Here’s evidence to show Thatcher’s economic model didn’t work


2:13 pm - April 11th 2013

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by Stewart Lansley

Margaret Thatcher will surely be remembered, above all, as the architect (along with Ronald Reagan) of the modern market economy. Her prime goal was to shift Britain from the post-war era of ‘managed’ to one of ‘market capitalism`.

From 1980, the British economy was turned into a real life laboratory in a prolonged experiment designed to free up markets, weaken the state and role back the power of collective bargaining. The rich were allowed to get much richer, inequality rose and the share of output going to wages shrank.

The experiment – continued by new Labour from 1997 – was launched with an intoxicating promise: it would correct for the failings of post-war welfarism, lift Britain out of its tepid entrepreneurial culture and bring renewed economic dynamism. Such was its influence, the model was eventually copied, at least in part, by a majority of other rich nations.

The big question, of course, is has the theory worked? The answer is no.

On every count bar inflation, the much heralded promises have failed to materialize. Inflation rates have fallen, but on all other measures, the economic record of market capitalism has been poorer than its predecessor. The main outcome of 30 years of blind-eye regulation, axed controls over business and a weakening of collective bargaining has been an economy that is both more unequal and more fragile and prone to crisis.

In the post-war era, the UK’s growth rate averaged 3 per cent a year. Since 1980, it has averaged 2.2 per cent. Why? Because productivity rates have fallen. Despite greater market freedom, and a growing profit share, productivity growth ( the rate of increase of productive capacity ) has averaged 1.9 per cent a year from 1980-2008 compared with an annual average rise of 3 per cent from 1961-1973.

Rising corporate profits were to be the means by which the love affair with markets would deliver economic renaissance. Yet burgeoning profits have been associated with falling investment, a decline in spending on R&D and at best a marginal boost to entrepreneurship.

Figure 1: The record on productivity: ( growth in productivity per annum, UK, )

As a result of the slower growth, unemployment levels have jumped from an average of 1.6 per cent in the immediate post-war era ( from 1950 to 1973 ) to an average of 7.8 per cent since 1980, a near five-fold rise. This is despite a steady fall in the share of national output accruing to wage-earners, a trend that was designed to unleash a new era of job creation. .

Crucially, the record on economic turbulence is also much poorer. IN the two decades from 1950, the UK economy experienced only three shallow and short-lived recessions, with output falling by 1.4 per cent in 1956, 0.9 per cent in 1967, and by 0.7 per cent in 1961. In contrast, the post-1980 decades have seen much more prolonged and severe economic shocks: in 1980-1981, output fell by 4.7 per cent; in 1990-1991, by 2.5 per cent; and in 2008-2009 by 6.4 per cent.

Figure 3: The record on recessions ( percentage fall in output )

The evidence is that the present crisis has its roots in the fanfare economic changes launched during the 1980s. Far from a more vibrant and robust economy, the great market experiment has landed the nation with an economy that is much more fragile and turbulent than the one it replaced.

The promise of rising prosperity for all has in fact meant soaring wealth for the few. Mrs Thatcher may have set about her transformation of Britain with the deepest of convictions, but she has left a model of capitalism that is deeply flawed and no longer sustainable.


Stewart Lansley is a visiting fellow at Bristol University and the author of The Cost of Inequality, Gibson Square.

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Reader comments


There are a plethora of other factors which have not been taken into account in this article. Government debt, entrepreneurship, and international confidence in Britain, for instance.

And the factors that this article does look at do not necessarily reveal the whole story. What is the “growth rate”? GDP? Real GDP? PPP? Such a measure can hardly be called “evidence” when it is so unscientific and prone to subjectivity. “Productivity”, too, cannot be treated as accurate. Using any of these measures is definitely a form of evidence, but it remains impossible to prove anything scientifically, as this article’s headline suggests the author does.

This article ends by talking about an economy that is now “deeply flawed and no longer sustainable”. The same could be said of the pre-Thatcher economy, where inflation was going through the roof, high taxation was driving away business, and subsidies for the coal industry was unsustainable.

Overall, I think that this is an interesting and thought-provoking article but unfortunately it only seems to look at the data that is convenient for the point Lansley is trying to make.

2. Gallbladder

Cherry-picking.

Thatcher wasn’t right about everything, but she was less wrong about everything than the previous governments, and going back to those ways wouldn’t have worked in the 1980’s and would work even less well today.

COuple of quick points:

Productivity growth chart is annual % increases.

This trend tends always to decrease in developed economies, not least because the series isn’t compounded….if you base it back to 100 at a certain date you get a very different looking chart. That said, the chart does show that the Thatcher years had better average productivity growth than the 70s.

Not sure what the output/recession chart is supposed to tell us…the worst recession happened under Labour, the next worst under Thatcher as she started her reforms, and the third worst under Labour again. I guess all it says is that recession can happen whoever is in charge.

If yoou look at a GDP grwoth chart you’ll see that the Thatcher years had almost exactly the same average growth (2.2%) as the years preceeding her and post her rule. So it’s hard to argue her economic record is somehow worse.

Nothing in the article backs up the final “no longer sustainable” assertion.

Nicholas Crafts is the UK’s leading economic historian.
Here is his rather more balanced assessment.
Thatcher then Blair reversed what had up to 1979 been a sharp decline in economic performance relative to our international peers.
They also, through supply side reforms, substantially reduced the UK’s non-accelerating inflation rate of unemployment.

http://www.voxeu.org/article/economic-legacy-mrs-thatcher

Let’s consider but a few issues you point to:

(1) “The rich were allowed to get much richer, inequality rose and the share of output going to wages shrank.”

The rich did get richer, but so did the average worker. In fact if you look at wages adjusted for inflation, the average worker got richer under Thatcher faster than either 11 years of the Labour government previous, or 11 years of Blair after. So a little context would help.

(2) “it would correct for the failings of post-war welfarism, lift Britain out of its tepid entrepreneurial culture and bring renewed economic dynamism.”

Which to a great extent it did. To say that Britain did not benefit from the management of Thatcher is mad. During her time and after Britain in simple terms climbed from 7th largest economy to 4th. That has steadily come undone in the Blair/Brown years.

(3) “Inflation rates have fallen, but on all other measures, the economic record of market capitalism has been poorer than its predecessor.”

You dismiss inflation as no great issue. However inflation that was ravaging the UK with rates of 15%+ and up to 26% made the economy volitile and the poor poorer. Remember the IMF had to bail Britain out in 1968 and 1974. They even re-introduced bread rationing in 1978. To claim that somehow the 60’s and 70’s were some type of economic success makes me think that you have gone to the land of the fairies, or have an increadibly short memory.

(4) “The main outcome of 30 years of blind-eye regulation, axed controls over business and a weakening of collective bargaining has been an economy that is both more unequal and more fragile and prone to crisis.”

Firstly, the crisis you refer to have to be looked at in terms of period. The recession in the 1980’s was unavoidable if we were to get rid of inflation. That is the price we had to pay because the loose money policies had to be thrown out. The recession in the 70’s was no doubt the incompetence of the govt. at the time and was actually more damaging to GDP than the 2008 crash, which brings me to the second point. You say the market was more volitile, but on a pure earnings basis that is not true. (http://www.guardian.co.uk/news/datablog/2009/nov/25/gdp-uk-1948-growth-economy). Recessions have become slightly less erratic, and as for thier length have remained largly unchanged.

(5) “the UK’s growth rate averaged 3 per cent a year. Since 1980, it has averaged 2.2 per cent. Why? Because productivity rates have fallen.”

This is simply wrong. Firstly you have incorrectly mixed two issues here. Growth and productivity. Your ‘growth’ figures are simply wrong, but you are going to have to try far harder on your ‘productivity’ estimate. Firstly, what measure are you using, and secondly on economically based models are you aware that ‘productivity’ has climbed almost year on year since the early 1900’s? The biggest driving force is technology. I reckon your statement here is more guessing than fact.

(6) “unemployment levels have jumped from an average of 1.6 per cent in the immediate post-war era ( from 1950 to 1973 ) to an average of 7.8 per cent since 1980, a near five-fold rise.”

Yes, but we all know the state led economies used governmetn programs to employ people. Which meant they had to get the money to pay them from somewhere, and when they ran out of people to tax (ie, 1970’s) then what? what do you think caused most of the inflation problem? I also like how you have said “immediate” post war era, subtle but very relevant. Yes, unemployment was very low after WWII because a lot of the male working population had been killed, and the entire country needed re-building. No wonder it was low unemployment, but what are you suggesting? have a war so we can have low unemployment, because as we all know unemploymnet wasn’t 1.6% in the 60’s and 70’s was it?…

(7) “In contrast, the post-1980 decades have seen much more prolonged and severe economic shocks”

See above. This also sounds familiar doesn’t it. Who was it that said we have seen the end to ‘boom and bust’…hmmm, name escapes me. I am sure that Wilson and Callaghan also tried that…how’d that work out for them. It didn’t. Recessions are part of every economy, get used to it.

(8) “The evidence is that the present crisis has its roots in the fanfare economic changes launched during the 1980s.”

Just daft. How does the cheap money bubble started in the mid 1990’s, primarily by Clinton and Cuomo, and copied around the world have anything to do with Thatcher? She de regulated te stock market, not the banks. Big difference. You can thank Brown for the deregulation of the banks.

“unemployment levels have jumped from an average of 1.6 per cent in the immediate post-war era ( from 1950 to 1973 ) to an average of 7.8 per cent since 1980, a near five-fold rise.”

The period 1950-1973 has been dubbed the Golden Age of Capitalism by economic historians because the advanced capitalist economies in N America, W Europe and East Asia experienced faster average rates of economic growth over this period than in previous periods of their respective histories.

This was true of Britain too but Britain persistently lagged at or near the bottom of the league table of its peer group in this period. This is not my invention. There were continuing policy debates and political speeches about this and much literature – for example:

Andrew Shonfield: British Economic Policy Since the War (Penguin 1958)
Richard Caves et al (eds): Britain’s Economic Prospects (Brookings Institution 1968)

In spring 1961, Macmillan launched proposals for a National Economic Development Council and an Office to address this lagging behaviour. He also announced that an application would be made for Britain to join the European Common Market.

In the extended national debate that followed up to Britain’s eventual accession in January 1973, the argument frequently put was that British industry would gain from access to the faster growing European market and would benefit from competing against more efficient European producers without the intervention of trade barriers.

Harold Wilson made much of Britain’s lagging economy in the 1964 election campaign with his reference to the prospect of a white-hot technological revolution through a national economic plan by a Labour government. I listen to his speech – sat next to Anthony King.

Following the world oil price hike of 1973/74 and the record levels of world commodity prices at that time, the OECD characterised the 1970s as a period of “Stagflation”.

Inflation rates increased, as did unemployment rates, and economic growth stagnated. The performance of the British economy was again worse than that of its peers in W Europe – the British economy was widely seen as the sick economy of W Europe.

A loan from the IMF was needed in 1976 (not 1974) to prop up the foreign exchange reserves to prevent the Pound from sinking further, which would have added to cost inflationary pressures. Public debate focused on “Deindustrialisation” – this gives a flavour of the scope of the debate: Nicholas Woodward: Britain’s Post-War Economic Decline (1995)
http://www.users.globalnet.co.uk/~semp/bdecline.htm

As has been remarked, the evidence is that the performance of the British economy since the end of the 1970s has improved relative to its peers. Sam Brittan writing in the FT on 8 July 2011:

“The relative decline of the British economy in the century up to the late 1970s has been reversed. Since then, the UK has caught up with and even overtaken its principal trading partners. The previous two sentences are neither a typing mistake nor a daydream. They are the sober conclusions of the country’s leading quantitative historian, Prof Nicholas Crafts.”

For Crafts’s assessment, see the link posted here @4.

Frankly, as someone who has lived through all this, I don’t think much of Stewart Lansley’s article at the thread head. For starters, he is woefully ignorant about the relevant economics literature.

7. gastro george

It would be foolish to make any comparison without taking into account North Sea oil – which contributed heftily to GDP over this period – and has been pissed away. Compare Norway – albeit with a smaller population.

8. gastro george

@Tyler:

“… the worst recession happened under Labour, the next worst under Thatcher as she started her reforms, and the third worst under Labour again.”

More realistically, the third worst was the inevitable result of the oil shock, and the three most recent have resulted from the same misguided neo-liberal economic policies.

“It would be foolish to make any comparison without taking into account North Sea oil ”

Absolutely. After the quadrupling of world oil prices in 1973/74 and then a further doubling in 1978/79, the effect of North Sea Oil coming on stream around 1980 was to turn the Pound into a petro-currency. The exchange rate of the Pound massively appreciated, which rendered manufacturing industries dependent on export markets uncompetitive because of their poor productivity.

I was in a university audience in the mid 1970s, well before the 1979 election, to listen to a lecture by Sir Keith Joseph, Mrs T’s shadow minister of industry. He went on about Adam Smith, about the invisible hand of the market and Britain’s pioneering industrial revolution. And about how massive state subsidies for industry were trapping resources into inefficient uses.

Come Sir Keith in government as industry minister, he was regularly signing checks for hundreds of millions in grants to British-Leyland. The company got renamed the Rover Group and was privatised in 1988 at which point, on checking up, it had swallowed up £3.4 billion of taxpayers’ money.

Recall that ironical piece of history: Ted Heath’s Conservative government nationalised Rolls Royce in 1971 to save the company from collapse. Rolls Royce Aeroengines was turned around and was also privatised in 1988. It is now among the top few manufacturers of jet engines for airliners in the world.

The lesson: there is too much rewriting of history going on to promote dubious political causes.

I’m surprised that no one has made the entirely valid complaint that Mrs T, as education minister in Heath’s government, approved the conversion of more grammar schools into comprehensives than any other education minister before or since. But then it was Leicestershire County Council, as a high-Tory council then, which had pioneered comprehensive schooling by opening Oadby Beauchamp Community College for 14-18 year-olds in 1958.

One of the factors motivating the creation of comprehensive schools was that by the mid 1970s, half of Britain’s adult education had no educational qualifications at all. Some analysts believe that had contributed to Britain’s relatively poor productivity in industry and as to why a succession of studies into the quality of management showed that British managers were generally poorly qualified in comparison with their counter-parts in W Europe.

Comparison to the post war years of the long boom is fallacious, the world economic conditions were very different and the 1970s marked the end of this period of advantage for the West. And global circumstances have been changing rapidly ever since.

Even in my most ardent Left wing days I realised reform had been necessary, even if I didn’t agree with the way it was carried out. And now, well it’s clear compromise with the Unions is no easy thing…

Probably partly because of Labour’s failure in Government, a lot of commentators on the Left are looking back to the days before Thatcher, but they have to take off the rose-tinted spectacles and see it in context. Maybe some would be happy to see the return of a Soviet Bloc, who knows, but would they want an undeveloped 3rd world?

Funny how so many commenters, when confronted with evidence covering key economic indicators, claim it’s all cherry picking. Why not offer the counter-argument then? Why not point to other stats that make a different argument?

12. Charlieman

@OP, Stewart Lansley: “Margaret Thatcher will surely be remembered, above all, as the architect (along with Ronald Reagan) of the modern market economy.”

I suppose it depends on your definition of “architect”. If I disregard my back garden for 10 years, sprinkle a few packets of seeds over it, something wonderful will grow up. Does that make me an “architect”?

“Her prime goal was to shift Britain from the post-war era of ‘managed’ to one of ‘market capitalism’.”

I’m not convinced. A pure laissez faire government policy would have addressed mass unemployment of the 1980s by letting people sink. The 1980s were horrible but the unemployed were paid subsistence; long term unemployment was invented and sustained.

All of this was paid for by North Sea oil and the sale of national assets. It was/is unsustainable and inhumane.

The OP then starts to talk about trickle back which is the topic of another thread on LC.

“Such was its influence, the model was eventually copied, at least in part, by a majority of other rich nations.”

The greatest influence was endured by former-USSR puppet nations and it had appalling consequences. But no other country copied Thatcher policies to completion; you said it, not me.

To change the metaphor slightly, Margaret Thatcher was not a purposeful gardener who knew what to uproot and what to plant. She dug up randomly and planted randomly, but thanks to a lorry load of compost the garden looked good. Neighbours looked at it, and they pondered whether the idea was daft or to copy it.

And if there is such a thing as a “modern market economy”, given that every country is different and exist in a bubble of trade agreements, it is a consequence of a multitude of choices.

Without getting into an argument about how much the Thatcher governments reforms transformed the economy, and I agree the record is not the astounding performance that the groupies claim. I would question some of your comparisons with earlier eras. Unemployment is not a valid comparison because how it is calculated has changed over the years. Moreover, earlier eras had very few women in the labour force. You are not comparing a like for like labour market. Therefore, employment is a better measure.

Comparing UK GDP growth rates with the postwar period is also problematic. The growth rates in every advanced industrial economy slowed down in the 1970s. Some people blame the oil shocks as the cause due to a higher energy input costs. Other economists say the early 1970s seen us entering a great innovation stagnation and we are still in the stagnation. Basically the argument is our contemporary innovations only make incremental changes to our existing technology base and are not like the transformational innovations of the past.

So all the advanced industrial nations will find their growth rates for the last 30 years are lower than for the 30 years after the Second World War. What you need to do is to compare them with each other not their own past. The evidence from multiple sources is those who reformed grew faster than those who did not reform. Here is the UK comparison with the U.S., France and Germany. The UK is represented as 100 and has higher GDP per capita than the rest in 1870, by 1950 the U.S. has surpassed the UK and the other two still lag. When we move to 1979, statism has reduced the UK GDP per capita to below all three. The horny handed sons of toil may have lived in a more equal society but statism had impoverished them. By 2007, the gap with the U.S. had been reduced and UK GDP per capita had moved ahead of Hans and Pierre.
http://www.edmundconway.com/wp-content/uploads/2013/01/gdppercapbars.jpg

Here is a chart of the growth rates. Moreover, Major and Clarke in the 1990s had a better record than the Thatcher governments. Although the Thatcherites would tell you it was all a delayed reaction from the Thatcher reforms.
http://www.edmundconway.com/wp-content/uploads/2013/04/gdppercapita.jpg

Agree with Gastro about North Sea oil and gas. However, I would concentrate on the revenues generated for the Treasury rather than the contribution to GDP growth. Here is Ed. Conway (always too sensible for the contemporary Telegraph) arguing that point a few years ago.
http://www.telegraph.co.uk/finance/comment/edmundconway/6505670/North-Sea-oil-is-dragging-us-into-the-red.html

Apart from using the NSO windfall revenues to pay welfare benefits the Thatcher governments spent them on tax cuts in a regionally unfair manner. I would have agreed taxes were too high and should be cut. However, the way to cut taxes is through reducing spending at the same time to pay for the tax cut. The Thatcher governments used the windfall revenues to pay for large cuts on higher rate taxpayers. The regional unfairness of that was because the UK is so centralised most of the higher rate taxpayers lived around the London area and the South East. Therefore, the windfall of a national resource was being used to disproportionately benefit only a part of the country.

“Funny how so many commenters, when confronted with evidence covering key economic indicators, claim it’s all cherry picking. Why not offer the counter-argument then? ”

Plenty of stats and analysis refuting Lansley’s claims have been posted.

His main failings were in not recognising the recurring concerns throughout the post-period that Britain’s economy was under-performing its peer-group countries in W Europe — hence my references to Shonfield on British Economic Policy Since the War (1958) and to the Brookings study: Britain’s Economic Prospects (1968). That and the especially miserable performance of Britain’s economy during the 1970s, as compared with its European peers, is what gave credibility to Mrs T’s platform for unwinding the socialist legacy, as she saw it, by the privatisation programme, by the Big Bang on the stock exchange, and by cutting the absurdly high top tax rates. Contrary to rumour, during her premiership, public spending grew in real terms by 1.1pc a year. All the stuff about the mining strike is really a big detour – the strike was about getting even more subsidies for the nationalised coal industry which was massively producing more coal than was being used to generate electricity.

As mentioned, Conservatives are fixated on a particular theory about labour markets. This is that if a job goes, a new one will promptly spring up to replace it unless blocked by feather-bedding social security payments to the unemployed, regulations blocking business or by the disincentive effects of high tax rates. What is happening to aggregate demand dosen’t come into it – because that is “keynesian”. Skill mismatches don’t come into it – or aren’t admitted to.

The curious thing is that Osborne has approved BoE initiatives, such as Quantitative Easing and Funding for Lending, which are intended to boost aggregate demand.

The effect of the Hate-Thatcher binges and the blame-game is to block out sensible discussion of policy issues.

FWIW, in case anyone is interested, this is my unpartisan selection of academic books and references for any who want to be serious about the British economy:

Alec Cairncross: Years of Recovery 1945-51
Andrew Shonfield: The British Economic Policy Since the War (Penguin 1958)
R Caves (eds) Britain’s Economic Prospects (Brookings Institution 1968)
Alec Cairncross: The British Economy Since 1945 (Wiley-Blackwell 1995)
NFT Crafts and Nicholas Woodward (eds): The British Economy Since 1945 (OUP 1991)
Nicholas Woodward and Richard Coopey: Britain in the 1970s: The Troubled Economy (UCL press 1996)
Nicholas Woodward: The Management of the British Economy 1945-2001 (Manchester UP 2005)
Nicholas Crafts and Gianni Toniolo (eds): Economic Growth in Europe Since 1945 (Cambridge UP 1996)
Nicholas Crafts and Gianni Toniolo: European Economic Growth, 1950-2005: An overview
http://wrap.warwick.ac.uk/1671/1/WRAP_Crafts_CEPR-DP6863%5B1%5D.pdf
Andre Sapir: Globalization and the Reform of the European Social Models

16. Stewart Lansley

Remember I am comparing two periods, the period of ‘managed capitalism ` ( 1946-1973 ) and ‘market capitalism` ( from 1980 to today ). MT ( along with RR ) was clearly the architect of the more liberal market economy though her model was continued largely unmodified by Blair and Brown. There are many ways of making the comparison between these two broad era. I have concentrated here on the key goals of macro-economic policy: inflation, growth, productivity and growth. I could have added in investment which is also lower as a proportion of GDP post-1980 and has been declining despite the rising profit share. The comparisons are clear – performance in the second era on these accounts was weaker. All data is from ONS and precise sources are in the much longer account in The Cost of Inequality. Of course there is a more nuanced analysis – other global factors have been at work – than is possible in 600 words. These are detailed in the Cost of Inequality.

Of course, big economic changes were needed to deal with the crisis of the 1970s, but this was a global crisis not just a British one – though it was especially severe in the UK – initiated by external factors, notably the collapse of the global monetary system and the OPEC crisis. Remember, the US topped the strike league table of the richer nations in the mid-1970s, and there was also severe militancy in Germany and other European nations.

It is true that Britain’s relative decline slowed post-1980, but crucially, on comparisons up to 2007. But this is in part because GB growth from the late 1990s – higher than the OECD average – was falsely inflated by the credit boom and was always unsustainable . Since 2007, Britain has declined again in terms of relative growth. US , Germany and France have ben growing more quickly since 2008.

I am challenged on ‘present crisis has its roots in the economic changes launched during the 1980s.’ Key here are two crucial elements of the post-1980 model. First, the sharp rise in inequality – the share of income going to the top 1% rose from just over 5% in the mid-1970s to close to 15% by 2009 – almost back to 1930s levels. The earnings gap rose most sharply during the 1980s but has continued to grow. Gini coefficient up 9 points etc Secondly, the excessive de-regulation of finance that began with Big Bang. Both these factors have had a profound negativ e effect on the economy, helping to create a growing wage-productivity gap ( which began in the UK in the early 1980s but not as large as in the US ) which ultimately led to the unsustainable credit boom, misallocation of investment from the early 1990s with the long squeeze on the productive economy and a series of unsustainable asset booms. This is the real legacy of the model. Don’t just believe me . IMF and OECD as well as President Obama and Christine Legard saying soemthing very similar. It was an over-zealous application of the liberal model that took us over the cliff and thus indid some of tyhe good things that emerges from tyhe post-1980 supply-side revolution.

(1) “Remember I am comparing two periods, the period of ‘managed capitalism ` ( 1946-1973 ) and ‘market capitalism` ( from 1980 to today ). MT ( along with RR ) was clearly the architect of the more liberal market economy though her model was continued largely unmodified by Blair and Brown”

I do find it amusing that you define Wilson as advocating ‘managed capitalism’. First, the term is non sequitur. You cannot have a capitalist economy with a government that pulls levers believing them to impact upon the economy. Largely this just creates worse problems, for instance those seen in the recent crash with govt stoking lower and lower interest rates to prop up a property bubble.

I would not agree with your statement about Blair and Brown however. What we saw under Blair was a dual role where he used the boom times to grow the state to provide social security. Sure, that is possible when times are good, but look what has happened now. This was not unforseeable, many economists and businessmen commented on the dangerous path of psudo-capitalist policy (more correctly ‘corporatist’) and increasing state spending. Brown on the other hand was an economic fascist. Spending under Brown was simply uncontrolled as he tried to prop up collapsing industries at any cost. So I wouldn’t agree that the policy remained unchanged. MT hated waste, and the govt of the last 16 years has given us a lot of waste.

(2) “I have concentrated here on the key goals of macro-economic policy: inflation, growth, productivity and growth. I could have added in investment which is also lower as a proportion of GDP post-1980 and has been declining despite the rising profit share.”

It is always interesting when people speak of macro economic ‘policy’. This again suggests lever pulling as a solution. Macro economic policy in a capitalist economy is largely irrelevant, but consider the macro economic decisions in recent times. Have they improved the situation of made it worse?

(3) “Key here are two crucial elements of the post-1980 model. First, the sharp rise in inequality – the share of income going to the top 1% rose from just over 5% in the mid-1970s to close to 15% by 2009 – almost back to 1930s levels.”

Yet the poor are wealthier than they have ever been even when adjusted for inflation. That argument is perfectly met with a quote of MT’s which is: “that you rather the poor poorer, so long as the rich are less rich”. Economies the world over have found a striking correlation between policies that soak the rich and declining wealth for the whole population. Even the alleged bastion of socialism, Sweden, has proved this (although they are less socialist than the UK). Their greatest increase to the average man has come from the liberalisation of their markets and privatisation that started in the early 90’s.

(4) “Secondly, the excessive de-regulation of finance that began with Big Bang. Both these factors have had a profound negativ e effect on the economy, helping to create a growing wage-productivity gap ( which began in the UK in the early 1980s but not as large as in the US ) which ultimately led to the unsustainable credit boom”

No. I am sorry but that is linking together ideas with nothing more than fresh air. There was a de-regulation of the stock market under MT. This proved to be very useful as it was effectively and old boys trading net before that. Part of the Big Bang has also been to propel London into a world leading financial sector. However the ‘unsustainable credit boom’ had nothing to do with the decision to de-regulate the stock market. It had everything to do with loose monetary policy, and govt policy to force lenders to prop up a housing bubble. (ie, Freddie Mac and Fannie Mae and the institutions and govts around the world that followed suit). Again, MT did not de-regulate banks (arguably its not about de-regulating its about having the wrong type of regulation) on anything like the scale of Brown as Chancellor.

8 what was this first recession under labour, there wasn’t one between74 – 79

Increasing inequality in the distributions of income (a flow) and wealth (a stock) are certainly not peculiar to Britain – compare the US, for instance – and the trend towards increasing inequalities in Britain continued post-Thatcher.

Several factors likely contributed in the case of Britain, including changes in the tax and benefit systems, the relatively large contribution of financial services to the British economy by international standards and the relatively large income premium paid to graduates over non-graduates.
http://www.bbc.co.uk/news/business-16511956

I suspect this finding of the HoC Public Accounts Committee matters, especially with the shift from jobs in manufacturing to jobs in service industries:

“Up to 12 million working UK adults have the literacy skills expected of a primary school child, the [HoC] Public Accounts Committee says. . . The report says there are up 12 million people holding down jobs with literacy skills and up to 16 million with numeracy skills at the level expected of children leaving primary school.” [BBC website January 2006]

In the mid 1970s, half the adult population in Britain had no educational qualifications. By the mid 1990s, that percentage had dropped to a quarter.

I’ve not seen research studies disentangling the various contributing factors to inequality or the trade-off, if any, between trend economic growth rates and increasing inequalities in the distributions of wealth and income. Blaming it all on Thatcher seems a tad simplistic to me. Looking into the features of the Nordic version of the European Social Market Economy could yield illuminating insights.

16. Stewart Lansley

This post contains lots of charts.

” It is true that Britain’s relative decline slowed post-1980, but crucially, on comparisons up to 2007. But this is in part because GB growth from the late 1990s – higher than the OECD average – was falsely inflated by the credit boom and was always unsustainable . ”

That really is a strange argument for an economist to make. The argument is premised on a type of common quasi-fallacy in pop economics that seems to flourish on the internet. The implicit premise is there is such a thing as real growth and there is this weird fake growth that is not real. However, a nation’s total productive capacity is determined by things like how many workers it has, how good their skills are,(its human capital) how much physical capital it has, what kind of production technologies it has etc. Credit growth can add to consumption but can’t artificially create production that does not exist. GDP is determined by real factors of production and can’t be “falsely inflated” by a credit boom, especially when you correctly say that investment was at disappointing levels.

We certainly did not have a house building boom. UK housing completions 2007:
https://twitter.com/NobleFrancis/status/309692556629909504/photo/1

Contrary to what most people believe finance did not really contribute much over the last 30 years to UK GDP growth.
http://www.edmundconway.com/wp-content/uploads/2013/01/financeproductivity.jpg

See this LSE argument:
http://blogs.lse.ac.uk/politicsandpolicy/archives/17297

Fifty years of UK lending to the corporate sector. No credit boom there which is the flip side of subdued investment.
http://av.r.ftdata.co.uk/files/2011/08/UK-lending-UBS.jpg

Moreover, Canadian households are more indebted than U.S. households and their economy has performed better than the US. Australian households are more indebted than UK households and their economy has performed better. We often hear that we ought to be more like the Nordics and households in Norway and Sweden are more indebted than the UK. The difference is the macro policies followed by different governments.
http://www.edmundconway.com/wp-content/uploads/2013/02/leastindebted.jpg

“Since 2007, Britain has declined again in terms of relative growth. US , Germany and France have been growing more quickly since 2008. ”

Yes, but there is a reason why it is right to look at data pre and post 2008. Including the data when the economy is still in a slump distorts the data. For all I know we may be in a new normal but it is still too early to tell. Moreover, if you look at the UK GVA economy excluding oil and finance the picture is not as bad. There is no doubt that finance and oil are a part of the UK GDP story, but their contribution to GDP is in decline and we will need to cope with that transition. However, they can also give a distorted picture of the macro economy. Note also that the decline of oil is overstated because much of the decline was caused by tax changes instigated by the Number 11 fat cat. Those have been reversed and the UK continental shelf is currently undergoing an investment boom.
http://www.bbc.co.uk/news/business-21783506

” I am challenged on ‘present crisis has its roots in the economic changes launched during the 1980s.’ Key here are two crucial elements of the post-1980 model. First, the sharp rise in inequality”

Yet the rise in inequality happened in all comparable nations no matter which economic model they were following. Nobody would seriously suggest that the UK and Italy had followed the same model over the last 30 years. Yet their income inequality is almost identical.
http://www.edmundconway.com/wp-content/uploads/2013/02/inequality.jpg

The after market income inequalities between the UK, Germany and Sweden are almost identical and they all follow different economic models. The reason why they are more equal societies in the Gini coefficient is because they use taxes and transfers to equalise outcomes.
http://www.peterfrase.com/2011/08/redistribution-under-neoliberalism/comment-page-1/

Another thing to take into account is UK inequalities do not look abnormal compared to everyone else if London is excluded. Of course London is a dominant and important part of the UK economy. However, the London data distorts the rest of the country because it tends to be an outlier in terms of income etc. A Russian billionaire oligarch moving to Mayfair makes the UK a more unequal place. However, it is not obvious to me in what way it makes any difference to someone living in Newcastle.

I’m unclear as to why Mrs T gets the blame for the flagging performance of the UK economy from 2008 owards due to the financial crisis and then Osborne’s austerity programme, Eurozone issues and higher oil prices.

I know Mrs T gets blamed for the Big Bang in the stock market in 1986 (meaning deregulation) but the subsequent growth of the financial services sector turned London into a world leading financial centre, which generated the buoyant tax revenues that New Labour spent on health and education.

This is what The Economist was writing about the London capital market on 1 February 2007, before the financial crisis broke:

“The City of London is globalisation in action. It is, first of all, thoroughly international, handling more of the world’s deals in over-the-counter derivatives, global foreign equities, eurobonds and foreign exchange than any other financial centre (see chart 3). Second, its firms specialise in innovative, high-value-added products. Third, the City is living proof that clusters work in the way that economists claim. Capital can move like mercury. The main reason why international finance has made London its home is that everyone is there, making it easier to do complicated deals and to trade quickly in large quantities. The City offers a cluster of talent—financial whizz-kids, lawyers and due-diligence accountants—that is second to none, and self-renewing. It helps that English is a near-universal second language and that London’s time zone makes it possible to trade in a (long) working day with both Asia and America. Regulation is mainly deft but not lax, and the taxman takes a hospitable view of foreigners’ personal earnings.”
http://www.economist.com/specialreports/displaystory.cfm?story_id=8582323

Those who want wish away the tax revenues generated by the London financial markets for the national exchequer need to tell us from where else the public financies for health and education would have come from.

I wonder on which basis you are measuring productive rates. If it is the common measurement then you’d be using GDP …

GDP however is not a way to measure growth of economy at all. Even if that is mainstream economic wisdom.

For instance, if a government embarks on the building of a pyramid, which adds absolutely nothing to the well-being of individuals, the GDP framework will regard this as economic growth. In reality, however, the building of the pyramid will divert real funding from wealth-generating activities, thereby stifling the production of wealth.

The outlook of Britain’s future when Thatcher took over was grim to say the least. Blaming her for current issues is like blaming the Roman Empire for WW2.

If you look at the current recession and what caused it – essentially there was way too much liquidity in the system. Money was cheap. Therefore lending was cheap. Therefore Banks sold Mortgages like cup-cakes to people who couldn’t afford it. Therefore investment bankers finding ways to short these mortgages. Therefore economic collapse.

The problem is CHEAP MONEY stupid. Not Thatcher. Cheap Money is mainstream economic bullshit that Thatcher didn’t adhere to ever. In fact she correctly understood that you should never use monetary policies in order to solve a crisis. And she didn’t.

However Bush did – and to an extend that was never seen before … THUS our crisis.

And what do we do? The Fed is reacting to this crisis, by keeping interest rates low. Thus creating new bubbles!!

If Thatcher was in power she would stop this nonsense!!

Jacob

There are well-established criticisms over using GDP as a standard measure of the factor incomes generated in an economy during a year, before capital depreciation, but we are stuck with it and stay with it for the sake of international comparisons using agreed standardised definitions. Britain didn’t show up well during the 1970s on productivity comparisons with European peers and we still don’t show up well.

A research study by the LSE in 2004 concluded that Britain’s relatively poor productivity performance, compared with European peers, was due to too little investment and skill shortages: The UK’s Productivity Gap – The Centre for Economic Performance

I certainly agree that blaming Mrs T for the financial crisis is bonkers. New Labour had ten years from 1997 to 2007 to sort out and tighten the regulatory regime for financial services and failed to do that. Instead, New Labour spent over 700 hours of Parliamentary time debating over legislation to ban hunting with dogs.

I agree that part of the explanations for the consumer credit mountain of £1.3tr and for the house-price bubble is that interest rates were too low for too long despite warnings from Charles Goodhart and Roger Bootle, in the early 1970s, about what was happening to house prices. Adair Turner’s review of the Financial Services Agency in 2009 admitted to regulatory failings by the Agency.

“And what do we do? The Fed is reacting to this crisis, by keeping interest rates low. Thus creating new bubbles!! If Thatcher was in power she would stop this nonsense!!”

If new bubbles develop they should be dealt with but Britain’s GDP is still running about 3 to 4 pc below the previous peak in early 2008 and average real living standards are back at 2003 levels. The latest revised results for business investment for the last quarter of 2012 – published in March – are showing a downturn in business confidence after a marked improvement:
http://www.ons.gov.uk/ons/dcp171780_303543.pdf

Btw while there seems to be a Transatlantic consensus that something must be done in future about asset-price bubbles, there is also something of a consensus that bubbles can be difficult to recognise when they are happening and also about what to do about bubbles.

In 1990, Mrs T had reservations about Britain joining the ERM but was unable to convince her cabinet.

“The rich were allowed to get much richer, inequality rose..”

Firstly, everyone got richer, just some got richer faster than others, which is why inequality rose.

Second, the problem with income deciles you cannot say who the top 10%, bottom 10% and other cohorts are through time, so you have no idea whether it was the rich who got richer, or if it was the poor, or any combination of the two.

To illustrate, take an example of four people. One has an income of £5,000, one £10k, one £20k and one £40k. Suppose the £40k person loses their job, the £20k gets a big promotion up to £50k, and the £5k and £10k each double their salaries. If you look at the quartiles, you start with 5, 10, 20, 40 and then move to 0, 10, 20, 50. A classic case of ‘the rich get richer’. The bottom 25% have lost £5k, the top 25% have gained £10k while everyone else has stayed the same. You have greater inequality, the rich have got richer and the poor have got poorer.

You really can’t make much meaningful analysis from the deciles because you can’t get a feel for how much individuals have moved.

As already posted @19:

Increasing inequality in the distributions of income (a flow) and wealth (a stock) are certainly not peculiar to Britain – compare the US, for instance – and the trend towards increasing inequalities in Britain continued post-Thatcher.

The claim that increasing inequality was all due to Thatcher and only to Thatcher is just a claim and nothing more. Why did other countries also experience increasingly inequality in the distributions of wealth and income?

It makes better sense to see how the Nordic countries have maintained strong economies with high affluence, relatively large public spending as percentages of national GDP and low inequalities of income distribution.

Just equating Tharcherism with inequality without looking into why that happened and what happened elsewhere is for dumbos.

In the mid 1970s, half Britain’s adult population had no educational qualifications at all, By the mid 1990s that was down to a quarter. I suspect that mattered with the shift from manufactuting to service jobs, especially with the shift to jobs in business and financial services, the fastest growing employment sectors.

On deindustrialisation, try Nicholas Woodward: Britain’s Post-War Economic Decline (1995)
http://www.users.globalnet.co.uk/~semp/bdecline.htm

On causes of rising income inequalities, try this: An overview of growing income inequality in OECD countries
Over the two decades prior to the onset of the global economic crisis, real disposable household incomes increased by an average 1.7% a year in OECD countries. In a large majority of them, however, the household incomes of the richest 10% grew faster than those of the poorest 10%, so widening income inequality. Differences in the pace of income growth across household groups were particularly pronounced in some of the English-speaking countries, some Nordic countries, and Israel.1 In Japan, the real incomes of those at the bottom of the income ladder actually fell compared with the mid-1980s (Table 1).

In OECD countries today, the average income of the richest 10% of the population is about nine times that of the poorest 10% – a ratio of 9 to 1. However, the ratio varies widely from one country to another. It is much lower than the OECD average in the Nordic and many continental European countries, but reaches 10 to 1 in Italy, Japan, Korea, and the United Kingdom; around 14 to 1 in Israel, Turkey, and the United States; and 27 to 1 in Mexico and Chile.
http://www.oecd.org/els/soc/49499779.pdf

Mrs T resigned as PM in 1990, more than two decades ago and much has happened since then. While I read many complaints about bankers’ bonuses in recent years and the increasing pay of corporate CEOs, I seldom read of complaints about the salaries of professional footballers or the incomes of pop stars and film stars and wonder why that is.

27. Charlieman

@OP, Stewart Lansley: “Margaret Thatcher will surely be remembered, above all, as the architect (along with Ronald Reagan) of the modern market economy. Her prime goal was to shift Britain from the post-war era of ‘managed’ to one of ‘market capitalism’.”

I feel compelled to return to this architectural myth.

Just get your head around that Thatcher had a bunch of prejudices and some economic theory. Economic Thatcherism was a mishmash of the two. And as a Conservative, Thatcher was a pragmatic (opportunist?) politician.

In her first time of office, Thatcher appointed Michael Heseltine as Environment Secretary, to stimulate public sector creation of jobs. That role was held by Heseltine throughout the Thatcher era: “Michael has a plan for jobs”. Under Heseltine and Thatcher, Development Corporations were created which removed economic planning from local people or the ‘market’; hardly ‘market capitalism’, then.

All that these graphs demonstrate is ‘what happened which can be measured’. ‘Market capitalism’ is not currently measurable because nobody has invented a formula (probably bollocks).

If you consider the Thatcher era as a scientist or engineer, it is hard to analyse. Every change is caught up by the wake of its predecessor and washes up into its successor. We don’t know how good any/all of the changes were. Analysis is often conducted by “control volume”, pre-Thatcher, Thatcher era etc.

Post-Thatcher, no UK politician would have ever meddled with the economy prior to disbelief* in international banking. Bollocks, of course.

“The evidence is that the present crisis has its roots in the fanfare economic changes launched during the 1980s.”

And the Pope is Catholic.

* I intentionally use the word disbelief rather than failure. Belief sustained banks with no money or prospects.

Heseltine was SoS for Defence from January 1883 to January 1986, when he resigned after storming out of a cabinet meeting during some row with Mrs T over helicopter procurement.

Geof Howe, as Chancellor, introduced “Enterprise Zones” in the autumn of 1979. As that came into my line of work at the time, I made unquiries with the civil service which yielded information that there had been no prior assessment of the policy by the civil service before the announcement. Basically, the advantages to a business from moving into an enterprise zone from outside amounted to some tax breaks and more relaxed town planning controls. It would therefore be worth such a business paying more for land or buildings in an Enterprise Zone so landlords stood to gain up to the value of the benefits which the business would expect to gain from the move. Where the landlord was a public authority – as was often the case with derelict inner-city areas turned into Enterprise Zones – this was fine but what if privately owned land was turned into an Enterprise Zone?

Mrs T wasn’t a dumbo. She had a good degree in chemistry from Oxford as well as a research degree before taking legal qualifications and making a career in tax law (dull but rewarding) before turning to politics. Her early mentors, as party leader, on economics were Sir Keith Joseph (Fellow of All Souls, Oxford), Nicholas Ridley, a professional engineer and Professor Alan Walters (ex-LSE). It would be challenging to make a convincing argument that they were dumbos or middle headed.

On taking up the job of industry minister in Mrs T’s first cabinet in May 1979, Sir Keith Joseph famously circulated a reading list to the senior civil servants in his department with Adam Smith’s Wealth of Nations (1776) featuring prominently. That was still a discussion point in the DTI more than a decade later. How could a book originally published in 1776 still be relevant?

29. Lord Mason

Um, measuring productivity is a Keynesian model in the first place. Of course productivity should rise that is why it is called supply side economics. As Milton Friedman says always increase the money supply directing the money to corporations to spend. It is how the Bank of England justifies all this Quantitative Easing program. Ie. if productivity fails increase the money supply so companies keep producing. It is known as Says Law in economics. You know the Frogs introduced this idea to bring down England and we all love there ideas thanks to Thatcher and Reagon.

John Maynard Keynes predicted that the Marshall plan would cause hyperinflation in the 1970’s and he was correct.

The correct way to analyse Margret Thatcher and the UK economics since is to measure Bank Lending not unemployment. As economic growth promises no recessions or great depressions. Which is a load of well thought out falsehoods. How is HBOS going these days? How many banks went bankrupt in the 1970’s? How is the bond market going? HOw is the derivative market going?

With all this printing money the only way to avoid inflation is to end the government with high mass unemployment until the banks pay down there debts. Like this is going to work in Europe. It works in Asian, Latin
America and Africa not so well in Western countries.

Galbraith “The worst thing about Milton Friedman is his ideas have been even attempted”. Galbraith does believe in derivatives etc. How does increasing the money supply increase farm productivity? How has farm productivity improved over the last years?

Since the French created a share market in 1714 and the collapse of the Mississippi Corporation there has been a great depression every forty years.

Under the Keynesian model at leasst we still had control of our nation not at the control of International Corporations who don’t give a rats about anyone but there bank accounts. However, still at the mercy of the world economic system.

How can conservatives justify sending jobs to Sth Korea even just recently with $400 million military contract going to Sth Korea and then tell Britons why we need foreign workers.

30. Charlieman

@28. Bob B: “Heseltine was SoS for Defence from January 1883 to January 1986, when he resigned after storming out of a cabinet meeting during some row with Mrs T over helicopter procurement.”

I was referring to Heseltine’s long term job cheering role rather than to a specific government job.


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