Further Thoughts on the Legacy of Margaret Thatcher

By Sean Gabb

Because I’m busy on something else, this will be an abbreviated argument, and will be short on facts. But I feel obliged to give some explanation for my claim, made elsewhere, that Mrs Thatcher did great harm to British industry and to the industrial working classes.

The lefties claim she pulled the plug out of the British economy in the early 1980s, and deliberately put millions of workers on the scrapheap. The Thatcherites claim that all she did was to allow the liquidation of previous malinvestments, and that the industrial concerns that failed were unviable. Both are wrong, but I suspect the lefties – if for other reasons than they normally give – may be less wrong than the Thatcherites.

Let us imagine an initial state of affairs in which interest rates are allowed to act as prices to equalise savings and investment, and let us imagine that the government runs only a small budget deficit. In this case, most savings are channelled into private investment.

Let us now imagine that the government runs a larger deficit. It can finance this by selling bonds to the public. In this case, other things being equal, interest rates must rise, because there is now greater demand for loanable funds. But the government does not wish interest rates to rise, and so it finances its deficit by selling bonds to the banks. These, following their fractional reserve rules, increase the money supply by a multiple of the money received, and spend this on a larger number of new government bonds. The result is monetary inflation. Interest rates may rise less than would otherwise be the case, or will remain unchanged or will fall. Prices may increase. Certainly, there will be a distortion of economic activity.

Whatever the case, the government decides after some time to stop the inflation. It must do this by stopping its sale of bonds to the banks. This means it must either cut or eliminate its deficit, or watch interest rates rise as it competes for a lower volume of loanable funds. If its deficit is very large, it may need to watch interest rates rise very high.

I grant I have made assumptions about an initial state for the British economy that had not been true for a long time. But my abstract case is given only to clarify the choices faced by Mrs Thatcher in 1979. What her government did was to choose the second of the above options. It choked off the inflation in advance of reducing its deficit. It continued to borrow on a large scale, not caring if high interest rates depressed private investment. These high interest rates also caused the pound to appreciate beyond any reasonable consideration of purchase power parities.

Most Austrian analysis of currently manipulations is given to tracing the effects of artificially low interest rates. These cause larger investments than would otherwise take place. These investments are often unviable, and are exposed as such when the manipulations cease. But artificially high interest rates cause the failure of enterprises that would otherwise be viable. Instead of lengthening, they shorten the chain of production.

There is no reason to weep over the fate of operations like British Leyland and the other nationalised industries. But many other industrial enterprises that would normally have been viable were destroyed by a combination of high interest rates and a high pound. Industrial output did eventually recover, and even exceeded its earlier peaks. However, these were unnecessarily capital-intensive enterprises. Many enterprises that employed unskilled and semi-skilled labour were priced out of existence.

There is no doubt that ending the inflation of the 1970s would have led to a recession in the early 1980s. Somebody was going to suffer. But, if Mrs Thatcher had balanced the budget by radical cuts in state spending, the pain could have been mostly felt by state employees. She could have shut down several parts of the government in full. She could also have brought in a Public Employment Payroll Tax to cap all salaries at – say – £10,000. She could have been still more radical, and cut state spending to the point where taxes could be cut. There would have been no reason for interest rates to rise as high as they did, or for the pound to rise as high as it did. Instead, she pushed nearly all the burden of adjustment onto the private sector, and the result was industrial mass-unemployment. Industry seems to have been the weakest part of the private sector, but not unviably so in the absence of monetary distortions.

Mrs Thatcher is praised for bringing inflation under control and for forcing the private sector of the economy to become more competitive. What she did, in fact, was the equivalent of strapping hundred pound weights to everyone. In this case, many people would fall down dead, and the survivors would be left with unnecessarily enlarged muscles. There was no necessary reason why textiles and light engineering should virtually disappear from the country. This was not the result of undistorted market forces. It was the result instead of a bias towards the state sector at the expense of those who were actually productive – oh, the state sector and those City institutions that did well out of handling government debt and from the general credit and currency manipulations.

Her fault is compounded when we consider that political correctness was born and wholly sustained for many years within the state sector. Her legacy was the privileging of a class that, when mature, set about the transformation of the country into a soft totalitarian police state.

I could say more. I could, for example, look at her transformation of the unions from autonomous working class institutions into a mass of sinecures for the Enemy Class. Outside of the state sector and the privileged corporate sector, I do not believe these were as mindless or as destructive as is claimed. They generally abused their privileges – privileges that she never removed, but only regulated – when management was useless. But I have said all that I feel is necessary for the moment.

8 responses to “Further Thoughts on the Legacy of Margaret Thatcher

  1. The failure to cut government spending in 1979 was indeed tragic.

    However, Dr Gabb appears to have forgotten the media – every day (many times a day) the BBC denouced “the cuts” in government spending.

    Of course these “cuts” were not real cuts at all – they were cuts in the wild INCREASES in spending (on everything) promised by the outgoing Labour government.

    To actually cut government spending the new government would have had to go back on government sector pay agreements that the Labour government had already made – this would have meant, at once, a return to the “Winter of Discontent”.

    The cabinet (Mr Prior and so on) were terrified of such a prospect – so actually CUTTING government spending was never really an option in 1979 (Mrs T. could not have got it through her own Cabinet – let alone through anything else). It was hard enough to restain the increase in government spending (with the BBC, and others, screaming “cuts” every day – many times a day).

    “But Paul that just means that the first order of business of Mrs T. should have been to get rid of the BBC”.

    Now there were agree – but that was considered “extreme” (indeed I do not know of a single M.P., in 1979, who supported getting rid of the “license fee” – perhaps their were a few such members of Parliament, but I can not remember them).

    So a bust in 1979 (worse than the world recession in other countries) was inevitable.

    Cutting government spending (as. for example, Warren Harding did in 1921) would have been useful – but it was not a political possibility in 1979 (restainging the increase in government spending was hard enough).

    As for UNEMPLOYMENT – for some reason Dr Gabb does not stress the vital need to reform the labour market, i.e. to take away government granted union power.

    As everyone with even a basic grasp of economics should know governmen granted union power (a classic example would be the Wagner Act in the United States in 1935 – which forbad employers from dissmissing employees for not turning up to work, for “going on strike”) makes waged and conditions of work inflexible (that is the basic point of unions and what W.H. Hutt called “The Strike Threat System”). thus when there is crash – unemployment vastly swells.

    J.M, Keynes (if one burns through his mist of words – to what he is actually getting at) argued that this could be dealt with by creating more money in order to increse prices – the “money illusion” to cut wages by increasing prices (employees, supposedly, being too stupid to notice). However, this does not work for long in practice – for the simple reason that people are not that stupid.

    So this means that (to avoid mass unemployment) real labour market reform (i.e. the removal or weakening of government granted union power) must be done.

    Again in 1979 it was NOT done – Margaret Thatcher did not defeat James Prior (and the other “wets”) till years later (and even when labour market reform was done, years too late, it was done in a very odd way – with more laws being passed, rather than the REPEAL of the existing laws going back to the Act of 1906 and the Act of 1875).

    This failure to reform the labour market (even in the face of a slump) meant that unemploment would explode – which indeed it did.

  2. By the way – few government employees in 1979 were on very high wages (that came very much latter under Mr Blair, who thought that if you paid top government people as if they were the managers of private companies, government departments would act like private companies – this was one of Mr Blair’s many eccentric ideas).

    A government sector pay cap of ten thousand Pounds would have hit very few people in 1979 (a few top judges perhaps?). It would not have saved much money.

    As always – if you want to save serious money, you have to go for the mass of people. Hitting the mass of (normally not highly paid) government employees – as well as health and education spending (because this is where the money is spent).

    To give an example…..

    California and New York are normally compared to Texas (the country of young Miss Thatcher) – but England (my apologies to the people of Scotland. Wales and Ulster) is nothing like Texas in size and resources (pr. more importantly, in the relatively lower TAXES of Texas).

    England is only a bit bigger than South Carolina.

    Now it is perfectly true that South Carolina has a better chance of avoiding bankruptcy than New York or California – but……..

    Would you, gentle reader, prefer to be a government employee in New York or California – or in South Carolina?

    Your government pay, benefits and pension would be vastly lower in the Deep South (than in New York or California). And people do not tend to look to the future (“in the long run we are all dead” as Lord Keynes said) they look at living standards (and promises) NOW.

    My own view is that the world is very close to the “long run” – but gloomy people like me have been wrong before.

  3. By some error of thought Tony Blair thought if you pay high wages this
    would increase Human Intelliegnce and IQ’s contrary to the laws of anotomy, As we note there was no change in this department despite the huge salaries.

  4. John R McDougall in BNE

    Dr Gabb,
    I do not wish to enter into a detailed discussion with you about British Politics… I am, after all, not from your country. But I am old enough to have seen many things around the world in a lifetime of roaming that place in the mining industry. And this is where I can speak with some knowledge.
    Under the incompetent governments that started … I do not know when, but some distance in time before these troubles, Britain had become a “sheltered workshop”; and this had gone on for so long that the remedy was always going to be unpleasant, and long drawn out. When the struggle came to “discussion” with Scargill and the miners’ unions, there were mines in the northern coalfields which were so expensive that the UK could have imported coal from Australia and landed it more cheaply than coal from the northern coalfields could have been landed at the pit head. And Sth Africa and the eastern USA were a lot closer than Australia.
    I suspect that you guys should stop arguing about how slow it was done; and be thankful that someone STARTED the process.
    I have come to a long overdue retirement in eastern Australia, and I both sympathise with the problems that the UK overcame (partly) during Maggie’s years, and am concerned that we overcome the self destructive behaviour of our own, home grown, version of your problems … governing parties behaving suicidally in Australia (for only 6 or 7 years) and leaving us with almost AUD 300 billion in debts.

  5. That was the big problem with the Coal issue I read on web last week you
    can buy it for £18.00 ton on open market, hence the problem with the
    coal industry at the moment.

  6. Karl – Mr Blair was, and is, a very strange man. I thought he was strange at the time – but the more I think about him the odder he appears.

    For example, why would someone who is pro abortion become a Roman Catholic? I can understand a “social liberal” who is born into the Roman Catholic Church not wanting to leave it – but why JOIN a Church when you disagree with its basic doctrines?

    Still it is off topic – so I will just file it along with “Blair the expert on Islamic theology” (who, whenever he taked about Muhammed or what he taught, seemed to be citeing an alternative universe – not Muhammed the military leader and his band of warriors in this universe) and leave it at that.

  7. I have to agree 100% I don’t know what the thumbs up to the EU lot meant
    at Thatchers funeral yesterday, looked a bit odd what could Blair mean, with such a gesture. looked like a formal
    signal of sorts. on TV as well. The good old BBC caught the right frame.

  8. Anyway paul, I don’t know what Tony Blair brought us or left us with, I was flicking through the F.O.I.’s today particulary Robert Verainks investigations into the Police, Crime leaks, another interesting article, concludes that crime in the Police is so high the new investigation teams are unable to keep up with, dealing with an alleged case load of between 250 to 300 cases per month, the corruption cases are now at the highest level ever recorded in Britain, with suggestions police are becomming epidemically involved in crime, the allegations suggest police are disclosing confidential state information, as well as being involved in other serious criminal offences, and abuses of evidence, is this what happens under uncontroled statisim, does statisim eventually break down into lawlessness and economic chaos where you no longer have the resources to keep up with, towards the end of Hitlers reign there were indeed similarities.