London – Thirty years ago this month, Margaret Thatcher came to power. Although precipitated by local conditions, the Thatcher (or more broadly the Thatcher-Reagan) revolution became an instantly recognizable global brand for a set of ideas that inspired policies to free markets from government interference. Three decades later, the world is in a slump, and many people attribute the global crisis to these very ideas.
Indeed, even beyond the political left, the Anglo-American model of capitalism is deemed to have failed. It is held culpable for the near financial meltdown. But 30 years of hindsight enable us to judge which elements of the Thatcher revolution should be preserved, and which should be amended in the light of today’s global economic downturn.
Most obviously in need of amendment is the view that minimally managed and regulated markets are both more stable and more dynamic than those subject to extensive government intervention. The Thatcherite assumption, in other words, was that government failure is far more menacing to prosperity than market failure.
This was always bad history. The record shows that the period 1950-1973, when government intervention in market economies was at its peacetime height, was uniquely successful economically, with no global recessions and faster rates of GDP growth – and growth of GDP per capita – than in any comparable period before or since.
One can argue that economic performance would have been even better with less government intervention. But perfect markets are no more available than perfect governments. All we have are comparisons between what happened at different times. What these comparisons show is that markets plus government have done better than markets minus government.
Nevertheless, by the 1970’s the pre-Thatcher political economy was in crisis. The most notorious symptom of this was the emergence of “stagflation” – simultaneously rising inflation and unemployment. Something had gone wrong with the system of economic management bequeathed by John Maynard Keynes.
In addition, government spending was on the rise, labor unions were becoming more militant, policies to control pay kept breaking down, and profit expectations were falling. It seemed to many as though government’s reach had come to exceed its grasp, and that either its grasp had to be strengthened or its reach had to be reduced. Thatcherism emerged as the most plausible alternative to state socialism.
Nigel Lawson was Thatcher’s second Chancellor of the Exchequer, or finance minister. Out of the government’s anti-inflationary efforts emerged the “Lawson doctrine,” first stated in 1984 and broadly accepted by governments and central banks ever since. “The conquest of inflation,” Lawson said, “should...be the objective of macroeconomic policy. And the creation of conditions conducive to growth and employment should be...the objective of microeconomic policy.”
This proposition overturned the previous Keynesian orthodoxy that macroeconomic policy should aim at full employment, with the control of inflation left to wage policy. Yet, despite all the “supply side” reforms introduced by Thatcherite governments, unemployment has been much higher since 1980 than in the 1950’s and 1960’s – 7.4% on average in the United Kingdom, compared to 1.6% in the earlier decades.
What about inflation targeting? Here, too, the record since 1980 has been patchy, despite the huge deflationary pressure exerted by low-wage competition from Asia. Inflation in 1950-1973 and 1980-2007 was about the same – just over 3% – while inflation targeting has failed to prevent a succession of asset bubbles that have brought recessions in their wake.
Nor has Thatcherite policy succeeded in one of its chief aims – to reduce the share of government spending in national income. The most one can say is that it halted the rise for a time. Now public spending is on the increase again, and record peacetime deficits of 10% or more of GDP stretch ahead for years.
In de-regulating financial markets worldwide, the Thatcher-Reagan revolution brought about the corruption of money, without improving on the previous growth of wealth – except for the very wealthy. The average world citizen would have been 20% richer had world GDP per capita grown at the same rate between 1980 and 2007 as it did between 1950 and 1973 – and this despite China’s high growth rates in the past 20 years. Furthermore, in unleashing the power of money, the Thatcherites, for all their moralizing, contributed to the moral decay of the West.
Against these formidable minuses are three pluses. The first is privatization. By returning most state-owned industries to private ownership, the Thatcher revolution killed off state socialism. The British privatization program’s greatest influence was in the former communist states, to which it gave the ideas and techniques needed to dismantle grossly inefficient command economies. This gain must be preserved in the face of the current clamor to “nationalize” banks.
Thatcherism’s second success was to weaken trade unions. Set up to protect the weak against the strong, labor unions had become, by the 1970’s, enemies of economic progress, a massive force of social conservatism. It was right to encourage a new economy to grow outside these congealed structures.
Finally, Thatcherism put paid to the policy of fixing prices and wages by central diktat or by tripartite “bargains” between governments, employers, and trade unions. These were the methods of fascism and communism, and they would, in the end, have destroyed not just economic, but political, liberty.
Political pendulums often swing too far. In rebuilding the shattered post-Thatcherite economy, we should be careful not to revive the failed policies of the past. I still find fruitful Keynes’s distinction between the agenda and the non-agenda of politics. As long as central government takes responsibility for maintaining a high and stable level of employment, Keynes thought, most of the rest of economic life can be left free of official interference. Building a proper division of responsibility between state and market from this insight is today’s main task.