The Economic Legacy of Margaret Thatcher


Global Views

Op-Ed Special
The Legacy of Margaret Thatcher

Special Contribution
By Sean Gabb
Published in The Seoul Times, 25th April 2013

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. Margaret 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.

Dr Sean Gabb is Director of the Libertarian Alliance. He has written over a dozen books and around a million words of journalism, and has appeared on hundreds of radio and television programmes. His seven novels have been commercially translated into Spanish, Italian, Greek, Hungarian, Slovak and Complex Chinese. His latest novel, The Churchill Memorandum, can be found on Amazon.

Sean Gabb
Director, The Libertarian Alliance (Carbon Positive since 1979)

11 responses to “The Economic Legacy of Margaret Thatcher

  1. To save heavy industry Mrs T. would have had to two things.

    Firstly cut government spending (or at least not allow it to INCREASE – as it did) in 1979.

    And get rid of the GOVERNMENT GRANTED union powers – again right away in 1979.

    Dr Gabb mentions capping government pay at ten thousand Pounds – in 1979 this would NOT have saved the money that needed to be saved.

    The only way to save the money that needed to be saved would be to tear up the government spending promises already made by the outgoing Labour government in 1979.

    This would have meant a return, at once, to the “Winter of Discontent” (i.e. massive union disruption – perhaps with fighting on the streets added).

    Getting rid of the GOVERNMENT GRANTED union powers (such as the right to obstruct, “picket”, the entrance to a place of employment) would also have led to a return to the “Winter of Discontent” – i.e. a showdown with the unions. not years into the new government, but at once (in 1979).

    On in this way could heavy industry have been saved in the context of the world recession of the time.

    It is very doubtfull that Mrs T. could have got any of the above through her own Cabinet – let alone anytihing else.

    As so often, I suspect that Dr Gabb knows the above – but, for reasons of his own, has chosen not to be frank.

  2. Yes the workers and the unions at triumph were a problem, they would not
    change or accept new technologies, this is why the MC industry went broke
    for sure.

  3. The problem about “trade” “unions” is that they were specifically set up in the beginning, if not exactly to destroy western (which meant in particular in the Anglosphere, that was and is hated primordially and directly and mortally by FabioSocialismus) industry, then at least to hobble it and burden it gravely, the “neopastoralist-barbarian anti-life force being strong in him/them”…

    You see, you couldn’t (if you were a FabiaNazi) just allow the industrial masses, pregnant with all that political power – when farmed – to propel you and your friends to dizzy heights of neo-RomanImperial tyranny, to get away from your clutched fists and jaws. You could work out that coontinuing liberalism and creativity, untrammelled by pre-capitalist-barbarian sovietism, would rapidly generate so much wealth, well-being and progress (the real one, not their version) that your patronised political-class of farm-animals would soon evaporate.

    You’d be back to being a failed academic like Karl Marx himself. Nobody listening to you any more, nobody reading your “pamphlets”, nobody turning up to hear you even if you stood on a soap-box while throwing out silver shillings (a huge amount of dosh then, like waving a £20 note today) And just think: all you wanted to do was ferociously kick Mankind’s butt, backwards: back into deep terrible time, into the unending agrarian horror of pre-industrialism and subsistence-living, from which he was beginning to emerge in serious numbers.
    FabiaNazis wanted Man booted harshly back, back into the earth-floored hovels shared with his animals in the winter and _not_ forwards into brick and stone houses with real wooden floors like the feudal toffs had, and some even with window-glass and proper flue-chimneys…

    The “Unions” were a stalking-horse, a plausible-looking vehicle to inveigle the poor bastards that worked for a living, into supporting an initially-veiled but now naked bid by wicked regressive tyrants for an “irreversible transfer of wealth and power into the hands of FabiaNazi apparatchiks.”

    I give notice that when I am Principal Secretary of State for War, Unions will go. I really don’t give a monkey’s fuck where: they’ll just “go”. They’ll certainly be illegal organisations, and “members” ought to seriously think about getting out now, so that their names don’t appear on the “closing registers” at the moment of dissolution.

    Does one really want to be still on a ship that’s just been torpedoed?

  4. This was the probem agreed, BSA had some excellent new engine designs
    I have copies of the drawrings somewhere, going from push rod, to overhead
    cam, these are the things that would have saved them not the union or the
    f-ing bad management at the time.

  5. I think that, if there had not been any “unions”, the management would have saved them anyway. No “management” wants to be bad. “Managements” are clever people designed to find out what the competitors in ChindoBrazilia are doing, and do it better, faster and cheaper. That’s why “managements” are made of cleverpeople who have studied things – at least if we are talking about engineering and manufacturing firms, where if you are unclever, you will then be killed..

    “Unions” are designed to prevent this thing, at least in Western nations where Unions are a vehicle for socialism on purpose, for destruction.

    The only problem is the “trade” (not) “unions” (not). They are a deliberate GramscoFabiaNazi invention, to kill.

    If they are gone, we shall live. If they are here, we shall die.

    I do not apologise for stating this simple “settled” truth on a libertarian website. If anybody would care to debate this point with me, I would be available.

  6. David, sorry some managers in the UK are complete twatts, in such situations it is only engineers who can save, it was they who kept planes
    fying during the war, they kept transport running, they created Hitlers
    war machine. Look at the theft in the car industry by management near
    the decline of the british industries.

  7. If manages are so good just look at the NHS why have got all these woman
    mangers with no management experience, or qualifications. Look at GP
    surgeries, some of the pratts probabaly don’t have a CSE.

  8. Karl, Karl…when i said “managers”, I do not mean the apparatchiks in the NHS, or anywhere else in “government” (the NHS is part of the government.) That’s the whole idea: so that the FabiaNazis can decide who will be “treated” and who will be “put on the Liverpool Care Pathway” (do you know what that is?)

    And it does not matter if the NHS “managers” are women or men: they all produce the same outcome regardless of Gender – they are statists.

    When I said “managers”, I meant proper ones in private firms that actually manage stuff. If they don’t manage it, they die.

  9. Well agreed, like I used to be. I’m sure you got my point, I would never
    consider such people as statists to be capable of management.

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