Thatcherism: A Socio-economic Perspective

EPQ- 'What were the socio-economic effects of Thatcherism and Thatcher's premiership?'

The eleven years of Thatcher's rule left an indelible mark upon the nation- the decisions she took continue to hold a remarkable sway over our lives. As she entered Number 10 on 4th May 1979 , few would have predicted such a deep reaching and long impact; however, the signs were there. Thatcher's 'St Francis of Assisi' speech was not just a piece of political rhetoric- it was a clear statement about how she viewed her destiny, and, more precisely, the import of her premiership. As William Waldergrave commented, "She believed that Britain was in a state of near total political and economic collapse" . His further descri ption of Thatcher as a "radical declinist PM" is particularly compelling - Thatcher believed her mission was to turn around the decline in Britain which had started with the end of empire and had continued through the unionisation and sterling crisis of the 1970s. Within this political context, the actions she took while in government can be understood with far greater ease. Equally, while this EPQ is on the subject of Thatcherism, my research has led me to strongly contend that the decisions of Thatcher's government were generally ones of Thatcher herself (or at the very least in the in line with Thatcher's direction). As party historian Robert Blake comments, 'The history of the Conservative Party in those years. is the biography of its leader [Thatcher]' . This position is strongly supported by Peter Hennessy's constitutional study of Thatcherism, and by contemporary ministers: Nicholas Ridley (who served in various roles within Thatcher's government) stated that 'Margaret Thatcher was going to be the leader in her cabinet. She wasn't going to be an impartial chairman.' The 'declinist PM' caricature of Waldergrave chimes pertinently with Milton Friedman's economic assessment of Thatcher: "she really [was] the closest thing to a nineteenth century liberal in British political terms" . Andrew Marr goes further, describing her as a libertarian in outlook . I think both of these analyses deserve some credence; however, I believe that neither of them takes sufficient account of the incompatibility of the Liberal and Libertarian outlook with the strength of Thatcher's central government. While her economic reforms did see a huge roll back in state size and responsibility, they also left a strong core which was very capable of comprehensively defeating the unions. Furthermore, it would be imprudent to offer a comparison to Thatcherism that did not take account of its strong monetarist principles. Monetarism, most famously espoused by Milton Friedman, is an intellectually attractive economic theory that states that the sole job of government is to control the monetary supply within the economy to keep inflation low; if this is achieved, other issues (unemployment, productivity etc) will eventually correct themselves. Indeed, I would state that monetarism should be the starting point of any analysis of Thatcher's government. In 1981, two years into the Tory government, the economy was in free fall. The biggest collapse in industrial production in a single year since 1921 was matched by a host of bankruptcies and unemployment shuddering towards 3 million. There is very little case to be made that this was Thatcher's fault: she had been at the helm for far too short a time. It was the Conservatives' actions at this point that were to prove controversial. The post-war concensus of how governments should deal with an economy flat lining was for Keynesian 'pump-priming' or stimulus. This helped to moderate the swings of the business cycle and shield the labour market from unemployment; however, it was contrary to monetarist philosophy, which objected to the state interfering in the market. As such, Howe continued on his path of deflating the economy even at a time of recession, removing £4 billion in 'sterling M3' [the commonest measure of monetary supply]. Despite 364 economists writing to the Times to object to the measures , Howe carried on and removed a further £5 billion from the economy in 1982. By the (admittedly rather narrow) criteria dictated by monetarist theory, Howe's project was an indisputable success. Inflation fell from an unsustainable rate of 16.3% in 1980 to just 4.8% by 1983 . The effects of this were very real in the social economy: the ratio of a >10% inflation rate to a <10% interest rate almost throughout the 1970s had made saving prohibitive and inadvisable. However, as Howe bumped inflation rates down to below 5%, the Bank of England base rate remained at or around the 10% mark until the late 1980s. Thatcher had begun to realise her dream of a 'thrifty nation'. Economic growth also began to rebound, with growth of 1.3% in the third quarter of 1981, which continued throughout the 80s (albeit in an inconsistent manner- see figure 2.)Before monetarist policies, the British economy had the slowest growth in Europe; afterwards it had the second fastest . There is a further argument that Thatcher rationalised the economy: her contention was that previous Keynesian policies had created 'false', unsustainable growth and that Government stimulus merely displaced private demand, creating inflation. The Austrian economist Friedrich Hayek strongly advocated this view, stating that Keynesian stimulus caused workers and capital to be inefficiently assigned. One unusual symptom abounded however. Despite (admittedly lethargic) economic growth from 1981 onwards, unemployment continued to rise until 1986. The increase was dramatic: from an already high annual average of 1,794,717 in 1980, the number of unemployed stood at 3,292,867 by '86- 11.8% of the labour force. There is a strong causal link between this rise and Howe's monetarism. While the low inflation rates and high interest rates benefited savers, they meant that employers who were leveraged were restricted by high debt payments and credit was increasingly hard to come by. The afore-mentioned post-war governing commitment to full employment was abandoned- Thatcher claimed that this was the responsibility of the employers and employees, not government. Friedman made the argument that there was a 'natural rate of unemployment' and that a government attempt to increase employment above this rate only increased inflation. Thatcher was therefore happy to tolerate unemployment as long as it coincided with (and helped to maintain) low inflation rates. The social and economic effects of unemployment are disturbing, for clear reasons in the short term, but also disturbingly in the long term. Dr. M. Brenner found that for every 10% increase in the joblessness rate, there is an increase of 1.2% in the total number of deaths, a 1.7% increase in the prevalence of cardiovascular disease, 1.3% more cases of cirrhosis, 1.7% more suicides, 4.0% more arrests, and 0.8% more assaults. Neil Kinnock proposes a more controversial reason for Thatcher's toleration of unemployment: her desire to reform the labour market and shift the balance of power from the unions to the employers; he states "people threatened with unemployment don't jeopardize their jobs by undertaking various acts of labour militancy." This comment would appear to be compromised by its evident political bias; however, the Chief Economist to the treasury from 1990 to 1993, Sir Alan Budd, concurs, stating "the government never believed for a moment that [monetarism] was the correct way to bring down inflation. They did, however, see that it would be a very, very good way to raise unemployment, and unemployment was an extremely desirable way of reducing the strength of the working classes." Whether this was an aim or a consequence, the buyers' market for labour that unemployment created allowed employers to derecognise unions in 9% of work places. Thatcher's labour market reforms were, along with monetarism and privatisations, the key stones of her economic model. Prior to her accession, the balance of power lay very firmly with the Unions. The much maligned 'winter of discontent' of 1978-9 had swept Thatcher to power; with unions combining forces to leave rubbish rotting in the streets, the dead lying unburied and the sick children of Great Ormond Street untended, there was a strong feeling that the Labour Government under James Callaghan had completely lost control. Thatcher's desire to change the situation was from economic as well as political necessity. While other European nations had completed 'economic miracles' of expansion, Britain had earned the nickname 'the sick man of Europe' for its highly powerful unions causing low growth and high inflation. Martin Warren, director of Employment Law at Eversheds PLC stated that Thatcher's labour market reforms were her most important legacy: "The abolition of the pre-entry and post-entry 'closed shops' in 1980 and 1982 and the implementation of secret strike ballots in 1984 augmented the accountability of Unions to a workable level." These laws limited the power of Unions through reducing the extent of obligatory membership agreements and allowing a more democratic process in the determination of industrial action. Further laws removing trade unions' legal immunity and 'secondary picketing' (picketing in support of other strikers) again curtailed the unions' power. [The 1982, 1984 and 1988 Employment Acts]. The change was dramatic. Superficially, the pitched battles of the miners' strike are the most obvious example of the breaking of union power. However, this was a sideshow to the really momentous changes. In 1975, over half of all workers were trade-unionised (a total of just under 14 million members). By 1996, there were fewer than 6 million members, and the number of separate trade unions had halved. Today, fewer than 15% of all private sector workers are unionised. Peter Hennessey stated that the most important consequence of Thatcher's premiership was that "the balance will never again be so far in favour of the labour movement as it had [been] by the late 1970s" . There are clear socio-economic consequences to de-unionisation. Some are broadly accepted (with the exception of the extreme left) to be positive: the situation in 1978, with 29.5 million days lost to industrial action per annum, was unsustainable and led to gross economic inefficiencies. Within 5 years, Thatcher had reduced this number to the far more manageable level of 278,000 days per annum. The removal of secondary picketing prevented what I would term 'political striking'- industrial action not for a defined goal of the workers but to pursue the political agenda of the union leaders. Furthermore, (though it is more contentious to describe this as purely positive), the reduction in power of the Unions meant that they were no longer in the position to unilaterally impede the state. In 1974, Heath asked the question: 'Who rules Britain?': post-Thatcher, the answer was certainly not 'the unions'. The reforms allowed the labour market to achieve a great increase in flexibility and efficiency; this supply side reform contributed to economic growth- though at the expense of employment figures. Beyond this, the removal of collective bargaining agreements allowed employment contracts to be more tailored to the individual employee. Moreover, it removed many obstacles to businesses employing people by, in most cases, reducing their obligations. However, the obvious point to make is that it also removed obstacles to dismissing employees as well. Furthermore, without the protection of the unions, workers were exposed to the ruthless edge of capitalism. By the time Major took over power in 1991, the labour market was unrecognisable. Workers had had so many rights removed by 1994 (with no legal right to representation in the workplace, no working time regulation and no minimum wage legislation) that the Organisation for Economic Co-operation and Development ranked Britain as the lowest nation in the industrialised world (other than the USA) in a composite index of workers' protections. Owen Jones, the columnist for the Independent, makes two further arguments on a broader level: firstly, he focuses on how workers' wages have stagnated despite their increase in productivity. Secondly, he makes quite a persuasive cultural argument: without the vested interest the unions provided in a fair deal for all workers, employees now have a more individualist attitude that breaks down traditional working class solidarity. The diffusion of cohesion drove market growth, but it at least partially augmented the fissiparous nature of today's labour force. The greater opening up of the labour market was matched by the release of market forces in other areas- the third keystone, privatisation. This was monetarism's answer to Keynesian demand-side economics: supply-side economics. During her premiership Thatcher privatised huge swathes of Britain's state industries- the state airline, the utilities and the steel industry. In her first ten years she sold off 2/3 of state assets, changing not only the character of British industry but also the bounds of the state. Peter Hennessy incisively defined the extent of the change: "The public-private boundary will not return to the status quo post- Herbert Morrison or ante- Margaret Thatcher. The argument from now on will be more about regulation than ownership." The rationale behind this was that the market would beget efficiency through competition. Indeed, there were marked improvements in efficiency- BT was forced to cut its prices at an average rate of 4½% throughout the 1980s, while doubling investment . There were also lower prices in the electricity and telecoms sectors. Particular success stories included British Steel and British Leyland, which both spawned privately profitable firms from state entities absorbing vast public subsidies. However, the effect of competition was overstated- in most cases the situation changed not from a state monopoly to a plurality of competing private firms but to a natural private monopoly. Thatched failed to appreciate how in many cases of infrastructure provision the most efficient number of providers is one due to the significant fixed costs. There were significant problems of monopolies without a public interest: owners were able to impose high prices without corresponding high quality services in order to augment profit margins. The distribution of water is the most extreme example of this phenomenon. 10 years after privatisation formed local monopolies, water firms had seen profits increase by up to 1250% (Northumbrian Water), with an average rise of 227%. At the same time, the number of 'critical' sewers in a poor condition rose from 0.1% to 10%. The water regulator, OFWAT, blamed the severe droughts of 1995 on chronic underinvestment by the water companies. The seventh parliamentary report on water prices and efficiency concluded "We believe that companies do not have significant incentives to promote water efficiency...in effect there is market failure". The data on efficiency is contentious and the data on service provision critical; therefore, I feel the real success of Thatcher's supply side reforms was the enfranchisement of the populace. £29 billion was raised from the denationalisation of industries; however, the government sold the shares at a price slightly below the market rate to include ordinary people in the process (with the particular example being the flotation of BT creating 1 million first time shareholders). Overall, the number of shareholders increased from 3 million in 1979 to 9 million by 1989; 20% of the population became shareholders. This was of obvious economic benefit: ordinary people were able to share in the surge in profits of the private companies. However, it was also an example of social enfranchisement: people felt directly involved in the process of economic expansion. Thatcher lauded the flotation of BT as 'the foundation of popular share owning capitalism in Britain'. On privatisation of national industry, I feel that I rather agree with Gordon Brown's sentiment: privatisation was broadly necessary and beneficial; however, the ideological pursuit of neo-liberalist free markets led to some poor privatisation decisions such as the natural monopoly of water provision. Thatcher's real dream of social enfranchisement, however, was her other main privatisation: the sale of social housing. In order to realise the traditional Conservative dream of a 'property owning democracy', Thatcher's premiership saw 1.24 million council units transferred to private ownership. The favourable terms of the 'right to buy' scheme meant ownership of property was no longer the preserve of the middle classes. In 1979, 52% of the population owned their own homes. By 1987, 66% did. This was a real political coup: property ownership is linked to higher employment and greater social cohesion, and directly causes lower crime rates. From a partisan point of view, property owners were many times more likely to be conservative with both a small and big C. The move was one of the most popular schemes of Thatcherism: it gave large numbers of people the chance to get on the property ladder for the first time. Despite this, there were people who queried the policy. Both Shelter and the Labour Party fiercely objected to the extent of privatisation on the grounds that it affected the long term availability of housing stock- and there were a number of questionable outcomes. The selling off of council stock coincided with a 67% cut in the housing budget to leave a huge shortage of homes. Before the right to buy scheme was launched, never fewer than 75,000 homes were built each year; this continually fell throughout the years of Thatcher's premiership to the point where it was just 84 by 1999. The combination of falling construction and large scale sell offs led to a crisis of supply and demand within social housing; the number of homeless people rose by 38% between 1984 and 1989. Furthermore, the restrictions on the availability of social housing meant that the few homes that were available had to be prioritised for those most in need: single parents, the homeless, new immigrants. This completely transformed the character of the estates. Before the right-to-buy scheme, one fifth of the richest 10% lived in social housing. Now, 2/3 of the residents of social housing are in the bottom 40% of income earners. Aneurin Bevan warned of the problems associated with this form of social stratification when he launched the social housing scheme: "It is entirely undesirable that on modern housing estates only one kind of citizen should live. If we are to enable citizens to lead a full life, they should be drawn from all sections of the community." His words were prophetic: 51.2% of children in council houses live in homes where no on