Thatcherism triumphant. Photo Credit: Reuters
Margaret Thatcher’s economic legacy is to have brought a sharp, if not short end to Britain’s regime of post-Second World economic management. The ‘post-war settlement’ was a compact between politicians, big business and the trade unions to manage the economy along broadly Keynesian lines through industrial planning and price and incomes policies to contain unemployment.
By the 1970s, it was clear this was failing to keep Britain up with the growth rates of the other rich countries, a problem exacerbated by the high inflation that followed the oil-price hikes of the early 1970s. When Thatcher became leader of the Conservative Party in 1975, mid-way through a decade riddled with public-sector strikes, she saw the corporate state as both a failure and intolerable. Unions in her view were choking the economy and a growing public sector, including large swathes of nationalized industries, was stifling business — leaving Britain’s manufacturing industry uncompetitive and unproductive.
Thatcher wanted to promote individualism, wealth creation and property ownership to counter the country’s decline. She saw the proper role of the state as that of a benign regulator within the economy, not as that of lead manager. She was a classic 19th-century Liberal, a reflection of her small-town, Methodist, middle-class upbringing (as seen through the lens of Adam Smith’s Scottish enlightenment).
This worldview had already drawn her to the the Milton Friedman-influenced monetarist theories of Keith Joseph and his colleagues at the Institute of Economic Affairs. While she did not particularly contribute to their development, she was the right person at the right time to give them a political voice and the backing of strong personal conviction.
When she became prime minister in 1979, following the Winter of Discontent — a series of strikes against the Callaghan Labour government that was trying to impose inflation controls on public sector unions — her goal was more to end the corporate state by unleashing enterprise than break the unions. That, though, was always going to be a consequence. Labour’s social contract with the unions was a ‘devil’s bargain’, in Joseph’s words: it gave the unions political power far beyond mere pay-bargaining. Thatcher’s first moves were to end incomes policies and cut the unions out of the process of national economic management.
Her next was to raise interest rates and control the money supply to tackle inflation. Public spending was reined in. She expected the first budget introduced by her chancellor, Geoffrey Howe, to provide the short, sharp blow that would slay the dragon of the corporate state; she expected the British public to support out of rational self-interest what she clearly saw as the path to end the country’s economic, political and moral decline.
The recessions of the early 1980s ended any such notions. Thatcherism proved highly divisive, and the reaction of its opponents was hostile, especially in the Labour-voting areas where the country’s manufacturing industry, and thus the unemployment her policies caused, was concentrated.
Thatcher, though, was determined not to bend at the height of crisis, as she believed past governments had done, yielding to union demands in order to maintain a political consensus. Unions became as much an enemy to be beaten as the Soviet Union, bureaucrats, the Argentine junta, or the IRA. That antagonism would color the politics of the 1980s, though the riots of Toxteth and Brixton, until the decisive show-down with Arthur Scargill’s National Union of Mineworkers in 1985.
At the outset, not many thought that the eventual economic price of these policies would be so high. Britain’s GDP contracted by 3.7% in the four years from 1979. Industrial capacity shrank by 17%. Investment fell sharply. Unemployment doubled to 3 million — an 11.2% rate. Such a level not seen since the Great Depression. It wouldn’t fall until the mid-1980s, and would take 20 years to retreat to 1978′s level. Britain’s industrial output wouldn’t recover its 1973 level until 1988. And that recovery owed as much to the windfall from North Sea oil as newly competitive industry. With interest rates at 14% and the pound at parity with the dollar, Britain’s exporters struggled. The country’s trade deficit ballooned as imports surged. A cohesive foreign exchange policy didn’t come in until Nigel Lawson had replaced Howe as chancellor, when the pound was informally pegged to the Deutsche mark, despite Thatcher’s adamant opposition to Europe.
Early on, Thatcherism set a new agenda for Britain’s economic policy discourse, one based on inflation and public spending, not unemployment. Employment had been the imperative for the previous generation of Conservative and Labour leaders alike, who were haunted by the mass unemployment of the 1930s. Thatcher said clearly that governments couldn’t be expected to manage employment levels.
By making financial instruments the levers of government, Thatcher also centralized state power in the Treasury, at the expense of the spending ministries that had been at the heart of the post-war settlement, such as Trade and Industry, Education, Health and Pensions. These, and other recalcitrants like local government, were reined in through public-sector borrowing requirements.
Though widespread property ownership was woof and warp of her populist Middle England Conservative views, the supply-side reforms of deregulation and privatization so closely associated with Thatcherism would come piecemeal and relatively slowly. Even then, the privatization program was driven as much as anything by the government’s pragmatic need to raise revenue.
The deregulation of financial services — ‘Big Bang, in the parlance of the day — didn’t happen until the mid-1980s. It would be her New Labour successors who would foster the quintessentially Thatcherite housing and finance booms of the 1990s, and turn Britain into a services economy. By then the economy was being shaped by the forces of globalization sweeping the world, and had moved on to post-Thatcherism.
