skills, a high level of boredom and little motivation - and it is downhill from there. As Sir John Harvey-Jones has observed, they have energy and creativity but these qualities are spent on building a matchstick model of the Taj Mahal or dreaming that the pop group they have formed will be the next Oasis.

It is, of course, even harder to improve efficiency than it is to increase the level of investment. It is Japanese inward investment that brought new practices such as just-in-time and team-working to great swathes of British industry. Investment in new techniques is likely to be the only alternative for UK companies.

For the cotton industry, which survives mainly in specialised and high- quality niches, it is too late. It might be too late for other chunks of manufacturing, too. Ten miles down the valley from the Helmshore museum lies Chadwicks, Britain's last producer of plastic drinking straws, among other things.

The plant has the most up-to-the minute machinery there is for making straws, having made much of the workforce redundant during the past decade and a half. The business is still struggling against Chinese competition, which is far less technically advanced, very labour intensive and very low cost. Perhaps the lesson is that an advanced industrial country should not cling to the low-tech end of manufacturing at all. There is nothing technically sophisticated about small plastic tubes, no matter how impressive the machines that make them.

For the rest of manufacturing, however, survival will depend on investing in new technology and finding new ways of working with it. It is the countries that have been at the forefront of using computer technology in manufacturing - the US and Japan - which have the best economy-wide employment performance in the industrialised world. It is becoming painfully clear to other countries that it is better to invest in new technology yourself than to import the fruits of it from overseas.

Industrialists, as much as their workforce, dislike the fact that technical progress puts people out of work. But the choice is not between carrying on as before and investing in new equipment that will put many people out of a job; it is a choice between the disappearance of all the jobs and the loss of some. After all, the textiles industry was once Britain's biggest employer and one of the most technically advanced industries anywhere in the world, as the museums poignantly remind us.