Thirty years ago this month, former British prime minister Margaret Thatcher came to power. Although precipitated by local conditions, the Thatcher revolution, when paired with the policies of former US president Ronald Reagan, became an instantly recognizable global brand for a set of ideas that inspired policies to free markets from government interference.
Three decades later, the world is in a slump and many people attribute the global crisis to these very ideas. Indeed, even beyond the political left, the Anglo-American model of capitalism is deemed to have failed. It is held culpable for the near financial meltdown. But 30 years of hindsight enable us to judge which elements of the Thatcher revolution should be preserved and which should be amended in the light of today’s global economic downturn.
Most obviously in need of amendment is the view that minimally managed and regulated markets are both more stable and more dynamic than those subject to extensive government intervention. The Thatcherite assumption, in other words, was that government failure is far more menacing to prosperity than market failure.
This was always bad history. The record shows that the period 1950 to 1973, when government intervention in market economies was at its peacetime height, was uniquely successful economically, with no global recessions and faster rates of GDP growth — and growth of GDP per capita — than in any comparable period before or since.
One can argue that economic performance would have been even better with less government intervention. But perfect markets are no more available than perfect governments. All we have are comparisons between what happened at different times. What these comparisons show is that markets plus government have done better than markets minus government.
Nevertheless, by the 1970s the pre-Thatcher political economy was in crisis. The most notorious symptom of this was the emergence of “stagflation” — simultaneously rising inflation and unemployment. Something had gone wrong with the system of economic management bequeathed by John Maynard Keynes.
In addition, government spending was on the rise, labor unions were becoming more militant, policies to control pay kept breaking down and profit expectations were falling. It seemed to many as though government’s reach had come to exceed its grasp, and that either its grasp had to be strengthened or its reach had to be reduced. Thatcherism emerged as the most plausible alternative to state socialism.
Nigel Lawson was Thatcher’s second chancellor of the exchequer. Out of the government’s anti-inflationary efforts emerged the “Lawson doctrine,” first stated in0 1984 and broadly accepted by governments and central banks ever since.
“The conquest of inflation should ... be the objective of macroeconomic policy. And the creation of conditions conducive to growth and employment should be ... the objective of microeconomic policy,” Lawson said.
This proposition overturned the previous Keynesian orthodoxy that macroeconomic policy should aim at full employment, with the control of inflation left to wage policy. Yet, despite all the “supply side” reforms introduced by Thatcherite governments, unemployment has been much higher since 1980 than in the 1950s and 1960s — 7.4 percent on average in the UK, compared to 1.6 percent in the earlier decades.
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