Was 'Thatcherism' necessary to 'save' Britain?



What is the truth about Thatcher's reforms in the early 1980s? Where they 'necessary' as her supporters claim?



Ken Clarke insists that the true history will be written one day, and he obviously thinks that his version of events is the only truth, but one suspects his opinions are likely to be just as prejudiced as anyone else's.



You have one set of people praising her reforms as having saved the country and another set of people saying she destroyed the country. What is the truth?



This graph shows that as soon as Thatcher introduced the laws requiring unions to hold secret ballots for strike action, the ending of the closed shop, and other anti-union laws, the number of strikes and the number of days lost to strikes fell significantly within a couple of years:





Looking at this graph I find it hard to believe the notion that the unions were unbreakable and that the only way to destroy them was to destroy the industries that went with them. The anti-union laws appeared to be working. The Miners Strike in 1984/85 was the only major union action that significantly disrupted the economy after the change in the law and it does not appear that another 'Winter of Discontent' was likely.



Had Callaghan gone to the polls in 1978 and won, and then faced the Winter of Discontent, it is likely that even his patience with the unions would have run out and the proposals suggested in "In Place of Strife" would probably have been implemented in full. This document contained many of the policies that Thatcher introduced.



The most destructive parts of Thatcher’s economic policy were: letting the pound rise so far in value, pushing up interest rates to calm inflation and removing subsidies from key industries. This hit business like a triple wammy in the early 80s and contributed to the fastest rate of deindustrialisation the world has ever seen. Britain has run a significant trade deficit ever since, despite significant oil exports. The present governments desire to see a “march of the makers” to export our way out of recession is not materialising, despite a much weaker pound, because the industrial capacity of the economy has shrunk so much. The economy grew by an average of 2.7% in the 1980s - with North Sea oil - and 2.5% a year in the 1970s - with the Oil Crisis and without significant oil revenues - so Thatcherism can hardly claim to have transformed the performance of the economy. The national debt remained approximately the same throughout this time as well.



What would have happened if Labour had stayed in power in the early 1980s?



It is likely that they would have fixed the value of pound to keep our exports competitive, and that interest rates would not have been used as the exclusive method of controlling inflation. Labour would probably have used the Bank of England to restrict the supply of money and perhaps demanded that banks hold more reserves and lend less money. This would have calmed inflation, at a slower rate, but without harming businesses that had existing loans. Using interest rates as the key economic lever is described as playing one-club golf and it has an effect on all areas of the economy equally. Higher interest rates pushed up the existing borrowing costs of all businesses and the higher pound made exports much less competitive.

Combined with reduced trade union power and the subsequent lower bargaining power of workers it is likely that inflation would have reduced had Labour been in power during this period.

The key difference is that the Conservatives had adopted the economic theories espoused by the “Chicago School” that emphasised inflation above all else. The “Post-War Consensus” stressed full employment and a balance of payments equilibrium as the key priorities. Had Labour been in power and continued the “Post-War Consensus” they would not have allowed the UK manufacturing sector to decline in the way it did. Continued subsidies, but combined with modernisation (using North Sea oil revenues), a fixed exchange rate and a more creative money supply policy should have been able to maintain lower unemployment than was seen and a continued manufacturing and export performance. It is the regrettable adoption of the “Monetarist” economic thinking combined with a blind faith in the free market to deliver jobs that allowed industry to go to the wall to such a large extent, one that we have yet to recover from sufficiently well for the UK to pay its way in the world on trade alone. Britain now imports 40m tonnes of coal a year and only mines around 15m tonnes itself. In the 50s, 60s and 70s the mining industry declined to a similar extent as in the 80s, but the post-war period was a time when redundant miners would have been able to get a different well-paid job in industry, unlike the bleak times of the 1980s.



It is a key belief of the Right in politics that the government should not subsidise industry. This is generally a sound policy, but in the case of the mining industry in the UK it would make more sense to subsidise it to avoid paying unemployment benefit. Where other jobs and industries are available then the economy should allow the market to allocate resources to where they are most efficient, but where subsidising an industry is likely to be cheaper than paying out-of-work benefits then it makes sense to subsidise that industry - at least for a time before new industries emerge. Sometimes the market does not allocate resources as well as its leading protagonists believe. Thatcherites overestimate the true effectiveness of the free market and have a blind faith in it that is not matched by reality. Because people cannot easily relocate or retrain in new industries there is inertia in labour being moved to growing industries from declining ones. It is also far easier to close down a factory than to build and establish a new one.



The failure of this destructive policy can be seen the UK’s failure to achieve a balance of payments equilibrium since 1982, despite significant North Sea oil exports. In addition there is the issue of “critical mass” in an industry. Businesses in certain industries tend to cluster together due to the availability of skills and expertise in one place, and the existence of a cluster in turn reinforces the local skills base. The City of London is probably the biggest such cluster in the world. With any cluster, if it is allowed to decline below a level where there is a ‘critical mass’ of skilled people then it starts to disappear, because businesses cannot recruit enough skilled workers. A Sheffield steel company I worked for had 200 applications for my job as an accountant, and 2 applications for a job of technical manager. Though the Sheffield steel industry remains a good example of a cluster (people in the industry frequently know each other from other companies) it appears that the critical mass is in danger of being lost. Closing down so much manufacturing has resulted in valuable expertise being lost and it is therefore hard to re-establish and grow those industries when demand increases. Sometimes it is worth subsidising an industry, or sacrificing short-term profits, to maintain a skills base for the future. Thatcherism completely ignored this factor, and we pay the price today in the balance of payments deficit that the UK suffers, which will ultimately mean a lower value of the pound and lower living standards until we learn to sustainably pay our way in the world.



There is much talk from the Right that much of UK industry was "rust bucket" and needed to close, but Britain managed to run close to a trade balance in the 1970s (and would likely have run a surplus without the Oil Crisis) so our exports must have been sufficiently in demand for this to be the case. British manufacturing industry generally needed to modernise but this didn't necessitate its widespread destruction.



So, was Thatcherism necessary to save Britain?



Clearly, no. Britain didn't need "saving" as her admirers suggest, apart from the Unions being made democratic, which Labour would almost certainly have done anyway.



The adoption of "monetarist" economics was a gross mistake which resulted in widespread and unnecessary closure across the manufacturing sector, for which we are still paying the price today.