There are very few politicians in history who’ve had economic policy named after them. Yet Mrs. Thatcher created an ism, which is widely copied, if often misunderstood or misinterpreted, by many political leaders in other countries. Unlike some other politicians associated with a particular and successful approach to economics, like Ludwig Ehrhard, for example, she had no background in economic thought or decision-making. She was a chemistry student, an industrial chemist turned lawyer before she became a member of Parliament. Her approach to economic matters initially hinged on simple homespun ideas, a housewife’s common sense approach, she called it, thrift, hard work, self-discipline, and balanced household budgets.
There’s little in her personal writings and speeches and in the 1979 Conservative Manifesto, before she came to power, which previews Thatcherism. Moreover, the two chancellors who were the main architects of Thatcherism in practice, Howe and Lawson, she fell out with very badly. And in British political terms, her reputation and electoral success and the eventual loss of leadership hinged on events which owed very little to economic philosophy, winning the Falklands War, facing down the miners strike, securing an EU rebate, the poll tax. Yet it would be wrong to conclude that she had no guide to economic policy.
Her memoirs refer to Hayek’s Road to Serfdom as a formative influence, though perhaps more because of his philosophical aversion to socialism, than the specifics of Austrian economics. The two guiding economic lights that she refers to are Hayek and Milton Friedman, the latter for both his monetarism and his advocacy of market economics. It’s clear that the person who did most to influence her thinking, particularly in the four years before she became prime minister and was leading in opposition, was Sir Keith Joseph. Joseph was a very clear and philosophical thinker, who acquainted Mrs. Thatcher with the main strands of economically liberal thinking.
He wrote a pamphlet at that time on the social market economy, making it clear that the German social market was ordoliberalism, and had nothing to do with the middle way favoured by British Social Democrats or Conservatives aligned to her predecessor and nemesis Edward Heath. So what did and what does Thatcherism consist of? There are three main elements. The first is the conduct of macroeconomic policy through monetarism, giving overriding priority to the control of inflation through the management of money supply, while simultaneously ensuring budget discipline. Her autobiography has 115 references to monetarism. It clearly mattered.
And it mattered because the first few years of her prime ministership involved coping with double digit inflation, at the same time as high levels of unemployment by post-war standards and a very substantial budget deficit, albeit somewhat reduced from the very high levels which had prompted the previous Labour government to call in the IMF. Sir Geoffrey Howe, the Chancellor, dealt with the situation by a combination of deficit reduction and tight money, high interest rates, which pushed up sterling, curbing inflation through reduced import prices and a squeeze on the costs of exporters. In fact, this was not monetarism in a technical sense, since there was no means at that stage of managing the money base N3.
And the fiscal policy objectives were complicated by a wish to cut taxes on incomes, from 83 to or 60 for top earners and 33 to 30 for the basic rate, offsetting the tax cut by a big increase in value added tax. Monetarism in a populist sense was essentially about adopting tough budget and monetary policy to restore financial discipline, even in the face of recession. And this was the context of Mrs. Thatcher’s comment in 1980, “the lady is not for turning”. The second strand in Thatcherism was the deregulation of markets, removing state control over private business and household choices.
Shortly after coming to office, her government removed all exchange controls, permitting the exchange rate to flow freely, encouraging inward and outward capital flows. In 1983, the government also initiated what became known as the Big Bang, removing the regulatory controls over the City of London. This liberalisation had the effect of massively increasing the volume of trading and exports from the City of London, but also sowing the seeds of excess and greed which later had disastrous consequences. Another key element of financial deregulation was freeing up mortgage lending, which led in due course to the demutualisation of building societies and a big expansion of mortgage lending. The policy was initially popular and very successful in facilitating homeownership.
But it did lead to a loss of control over lending and to an inflationary housing bubble that ended badly. Two elements of Thatcherism clashed badly, deregulation of credit and control of the monetary base. When inflation threatened to get out of control in the late 1980s, the Chancellor, then Lawson, tried to use a strong currency linking sterling to the Deutsche mark to curb it. And this led to a clash with Mrs. Thatcher. She’d by then fallen under the influence of Alan Walters, a monetarist economic adviser, and she also wanted nothing to do with European monetary experiments. The subsequent recession damaged both Nigel Lawson and Mrs. Thatcher’s reputation very badly. The third element in Thatcherism was privatisation.
And it’s this that’s become the main internationally recognised element in her brand. The 1979 manifesto which she was elected on was cautious on the subject, but a mixture of ideological zeal, pragmatic economics, and low politics drove it forward. Mrs. Thatcher saw privatisation primarily as a political weapon to weaken state control, undermine socialism, and outflank the Labour Party by seducing working class supporters with cheap shares, and the offer to sell council houses at a heavy discount. This sale of assets also reduced public borrowing and it shifted future borrowing by privatised companies off the public sector balance sheet, making the policy attractive to the Treasury.
And there was a hope that private ownership would improve the performance of state-owned entities, either by making them compete or by removing political interference, or both. Experience was mixed. There was a large transfer of asset share and council houses to private owners, but the proportion of British households owning shares actually fell from 20% to 14% from 1994 to the end of the decade. The performance of enterprises in competitive markets, British Airways, Rolls-Royce, BAE, undoubtedly improved, probably at the expense of long term investment. But most of the privatised companies became regulated monopolies, so that the state did remain centrally involved. There is now little public pressure to reverse the privatisations, except for the railways.
Interesting to note that Network Rail slipped back into public ownership by accident when statisticians reclassified it. Mrs. Thatcher remains a highly controversial and divisive figure to this day. But she is a politician who genuinely changed, in fundamental ways, the way that the economic policy is conducted, not just in the UK, but internationally too.