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4 May 1979: a turning point

Thatcher: She Changed the World

President Reagan and Thatcher in the Oval Office, 16 November 1988. Photo: White House, National Archives.

Thatcherism is still controversial. But what was it that Thatcher accomplished?...

On this day in 1979, 4 May, British Conservative Leader Margaret Thatcher formed a government. It was truly a turning point. By then, Great Britain, in the nineteenth century the wealthiest and most powerful country in the world, was not only frequently dismissed as Little Britain but also regarded as ‘the sick man of Europe’. The trade unions, mostly controlled by militant socialists, had become a state within the state: in 1974 the Miners’ Union had even brought down a conservative government. The trade unions fought fiercely against the introduction of labour-saving technologies, for example in printing, and against all attempts at rationalising the many large and inefficient government enterprises. For a while, a three-day week had even been introduced to save energy. The policy of full employment at the cost of inflation had failed miserably. The economy suffered from both unemployment and inflation, stagflation. In a humiliating move, the United Kingdom had in 1976 been forced to request a large emergency loan from the International Monetary Fund. In the winter of 1978–1979 there were widespread strikes by workers in the public sector, not only by garbage collectors and the like, but also more ominously by ambulance drivers and gravediggers. While rats were feasting on piles of rubbish, cancer patients could not be treated in hospitals. It was in Shakespeare’s words ‘the winter of our discontent’. The ruling Labour Party was forced to call an election in May 1979 which was won by the Conservatives, led by Thatcher.

She liberalised the British Economy

As Prime Minister, Thatcher immediately abolished exchange and price controls and various requirements for permits and certificates. She introduced enterprise zones, including one in London’s docklands, east of the City, now Canary Wharf. She targeted inflation by monetary restraint and not by ‘incomes policy’, to the dismay of the economic establishment. In 1981, 364 British economists signed a letter sharply rejecting her approach to monetary and fiscal affairs and predicting disaster. At the time I was a student at Oxford. In a lecture, one of my teachers, legal philosopher Ronald Dworkin, criticised Thatcher at length for creating mass unemployment. I raised my hand. He smiled and paused, and I said: ‘But is unemployment not that the supply of labour exceeds the demand? And will this not be solved eventually by the market, through price adjustments and economic growth? Surely most workers prefer low pay to no pay.’ Dworkin’s smile broadened and he replied: ‘Yes, of course, but it takes just such a long time.’

The disaster predicted by Dworkin, the 364 establishment economists and other pundits did not happen, however. Unemployment started to go down, and Thatcher continued briskly with her reforms. In 1979, the marginal income tax was lowered from 83 to 60 per cent, and in 1987 it was lowered to 40 per cent, whereas VAT was raised from 8 to 15 per cent. The idea was to tax spending rather than production. Thatcher also started a programme of ‘contracting out’ of public services such as trash removal, street cleaning and road maintenace to private firms. Government would do the steering and private companies the rowing. It is estimated that contracting out tends to save between 20 and 40 per cent of the cost of providing public services.

She gave power back to the people

Thatcher won the 1983 elections. Britain’s victory in the Falklands War the year before certainly helped her, but it was probably not crucial: she was already before the War making gains in polls. Voters realised that they could not return to the road travelled before 1979. There had been some denationalisation both in Britain and elsewhere before Thatcher came to power (for example in the German Federal Republic on the initiative of Ludwig Erhard), but she turned it into a major programme which was then copied all over the world. The main strategy was to involve employees of the companies being sold off by giving discounts to them, and to encourage mass ownership, not least in order to make the changes less reversible. Steel had for example been nationalised in the 1940s, denationalised in the 1950s and renationalised in the 1960s. Instead of selling such companies to a small group of people, they were sold to hundreds of thousands of small owners. Nine of the big companies privatised under Thatcher had names starting with ‘British’ or ‘Brit’: British Petroleum, British Aerospace, Britoil, Associated British Port Holding, British Telecommunications, British Shipbuilders and Naval Docklands, British Gas, British Airways and British Steel. Eleven electricity and eleven water companies were privatised, and seven other important companies: Cable and Wireless, Amersham International, National Freight Corporation, Enterprise Oil, Jaguar, Rolls Royce and National Power.

Politically, the most important privatisation was probably the introduction of a ‘right to buy’ scheme which gave tenants in public housing a statutory right to purchase at a discount linked to the number of years spent paying rent. In effect it was a scheme for converting rent into mortgage. It proved very popular, with three million housing units eventually being taken into private ownership. Thatcher consciously wanted to create a property-owning democracy.

She won the Cold War

Thatcher had in 1984–1985 to deal with a violent miners’ strike, organised by militants partly funded by the Soviet Union and Libya. The government had quietly prepared for the confrontation by hoarding coal, not in the pits, but in the power stations. It strongly backed the police that frequently had to fight ‘flying pickets’ moving in groups from one place to another, intimidating working miners. The year-long strike ended with the victory of working miners over the strikers. Another fierce year-long battle was fought in 1986–1987 when pickets from the printers’ union tried to shut down modern printing plants and intimidate those working there, but again without success. Thatcher initiated labour legislation which allowed individual workers more say in wage negotiations. During her tenure, trade unions ceased to be a state within the state. The labour market became more of a real market. So did the financial market. In 1986, Thatcher’s removal of various restrictive practices there had such an impact that it was called the ‘Big Bang’. Bowler hats disappeared; long Martini lunches became rare; London grew into an international financial centre. Great Britain had ceased to be the sick man of Europe.

In international affairs, Thatcher was a friend and ally of US President Ronald Reagan, and together they stood firm against communism. In 1987, Thatcher won her third elections, and in the following years she saw communism crumble, first in Central and Eastern Europe and then in the Soviet Union. In the book The President, the Pope, and the Prime Minister: Three who Changed the World, John O’Sullivan argues that she, President Reagan and the strongly anti-communist Pope John Paul II jointly won the Cold War. Despite all her accomplishments, home and abroad, Thatcher was nonetheless in 1990 forced out of office by the parliamentary group of the Conservative Party, not least because of her uncompromising opposition to the political integration of Europe as distinct from economic integration. She wanted Europe to be an open market rather than a closed state. Thatcher was the longest-serving Prime Minister of the United Kingdom since the Earl of Liverpool, who served from 1812 to 1827.

Thatcherism was a success

During Thatcher’s tenure, her political programme, often called Thatcherism, met with fierce resistance, and there are still those who denounce her legacy. When they argue on her terms, they say that under her economic growth was relatively slow. According to one group of critics, purporting to present an autopsy of her policies in the resolutely left-wing Cambridge Journal of Economics, ‘annualised’ increase in real GDP per capita was 2.8 per cent under the conservative governments of 1951–1964, 2.3 per cent under Labour in 1974–1979, and 2.1 per cent under the conservative governments of 1979–1997.

But there are several reasons why such a comparison is misleading. First, of course, economic growth was fast after the Second World War in most Western countries when they were rebuilding and also returning to international free trade. This explains the rate of growth in 1951–1964.

In the second place, a developed country like the United Kingdom cannot in general expect the same rate of growth as less developed countries initiating reforms, like Chile or South Korea. A developed country is somewhat akin to Lewis Carroll’s Red Queen who had to run in order to stay in the same place.

Thirdly, figures on economic growth have to be analysed critically. Short-term economic growth can be produced by government investment in projects of little or no use, often called ‘white elephants’, such as the supersonic jetliner Concorde in the 1960s, or more prosaically, an unprofitable coal mine or steel plant. This was often the case in Great Britain before 1979 when government was actively investing in the economy, trying to pick winners that turned out to be losers because the ability to convince officials and politicians does not necessarily coincide with the ability to run a business.

Fourthly, the results of liberal reforms such as monetary and fiscal restraint and transfer of assets from the public to the private sector do not appear immediately. If one tries to solve problems by throwing money at them, the immediate results may feel pleasant, while the long-term consequences will be bad, whereas thrift and hard work require initial sacrifices and produce long-term benefits. What is relevant is that Great Britain saw a long period of sustained economic growth from 1982 to 2008 (with the exception of two years), and that in this period the economy grew faster and performed better than in comparable economies, those of the United States, Germany, and France.

She put the Great back into Britain

Thatcher’s critics also argue on other terms. They say that her policies were divisive and that poverty increased during her tenure. Those who make the first accusation seem to forget the ‘winter of discontent’ when left-wing militants practically paralysed Great Britain. During the miners’ strike, the government did not initiate confrontations. The police simply protected working miners from pickets. The same can be said about the conflict over the introduction of modern technology in printing plants. The pickets tried by force to hinder the operation of these plants. The policies of the trade unions were divisive, not those of Thatcher. ‘Cet animal est très méchant: Quand on l’attaque, il se défend.’ Or: This animal is wicked; it will fight back, when attacked.

Those who make the second accusation, about the increase in poverty, are talking about relative, not absolute poverty. Usually, relative poverty is defined as the situation when people earn less than 50 (sometimes 60) per cent of median income. (Median income is different from average income: it is that income which would divide society into two equally large groups, one with income below and the other above it.) Thus, it is really a reflection of income distribution. If one group in society becomes richer, then the relative poverty of other groups increases. What is much more relevant is absolute poverty, the real lack of goods and services necessary for living a tolerably decent life. During Thatcher’s tenure, relative poverty certainly increased, simply because income distribution became less equal, but absolute poverty did not increase. Income distribution did not become less equal because the poorer became poorer, but because the rich became richer, which is normally not seen by economic liberals as a problem. 

Perhaps Thatcher’s most lasting contribution in her own country was to the mindset of her compatriots. In my years in England, between 1981 and 1985, I could observe how perceptions shifted. Slowly, people came to realise that they could not just set the level of wages in negotiations. Income had to be earned; wealth had to be created. If wages were set too high forcibly, then unemployment would be the result. In Thatcher’s Britain it was no longer considered shameful to make a profit or to be a patriot. Hard work, thrift, self-reliance and self-improvement were applauded. The use of violence to defend privileges such as trade unions had enjoyed was no longer accepted. Thatcher put the Great back into Britain. Sir Geoffrey Howe who was her finance minister, Chancellor of the Exchequer, during the difficult period of 1979 to 1983 commented that her ‘real triumph was to have transformed not just one party but two, so that when Labour did eventually return, the great bulk of Thatcherism was accepted as irreversible’. But Thatcher’s example was not only significant in her own country. She had a strong impact abroad. She set out to change her country, but she ended up changing the world.

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