Lady Thatcher was a great and transformational Prime Minister who pursued her objectives with an intellectual rigour and a determination that is rare among modern politicians. The comments that follow will concentrate on dispelling some of the myths that have been propagated about the economics of the Thatcher period. However, this narrow focus should be seen in a wider context that of the courage of a lady who spent much of her life under the threat of political assassination; of one whose unique moral force, derived from the Methodism of her youth, gave her the strength robustly to defend her views; and of her important role in winning the cold war. Lady Thatcher’s contribution, in close co-operation with President Ronald Reagan, to the freeing of millions of Eastern Europeans from Soviet domination may eventually come to be regarded as her greatest achievement. However, it is now time to challenge some of the myths about the economic policies of the Thatcher years.
Economic Myths about the Thatcher Years
Myth number one – which has been endlessly repeated by hostile, often left-wing commentators – is that Britain in the 1970s was some sort of workers’ Paradise which Lady Thatcher deliberately set out to destroy as an act of bourgeois class warfare. In fact, the pre-Thatcher 1970s were a miserable time.
All the macroeconomic indicators registered some of their worst statistics of the post-war period and de-industrialisation had been well in train ever since the late-1973 oil price shock. In addition, state molly-coddling had meant that British industry, which was still making products appropriate to a bygone metal-bashing era, was badly managed, suffered appalling labour relations, and was totally behind the curve where technical innovation was concerned. The country could not have continued on the path on which it was travelling in the mid-1970s, particularly as the then new competition from South East Asia came fully on stream.
Myth number two is that Lady Thatcher’s economics were idiosyncratic, had no intellectual merit and destroyed the previous utopia. In fact, the economic policies developed by the then Mrs Thatcher and Sir Keith Joseph in opposition during the mid-1970s contained two perfectly rational core elements. One was gradually to dis-inflate excessive nominal demand through a tight monetary policy along traditional pre-Keynesian lines. The second was to offset any adverse consequences stemming from the downwards management of nominal demand. This would be done by encouraging a supply-led expansion of real activity through tax cuts, privatisation and de-regulation. Unfortunately, the shift from substantially negative real interest rates to positive ones led to a sharp surge in the demand for interest-bearing bank deposits, a ballooning of the broad money stock, unnecessary further rate increases and an unintended monetary overkill, which made the early 1980s recession far worse than had been intended.
It also tends to be forgotten that a long-running engineering industry industrial dispute during the summer and autumn of 1979, led employers to give way on manufacturing wage rises (roughly a one quarter rise) at a time when Sterling was strong because of the build-up of North Sea oil production.
Myth number three is that ‘Thatcherite’ economics came in with a bang in May 1979. If one looks at the policies that were actually pursued, as distinct from the political rhetoric, all the central tenets of economic Thatcherism were implemented by the Labour government of James Callaghan following the December 1976 International Monetary Fund (IMF) bail out of the UK economy. Callaghan and his Chancellor Dennis Healey had little choice because of the IMF loan. However, Mr Callaghan made a brave attempt to convince his party of the need for these reforms.
Money-supply targeting, cuts in public borrowing, government spending reductions, and the privatisation of state assets were all policies implemented by Labour from early 1977 to May 1979 and Callaghan might have persevered with these policies on a limited scale if he had been re-elected; in part, because there was arguably no realistic alternative. While these policies were taken noticeably further and with greater enthusiasm by Lady Thatcher, the groundwork had already been laid.
Myth number four is that there was a consistently pursued Thatcher economic agenda from 1979 to 1990. In practice, the technical apparatus of monetarism was abandoned in 1986 when the authorities came to believe that the demand for money was unstable and that it was no longer useful to pursue money supply targets.
Unfortunately, rather than follow the Bundesbank’s approach –and use techniques such as mandatory liquidity ratios to control money and credit – an inept Bank of England and HM Treasury allowed the damaging Lawson credit boom to develop instead. On the spending side, the doctrine of tight public spending control as a necessary condition for sound public finances and a healthy supply side was increasingly subverted from 1988 or 1989 onwards, as Lady Thatcher progressively lost control over the spending ministers in her cabinet. Thus, neither monetarism nor the closed-handbag approach to public spending discipline coincided neatly with Lady Thatcher’s period as Prime Minister.
Myth number five is that the problems of the contemporary British economy can be laid at Lady Thatcher’s door. Not only does this ignore the twenty-three years since she left office – most economic policy initiatives have fully worked through within two to five years – it also ignores the extent to which her policies have since been reversed, particularly during the period from 2000 to 2010 when Gordon Brown had abandoned ‘Prudence’ and was engaging in a massive re-socialisation of the UK economy.
At its recent peak in 2009-10, the ratio of UK general government expenditure to the basic-price measure of UK GDP was around 52½%, compared with 42½% in 1990-91 when Lady Thatcher left office, and has since eased to only 50¾% in 2011-12 and 48¾% in 2012-13. After allowing for the sharp increase in regulation – much of it European Union inspired – since 1990, the contemporary British economy bears little resemblance to the more free-market one left behind by Lady Thatcher, let alone what she might have hoped to see by now.
Two positive bequests still remain from the Thatcher period, however. The first is that the UK still possesses its own independently managed currency and has not been sucked down by the crisis currently gripping the Euro-zone. The second is that the Thatcher labour-market reforms have meant that the current severe output shortfall has been accompanied by a relatively modest rise in unemployment. The more sensible and realistic attitude on the part of private sector employees, compared with the industrial anarchy that gripped the 1970s, has also helped limit joblessness. This development may also reflect a shift in attitudes that started in the 1980s.
To conclude, Margaret Thatcher was a remarkable human being and possibly Britain’s greatest peacetime Prime Minister of the 20th Century. However, most of her reforms have been undone and the British economy is more socialised today than the one she inherited in May 1979. The main exception has been the continuing privatisation of the former nationalised industries, even if these are now often tightly regulated. Today’s problems of slow growth and chronic fiscal imbalances would not have surprised the Mrs Thatcher of the 1980s. Rather she would have regarded them as the inevitable consequence of the ‘big-government’ policies introduced by Gordon Brown, which have been largely continued by the present Coalition. Subsequent events have shown that she was more analytically correct with respect to the European Union issues that led to her downfall than her critics. She was not alone in this, however. The Bundesbank also anticipated the difficulties now facing the Euro-zone in the run up to monetary union. It is unfortunate from the viewpoint of Europe as a whole that the two never combined forces.
One of the huge problems for our economy has been the remorseless growth of the state and public spending over the past century. The share of general government expenditure in Britain’s national output has risen from just over one tenth to roughly one half over the past hundred years or so. Yet only two administrations have reversed this incoming tide of socialisation since World War II. The first was the early 1950s Churchill government, the scale of whose liberalising economic achievements has probably been badly underestimated (see the author’s Britain in the 1950s: Lessons for Today, B & O, Autumn 2012, Vol. 42, no. 3 www.ercouncil.org). The other was the administration led by Lady Thatcher. Sadly, Margaret Thatcher has now joined Winston Churchill in the Valhalla reserved for British Prime Ministers.
*David B Smith is Visiting Professor, Derby Business School, the Chairman of the IEA’s Shadow Monetary Policy Committee and author of Politeia’s Crisis Management: How British banks should face the future.