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You are here: Home > Current Topics > Mind your Business > 17 May 2004 |
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Former British Prime Minister Margaret Thatcher is regarded as having helped to modernise the UK economy. What impact did she have on modernising the role of women in the workforce? © Alamy Images It is 25 years since Mrs Thatcher came to power - the first female Prime Minister in the UK. Britain had experienced a troubled decade, the 1970's seemed to be a decade of one crisis after another with the effect that Britain was seen as being in economic decline, unemployment was rising, inflation was always a problem and industry was vilified as being inefficient and of poor quality. Mrs Thatcher presented herself as the woman who would bring some common sense to the economy; a woman's ability to run a household was, she claimed, an important skill in running the country. There was no real difference - 'you can't keep spending more than you earn' she chided and set about an economic transformation that was to be heralded by some as a miracle and others as a total disaster. Many students of economics and business will not have experienced the rule of Mrs Thatcher but there is no doubt that they will have heard of her and are still living with the legacy of the economic transformation (good or bad) that she generated. This article will look at some of the main features of Thatcherite economic policy 25 years on. When Mrs Thatcher won the election in 1979, economic growth stood at just over 2% but this apparently respectable figure hid many problems. Unemployment had been rising from 2% to 4% reaching a million and inflation stood at 13.4%. The election was fought in the shadow of the 'winter of discontent' - public sector workers throughout the UK went on strike following frustration with policies that attempted to restrain their pay to keep inflation under control. Rubbish went uncollected, as dustmen amongst others seemed to reflect the growing trend towards industrial unrest that gave the UK such a bad reputation. 
Rubbish builds up very fast when refuse workers take strike action! © Photolibrary Group The government was borrowing £8.5 billion a year with total government debt standing at nearly 44% of GDP and had previously borrowed from the International Monetary Fund (IMF) to ward of a balance of payments crisis. Sterling was strong, causing pressure on exporters who in turn were hampered by the lack of attention to quality and the poor reputation British manufactured goods had around the world. Things were not good. Mrs Thatcher promised a new approach. At the heart of Thatcherite economics were the following:
It is hard for those who have not lived through this period to understand the impact these policies had. The years after the end of the Second World War had seen government take an increasing hand in the economy - Keynesian demand management was the order of the day. If unemployment - the main focus of such policies, were too high, the government would engineer economic growth through operating a budget deficit - spending more than it received in tax revenue. The multiplier effect would lead to economic growth and unemployment would fall. Booms in the economy could be dealt with through a reverse of this policy. Mrs Thatcher however, believed that such policies lead to society becoming too reliant on the state to provide - especially with regard to the economy. The British car industry was typical of such a problem. Widespread industrial unrest, massive losses, increased competition and poor quality products had weakened the car industry. Being such a key industry in terms of employment - including all the ancillary work that goes with it - led successive governments to use taxpayer's money to support the industry. Such support could not go on indefinitely. State owned utilities such as gas, electricity, telecommunications and water along with other nationalised industries like steel and coal, were all seen as being inefficient and victims of state control. Mrs Thatcher intended to bring competition to these industries, to make people appreciate the necessity of operating in real world markets, as a vital plank of her policy as well as bringing people into contact with share ownership and thus having greater understanding of how businesses work. During the next 13 years, most state owned enterprises were privatised, share ownership amongst ordinary people increased dramatically, most of these enterprises became efficient profit making organisations although the cost was seen as being massive. Thousands of jobs were shed in the drive to profitability prior to privatisation; the industrial landscape of Britain changed beyond recognition, communities were laid waste - especially in the coalfields and steel-producing areas of the UK and services became the dominant business type. Mrs Thatcher oversaw cuts in income tax - the bands were reduced and the top rate cut from 83% to 40% whilst the lower band was also cut. To replace this, VAT was increased from 8% to 15% and then again to 17.5%. Targets were set for the growth in the money supply as attempts to cut inflation were strengthened. In addition, Mrs Thatcher passed numerous bits of legislation cutting the power of the unions. There were high profile strikes by the miners in 1984 and the print workers in Wapping in 1986, following the sacking of 6000 of them after their refusal to accept new working regimes by Rupert Murdoch's News International Group. Both of these strikes were long and violent but Mrs Thatcher stood firm. The unions would not blackmail the country and the failure of both strikes led to a new approach by the unions and a new attitude to industrial relations. By 1987, inflation had been brought down to around 4%, unemployment was falling albeit from a high of 12% of the working population - a total of 3-4 million people depending on whom you believe - and economic growth was rising at between 4 and 5%. Government debt had fallen to 27.7% of GDP by 1990 with the government running a budget surplus of some £6 billion. To all intents and purposes it was an economic miracle. Mrs Thatcher had succeeded in creating for herself a whole economic philosophy much of which endures not only in the UK but also in many other European countries. Even Tony Blair managed to use the same quote from St Francis of Assisi to describe government as Mrs Thatcher did on the steps of 10 Downing Street on the day of her accession to office! Things did start to go wrong - the economy grew too fast by the late eighties, and inflation was rising. The brakes were put on but it caused a deep recession lasting into the middle nineties. Despite this crash, the legacy of Mrs Thatcher still seems to be that she turned round the country and that she made people become aware of the necessity for stable economic policies, for paying our way, standing on our own two feet and not expecting someone else to bail us out of our problems. The relative economic stability we now seem to enjoy does, in many people's eyes, depend in large part to the medicine that Mrs Thatcher gave us; it inculcated a new approach to the economy, even though at the time we didn't enjoy it. It is now fourteen years since Mrs Thatcher resigned. Whatever anybody thinks of her, she left an indelible mark on the UK economy that does still have an impact on economic policy making. |
There are a number of theoretical implications of the policies that Mrs Thatcher introduced. The philosophy rests on the belief that the market is a better allocater of scarce resources than the state. Where free markets occur, competition will ensue which ultimately increases efficiency and drives down prices. Competition will not only occur in the goods market but also in capital markets and labour markets. These should lead to increases in efficiency and productivity and lead to firms being able to reduce costs. In so doing they will increase their competitive advantage and be able to increase sales.
Freeing markets also has implications elsewhere. Public services like health and education wre also subjected to 'market influences'. Deregulation was a key feature of the Thatcher 'revolution'. Deregulation occurred particularly in the financial services industry, which led to an explosion of new financial products, and providers that helped fuel the rise in credit and borrowing that drove the economy in the eighties.
This, accompanied with the push to encourage home ownership led by the government's decision to provide the opportunity for council house tenants to purchase their own homes (which also had the effect of reducing government spending!) meant that many more people now had some form of security on which to borrow - especially against their mortgage. Borrowing using such funds was now not restricted to home improvement or property purchase but also to buying consumer goods like cars and holidays. All of this led to an increase in aggregate demand but it was not an increase fuelled by government spending which had been seen as the way to get out of economic problems prior to the mid 1970s.
To be fair, it was not Mrs Thatcher who first recognised that demand management was not the panacea so many had thought to economic decision making. James Callaghan, the Labour Prime Minster began the move to greater emphasis on monetary policy when arguing the case for a loan from the IMF in 1977. Mrs Thatcher however went much further in emphasising the role of monetary policy with successive chancellors setting targets for the growth of the money supply as a means of restricting growth in inflation. The main theory behind this intention was the quantity theory of money. This stated that increases in the money supply without corresponding increases in aggregate supply would lead to rises in the price level.
Monetary policy gave way to an exchange rate policy under the Chancellor, Nigel Lawson, from the mid-eighties when it became clear that, with deregulation, it was very difficult to hit the targets the government was setting. Exchange rate policy however was to have the same effect. If exchange rates were 'managed' exporters could not rely on devaluation of the currency to improve their competitive status and therefore would have to take difficult decisions to increase productivity and raise efficiency whilst finding ways of cutting out waste and reducing costs.
Whilst both monetary and exchange rate policy had mixed results, one factor came out that was perhaps more important than both of the actual policies and that was the impact on expectations.
Friedman had developed the 'expectations augmented Phillips Curve' to explain why the curves properties did not seem to be holding in the stagflation era - rising inflation and unemployment at the same time was not the trade off predicted by the curve. Friedman asserted that individuals would adjust their behaviour in line with what they expected to happen in the economy. So if inflation was growing and was currently at 5%, workers might reasonably expect that it would continue to rise. They might therefore put in wage claims to cater for an expected rise in inflation (plus a real increase) of 8%. In so doing and assuming firms paid the increase, costs would rise and to protect their margins firms would increase prices causing inflation to rise as anticipated.
Research had also been undertaken to see what impact talk of recession had in shaping people's behaviour. Increasing use of the 'R' word in the press seemed to correlate to evidence that people adjusted their spending behaviour, thus contributing to the very problem they feared. So, the impact of Mrs Thatcher's economic policies may well have been to re-shape our understanding of the effects of our decision making.
Prior to the Thatcher government, people put in wage claims that they expected to be met. If business started to fail, people expected the government to intervene and support it. The Thatcher government altered such expectations. The decision by the Labour government to give the Bank of England independence in setting interest rates may well be due, in part, to the effect on our expectations. If we spend too much then we know the Bank of England will put up interest rates and we will risk financial problems in terms of mortgage payments, credit payments and so on.
In addition to a move away from demand management, Mrs Thatcher was keen to promote supply side policies. Supply side policies concentrated on increasing the capacity of the economy - to move the aggregate supply curve to the right. Supply side policies involved a number of measures. De-regulation was one of them but policies designed to promote enterprise, risk and incentives were also central. Entrepreneurs such as Stelios Haji-Ioannou, founder of easyJet, was one such entrepreneur who found the climate in Britain suitable for his ambitions. It was about creating the right climate to promote business in Britain.
This meant reducing the tax burden on individuals and companies. Corporation tax was reduced, as were income taxes. The decision to switch emphasis from direct to indirect was, so the argument went, that people had choices as to whether they spent money on items that attracted VAT but did not have such choices with regard to their income. The move to 'fair' tax policies led to the ill-fated Poll Tax which replaced domestic rates as the means by which local government raised some of its funding. It was seen as fair in that everyone who uses public services should pay for it. The outcome was slightly different - it was seen as being very unfair and was abandoned after it became obvious that it would be unworkable.
The actual rates of income tax did indeed fall - allowing people to take home more of their hard earned income, but the overall tax burden - the amount of total tax paid, did not fall, in fact, it increased. The image though, was of the Conservative party being the party of 'low taxes'. Lowering taxes but still generating tax revenue for the government was based on the Laffer Curve (see an explanation of this theory in Biz/ed's Virtual Economy).
Attempts were also made to adjust welfare policy to encourage those out of work to try to find employment rather than rely on the state. This included amendments to the tax and benefits system that made the hoops people had to go through to claim benefit harder as well as making the financial incentive of getting work more significant. Such a policy is fraught with problems but the effects continue to be felt as the current Labour government use similar tactics with its 'welfare to work' programme and 'working families tax credits' systems.
Arguably the most enduring image of the Thatcher era is the accusation that she encouraged self-centredness and greed. The 'have's' benefited at the expense of the 'have-nots' with the gap between rich and poor getting wider. Such images were clarified in the numerous inner city riots of the early eighties in Brixton, Toxteth in Liverpool and Tottenham in North London and the 'yuppie' culture perhaps emphasised by Harry Enfield's 'loadsa money' character.
This image of greed and the emphasis on the enterprise culture was also reflected in the approach to industrial relations. The miner's strike and the News International dispute were both seen by the government as necessary victories in the fight against union militants who were deemed to have too much power and who were stifling change and innovation and making the labour market inflexible.
The legislation passed at various times throughout the eighties forced the trade union movement to look at its role and how it represented its dwindling membership. For some, the new union movement that emerged was more responsible, forward looking and pragmatic. For others, the costs in terms of the damage to communities and the heavy handedness of the state, exemplified by the way the police acted, were costs that were too high to pay for the supposed benefits.
The first part of this activity should be relatively straightforward. Begin with some equilibrium position, which gives an unemployment level, which is seen as being too high (say 10%). Demand management policies seek to influence the components of AD (C + I + G + (X-M) ) to influence its level. Say the government decides to cut taxes, this affects consumption (C) and will lead to AD shifting to the right. On your diagram, trace through the effects on national income (output) and thus unemployment. Note however, what happens to inflation!
For part (b) you will need to consider what happens after the situation above has been reached and in particular the effects on expectations. It is a useful exercise to link this diagram with the expectations augmented Phillips curve to see the relationship between the two. The effect of demand management has been to increase output and lower unemployment but at the cost of higher inflation. The next stage would be to consider the impact on AS. The increase in costs through the granting of higher wages or other input costs to raise output will cause the AS curve to shift to the left. As it does so, national income (output) will fall and unemployment will rise again but equally so does inflation. The end result is an equilibrium output level (and therefore unemployment level) at the same stage as it was at the start of the analysis but with higher inflation! If you have followed this through with the expectations augmented Phillips Curve you should see how the two are linked.
For part (c) start with an equilibrium position but this time it is the AS curve which shifts to the right. In so doing, look at the effect on national income (output) and inflation! Such policies represent sustained economic growth - growth without generating faster inflation. To take this one step further, what needs to happen to AS if AD is rising at 4% per year if growth is to be maintained without generating faster inflation?
This is an out and out evaluation question. You will have to do some research on the links between current economic policies and the policies of the Thatcher era. An outline of the latter is given in the theory section above but there are additional links that take you to other sources of research as well. At the heart of this question is the premise that if Mrs Thatcher did change the way we think about economic policy then we should still see evidence in current policy of that thinking. Again, the section above offers a view that perhaps the independence of the Bank of England and the Labour Party's welfare programme may have some link with Thatcherite policies. A structure for this answer might be as follows:
