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GUEST,rarelamb BS: Happy Birthday Mrs Thatcher-13 Oct 1925 (165* d) RE: BS: Happy Birthday Mrs Thatcher 17 Oct 05

"In the 1970s, Britain's economy was in a sorry state: Many people were regularly referring to the "British disease." This was not an exaggeration: "during the nineteenth century and the first three fifths of the twentieth century the United Kingdom remained ahead [in terms of output per head] of nearly all the main European countries."13 "Since 1960, however, an absolute gap emerged...[and] by 1973 most European Economic Community countries were 30 to 40 per cent ahead of Britain."14

Productivity was much lower than in continental Europe: According to studies by international corporations, at the end of the 1970s net output per head was over 50 percent higher in German and French plants than in corresponding plants in the United Kingdom.15 To top this all, Britain experienced rampant inflation--from 1972 to 1977, while the OECD price level rose by 60 percent, the British level rose by 120 percent--and high unemployment--by 1977, the British unemployment rate was 7 percent, or 2.5 percent above the OECD average."

"To put it bluntly, by the 1970s Britain was a basket case. Many economists agree that the excessive power of labor unions was responsible for the sorry state of Britain's economy.24 For example, according to Samuel Brittan:

    [M]any of the particular perversities of British economic policy stem from the belief that inflation must be fought by regulation of specific pay settlements. To create a climate in which the unions will tolerate such intervention has been the object of much government activity. This has involved price controls, high marginal tax rates, and a special sensitivity to union leaders' views on many aspects of policy. The post-1972 period of especially perverse intervention began, not with a change of government, but with the conversion of the Heath Conservative government to pay and price controls.25

Brittan is referring to the disastrous economic policies uniformly pursued by Conservative and Labour governments in Britain during the 1970s.26 In particular, the Conservative government to which Brittan is referring started with admirable intentions. In the Conservative manifesto for the 1970 election, one reads:

    [W]e reject the detailed intervention of socialism, which usurps the function of management, and seeks to dictate prices and earnings in industry.... Our aim is to identify and remove obstacles that prevent effective competition and restrict initiative.27

These admirable intentions were not followed by equally commendable policies. In fact,

    [T]he Conservative government of 1970-74 was the most corporatist of the post-war years. Its economic policies ended in disaster and the Conservative party lost two elections in succession. Not surprisingly, Mr. Heath lost the leadership of the party....28

According to Brittan, the excessive power of organized labor also influenced the tax code, with devastating consequences:

    For most of the postwar period the real trouble has been...not average tax rates but the very high marginal rates of tax, both at the top and at the bottom of the income scale. The top marginal rates are not only higher than in other industrial countries, but reached at a much lower level of income. These are entirely political taxes. The revenue collected at the top is trivial in statistical terms; and the real effect is certainly to lower revenue.... As the diversion of scarce energy and talent into trying to convert income into capital, or into benefits in kind not taxable at these rates.29


This was the background of the advent of Mrs. Thatcher. Wrong economic theories, entrenched interest groups, and a widespread aversion for the free market had resulted in economic sclerosis, inflation, unemployment, and general decline. She intended to change all of this, and she did.

Her first battle was in the field of macroeconomic policy, where there was a switch from reliance on fiscal policy as a means of managing aggregate demand to the use of monetary policy. In fiscal policy the aim was that of reducing the deficit (PSBR: Public Sector Borrowing Requirement). In the field of taxation, the goal was that of restoring incentives to work, save, and invest through cuts in all tax rates, especially at the highest levels. The underlying philosophy was that the restoration of incentives was more important than the search for equality.

But where she really excelled was in macroeconomic or supply side reforms:

[A]fter the inflation-fighting campaign of 1979-82, [she engaged in] non-stop reform of the supply side--union laws, privatisation, deregulation, local government finance reform, housing, radical tax reform and much else.30

Thatcher also succeeded in taming the unions. Even her detractors concede that that was one of her great successes, one which she shares with President Reagan:

    [Reagan and Thatcher] did make considerable progress in shrinking the role of government, and in expanding the reach of market forces in the microeconomy. Both did so, first, by taming the trade union power.... The President successfully broke a strike by air traffic controllers in 1981.... The Prime Minister equally successfully broke a strike in 1984-85 by coal miners determined to impose their leader's political agenda on an electorate that had rejected it.31

She also succeeded in shrinking government's direct role in the economy through privatization. It is generally recognized that "Thatcherism's success in converting state-owned to privately-owned enterprises...[was] a programme so radical in conception, and so successful in operation, as to have won the highest form of flattery from other nations--imitation."32 Contrary to what people both on the right and on the left maintain, Mrs. Thatcher's successes do not include a reduction in total public spending: "Indeed, 18 years of Tory government left the state's overall share of the economy virtually undiminished: 44% of GDP in 1979 and 43% in 1996."33

To sum up, Thatcher succeeded in drastically reducing inflation in a country that had become dependent on it; taming the power of what were probably the most powerful labor unions in Europe; privatizing a large portion of a bloated public sector; enacting a tax code more favorable to entrepreneurship and investment; and establishing the conditions for long-term economic growth.

She put an end to the "British disease." She put Britain back to work. Last, but definitely not least, she shifted the focus of political debate on economic issues. Mr. Blair's economic program would have been considered Conservative in the 1970s. If Labour has been forced to drastically alter its position, this is largely due to Mrs. Thatcher's legacy. One can criticize some details, but overall hers has been a fantastic success.34
How Did She Do It?

How did she do it? I believe there are several factors that contributed to Thatcher's "Conservative Revolution."

Ideas. There is no doubt that Thatcher's success is largely due to the power of ideas. She acknowledged the important role played by the Institute of Economic Affairs in providing the intellectual ammunition and the inspiration for her program. On the occasion of the 30th anniversary of the IEA, she said:

    [T]he Institute began at a time when despite free speech in a free country, there prevailed what I would call a censorship of fashion. Anyone who dared to challenge the conventional wisdom of the post-war years was frowned-upon, criticized, derided and pilloried as being reactionary or ignorant.... You set out to change public sentiment.... May I say how thankful we are to those academics, some of whom were very lonely, and to those journalists who joined your great endeavour. I do not think they ever numbered 364. They were the few. But they were right, and they saved Britain.35

Without those ideas, Thatcher's revolution would have been impossible. However, let's not forget that most of them were already available 10 years earlier at the time of the Heath government. It can be argued that in 1979 the justification for a radical change in economic policy was stronger than ever before, but it is still true that ideas alone do not explain the revolution. They were a necessary, but certainly not a sufficient, cause for the change.

Circumstances. It is true that by the end of the 1970s, the evidence of the failure of the statist policies pursued by both Labour and Tory governments was overwhelming. I believe that circumstances did play a role in Thatcher's success. However, the evidence of the failure of those anti-market policies was already in existence in 1970, even though it was not as conspicuous as in 1979.

Furthermore, let's not forget that not everybody drew the same conclusions from that experience. Certainly not the Labour Party that in 1979 was as Socialist as ever. And, as far as academic economists are concerned, the vast majority was convinced that there was no need for a change in policy, as revealed by the 364 of them who signed a manifesto against the new policies of the Thatcher government. The evidence was undoubtedly there, and it helped Thatcher's cause, but it had been there before with no impact, and many educated people still failed to draw the correct conclusions from it.

Interests. The trade unions had abused their power, and this made the case for reducing their influence stronger than ever. However, even this was not new: The danger omnipotent labor unions pose to a free society had been obvious for years, yet nobody had ever tried to tame them.

Leadership. I believe that, while these factors played a role in Thatcher's success, the crucial element was her personality, her principled and uncompromising leadership. It can be said of her what Ted Kennedy said of Reagan:

    It would be foolish to deny that his success was fundamentally rooted in a command of public ideas. Ronald Reagan may have forgotten names, but never his goals. He was a great communicator, not simply because of his personality or his teleprompter, but mostly because he had something to communicate.36

She dared do what no one else had had the courage to do in Britain for decades: challenge the prevailing consensus, the common wisdom, the entrenched interests, and drive a reluctant party and a befuddled country in a radically new direction.

I can testify to her unusual personality. I have had the chance to meet her several times even before I entered politics. Once, in 1991, there was a conference in Fiesole, near Florence, organized by the National Review Institute. During a coffee break, we were walking along the portico of the hotel. Tuscany's countryside looked magnificent under the afternoon sun. Mrs. Thatcher remarked: "Yours is a beautiful country, with a rotten government." To which I replied: "My dear lady, the opposite would be much worse."

Her straightforward, direct way of putting things, so unusual for a political leader, earned her some enemies among other leaders but made for a refreshing contrast with the hypocrisy and vacuity of the accepted political discourse. At times, she probably overdid it. For example, on that same occasion in Fiesole, during her summing-up of the conference, she came out with the statement: "Civilization is the exclusive prerogative of English-speaking peoples." I was the only non-English, non-American in the room. I looked at John O'Sullivan, who was sitting next to me. He smiled and said, "You have been consigned to barbarism!"

She can also be very kind and thoughtful. When we won the elections in Italy in 1994, she sent me a fax of congratulations. I called her to thank her for her kindness. She gave me her usual pep talk: "You must do for Italy what I did for Britain." I attempted to explain that we were at a disadvantage compared to her. I said: "You had a Constitution that was written in the hearts and the minds of your people. We don't. You had an independent judiciary. We don't. You had a clean and effective civil service. We don't. You had a single party majority. We don't. You had those think tanks, like the IEA, that provided you with the right ideas. We don't."

"However," I added, "we have something which you didn't have." "What's that?" she said. "Your example," I replied.

As to the relative importance of ideas and/or leadership, she gave her own view on the occasion of the celebration of the 30th anniversary of the IEA. After having listened to a series of speeches by distinguished academics, all praising the great importance of ideas, she thus concluded her remarks: "Speaking as the eleventh speaker and the only woman, I hope you will recall that it may be the cock that crows but it is the hen who lays the eggs."
What Can We Learn from Thatcher?

The lesson to be drawn is quite simple and not particularly encouraging: Mrs. Thatcher's success owes much to the intellectual revolution in economic theory. She did not invent anything new; there was nothing novel or original in her economic policies. However, while those ideas had been available for a long time, they had not been translated into policy changes until she came about. It was her leadership, courage, determination, and intellectual integrity that allowed those intellectual insights to inspire actual economic policies and change Britain."

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