Mrs Thatcher’s economic legacy

Chris at Stumbling and Mumbling has an excellent restropsective look at Margaret Thatcher’s economic legacy. (The title of Mr Dillow’s blog is a total misnomer – it is fluent, well-informed and rarely takes a misstep.)  As ever, don’t neglect the comments.

Chris summarizes Mrs Thatcher’s influence on privatisation, labour markets, and macroeconomic policy. He concludes:

She has given a generation of non-economists the impression that support for free markets is equivalent to support for the vested interests of the rich. Nothing could be further from the truth.

I agree with Chris’s analysis, especially the point quoted above – and I would add a few glosses.

  • We tend to take for granted some of the really good reforms and policy changes of that era, such as the abolition of exchange controls and the agreement to the Single Market Act.  Maybe they would have happened anyway; maybe not.
  • It is important to distinguish the period when Geoffrey Howe was Chancellor, which was largely disastrous, from Nigel Lawson, who was pretty good (at least from 1983 to 1987).
  • Howe’s budget of 1981 was a catastrophic, unforgiveable mistake, clinging to the wreckage of monetarism long after any reasonable person would have abandoned it, leading to one of the deepest (and least necessary) recessions on UK history; as was Lawson’s expansionary budget of 1988 based on the arrogant belief that he had conquered the business cycle.
  • Thatcher and Lawson should be commended for persuading the chattering classes that increasing trend economic growth is primarily challenge for microeconomic policy (ie improving the supply side), whereas controlling inflation is primarily a challenge for macroeconomic policy.   This seems obvious today but it was a total reversal of the then prevailing wisdom which saw macroeconomic policy targeting growth (demand management) and microeconomic policy controlling inflation (price controls, wage freezes, hire purchase controls etc).
  • Lawson should be commended for his simplification of the tax system (subsequently largely reversed, sadly).
  • One of the defining features of Mrs Thatcher’s economic policy was her ambivalent relationship with the exhange rate.  I think – though without much conviction – that we should have joined the Exchange Rate Mechanism of the EMS sooner than we did; and had we done so we might not have suffered the humiliating ejection that occured under the Major government.  Mrs Thatcher had a largely instinctive set of opinions about the exchange rate – she believed in keeping sterling independent and "strong" – without any very sophisticated underlying analysis.
  • The Thatcher Government has not got the opprobrium it deserves for breaking the link between the state pension and the growth of wages.  Allowing our old people to fall behind rising living standards of the rest of the community year after year, creating a generation of retired people living in poverty, was unforgiveable.
  • I think Mrs Thatcher did, in some undefinable way, change our attitudes – largely for the better –  to the role of the state in private enterprise.  Before her, there was a widespread assumption, under both Labour and the Conservatives, that the state should step in to prevent the collapse of particular firms or industries.  That was mainly an expensive mistake, and Mrs Thatcher was robust in refusing to come to the aid of many sunset industries.  (She was, however, not entirely consistent on this: her friends in industries such as aerospace continued to receive large public subsidies.)

See also New Economist, who has some good links to further commentary.

Update 17 October: See also BrightonRegencyLabour for 20 reasons why he hates Thatcher.  Also the comments below have a lot of good stuff.

16 thoughts on “Mrs Thatcher’s economic legacy”

  1. the problem with the privitisations of her era was that they did make certain people excessivly rich, Rothschilds for one, was given to expect banking mandates; and there clearly was a large amount of crony capitalism that took place

    There are always winners and losers when markets change; but often companies with the most capital do benefit from free markets because the investment in gaining market share as a market opens up clears out smaller players. Economic deregulation in NZ led to a wiping out of almost all the major large domestic companies as larger international corporations simply purchased market share, covered production at the margin, and failed to reinvest.

  2. The link between pensions and earnings and prices is a touch more complicated than you suggest. I’ve heard (but cannot prove…it’s somewhere in a comment in my archives.) that the link to earnings was a recent change by the previous Labour administration…a rather cynical one brought in in a year when earnings were rising slower than prices.

  3. Tim: re the earnings link, the rule was indeed a very recent (I think 1975?) and was also regularly fiddled with because it was done on a projected basis. I think Lawson’s memoirs report one year where Healey made a laughably optimistic estimate in order to cut the real value of pensions. Which seems much worse to me than what the Thatcher Government did – which was straight and honest. I would disagree with Owen’s point here because I don’t think that there’s a ‘right’ among older people to share in the nation’s income in quite that way. I do think that we should ensure rising prosperity is shared as widely as possible; but people retiring from the 1980s onwards were much richer than those retiring before.

    Owen: obviously not agreed on everything (although I’m no unalloyed Thatch fan), but a fair post. The only points I would make are that the record of the Thatcher Government should be seen in the context of a very different level of knowledge about economic policy. On macro policy, for example, those years provided us (through all the mistakes) with a much clearer view of the role and limits of monetary and fiscal policy; on micro policy, too (and as you hint), things we take for granted today were seen as shocking back then.

  4. The state pension is a transfer payment, not a wage, so it needn’t necessarily keep in line with the wages of those who are actually contributing to the profits of an individual company and to the economy as a whole, and who are paying taxes accordingly. At the very least pensions should keep in touch with prices: based upon a typical basket of goods for pensioners of that age, rather than the RPI, which factors in all sorts of things that pensioners wouldn’t buy. That may, in itself, help them in a small way. If the state pension is still too low, by all means establish a new, higher rate of increase as a reward for our honoured senior citizens, but don’t imply there’s an inherent link with incomes. I suspect a lot of pensioners would be better off with non-financial help anyway.

  5. Lawson may have simplified the tax system, but he also gave a massive windfall to top-rate tax-payers for no good reason (a year or two after the Miners’ Strike). Thatcher could have presided over an authentic British economic miracle, I’d still regard her governments as a thoroughly bad thing for British society.

  6. …but I see Chris is ahead of me:

    Thatcher was a class warrior, not an economic libertarian.

    And this is where her influence was wholly pernicious. She has given a generation of non-economists the impression that support for free markets is equivalent to support for the vested interests of the rich.

    As a side note, it’s worth remembering that she was in power for eleven years – and cast a very long shadow over British politics for the next seven (if not more). If we start comparing “Before Thatcher” with “After Thatcher”, we shouldn’t forget that the two periods are the best part of two decades apart – if you compared 1959 with 1977, or 1946 with 1964, you’d see one or two discontinuities.

  7. I remember without a trace of affection about Mrs Thatcher:

    – her constant distrust and indeed vilification of the public service and (nearly) all who sailed in her, giving preferment to those who were ‘one of us’ at the expense of experience and sound judgment, a suicidal failing;

    – her unshakeable conviction that only the private sector could make things work efficiently and that all ‘wealth’ was created by the private sector alone (i.e. that the public sector was a drag on the economy and an obstacle to growth);

    – her special distrust of British diplomats (apart from a few selected teacher’s pets) and her refusal to listen to their advice if it was unpalatable;

    – her destruction of a unified, transparent and accountable public service structure, opening the door to rank cronyism in government (enthusiastically carried forward by the present government, like so many other of her regrettable bequests to the nation);

    – her wilful blindness to the evils of apartheid (her phobia about sanctions caused Britain to be scorned world-wide as a protector of institutional racism and a defender of one of the ugliest régimes in the world);

    – her equally wilful prejudice, especially in the latter part of her reign, against the EEC, injecting a poison into British politics from which we still suffer;

    – her disastrous misjudgment of Reagan and all, or most, of what he stood for (less disastrous in its consequences than Blair’s misjudgment of Bush jnr., but that’s no yardstick);

    – her shabby and disloyal treatment of her own ministers, including some of those who had been the most doggedly loyal to her;

    – her deliberate dismantling of the post-war consensus on the values and principles of the welfare state and the merits of collective action;

    – her murderous indifference to poverty in the third world and her wholesale slaughter of the British aid programme;

    – her deliberate destruction of the trade unions as on the whole a beneficial and anyway essential player in a free society, rightly curbing trade union excesses (which the Callaghan government should of course have tackled but funked it), but taking that process far beyond what was required; especially —

    – her harsh crushing of the miners’ strike and her refusal to put in place re-training and investment programmes to reduce the hardships inflicted by her unnecessarily brutal programme of pit closures;

    – her reliance on narrow-minded thugs (no names, no pack drill: most are still alive, and were at her birthday party the other day) as her closest and most influential advisers, to the exclusion of her ministerial colleagues and her senior officials.

    Other horrors will come to mind the moment I sign this off.

    Having said all this, I should perhaps say that on the handful of occasions when I had direct contact with her during her time as prime minister, in No. 10 and overseas, she was the soul of courtesy and good sense, quick as a knife on the uptake, funny and charming, extremely effective with foreigners (who ate out of her hand from the first hand-shake), a good listener, markedly considerate…

    Funny old world.


    Owen replies: I rather agree with all that. I was picking up Chris’s original post about her economic legacy specifically – which, as your next comment notes, is a narrower topic.

  8. PS: Apologies for the topic drift in the preceding comment, which of course didn’t attempt to deal with Thatcher’s economic legacy. But there’s something slightly unreal about a debate that confines itself to the economic consequences of Mrs T., when there were so many other things about her style, her attacks, mostly destructive, on hitherto sacrosanct consensuses, and her prejudices, which still haunt us via Mr Tony today.

    (I should perhaps have added to the preceding catalogue her merciless destruction of the Conservative Party as a credible party of government and as an effective opposition capable of holding an equally wayward and arrogant government to account.)


  9. I should perhaps have added to the preceding catalogue her merciless destruction of the Conservative Party

    That’s a very suggestive line of argument. One corollary of the political style you’ve outlined (personally domineering, passionately opinionated, fond of cronies who reinforce those opinions, impatient of advisors who offer qualifications) is that such a politician would have no interest in a political party except as a machine for delivering and retaining power. Certainly the idea of a political party as an organisation with its own history, its own activities and its own ideas would be anathema to a politician like that.

    So it’s entirely in character for Mrs T to hold her own party in contempt, and to do her considerable worst to sideline and undermine it. And, as you say, the effects of this attitude on the party have been both real and enduring. Sadly, this looks like another lesson that Mr Tony has learned from her – which makes me wonder what on earth will be left of the British political landscape in five years’ time.

    The economic aspect of all this can be summed up in the classic Thatcherite phrase There Is No Alternative. There are those – probably including Chris D. and Owen, come to think of it – who would argue that there was, sooner or later, no alternative to implementing a good chunk of Thatcherite economic liberalism. What’s most truly poisonous about Thatcherism is that this position – which leaves room for unlimited debate about timing, mechanisms, allocation of costs and benefits, etc – was conflated, quite illegitimately, with the eternal There Is No Alternative of the charismatic leader: there is no alternative to following me, and therefore there is no alternative to my interpretation of economic necessity. Nor was Mrs T above working the trick in reverse, taking legitimacy for her own authority from the inevitability of economic change (we couldn’t go on like we were before) – another nasty habit the Dear Leader has picked up and made his own.

    I don’t think Chris took his argument quite far enough: under Thatcher, economic liberalism didn’t just get associated with class war from above, it got associated with messianic ‘big bang’ visions of social change and unchallengeable authoritarian leaders whose position is supported by a rhetoric of charismatic populism. To that extent we are still living in Thatcherland.

  10. Pingback: New Economist

  11. Wow! I think it’s amazing that one woman could achieve so much. Truly, she must have been a most powerful demon from the nether regions of hell to have achieved so much evil, unaided.

    I imagine that Satan himself is keeping her alive lest, upon her death, she challenge the devil himself for the crown of Hell.


    P.S. She ain’t getting my crown, y’know…

  12. Wow! I think it’s amazing that one woman could achieve so much. Truly, she must have been a most powerful demon from the nether regions of hell to have achieved so much evil, unaided.

    I imagine that Satan himself is keeping her alive lest, upon her death, she challenge the devil himself for the crown of Hell.


    P.S. She ain’t getting my crown, y’know…

  13. “Howe’s budget of 1981 … leading to one of the deepest (and least necessary) recessions on UK history”: don’t I remember that one problem was an overvalued pound and that no-one at the time seemed to have a plausible suggestion for what to do about it? Anyway, you clearly believe “Monetarism Bad”.

    ..Lawson’s expansionary budget of 1988 based on the arrogant belief that he had conquered the business cycle.” Again, don’t I remember that he had been cutting interest rates to try to hold the pound down against the Deutschmark, contrary to the tenets of monetarism. Preumably “Monetarism Good”?

  14. dearime

    Actually, I don’t “clearly believe” either monetarism ‘bad’ or monetarism ‘good’. I believe monetarism false – in that I don’t believe that the money supply determines the price level in any meaningful sense.

    On Howe, I think Friedman and Schwartz were partly correct in attributing the depth of the Great Depression to inept monetary policy in the 1930s. Howe’s mistake in 1981 was to try to control the growth of M3 by reducing the public sector deficit – so adding a fiscal squeeze to high interest rates, resulting in a severe recession. As almost all economists said at the time, that was a time for a relaxation, not a tightening, of fiscal policy (at the very least, to allow the automatic stabilizers to act).

    Lawson’s problem was also fiscal – too expansionary at the height of a boom (and inept, in pre-announcing the end of double mortgage interest tax relief, further inflating the housing bubble). On monetary policy, by trying to manage the exchange rate (shadowing the Deutschmark) while not having the credibility benefits of membership of the ERM, he was in the worst of all worlds – the costs of trying to manage the exchange rate and none of the benefits of a monetary anchor.

  15. I don’t have access to periodicals of the time and have to rely on my fading memory but my recollection of some of the events discussed here is:

    Lawson’s Budget – the monetary and fiscal expansion engineered by Lawson was a response to Black Monday, the stock market crash of 19th October, 1987 (itself following the great storm of 16th October, 1987). The City was united in drawing a parallel with 1929 and predicting that a depression would follow unless the government acted. Lawson later said that in all his six years and more as Chancellor that was the time he felt under most pressure. For once, Lawson paid heed to the ‘teenage scribblers’ in the City and relaxed economic policy. One analyst did predict the crash in a paper published a few weeks earlier but that City scribbler was in his mid-50s.

    Exchange Controls – it all seems so obvious now but Thatcher/Howe must take enormous credit for the abolition of exchange controls in the face of the united opposition of the Bank of England and the Treasury (perhaps this helped to reinforce Thatcher’s distrust of the civil service). Howe later said that of all the many decisions he had had to take, this was the only one that gave him a sleepless night.

    War – both Thatcher and Blair are War Prime Ministers. I remember the navy being instructed to slow steam to the South Atlantic so that Thatcher could give Al Haig more time with his shuttle diplomacy. Blair, by contrast, has appeared to be almost begging Bush to allow British troops into Afghanistan.

    Privitisation – Thatcher started it and privitisation has become an international phenomenon. Odd that Blair appears to be her greatest disciple and, I would suggest, has gone further than she would ever have done.

    With the advantage of another 25 years of perspective, it will be fascinating to compare the two long premierships of Thatcher and Blair. Whose will then be regarded as the more important, economically, politically and socially?

  16. Part of the problem with the 1988 budget was that the GDP statistics at the time were very misleading – there were substantial revisions. IIRC, the first estimate of growth for 1986 (ie the estimate in 87Q1) was 2.4%. This has been revised up ever since. In 1990, the estimate for 1986 was 3.6%. It is now 4%. If Lawson had known then what we know now, he might have acted differently.

    But Lawson claimed not to believe in macroeconomic fine-tuning. He should have stuck to sensible microeconomic reforms to improve the supply side. With hindsight, unleashing huge tax cuts in 1988 was definitely a mistake – leading to a boom and bust of historic proportions – even if, as Skinny Americano notes – it seemed a good idea at the time.

Leave a Reply

Your email address will not be published. Required fields are marked *