The Economic Legacy of Margaret Thatcher, by Sean Gabb, Published in The Baltic Review, 21st April 2013

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Baltic Review

Opinion & Analysis

Further Thoughts on the Legacy of Margaret Thatcher
by Sean Gabb
Published in The Baltic Review
21st 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 Thatcher did great harm to British industry and to the industrial working classes

Margaret Thatcher

Margaret Thatcher

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.

by Sean Gabb