Margaret Thatcher (Part 3)

Margaret Thatcher is one of my heroes and I have a three part series on her I am posting. “What We Can Learn from Margaret Thatcher,”By Sir Rhodes Boyson and Antonio Martino, Heritage Foundation, November 24, 1999, is an excellent article and here is a portion of it below:

The Role of Ideas 6

The epochal change in public policy began as an intellectual revolution. This is not as obvious as it sounds. On the practical importance of their ideas, economists disagree. As is well-known, Keynes was very sanguine: “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.”7 Alfred Marshall, his Economics teacher, on the other hand, was convinced that economists should preach unpopular truths:

Students of social sciences must fear popular approval, evil is with them when all men speak well of them…. It is almost impossible for a student to be a true patriot and to have the reputation of being one at the same time.8

This was also Hayek’s view, when he stressed that the economist “must not look for public approval or sympathy for his efforts”9 Finally, George J. Stigler was convinced that the practical relevance of the Economics profession’s intellectual output was minimal: “economists are subject to the coercion of the ruling ideologies of their times.”10

I tend to disagree with Stigler on this point.11 There is no doubt in my mind that “the Great U-turn” of our times has been initiated by a legendary revolution in economic thinking. From the perspective of the ideological confrontation, I am convinced that — thanks to the work of the great liberal scholars of this century — we live in one of the happiest times in the contemporary history of mankind. It seems to me that never before has the case for freedom been more thoroughly analyzed and better understood. Also, more people are aware of the importance of freedom on a theoretical level today than at any other time in the past 50 or 100 years.12

The “British Disease”

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.

This appalling record seemed paradoxical to the late Mancur Olson: “Britain has had more giants of economic thought than any other country,” and “[m]ost of the great early economists, and certainly men like David Ricardo and John Stuart Mill, were classical liberals.” Their work had a definite impact on British public opinion: “classical liberalism was more popular in 19th-century Britain than…in most countries of continental Europe.” And yet, “Britain has suffered from the `British disease’ of slow growth.” He concluded: “[W]e need something besides the level of economic understanding to explain economic performance.”16

It seems to me that Olson makes a mistake in lumping together the British economic thinkers of the 18th and 19th centuries with those of the 20th. First of all, while it is hard to dispute British supremacy in economic thought in the 18th and 19th centuries, I very much doubt that the same can be said of British economists in the 20th century. There have been notable exceptions, no doubt, but it seems to me that, compared to the previous centuries, the 20th century has been one of mediocrity as far as British economic thinkers are concerned.

Nor am I impressed by John Maynard Keynes — whom Olson quotes as evidence that British supremacy in economic theory continued in the 20th century — because his influence, in my view, has been disastrous. Britain and the world would have definitely been better off had Keynes devoted his tremendous intellectual powers to some other subject.

Finally, the majority of the Economics profession in Britain after Keynes’ death in 1946 has been notable for its mediocrity and its contempt for the free market: Let’s not forget the manifesto of 364 British economists against Mrs. Thatcher’s policies. Contrary to what Olson thought, the “British disease” was another example of the power of ideas, of wrong ideas: The anti-capitalistic consensus among British economists has undoubtedly contributed to Britain’s decline.17 In particular, let us see why Britain’s stagflation in the 1970s and her relative economic decline did not take place despite the influence of John Maynard Keynes, but because of it.

Keynesianism

Following Keynes’ teaching, British economists were convinced that inflation was the unavoidable price of economic growth and a cure for unemployment.18 They also believed that it was possible to reduce interest rates through monetary expansion and that the economy could be “fine tuned” in the short term, thus avoiding the ups and downs of the economic cycle. Furthermore, inflation was not considered a monetary phenomenon but the result of excessive increases in wages due to what Samuel Brittan calls “union pushfulness,” so that in order to combat inflation, one had to resort to wage and price controls, and come to terms with the unions, while at the same time pursuing expansionary monetary and fiscal policies to stimulate demand.

All of this sounds absurd today, and it certainly is, but it was the general Keynesian consensus at that time, shared by the Labour Party and to some extent also by the Tories. Everybody seemed to agree to the same Keynesian concoction: easy money, high taxation, deficit spending, and wage and price controls (incomes policy, as it was called in England).

Needless to add, all of these views have succumbed to the empirical evidence and the theoretical analyses of the last 30 years. The heroes of the counter-revolution are the great liberal thinkers I mentioned before: Milton Friedman, Friedrich Hayek, etc. We now know that there is no evidence that economic growth inevitably involves price inflation.19 The idea that one can reduce unemployment through inflation is thoroughly discredited. Only an accelerating inflation could keep unemployment below its “natural rate,” but even that unappetizing possibility is dubious.20

Finally, as for the desirability of wage and price controls, we now know that the remedy was not only ineffective but also positively harmful.21 A side effect of these policies was that of making the problem of the excessive power of labor unions much worse. Britain in the 1970s confirmed the wisdom of Henry Simons who, in a famous 1944 article,22 had denounced the danger of labor unions:

labor monopolies…once established…enjoy an access to violence which is unparalleled in other monopolies…. Unions may deal with scabs in ways which make even Rockefeller’s early methods seem polite and legitimate. They have little to fear…from Congress or the courts.23

It may be argued that Simons, writing in the U.S. in the 1940s, was slightly too pessimistic. His analysis, however, describes perfectly the U.K. of the 1970s. Keynesianism had convinced the overwhelming majority of politicians of both parties that there was no alternative to a policy aimed at appeasing the unions, while at the same time following an expansionary demand policy, through easy money and budget deficits. Wrong ideas resulted in stagflation — slow growth, unemployment, and inflation — and a rapid growth of the size of government.

Ideas and Interests: The Case of Britain

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 important…is 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

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