Blue Sky thinking: Lessons in Liberty and Legacy16th April 2013

“Economics are the method; the object is to change the heart and soul.” [1] So said one Margaret Thatcher, two years into her premiership. For all the plaudits and protests of the last week, I initially had trouble recalling my views on her. With her funeral today it is time I got my act together!

I was in a meeting a mere 100 yards from the Ritz when the news of her death there came through. As someone who feels incredulity at the political offerings of our time, I am never surprised at others’ strong opinion, whether fashioned from full or selective memory; after all, democracy is often described as the “tyranny of the majority”.[2]

What were the ‘70s like before she came to power…?

I grew up in a good home, feeling grateful that we had a coal-fired Rayburn, for we were able to enjoy cooked food at a time when others had cold. When my age could still be counted on two hands, I recall that the winter of 1972 saw electricity switched off as power was rationed typically for half the morning, afternoon and evening. The winter of 1974 saw the Three-Day Week, where commercial users could only use power for 3 days per week. In both cases millions of workers were laid off.

Back then even TV channels closed down at 10.30pm to conserve power. Today the TV stations remind us that if you wanted a telephone in the ‘70s, or wanted to move a phone within your own home, you joined a waiting list. Remarkable.

Of course the ‘70s were most memorable for soaring inflation, peaking at 25% in 1975, but averaging 13% across the decade. That almost sounds manageable, but try compounding it year after year and you’ll find that at 13% a year prices more than TRIPLED in just ten years. In contrast, prices more than doubled during WW1, and rose by over 50% during WW2, so for this trauma to occur in peacetime something must have been terribly wrong.[3]

Running a home, running a business, even running a government was nigh-on impossible, and in 1976 the British economy was placed under the supervision of the IMF. Think Greece today. Such was the grim inheritance that Margaret Thatcher faced on winning her first election in 1979.

Her strategy …

As she wrote in The Path to Power: “We intended policy in the 1980s to be directed towards fundamentally different goals from those of most of the post-war era. We believed that since jobs did not depend on government but upon satisfying customers, there was no point in setting targets for ‘full’ employment. Instead, government should create the right framework of sound money, low taxes, light regulation and flexible markets to allow prosperity and employment to grow.”

This is libertarian talk, and it is well known that she greatly admired Friedrich Hayek, an economist whom we shall feature in future blogs. Hayek’s approach was founded in Austrian Economics, of which I am a great admirer, which emphasizes that the economy is at its heart a collection of individuals making their individual decisions, rather than something that benefits from top-down controls. Hayek’s approach was founded on capitalism, low taxes, small state, individual responsibility, free trade, rule of law and sound money all working together to engender prosperity. Communism, social democracy, Keynesians and inflation were the enemy.

In contrast, macroeconomic debate and policy had for decades mostly focused on managing rises in GDP (little more than turnover, see here), an admirable but never-achieved desire for full employment, and low inflation (although much of the latter is achieved through statistical chicanery, see here).

Any attempt to seek progress through upturning previous methodology in order to embed an entrepreneurial, competitive spirit to introduce new and improved products and services is bound to create change and cause distress. In time these initiatives stimulate creativity and experimentation, but in the short term a process of “creative destruction”[4] occurs. Unlike the politicians of today, I am sure she knew that her role was not to be popular, but to be effective.

The Channel 4 documentary “Margaret: Death of a Revolutionary” was remarkable in upending many myths, on both sides of the political divide, and is a must-watch. That is all I will say on the period of her reign, for as a young man I really had few commitments and responsibilities, and so at the time never experienced the full impact of those changes.

So what of the practical economics…?

From a macro Austro-libertarian viewpoint, the rot was briefly stopped, and the UK achieved strong economic growth that stood us apart from the achievements of the rest of the world. However we now seem to inhabit a place where the “free market” is blamed for many ills, even though we do not truly enjoy a “free market”, and as a nation we seem fearful to extol the virtues of such policies. With this feeble approach we now inevitably fall well short of the benefits they could bring.

Even during Margaret Thatcher’s rule as PM, despite the “free-market” rhetoric, in many areas precisely the opposite was achieved. Much has been written on the areas where this was achieved, so lets focus on a few areas where policy over time went seriously wrong:

  • I have criticized bank deposit guarantees before as the agent whereby risk is forgotten, and bank leverage is encouraged to rise, unshackled from the self-imposed constraints of free-market capitalism. Her government introduced the deposit guarantee in 1979, and the effects of this process have since been greatly worsened through evolving regulation which has caused much of the risk and distortion in credit markets. I have no doubt that she would have been shocked by the unsustainable growth of both public and private debt encouraged by her successors. Indeed Hayek always forewarned that a credit boom always results in a bust, and she would have put a stop to it.
  • The windfall from North Sea oil was used to reduce the overhang of state borrowing. I have seen reports that this accounted for no more than 1.5% of GDP over her premiership, and much more oil has been produced since she left office, but neither she nor subsequent governments set about creating a sovereign wealth fund, similar to Norway, that invests overseas. This may be because the logical focus was on debt reduction, but for someone who espoused the benefits of “saving for a rainy day” this does seem a little curious. With significant oil comes Petro-currency status. A strong pound introduces other changes, and whilst making imports of consumer-goods and raw materials for manufacturing and processing cheaper, it makes exports pricier. This exacerbates any competitiveness issues caused by low productivity, and forces a faster rate of change. Perhaps the decision was taken to support the domestic economy to make the transition easier than it otherwise may have been.
  • For all the positive removal of ridiculous income and corporation tax rates, her government raised VAT as a tax on trade, and is mostly remembered for the introduction of the Community Charge, to replace the unpopular domestic rates. All taxation is a form of coercion, and by minimizing tax individuals and businesses have room to breathe, compete and innovate. But even as taxes go, the poll-tax was a bad tax. The concept of a poll-tax is an equal tax, along the lines of one vote one tax, and so it must be established at a low level. The funding of local authorities and services is beyond the scope of this paragraph, but the high level of the tax was its fundamental problem.
  • The cultural change to property ownership achieved a major shift. But matched with subsequent credit expansion that has led to far too much of our nation’s wealth, and commitments from our incomes, being subsumed into property. For all its merits, property is not an employment or wealth-generator other than in the very short-term. Subsequent government efforts to sustain house prices are indicative of this continuing failure, but again the villain has been an unsustainable credit boom rather than the initial decisions and policies.

Perhaps the greatest economic problem is that her successors failed to follow the path laid out for them. Hayekian followers shouted loudly about the instabilities building up in the late ‘90s and the ‘00s as central bank policies became barmy, bank leverage became excessive and property bubbles built up. But nobody was listening. Worst of all, when the system went “pop”, the free market was prevented from fixing it (something that Hayekians called for) as social democrats worldwide saved the banks, probably to save themselves.

And the economic legacy…?

We still grapple with the fact that the state takes too much and borrows too much. The state was smaller (as a proportion of GDP) when she left office than when she took office, although real government spending did rise, but her tenure may, in hindsight, be seen as a mere blip on an unsustainable path.

As her man responsible for developing policy and research, Sir Keith Joseph was perhaps the real thinker behind the radically fresh approach of Margaret Thatcher. Both were founders of the Centre for Policy Studies, which flourishes to this day, along with other excellent think-tanks such as the Adam Smith Institute and the Institute of Economic Affairs, all of whom provide a refreshing alternative to current political and media diatribe. As long as this blue-sky thinking continues, there is economic hope. Links to these are set out below.[5]

Ron Paul, a recently retired Congressman, libertarian, and consistent critic of America’s foreign, domestic and economic policies, recently announced that “The neo-conservative era is dead”. Perhaps he is the principal flag-waver of Austrian Economics today. Incidentally, he is a strong believer in home schooling, designed to expose students to thinkers they would never encounter in a government school.

Nowadays, discussions on both sides of the party divide over the cost of living seemingly focus on the need for more regulation, a living wage and greater redistribution. Yet the greatest cost in everything we earn and spend is tax. Fix that, and we fix much, but career politicians and bureaucrats see this line of thought as a threat. There are few in public office who understand or follow the Hayekian creed, and for now they are mostly lowly but vociferous backbenchers.

For all the myth and legend surrounding Margaret Thatcher, and her successes and failures in embedding Hayekian principles, perhaps the great economic and political lesson is that for policies to stick, long term, one needs to explain why the world is changing, and individuals can start to adapt. Political parties also need to understand this, because it has been all too tempting for them to return to the easy option rather than spell out hard truths. For the future to work, individuals need to do much for themselves, and in so doing reduce the scope, scale and size of government.

So who will take on the leadership mantle? …

Her inheritors are few, and the false prophets of neo-Keynesianism now hold sway. Despite her ultimately problematical leadership style, she certainly led from the front. In all walks of life we find that “commeth the time, commeth the man(woman).”

The time is nearing … who will it be?

[1]  The Sunday Times, January 1981

[2] The phrase was first used by John Adams, a Founding Father and second President of the United States. Democratic victories of the majority generally involve the subjugation of the opinions of the minority. Nowadays most democratically legitimate governments even fail to secure half of the vote (or at least half of the potential vote, such is the proportion who choose not to vote), and so could equally be described as the “tyranny of the minority”. It is no wonder that divisive populism has become the cheap-fix applied by politicians looking to secure their votes by pandering to this or that special interest group.

[3] The Bank of England has an interesting historic inflation chart at http://www.bankofengland.co.uk/education/Pages/inflation/timeline/chart.aspx. (But don’t believe the explanations on deflation which show an unpalatable bias!)

[4] Joseph Schumpeter, an Austrian-American economist who died in 1950, wrote on innovation and change, and coined the phrase “creative destruction”, which he had personally witnessed through his bankruptcy in 1920s Austria. He was also admired for his three goals in life: To be the greatest economist in the world, the best horseman in Austria and the greatest lover in Vienna! He apparently boasted that he reached two of his goals, adding that there were too many great horseman in Austria for him to achieve all three!