5
The Sledgehammer
The Russians, who are lucky to have such a marvelous sense of humor, if only because they’ve had so little to laugh about, recount a story about Leonid Brezhnev’s arrival at the pearly gates. St. Peter tells him that he has not exactly led the sort of life that would qualify him for heaven, but that he can choose between a capitalist and a socialist hell. To St. Peter’s surprise the former Soviet leader replies that he would prefer a socialist hell. St. Peter tells him to think carefully: This is no time for propaganda! But Brezhnev repeats that he chooses the socialist hell. St. Peter grants his wish but, greatly puzzled, asks for an explanation. “Ah,” replies Brezhnev. “It is because I know that in a socialist hell they will always be short of fuel!”
—ONE OF MARGARET THATCHER’S
FAVORITE JOKES
86Margaret Thatcher was not an economist. Her views about economics were not original. Her critics often note this with derision. “Thatcherism,” sniffs the economist Frank Hahn, “as represented by Mrs. Thatcher herself, is intellectually without interest. It consists of homilies on the virtues of work and ambition and on providing the carrot and stick to elicit these virtues.”
87 Hahn appears to be suggesting that there is something wrong with this, but I am not sure why. It is hardly a politician’s job to be intellectually interesting. It makes no more sense to criticize Thatcher because her ideas were unoriginal than it does to criticize Adam Smith because he was not a good politician.
Thatcher herself was exceedingly proud of the unoriginality of her economic opinions. She held it to be a measure of their value. She did not invent Thatcherism, she claimed; she merely rediscovered it, in much the way doctors have recently rediscovered the medical value of leeches—both are tried-and-true, old-fashioned cures only latterly obscured by high-tech faddism, and if both cures are rather unpleasant, well, when a patient is dying it is no time to be squeamish. (This is my analogy, not hers, although she did once liken herself to a tough nurse who refused to coddle her patients lest their muscles atrophy.)
“When people spoke about the ‘Thatcher experiment,’” she remarked after her resignation, “they missed one very important point. I am a trained research chemist. I know what experiments are. And I never confused my country with a bacterial culture. The proof that the theory worked was, I knew, already to be found in the economic progress of the West.”
88As these remarks suggest, there is a theory behind Thatcherism
. Nigel Lawson, Thatcher’s chancellor of the exchequer from 1983 to 1989, correctly insists that Thatcherism is not “whatever Margaret Thatcher herself at any time did or said.”
89 Rather, as he puts it, Thatcherism is “a mixture of free markets, financial discipline, firm control over public expenditure, tax cuts, nationalism, ‘Victorian values’ (of the Samuel Smiles self-help variety),
90 privatization and a dash of populism.”
91 He is right, but his phrasing might suggest that these ingredients are independent or equally weighted. In fact, all but nationalism and populism, which are not economic policies, derive from the first on the list: free markets.
Free-market economics and Thatcherism are often held to be synonymous. This is nearly true, but there is an important additional dimension to Thatcherism—a faith in the morally redemptive power of the free market that goes well beyond standard economic claims. Generally, free-market economists favor free markets for two reasons: because they believe free markets are efficient, and because they are, by definition, free. (To make the latter point non-trivial, add the suppressed premise:
freedom is good.) Thatcher believed both these assertions to be true. But equally importantly, she believed that free markets not only served but
created robust, self-sufficient, and moral citizens, and vice versa.
92 “We must not focus our attention exclusively on the material,” she declared in 1977,
because, though important, it is not the main issue. The main issues are moral. In warfare, said Napoleon—the moral to the material is as three to one. You may think that in civil society the ratio is even greater.
The economic success of the Western world is a product of its moral philosophy and practice.
The economic results are better because the moral philosophy is superior.
It is superior because it starts with the individual, with his uniqueness, his responsibility, and his capacity to choose.
Surely this is infinitely preferable to the Socialist-statist philosophy which sets up a centralized economic system to which the individual must conform, which subjugates him, directs him and denies him the right to free choice.
Choice is the essence of ethics: if there were no choice, there would be no ethics, no good, no evil; good and evil have meaning only insofar as man is free to choose.
93Free markets, she emphasized again and again, forced individuals to take responsibility for the outcomes of their choices. “People must be free to choose what they consume, in goods and services,” she told the Greater London Young Conservatives:
Choice in a free society implies responsibility on the part of the individual. There is no hard and fast line between economic and other forms of personal responsibility to self, family, firm, community, nation, God. Morality lies in choosing between feasible alternatives. A moral being is one who exercises his own judgment in choice, on matters great and small, bearing in mind their moral dimension, i.e. right and wrong. Insofar as his right and duty to choose is taken away by the state, the party or the union, his moral faculties, i.e. his capacity for choice, atrophy, and he becomes a moral cripple in the same way as we should lose the faculty of walking, reading, seeing, if we were prevented from using them over the year.
. . . The Socialists would take away most or all of these choices. A man would do what he was told by the state and his union, work where work was “found” for him, at the rate fixed and degree of effort permitted. He would send his children to school where the education authority decided what the children are taught and the way they are taught, irrespective of his views, he would live in the housing provided, take what he could get, give what he was obliged to give.
This doesn’t produce a responsible or a moral society.
This does not produce a classless society; on the contrary it produces the most stratified of all societies, divided into two classes: the powerful and the powerless; the party-bureaucratic elite and the manipulated masses.
And are these rulers better fitted to make choices on our behalf or to dispose of resources? Are they wiser, less selfish, more moral? What reason have we for supposing that they are?
94It is critical fully to appreciate that Thatcher’s enthusiasm for free markets can’t be reduced to an enthusiasm for economic efficiency—this is a charge often made, but it simply isn’t so. A moral society, not an efficient one, was her ultimate goal.
Almost everyone—no, everyone—has heard the phrase “free market.” But try asking the next five people you meet to explain what a free market is and why it might be desirable. My own admittedly casual research suggests that few people have given the matter much thought. This is surprising, because more than any other concept in economics, and perhaps more than any other idea in history, the concept of the free market has had a direct—a vital—influence on the lives of billions.
The argument for free markets involves a beautiful, fascinating, counterintuitive theory. It is one of the great achievements in human thought. It is also, basically, simple. A free market is one in which the prices of goods and services are determined by individual sellers and buyers, not by the government. It differs from a planned or command economy in that no centralized authority makes decisions about resource allocation.
The central claim of the theory is this: Free markets allocate resources efficiently because the decisions men and women make about what to buy, what to sell, and how much to pay or charge for those goods convey critical information about what people really want and how much they really want it—as opposed to what the government believes they want, or worse still, what the government believes they
should want. I use the word “efficient” because economists are partial to it, but I am aware that the word carries cold and technocratic overtones. You may substitute “an allocation of resources that makes people happier.” That is what we really mean. Or more bluntly, you can put it this way: “an allocation of resources such that fewer people starve to death.”
95A free market is more efficient than a controlled one because in a free market, prices convey critical economic information—information about the relative scarcity of goods. This in turn guides the myriad decisions of individual actors in the economy about what to produce and what to consume. This point tends to be abstruse in the abstract but intuitively obvious in the specific. Why, for example, are Hawaiian pineapples cheaper than Alaskan pineapples? They are cheaper because they cost less to grow. They cost less to grow because light, in Hawaii, is abundant. Why is Hawaiian seal blubber more expensive than Alaskan seal blubber? It is more expensive because seals, in Hawaii, are scarce.
Suppose that the Alaskan pineapple farmer—who grows his pineapples under halide lamps and thus pays a high monthly electricity bill—is finding it tough to stay afloat in a market flooded by cheap Hawaiian pineapples. Rather than selling the hothouse and buying a seal-spear, he persuades the federal government to give him farm subsidies on the grounds that without them, he will go broke. This is hardly a far-fetched example; the federal government dishes out billions of dollars every year in farm subsidies on precisely these grounds. The Alaskan farmer can now charge less for his pineapples than they cost to produce. At the supermarket, however, the price of Alaskan pineapples and the price of Hawaiian pineapples will now be similar. Perhaps the Alaskan farmer will even be able to undercut the Hawaiian one. Ceteris paribus, the consumer will pick the cheaper pineapple.
This state of affairs disguises an important truth: The Alaskan pineapples do not really cost what the Hawaiian ones do. The government subsidy comes from money taken from taxpayers. The consumer is not, in fact, paying the same price for Alaskan pineapples as he is for Hawaiian ones—quite the contrary. He is paying more for them, but doing so indirectly. Since the true cost of Alaskan pineapples has been obscured from him, he is apt to buy more of them than he would if he knew how much they really cost. But he has not been offered the information he needs, in the form of a price, to express his preference, in the form of a purchase.
I, for one, would not want Alaskan pineapples enough to pay their real price. I would rather keep the money that has been taken from me, buy a Hawaiian pineapple, and spend the difference on the latest issue of Public Choice. But it is clearly absurd to imagine that any government functionary, however well-meaning and prescient, could predict that this is how I would prefer to spend my money. It is even more absurd to imagine that the government could predict the preferences of every actor in a large economy with this degree of precision. In a free market, the government does not have to predict anything of the kind—the price mechanism does the work for them.
Consider another hypothetical scenario. Imagine the government has decided that the price of pineapples is simply too high. It decrees that all pineapples must now be sold for a dollar each. This will ensure that everyone, even the poor, has equal access to pineapples.
96 Thanks to the Fair and Compassionate Pineapple Program, pineapples of every provenance will appear, at the supermarket, to be cheap. If they are cheap enough, I will buy more of them. I may well buy every last pineapple in the store: I have been known to do this when something I like is on sale.
There is obviously a problem with this. If I buy all the pineapples, there will be none left over for anyone else. And if the government has capped the price of pineapples, no one will voluntarily start growing more of them, because in reality it costs two dollars to grow a Hawaiian pineapple and twenty to grow an Alaskan one. Pineapple farmers are not charity workers, and pineapple farming has now become not only unprofitable, but a form of personal economic suicide. Very quickly, you will have a pineapple shortage. Now apply this example across the board, to all food items: Soon you will have food queues. Ultimately, you will have starvation.
Is my example simplistic and far-fetched? Try putting that question to anyone who grew up in the Soviet Union. Gorbachev, apparently, struggling to solve precisely this problem, once asked Thatcher how she made sure the British people got enough food. She didn’t, she told him tartly.
Prices did. By extension, anything that distorts the information conveyed by prices is harmful to the market’s functioning and leads, sooner or later, to oversupply of things that people do not want and shortages of the things they do want—as Soviet planners discovered. “It was a shame,” recalled Gorbachev in 2001, “and I continue to say that it was a shame, that during the final years under Brezhnev, we were planning to create a commission headed by the secretary of the Central Committee, [Ivan] Kapitonov, to solve the problem of women’s pantyhose. Imagine a country that flies into space, launches Sputniks, creates such a defense system, and it can’t resolve the problem of women’s pantyhose. There’s no toothpaste, no soap powder, not the basic necessities of life. It was incredible and humiliating to work in such a government.”
97The free market is a simple concept, and the empirical evidence that it provides goods and services more efficiently than a command economy is about as strong as we can hope to have in the social sciences. Command economies everywhere have resulted in waste, shortages, poverty, and immiseration. That is why the great command economies of the twentieth century collapsed and the free-market economies are still here. Of course, the free market is a model, and like all models, it can only be approximated in reality. But it can be approximated to greater and lesser degrees, and those degrees matter. A freer market, Thatcher believed, is almost always a better one.
Despite the manifest failure of any number of command economy experiments, the concept of a free market continues to arouse great suspicion. Many people who are in no doubt that they favor freedom of religion, free speech, free assembly and free elections feel no such instincts about free markets. Likewise, many people who claim to believe in free markets think that free markets are fine for the widgets they talk about in the textbooks, but not for food, water, medicine, energy, or, indeed, jobs. After all, they think, you can’t trust that essential goods will be provided by impersonal market forces. No, the government had best step in to make sure there’s enough of those to go around. But if you accept the argument that free markets work better than ones that are not free, then logically, the essential goods are the ones you least want the government allocating by decree. The more you need the commodity in question, the more you must hope it is being produced and sold in the most efficient way possible.
No one in his right mind believes free markets will function smoothly with no government intervention at all. Even the most enthusiastic free-marketer willingly concedes that governments must make and enforce the laws that permit a free market to operate: You may not sell your widgets at gunpoint, for example, and if you promise to deliver fifty widgets on the first of January, you must do just that—you must not take your customer’s money and decamp for the Caymans. No one believes you should be allowed to buy or sell anything; not even the late, great Milton Friedman would have said that parents should be allowed to sell their children’s eyeballs to the highest bidders. To prevent people from doing these things, you must have a legal system; to have a legal system, you must raise taxes. Enthusiasts of free markets accept this but believe that government intervention should be the exception, not the rule. The government’s role, in other words, should be confined to the smallest possible sphere.
Yes, but how small is the “smallest possible sphere”? Those on the Left side of the spectrum often ask this in a sly, knowing way, as if the question is basically unanswerable and the optimal size of government thus a matter of taste. In fact, the question is not unanswerable at all, and the answer is quite precise.
The answer is 14 percent of GDP.
98From a commitment to free markets, Thatcher believed, certain policies followed logically: monetarism; financial deregulation; reducing controls on prices, wages, and exchange rates; lowering taxation; reducing government spending; privatization; and curtailing the power of trade unions to set wages that did not reflect market demand for labor. These were the policies Thatcher put in place, with varying degrees of success.
Let us look first at monetarism because this is where Thatcher’s critics usually start. Those who are inclined to sneer when they say the name Thatcher are likewise inclined to pronounce the word monetarism much as they would the words pervert or pathogen. Often the criticism reflects a conflation of monetarism with the rest of Thatcher’s policies and personality. In fact, monetarism was only one component of Thatcherism, and not the most significant one. But because it is so widely held to be the defining Thatcherite dogma, it warrants our attention.
So what is monetarism, really?
The story begins with the Phillips Curve. If you took Economics 101 as an undergraduate, you may remember it. In 1958, the economist A. W. Phillips described a relationship between inflation and unemployment. Simply put, he argued that when unemployment falls, workers interpret this, correctly, as a sign that there is now a greater demand for what they are selling—labor. They therefore increase the price of labor by demanding higher wages. Employers then pass on the cost of these higher wages to the consumers in the form of higher prices. Rising prices, inflation—same thing. The Phillips Curve implied that you could have low inflation or low unemployment, but not both. It also implied that there was a reasonably simple cure for unemployment: Create inflation.
It is not hard to create inflation. All you need to do is increase the quantity of money in an economy, otherwise known as the money supply. The value of money, like the value of any other commodity, depends upon the relationship between the supply of that commodity and the demand for it. If the supply of money increases, its value will diminish. That is the very meaning of inflation.
A government can pursue an expansionary policy—which often leads to inflation—in one of two ways. It can control the supply of money directly, through what is called monetary policy. For example, it can lower interest rates. This increases aggregate expenditure, because when interest rates are low, people save less and spend more. Investors invest more, because they can get cheap loans.
Alternatively, it can use fiscal policy: By taxing less, or by spending more, the government directly increases aggregate expenditure, leading to an increase in output. The use of fiscal policy to combat unemployment is commonly associated with the economist John Maynard Keynes—this is broadly what is meant by the term “Keynesian economics”—and until the late 1960s, Keynesian policies were held to be the state of the art. No one likes inflation, but the assumption underpinning an expansionary policy is that at times of unusually high unemployment, a controlled rise in the inflation rate is a reasonable tradeoff for getting people back to work.
Controlled is the operative word.
The state of the industrialized world in the 1970s led to a crisis of faith in the Phillips Curve. Stagflation—high rates of inflation
and unemployment—forced economists to develop a competing idea: the
natural rate of unemployment. If unemployment fell below this natural rate, they speculated, prices would not rise in a stable and proportionate way. Instead, inflation would gallop.
99Now why would that happen?
In 1975, the economist Milton Friedman famously proposed this answer: At any given time, constraints placed upon the economy’s efficiency create barriers to full employment. These constraints include, for example, the degree to which it is easy to relocate to find work, the degree to which the price of labor is artificially elevated (by, for example, mandatory minimum wages or collective wage bargaining), and the degree to which options other than working—such as collecting unemployment benefits—seem attractive. If these constraints are not lifted, then no matter how high the rate of inflation, unemployment cannot be completely eliminated.
Now suppose, said Friedman, that despite these constraints, the government, seeking to reduce unemployment below the natural rate, accepts the logic of the Phillips Curve and pursues an expansionary policy. This pushes up prices. Real wages fall, leading firms to increase their demand for labor, which is now cheaper. Employment rises. In the short run, the policy seems to work. Happy employees enter the marketplace; the government wins the election.
The problem, said Friedman, is this: The workers agreed to supply their labor at Wage W assuming that prices would remain stable. But the workers aren’t stupid: They notice that prices are rising, and they notice that the real value of Wage W is falling. They expect that this trend will continue. They demand higher wages. When labor becomes more expensive, employers buy less of it. Unemployment returns to its previous level. You have therefore raised inflation and gained nothing.
Now the government, which unlike the workers is stupid, again pursues an inflationary policy to correct unemployment. The workers respond by demanding higher wages still. This cycle continues, each time more rapidly. Voilà, skyrocketing inflation, and still no commensurate rise in employment.
If you accept this analysis, you will conclude that policymakers cannot attempt to choose between high unemployment and high inflation. Instead, they should steer the economy toward a growth rate such that prices remain stable, and accept the level of unemployment consistent with this. This target is called the Non-Accelerating Inflation Rate of Unemployment, or NAIRU.
100 To treat unemployment, the government should fix the underlying problem—the structural flaws in the economy that are increasing the NAIRU. Over the long run, argued Friedman, unemployment simply
cannot be cured by pushing up the inflation rate, so there is no point in trying. What’s more, by stimulating runaway inflation, the government will serve only to raise the overall level of misery.
During the 1970s, this argument looked extremely persuasive. Britain was suffering from acute stagflation. Thatcher’s predecessors—both Labour and Conservative—had attempted to control inflation through fiscal policy and by implementing wage and price controls.
101 These efforts had failed. Moreover, wage and price controls were ideologically abhorrent to free-market economists. Thus did Thatcher determine
• to target inflation, above all
• through monetary policy, alone.
It is important to stress that Thatcher viewed inflation not only as a problem, but, like socialism, an evil. And if inflation is evil, skyrocketing inflation is more evil still. But why was inflation so wrong? First, because it punishes the thrifty: If inflation is rising unpredictably, it is pointless to save. If you have not saved, to whom will you turn in your needy old age? You will turn to the government. Inflation, Thatcher believed, thereby encouraged citizens to adopt a dependent, infantilized posture toward the state.
Moreover, inflation distorts price signals. If the cost of goods and services rises quickly and unpredictably, the information conveyed by prices becomes gibberish. Who can plan or invest when they have simply no idea what things will cost in a year’s time or ten? The price mechanism is the key to the free market. If prices fail to convey meaningful information, the market will not function efficiently. This is why monetarism, for Thatcher, devolved from a commitment to free markets. Just as contract law is necessary to ensure the smooth functioning of the free market, so, she held, was the control of inflation.
If you believe, as Thatcher did, that free markets are morally ennobling, you must of necessity view inflation as no mere macroeconomic problem: It is, in fact, a
moral problem. Thus did Thatcher describe inflation as an “insidious moral evil to whose defeat everything must be subordinated.” In her famous “The Lady’s Not for Turning” speech, she called the defeat of inflation her “prime economic objective”:
Inflation destroys nations and societies as surely as invading armies do. Inflation is the parent of unemployment. It is the unseen robber of those who have saved. No policy which puts at risk the defeat of inflation—however great its short-term attraction—can be right.
102Contractionary economic policies appealed intuitively to Thatcher, for they seemed consonant with a key Methodist value:
thrift. The Keynesian idea that a government could make an economy grow by spending more money seemed to her not only contrary to common sense, but a serpent-in-the-garden species of temptation. That way lay the wickedness of profligacy. “For many years,” she said,
we have been told that a little bit of inflation is good for you. Many economists assured us—indeed some still do so assure us—that inflation is necessary to maintain full employment, to facilitate growth and to keep the economy moving. The message was: spend your way to prosperity, and when the economy faltered, spend and spend again.
Of course it was difficult for governments to resist such siren voices. Britain was among the first large economies in the West to pursue these policies. We learned a hard lesson—monetary expansion stimulates only a brief and temporary growth. Decay soon sets in. But such monetary expansion does have a permanent effect—albeit an unfortunate permanent effect. It raises the rate of increase of the price level. Inflation comes to stay.
With the hindsight of this sad history, we can easily see how the inflation rate rose persistently throughout these decades. But more strikingly, the average level of unemployment has also risen. The average unemployment was less than 2 percent in the 1960s, 4.1 percent in the 1970s and 6.8 percent in 1980. Our higher inflations have merely brought lower growth and rising unemployment.
The lesson is clear. Inflation devalues us all.
But the erosion of the currency not only has insidious effects on the health of the economy; it also breaks a trust between the government and the governed. The fabric of faith on which so much of our life depends rests on the maintenance of money values. A reliable and safe currency is a central responsibility of government. Once the people lose their trust in money the freedom of men and women in society will be diminished or even, eventually, destroyed.
That is why my administration has put the permanent reduction of inflation as its first economic priority. In a free society this can be achieved only by reducing permanently the rate of growth of the stock of money. We knew that the transition could not be painless and smooth. After these many years of inflationary drift the costs of recovery have to be paid.
103A siren voice, decay, and ultimate destruction—we all know this story, although it is usually not a fable of fiscal policy. From the analogy to the Fall, it is obvious that redemption will require, as it always does, pain.
Even less subtle was the language used in 1981 by her then energy secretary and future chancellor, Nigel Lawson, who publicly asked critics of the government’s tight money policy to “drop their high moral tone, because there is really nothing that is moral or compassionate in prescribing policies that would engulf this country in a holocaust of inflation.”
104 His use of the word “holocaust” is noteworthy: Lawson is Jewish, and obviously no word conveys greater moral horror to a Jew. The use of the word in this context is grotesque, but at least it makes it quite clear just how much the Thatcher stalwarts hated inflation and why they were willing to bear any price to kill it.
What Thatcher hoped to do, by maintaining strict control over the money supply, was return the economy to the point of zero—or at least low and stable—inflation. She imagined this would necessitate a slight period of higher unemployment, after which unemployment rates would return to their starting point.
That is not what happened—at all.
Within two years of Thatcher’s monetarist ministrations, British unemployment soared to rates exceeded in the twentieth century only during the Great Depression. A quarter of the British manufacturing industry disappeared—the largest drop in industrial output since 1921. Britain’s inner cities went up in flames.
. . . The latest government figures show unemployment rising from 1.5 million to 2.5 million in 12 months . . . Joblessness among ethnic minorities is rising even faster, up 82 percent in one year . . .
. . . four nights of what Home Secretary William Whitelaw describes as “violence of extraordinary ferocity” . . . Police are forced to withdraw . . . 150 buildings are burnt down . . . 781 police officers are put out of action . . . CS gas is used for the first time on the British mainland . . .
. . . In Toxteth, unemployment has risen to 37 percent, climbing to 60 percent among young blacks, with 81,000 people chasing 1,019 jobs in Liverpool . . . the local careers office has information on just 12 vacancies to offer school leavers throughout the city . . .
. . . New riots in Brixton are accompanied by a wave of disturbances the length and breadth of Britain. Southall, Battersea, Dalston, Streatham and Walthamstow in London, Handsworth in Birmingham, Chapeltown in Leeds, Highfields in Leicester, Ellesmere Port, Luton, Leicester, Sheffield, Portsmouth, Preston, Newcastle, Derby, Southampton, Nottingham, High Wycombe, Bedford, Edinburgh, Wolverhampton, Stockport, Blackburn, Huddersfield, Reading, Chester, Aldershot—all these and other towns and cities report riots . . .
. . . Margaret Thatcher cancels a planned visit to Toxteth because her safety cannot be guaranteed.
105Unemployment rose and rose and rose. Stores were firebombed and looted. Imagine this period with a soundtrack by UB40. You’ll recall the band, I expect, but may not know that the name stands for Unemployment Benefits 40, a form issued by the Department of Health and Social Security, otherwise known as DHSS, an acronym you’ll also recall if you’ve ever listened to Wham!
WHAM!
BAM!
I AM!
A MAN!
JOB OR NO JOB, YOU CAN’T TELL ME THAT I’M NOT!
. . . DHSS . . . DHSS . . . DHSS . . . DHSS . . .
All the same, the inflation rate simply refused to come down and stay down. The government couldn’t even achieve the one goal that was supposed to justify this misery. When Thatcher was elected in May 1979, the retail price index had risen by 10.3 percent over the previous year. By early 1980, it had risen above 20 percent.
By the spring of 1983, it had fallen below 4 percent. Much excitement ensued: Had she done it? Had she vanquished inflation at last? Alas, no. In late 1985, inflation began again to climb. In 1991, the retail price index rose 10.9 percent—higher even than the year Thatcher became prime minister. It is not a coincidence that this was her last year in power.
Why didn’t it work? The answer is quite technical, and even a professional economist who has spent his life explaining these concepts to hung-over undergraduates would be hard-pressed to sum it up neatly. I know this for a fact, because I asked the Master of Balliol to try.
CB: Why wasn’t it working?
Andrew Graham: [Sighs] Oh, God. This is back to tutorials, isn’t it? I’ll try and do as best I can. It’s a long time since I’ve given an economics tutorial . . . this is an incredibly boring technical argument . . . Um, I wonder if I could put my hands on an article, that would be even better . . . [Gets up and rummages through files] What happened is that a whole load of money that had been going out through the banks suddenly came in through the money supply, and ended up counted in the monetary aggregates, whereas before it had been outside the monetary aggregates—and, um, uh, sorry, this is extremely inefficient of me—God, it’s amazing what kind of stuff I’ve got in here, how weird! Um, I could give you, I have more than enough stuff to read—I could probably give you a copy of that—getting warmer . . .
CB: I can’t put a bunch of graphs in this book.
AG: Don’t worry, don’t worry. It doesn’t explain it there, that’s annoying—um—There are targets for M3, which was a funny old thing we were supposed to measure in those days, and it was supposed to grow by between 7 and 11 percent in that year—
CB: And M3 is?
AG: Current accounts in banks, plus deposit accounts in banks, plus, that’s about it, plus cash—M3 is simply a technical number. It was supposed to grow between 7 and 11 percent, and it grew 17 percent.
106 Next year it was supposed to grow between 6 and 10 percent and it grew 14 percent.
CB: And how do you explain the discrepancy?
AG: The abolition in the same year of the corset. The banks had not been allowed to engage in various forms of lending. So what had been happening was companies had been lending direct to one another, and company lending didn’t count, since it’s not part of the bank lending, so it just didn’t appear in the bank figures . . . At the same time as Thatcher and Keith Joseph were trying to hold down the quantity of money, they changed the way the quantity of money was being influenced and took off this administrative control.
Let me rephrase this. Monetarism sounded simple in theory but in practice proved confusing. This does not mean the theory was wrong, but it does mean that no one quite understood how to use it.
The heart of the technical problem is this: To control the money supply you have to measure the money supply. To measure the money supply, you have to define what you mean by money. Coins and bills with the Queen’s face on them are obviously money. So you measure those. What about the contents of savings and checking accounts? Yes, that’s money too. What about bananas? No, not money, definitely not. Treasury bills? Well—actually that one’s tricky; you could argue it both ways.
The contents of a PayPal account?
Mardi Gras beads?
Mexican pesos?
Mexican pesos after they’ve been taken from the mattress where they’ve resided for the past five years and converted to British pounds?
If not, why not?
In principle, as long as you use a consistent definition of money, you should be able to measure the growth of the money supply over time—if people are using money, as you’ve defined it, in a consistent way.
But while it was using an unchanging definition of money, Thatcher’s government was changing the way money was used. The abolition of foreign exchange controls and the deregulation of the banking sector were key free market reforms, obviously, and both led to a radical change in the way people used money as the government defined it. Corporations that had previously lent money to each other directly to bypass cumbersome bank regulations began using banks—which were now, as intended, more efficient—to facilitate these transactions. Stuff (to use the term of art) that had not previously been defined as money went into the banking system, where it was defined as money. This severely skewed the government’s efforts to measure the money supply, in a meaningful way, from year to year.
AG: It’s just like—imagine that you’ve got a particular marketplace. Prohibition in the ’30s. You’re using all your official statistics on sales of alcohol, but alcohol sales are banned, so it looks pretty low. But plenty of alcohol sales were going on in the ’30s in the black market. Take off the controls, suddenly your shops are selling the alcohol, which was previously being sold by bootleggers. The banks in this case are the shops. Suddenly all this money-lending comes back to the banks, because banks are the efficient way to do it, and the black market is the inefficient way to do it. So it comes back into the banks and it suddenly counts as money.
Here’s an even simpler way of looking at it: Thatcher’s key economic reforms collided in mid-air and exploded.
And yes, they should have predicted this.
There is a consensus now among economists—to the extent that there is ever a consensus among economists—that Thatcher’s first government measured money the wrong way and thus chose the wrong monetary targets. Her last government confused matters inordinately with an incoherent policy toward entering the European Exchange Rate Mechanism. This is why Thatcher’s remedy did not work as quickly or as well as expected, and this is why British cities went up in flames.
What is fascinating in this story is this: Despite Thatcher’s insistence that she was not confusing her country with a laboratory experiment, experimenting is precisely what she was doing. Obviously she was. That famous article by Friedman was published in 1975. No one in the world knew if this “monetarism” business would work. No one had really tried it before. As clearly evidenced by her government’s inability to figure out what to measure, no one was quite sure how to apply this theory in practice.
CB: Now, were they aware that this [abolishing the corset] would have this effect? Or was it inadvertent?
AG: No, they were aware of it, but they probably didn’t understand it.
It is the consensus of everyone, and I do mean everyone who knew Thatcher—even her most devoted loyalists—that she didn’t understand the technical details of the policy upon which she staked everything. Yet she did stake it all, and she would not relent, because it just sounded right to her.
Her policies appeared in these initial years to be an absolutely catastrophic failure. Economists the world over proclaimed Thatcher’s government to be the most disastrously incompetent in the history of postwar Britain. When asked in a debate in the Commons whether she could name just two economists who supported her, Thatcher managed to cough up the names of a pair of dogged loyalists who would have agreed with her had she pronounced her allegiance to the theory of phlogiston. Upon her return to Downing Street after this exchange, one of her civil servants apparently said to her, “It’s a good job you weren’t asked to name three.”
Yet she would not relent, even in the face of overwhelming pressure, not only from the public, not only from the Opposition, but from her own party. She believed, with what seemed at the time an almost religious faith, that it would work—because it just sounded right.
CB: Where does she get the confidence to do this?
AG: I don’t know! I would posit—I think Keith Joseph thought he did understand these things, and he was very enamored with Friedman, so he thought there were explanations as to why this would all work . . . I don’t think Thatcher went into these arguments at all . . . I think she was a remarkably instinctive politician. I think that she probably sort of at some gut level thought, I’ve just got to kill this inflation, I think it will create unemployment, but I think somehow we’ll get through . . . She had no training as an economist, none, no intellectual equipment which would suggest that she would have thought it through . . . Her statements were the statements of somebody who thinks about the economy as—I mean, to put it crudely—as a housewife.
Before concluding that monetarism was nothing more than the dimwitted delusion of a demented housewife, however, note this. In 1981, 364 highly trained economists, led by Frank Hahn (the very one who declared Thatcherism to be “intellectually without interest”) signed an open letter to the Times protesting her economic policies. Not long thereafter, the economy began rapidly to grow, entering the longest sustained period of expansion of the postwar era, and not long after that, unemployment began to come down—and it has stayed down to this date.
Rates of both inflation and unemployment in Britain are now very low. In fact, since 1997, Britain has ranked top in both output and inflation stabilization in the Organisation for Economic Cooperation and Development. The prestige of highly trained economists has never quite recovered. Thatcher’s first chancellor, Geoffrey Howe, subsequently declared that he had “actually produced a definition of economists as a result: that an economist is a man who knows 364 ways of making love, but doesn’t know any women.”
One may argue—and many do—that unemployment declined despite rather than because of Thatcher’s intransigent adherence to monetarist doctrines, but the fact remains that it did come down—a lot—which at least leaves the matter open to debate.
So was it insanity, or was it uncanny intuition coupled with astonishing force of will?
To be honest, I’m not sure. I think the jury is still out.
Nigel Lawson, predictably, feels the monetarist perspective has been vindicated. Although economists certainly have not converged around the principle that you must control inflation
above all, there is no longer much doubt that
if you are attempting to control inflation, monetary policy is the tool of choice. “The Andrew Grahams of this world,” Lawson wrote to me,
believed that you dealt with inflation largely by imposing prices and incomes policies, with perhaps some assistance from fiscal policies. What we said was no; all that is worse than useless, it is actively damaging. You deal with inflation by monetary policy. Since we now have an independent Bank of England, charged with keeping down inflation (and with nothing else), whose only tool is monetary policy, for which it is wholly responsible, I think it can fairly be said that it is game, set and match to us.
107About this, he is right. Before Thatcher, there was a debate about the primacy of monetary policy in controlling inflation. There is no debate now. In this respect, the Labour Party did indeed go beyond anything Thatcher ever attempted to do: As Lawson points out, in 1997 it removed the authority to set interest rates from the Treasury and transferred it to an independent monetary policy committee. This is a measure often recommended by monetarists on the grounds that the key to controlling inflationary expectations is credibility: People must be given a good reason to believe that inflation will stay under control. If you take responsibility for controlling inflation away from elected governments—which are apt to manipulate the economy for short-term electoral gain—you are sending a signal: We’re not just yanking your chain. No matter what happens, your money will be good. I am not sure that I would describe this development as “game, set and match” for the monetarists, but I agree that it’s certainly not an outright loss.
The Master of Balliol is not a great fan of Thatcher’s, but he is fair-minded enough to concede that the relationship between Thatcher’s experiments with monetarism and Britain’s now-vibrant economy is at least an open question. “It’s one of the very big unanswered questions in my mind about economics. She said there was no alternative.”
He hesitates for a moment, then adds, “She might have been right.”
“No alternative to—?”
“No alternative to massive unemployment to stop inflation. I wrote an article in 1975 which more or less said I thought this would happen. I didn’t believe for a minute this rubbish that it would be peaceful and easy. I thought it would be difficult, and I’d much rather we hadn’t had to do it. We’ve had one huge recession under her and another one under John Major, and it’s killed off inflation in the British economy and it needed to be killed off somewhere along the way. I’d much rather we’d found an alternative. But if we didn’t have an alternative—”
He pauses again, then sighs. “She had the guts to push it through.”
If we see the heart of Thatcherism as an attempt to control inflation above all by using monetary policy alone, our judgment of Thatcherism will be ambivalent at best. The high costs associated with this policy—and her inability to bring inflation down immediately and keep it down—have tended to obscure the success of her other policies. But they shouldn’t. That would be to miss the point of Thatcherism.
Recall the second part of Friedman’s prescription: To treat unemployment, you must fix the underlying problem—the distortions in the economy that are increasing the NAIRU. You must, in other words, target the supply side of the economy. As successive Thatcher governments struggled to bring down the inflation rate, they simultaneously sought to increase economic productivity through a series of dramatic supply-side reforms. The reason Thatcher matters
now, not the reason she mattered then, is the story of these reforms.
108What did Thatcher do, specifically, to affect the supply side? For that matter, what is the supply side? When we speak of strengthening the supply side, we are talking about creating incentives for people to produce—in other words, supply—goods and services. When taxes are lower, for example (this is the classic supply-side remedy), people have more incentive to be productive.
Foremost among the things Thatcher did to strengthen the supply side was smash the trade unions. (Economists would describe this as “augmenting labor market flexibility.”) When Thatcher came to power, some 70 percent of the British labor force was paid according to the terms of a trade union agreement. By 1998, this figure had fallen to 35 percent. Next in importance were changes made to the welfare benefit system: Prior to Thatcher, welfare payments had been indexed to average wages. Under Thatcher, payouts were linked to the Retail Price Index. Because wages rose faster than prices, over time this reduced payouts. These policies—together with reductions in income tax, the privatization of public industries and utilities, trade liberalization, and deregulation—were designed to heighten the ability of prices to convey information, create incentives to work, and ultimately lower the NAIRU.
They did precisely what they were intended to do.
These terms—supply side, incentives, NAIRU—may sound sterile. The everyday economic realities they describe, however, are nothing of the sort. John and Miranda Hoskyns, for example, recall what they meant in practical terms.
CB: I want to know what the business environment was like in 1979. What does it really mean when you talk about the “British malaise”? I mean, I’ve heard the anecdotes about garbage piling up on the streets, and corpses going unburied, but let’s talk about someone who comes from an average, mid-sized city in Britain and has modest ambitions for himself or herself. What were the obstacles to, say, going into business, becoming a small businessman?
Miranda: Well, you couldn’t send things by mail very easily, for a start, could you? I mean, the Post Office was—
John: No, no—
Miranda: A friend was having a baby . . . and all the electricity went off at the hospital. In the middle of giving birth. We had an elderly aunt in a nursing home who was left in pitch darkness because the lights went out. That kind of thing happened all the time. Every day.
John: But those were at particularly critical times, like the Winter of Discontent—
Miranda: Yes, but quite a few years—
John: But there’s also the question of, sort of, what did people over the years think? I mean, what was their level of optimism—and did they have any ambition? And part of my answer would be, because you remember this in the company, the Hoskyns Group . . . if any of our people went to work in the States, they never came back. They simply couldn’t afford to! . . . I mean, I remember the way it was always put. It was, “I can save money for the first time in my life.” . . .The general level, the standard of living, the standard of earning, and everything else, was pretty low. Taxes very high. And it was just impossible for anybody to save money. You just could not do it . . . Not only was I subject to high taxes, but because I was living on investment income, which was regarded as practically criminal in those days, there was an extra level of tax. So the maximum—so my maximum tax rate . . . was 98 percent.
Miranda: 98!
CB: 98 percent is unbelievable. . . . Is that the highest tax rate that’s ever been imposed on a modern country?
John: I suspect the Emperor Diocletian might have—didn’t he have higher taxes? I think he did.
Miranda: You just felt absolute despair. You felt you couldn’t rise above it.
That is what we’re talking about when we talk about the supply side.
Thatcher’s policies resulted, as would be predicted, in what economists would call “a complete reassignment of resources,” leading to “an inevitable period of readjustment.” Now remember, many of those “resources” were human beings. Some of them never adjusted. What we mean, in simpler terms, is this: Thatcher took a sledgehammer to a dysfunctional semi-command economy, stepped back, and waited for the rubble to reassemble itself—sans government direction—in a more efficient configuration. It took many years for the dust to settle, and the collateral damage was considerable. But in the end, the restructured economy was, as she had predicted it would be, leaner and meaner. The fact that these effects were chiefly seen after, and not during, the Thatcher era should not obscure the fact that they were the consequence of her policies.
Privatization generally saved the taxpayer a fortune and made privatized industries more competitive and innovative. The privatization of British Telecom resulted in a dramatic lowering of prices and improvement in service. The sale of council houses was and remains one of Thatcher’s most popular policies. But it would be wrong to describe privatization as an unalloyed success in every instance. Having taken British trains both before and after privatization, I can report that they were lousy and expensive before, and they are lousy and expensive now.
Generally—and predictably—privatization was most successful in industries with natural competitors. As the Master of Balliol correctly pointed out, “Don’t mix up competition and privatization. They’re not the same thing.”
CB: How would you introduce competition in a non-privatized industry?
AG: Well, I’d say you have to come at it a different way. You have to make up your mind, on the basis of analysis, whether this industry is of the kind where competition is feasible—I mean, competition between restaurants—drop-dead easy. Do it. Nobody in their right mind would do anything else. Competition between electricity-generation stations, one generating a supply in Scotland, another one generating a supply in Kent—tricky!
CB: Which do you consider the most successful privatizations, if any?
AG: Um—probably in the long run, telecoms, but that’s—the rate of technical change in that area has been so huge that the industry would have transformed itself no matter what happened. I think that British Telecom was eventually put more on its toes. But British Telecom even in the old state-run way would probably have been put on its toes by the mobile phone industry, etc. You just can’t compare telephones today with telephones then. Buses? Maybe.
CB: And which ones in your view were the least successful?
AG: Railways? Energy, I don’t know about.
CB: Well, that’s a shame, because that’s where I was going next—
AG: I’m allowed to—much better to just be humble and say you don’t know!
CB: I never thought so. Did you ever hear me admit I didn’t know the answer to something?
AG: All that bluffing in my economics tutorials—I knew you were bluffing.
Fair enough, I was, but I am still not persuaded that British Telecom would have been put on its toes by the growth of the mobile phone industry. Other nationalized industries, in the face of technological change and overseas competition, had simply grown more and more unprofitable. Coal, as we shall see, was a key example.
If some of the privatized industries, such as rail, were not noticeably better than their nationalized predecessors, nor were they noticeably worse. And most were noticeably better.
John Hoskyns: And you think, we had a government that had been making motorcars! Very bad motorcars. I mean, clearly this is
ridiculous! Quite extraordinary. The Post Office—for the customer, this was the most dramatic change. . . . Our old state-owned Post Office, it was absolutely ludicrous. You’ll have experienced it yourself, when you were at Balliol. Six months to get a telephone line!
109
CB: I never did get one.
John: And what was your telephone? Your telephone had a dial, and you could have it in one of three colors! Now that the war’s over, they’re not black anymore. You can have a pale cream one, or even a pale green one!
Miranda:—and also the queues at the Post Office, they did go on forever, you could never get anywhere . . . The customer was at the bottom of the pile.
John: The customer just had to put up with—you know, you’re lucky to get a pink telephone.
The withdrawal of state support to nationalized industries accelerated the restructuring of the British economy, hastening its transformation from one based primarily on manufactured goods to one based on services. Thatcher’s critics often charge that this transformation was undesirable. This criticism, because so often made, requires a response.
When we talk about manufacturing, we are talking about making things, either manually or with machines. When we talk about services—very crudely—we are talking about everything else, save for the direct sale of natural commodities. Doctors, accountants, lawyers, software designers, hoteliers, theoretical physicists, massage therapists, veterinarians, and journalists, for example, all provide services, not manufactured goods. Is an economy based on the supply of services really based on anything? Many people instinctively say no. There’s no there there, they say. You’re not making anything; it’s all a chimera.
But there is no special reason to believe this. As economies mature, they experience a predictable transformation in specialization: First they are agricultural, then industrial, then based upon services. This is a pattern that has been seen throughout the world, and there is nothing wrong with it—or if there is, most of the First World is now in worse economic condition than most of the Third World, which is an apagogical argument. Services are real economic goods, and civilization depends upon them. If you possess a comparative advantage in service provision, you are clearly better off providing services. The money I make writing books is no more or less real to me than money I might make by building toasters in my basement. However, given my particular set of competitive advantages, it would be ridiculous for me to try to make a living by building toasters.
Britain led the world in its transformation from an agricultural to a manufacturing economy. It then led the world in the next phase of development. Thatcher never publicly proposed to reduce Britain’s manufacturing sector and replace it with a service-based economy. But by forcing uncompetitive industries out of business, her policies dramatically accelerated this transition, and because of this, Britain is now far ahead of its rivals.
Recall Sir Nicholas Henderson, the British ambassador to Paris, who sent a telegram to the foreign office in 1979 remarking that “today we are not only no longer a world power, but we are not in the first rank even as a European one.” He included in this missive a table: It showed that Britain’s per capita income was 46 percent below West Germany’s and 41 percent below France’s.
As of today, British per capita income is 6 percent higher than united Germany’s and 8 percent higher than France’s.
110 Britain is Europe’s fastest-growing economy now, and the world’s fifth largest. (It was not long ago the fourth, but China is now ahead.) If these trends continue, it will soon overtake Germany, becoming Europe’s largest economy for the first time since 1959. This would have been unimaginable in the 1970s.
Britain’s economic performance since the Thatcher era has been unusual—strikingly unusual. Given that unemployment has fallen, what you would expect to see, at least if you still relied upon the Phillips Curve to make your predictions, is higher inflation. For the past decade, Britain has experienced declining unemployment with stable or falling inflation. The NAIRU has fallen, in other words. It has fallen—there is no other reasonable explanation—because Thatcher’s supply-side policies have worked their way through.
111How do we know that Thatcher’s policies are responsible for this, rather than the policies of her successors? The answer is simple: Her successors continued her policies. The changes Thatcher put in place were not reversed. They have now been embraced by every major political party in Britain. The Labour Party has reinvented itself as champions of free enterprise. “Government,” Tony Blair told the World Economic Forum at Davos, in 2000, “should have a role that is enabling . . . above all, promoting competition and removing the barriers to business growth . . . I call it a Third Way . . . Supporting wealth creation. Tackling vested interests. Using market mechanisms.”
You can call it a Third Way all you like, but the fact of the matter is, it is Thatcher’s way.
The remaining controversy about Thatcher’s economic policy, then, is not whether she strengthened Britain’s global economic position. She did. It is whether she did it at an unacceptable cost, and whether those costs were the inevitable price of transformation. Those costs—two painful recessions, a massive growth in inequality, and the creation of what seems to be a permanent British underclass—do indeed seem to have been high.
The top income tax rate dropped from 83 percent when Thatcher came to power (and 98 percent for those with “unearned income”) to 40 percent when she left. Indirect taxation, however, in the form of Value Added Tax, rose from 7 percent to 17.5 percent. This predictably led to a growth in income inequality. This was a design feature, not a bug. Thatcher aimed to reward those who created wealth and to punish those who did not. Inequality, in her view, was natural and inevitable. “The pursuit of equality itself is a mirage,” she said in 1975, in a speech delivered to American conservatives in New York:
What’s more desirable and more practicable than the pursuit of equality is the pursuit of equality of opportunity. And opportunity means nothing unless it includes the right to be unequal and the freedom to be different. One of the reasons that we value individuals is not because they’re all the same, but because they’re all different. I believe you have a saying in the Middle West: “Don’t cut down the tall poppies. Let them rather grow tall.” I would say, let our children grow tall and some taller than others if they have the ability in them to do so. Because we must build a society in which each citizen can develop his full potential, both for his own benefit and for the community as a whole, a society in which originality, skill, energy and thrift are rewarded, in which we encourage rather than restrict the variety and richness of human nature.
112Thatcher’s tax policies, coupled with the radical shift in the economy from manufacturing to services under her tenure, caused some poppies to grow to gigantesque heights. Other fields were simply mown down. Educated professionals in the financial sector flourished; factory employees went under. Some of those who had lost their jobs in the manufacturing sector found new jobs in the service sector, but often at lower salaries. Many did not find new jobs at all.
The average real income of British families rose 37 percent from 1979 to 1992. The income of the richest tenth rose 61 percent; the income of the poorest tenth decreased by 18 percent. Rates of welfare dependency and child poverty, in particular, soared—as did the crime rate. Although Britain as a whole obviously became more affluent, the poorest fifth profited not one bit from Thatcherism.
This is quite striking. An increase in income inequality is not a priori a bad thing, if the rich become much, much richer and the poor become only somewhat richer. But no economic policy can be reckoned a wholesale success if the poor become poorer during a time of massive economic expansion. Certainly, by all means let some children grow taller than others. But under Thatcher, a substantial number grew shorter. That was not the plan.
Margaret Thatcher went beyond the economic claim that free markets are an efficient vehicle for allocating scarce goods and resources. She argued that free markets were morally ennobling. Although Britain is on average a far more prosperous society now, it is not clear to me that it is a more moral one—in fact, the ubiquitous British underclass is a degraded, disgusting spectacle. Anyone who reads the British tabloid press, or walks through the streets of a British city on a Saturday night, knows this full well.
In this sense, Thatcher’s critics are right.
In 1986, Thatcher’s government opened the stock market to foreign and domestic traders, an event known as the Big Bang. British investors were now free to seek the best rates of return abroad, just as foreign investors were now free to invest in Britain. Thus did London become, again, the world’s center of finance. In 2002, the United States passed the Sarbanes-Oxley Act, regulating corporate accounting practices. Bankers in the City of London smirk that they would like to erect a solid gold statue in honor of the legislators who sponsored the act, for their efforts may well have diminished the likelihood of another Enron scandal in America—it is hard to say—but also, certainly, resulted in shifting a massive proportion of the mergers and acquisition boom to Britain.
While I was in London recently, I stayed with one of these bankers, an old friend of mine. He asked me to withhold his name—his company allows him to say nothing about these things on the record—so I’ll call him Harry. I’ll call his flat mate, a London restaurateur, William. They are typical children of the Thatcher Revolution, both prospering in sectors that are thriving now because of her policies.
Harry and William share a spacious flat in a newly gentrified neighborhood of London. It is conspicuously expensive and in the manner of all bachelor pads conspicuously uncivilized: Inelim-inable red wine stains subtly impregnate the luxuriant meringue of the wall-to-wall carpet; the cupboards are fully stocked with drink-mixers involving Rwandan fever-tree quinine, but the kitchen is empty of anything edible. That weekend, Harry was nursing not a broken heart, precisely, but a mildly indignant one. The woman he had been dating had just dumped him, telling him that she wanted someone who made still more money: “That’s what all women want, deep down,” she had apparently said to him.
We opened a bottle of champagne before going out to dinner, and when the subject of Thatcher came up, I switched on my recorder.
Harry: Why has London become the world financial center? . . . through a combination of multiculturalism, the ability to suck up the most talented from all over the world, and I think it’s worked also because of light-touch regulation. I mean, you just have to look at Sarbanes-Oxley in the States, and all the business that’s put London’s way. . . . The miners’ strike’s interesting because of its wider significance in the battle against trade unionism, and actually, the freeing up of the economy, and I think that’s been thrown sharply into relief by things like France, and Germany, and thirty-five-hour weeks—
William: Yeah, that’s madness—
Harry: And you have Sarkozy. And what, you know, he does speak to—it’s funny, because they interview people and they say, “Well, what do you think we need, Sarkozy or Royal,” and most people say, “We need Thatcher!”
William:—the journalists in France have been saying that for years!
Harry: Yeah, and so they need someone with the balls to do it. . . . But actually I think what is more interesting is the Falklands, you know . . . America, America sat on the fence for long periods . . . it had, you know, it was very much the kind of classic State Department, Defense Department, had a very . . . you know, was it . . . Fritz . . . Patrick, was it Fitzpatrick who was the—
CB: Kirkpatrick. Jeanne Kirkpatrick.
Harry: Kirkpatrick, yeah—
CB:—who was described by Alan Clark as “that Anglophobe harridan”—
Harry: Yeah! Exactly! Utter, utter Irish bitch, basically, who was causing us all kinds of issues. Anyway, focusing too much on the economic and the analytic arguments, I think, is a bore.
William: [bored] Yeah.
CB: Well, we’ll have plenty of time to talk about it, but first we should open that bottle of—
The transcript indicates that we did not, in fact, return to the subject, or if we did, I never turned the recorder back on.
It is not hard to see why unemployed former coal miners who are still living in poverty would fail to see the lifestyle of these two men as evidence that Thatcher created a better world. Now, you know where I stand on Thatcher—I am not saying that I agree with them. I am just saying that if you want to know why they still hate her, look no further.
Was there an alternative? Many people still think there was. Neil Kinnock thinks so, of course.
Neil Kinnock: I mean, the thing is, people say, “Ah, she got the trade unions reformed; she got the restoration of industrial order.” What she got was massive unemployment, so everybody is scared shitless! I mean—
CB: Yeah, but that forced restructuring, the moving of manufacturing into—
NK: No, no! That was a bloody disaster! I mean, there had to be a restructuring, there had to be a shift in the direction of high-tech, and services, and so on, of course there did. And it didn’t come from nowhere, either—that expertise was there in substantial part already. But there could have been a different pace, and simultaneously with a reduction—which was necessary—of traditional manufacturing, an intensive development of high-tech industry. I mean, if Sweden could, in twenty-five years, turn from a smokestack country into a high-tech country, do it without unemployment ever going above 6.4 percent, and be the most prosperous country in the world—we coulda done that in maybe the same amount, maybe a shorter time, without the devastation of communities and peoples’ lives, and the destruction of industries, in the way that it happened! But of course they didn’t plan it. They made the omelet by breaking the eggs on the wall. That’s not the most sensible way to break the eggs.
CB: Analogies to Sweden are always unconvincing, because Sweden has—
NK: Hold on, hold on! If you look at Sweden in, say, the mid-’70s, this was an economy with a more outdated industrial employment structure than we had then, even. I mean, this was a rustbucket economy. And it got turned around, they spent the same proportion of their GNP on unemployment as we did in the Thatcher years, except that three-quarters of that expenditure went on training and retraining, and the rest went on unemployment benefits, and the proportions were exactly the reverse in the United Kingdom. That was the difference—
CB: Why was there such a reluctance to spend on training and retraining among the Conservatives? Was it just an objection to spending the money, or was it a sense that—
NK: No, they didn’t feel that transition in the economy could or should be organized. So they didn’t do it.
CB: Right. It was a philosophical problem with planning an economy—
NK: Sure. Whereas, when we used to go around saying that we could get unemployment down, and it would require generating X amount of expenditure in the economy, etc., etc., etc., we’d get absolutely bloody hammered by the classicals—
CB: You’d get hammered by who?
NK: By, you know, the classical supporters of the Conservative philosophy . . . Anyway, you know, it depends on what you think a country should be run for, and how you think it should be run. The great thing about the kind of boiled-down Friedmanism that they had is that they didn’t think the country should be run. Or certainly, the economy. They felt that it should be left to the magic of the market. She said to me, in Prime Minister’s Questions, you may have heard the phrase, “You can’t buck the market.” And this is an incantation, this is—a religious conviction, almost, which is bloody ridiculous! I mean, there’s no serious economist in the world who would offer that as a kind of a chant in an economic church—
CB: No, there are plenty of serious economists who would say that the best economic strategy is to have as little state planning as is consistent with providing basic public necessities—
NK: Mmmm. Are they the same ones that defend maintaining the biggest defense budget in the world?
CB: Yeah, they are. And for good reason!
NK: [Laughter] There you are! They all believe in [unintelligible] capitalism, luv. They all believe the bloody system couldn’t run by itself!
CB: They all believe in what?
NK: They all believe the system couldn’t run by itself—
CB: No, you said something before “capitalism”—
NK: Tension o’ capitalism.
CB: The basic tension of capitalism?
NK: No, no, [unintelligible]. The kind o’ capitalism that, you know, is freebooting, and minimum interference and all the rest of it, but when it gets into difficulty, there’s a stretcher—
CB: But that sort of conservative does always say, “Yes, there are certain things the state has to provide, and must provide well.” Defense, security. But that’s where they draw the line. And they say, “The state should not provide job retraining, or health care; that’s best dealt with by markets.” And it’s not ideologically inconsistent; it’s spelled out—there are certain things that the market can’t do—
NK: Well, the trouble with economic models is that the people who make them never live in them. It’s a little bit like those office boxes built by architects who are never gonna work in ’em.
Kinnock, as you can see, wouldn’t let me interrupt him. But in the end I have the final word. In his view, and he is perfectly clear about this, the alternative to Thatcher was a planned economy. And the evidence he offers that such an economy can create anything other than a human hell is Sweden. Let me finish the sentence he wouldn’t let me finish. Socialists love analogies to Sweden. But they are always unconvincing because they are based on some
fantasy Sweden, rather than on an actual Nordic country bordered by Norway and Finland. In this Sweden of lore, every single woman is also eighteen years old, blonde, busty, lonely, naked, and waiting for you in the sauna. Kinnock is simply mistaken about Swedish unemployment statistics. In the early 1990s, Swedish unemployment rose to 13 percent, higher than ever experienced in Britain after Thatcher came to power. In the period Kinnock is discussing, Sweden in fact experienced a precipitous
slide in the prosperity league—from fourth place in 1970 to sixteenth place in 1998.
113 In fact, the policies Kinnock admires nearly ran Sweden into the ground. Only when they were abandoned did the Swedish economy begin to recover. You may as well argue that the command economy has been a splendid success in Narnia.
Over and over again, Thatcher’s critics told me that yes, Britain’s economic transition was inevitable, but “she didn’t plan for it.” No, she didn’t. That is precisely the point. If the government plans the economy, it is no longer free. And if it is not free, the transitions that do occur tend to lengthen the lines for bread.
So the question remains: Were the costs of the Thatcher Revolution inevitable? Was this the price Britain had to pay as a kind of entrance fee to a true market economy? I’m afraid most of them probably were. The blow of the first years would have been softened had her first governments been more deft in their monetary targeting, but the bulk of the permanent dislocation can’t be attributed to this. For the most part, those whose standard of living declined as a result of Thatcher’s reforms became poorer because they had previously been the beneficiaries of state support, either in the direct form of welfare payments or the indirect form of state intervention to prop up fossilized and uncompetitive industries.
Had this system of economic redistribution been sustainable, the argument could be made that it was more humane than the one that replaced it and, therefore, that it should have been sustained. But it was not sustainable: Britain was experiencing slow but steady relative decline. Relative decline, over time, tends to become absolute decline, followed by collapse—a pattern commonly observed in command economies.
Britain is now the world’s second-largest producer and exporter of services. What remains of its manufacturing sector is highly competitive. In the period since Thatcher came to power, countries such as China have liberalized their economies and transformed themselves into manufacturing superpowers. It is simply not credible to imagine that Britain could have survived as a major manufacturing power in the face of that kind of competition. Attempts indefinitely to prop up Britain’s uncompetitive manufacturing sector were doomed to progressively greater failure.
In Thatcher’s defense, let this be said: The transition from a command to a market economy tends everywhere to be brutal. For evidence of this claim, look at Russia. The moral responsibility for this is not with those who seek to return freedom to the markets; it is with those who thought it would be a splendid idea to eliminate it in the first place. The alternative to this brutal transition was—and could only have been—maintaining a command economy.
And this was no alternative at all.
