Friday, 20 May 2011

Heretical Truths about Thatcherism.

The rise of monetarism came in the 1970s when Keynesian economists were baffled by stagflation. The orthodoxy of the day was rattled by the continued rise of inflation, alongside a rise in unemployment, and monetarism provided a theoretical answer to the crisis. It was the consequence of spending more than we produced and inflation was caused specifically by too much money chasing too few goods. The transition from Keynesianism to monetarism came before Thatcher, Callaghan began to use the theory to explain the problem of inflation that had wracked Britain since the war. The purpose of economics began to shift from job creation to combating inflation as Britain accepted a loan from the IMF in 1976, which stipulated huge cuts to public expenditure and deficit reduction. As a result interest rates were lowered, the value of the pound increased and the balance of trade began to improve because of new oil revenue. The crisis forced Labour to consider scrapping nuclear weapons.

In 1979 Callaghan was booted out of office and Margaret Thatcher was elected Prime Minister. Inflation had risen over 10% and unemployment was continuing to rise, monetarists argued that higher interest rates and lower spending would lead to less inflation. By 1980 under Thatcher the cuts to public spending led to even higher unemployment and inflation doubled in spite of the fiscal squeeze. By 1981 interest rates had to be lowered in order for the exchange rate to be reduced, the hope was that this would lead to an increase in exports. Thatcher opted to cut even more in order to keep up appearances with monetarism, which it could not publicly dump for the sake of rational expectations. These expectations demanded consistency of government, as a way of maintaining the illusion of integrity and avoiding bad press. As a consequence of rising unemployment, as well as the strain of inflated prices on citizens, the country was shaken by riots.

When inflation finally began to fall the money supply was actually still rising and it could be that the rise in unemployment led to the fall in inflation. In 1982 it appeared as though the Thatcher government was walking into the election equivalent of an abattoir, wherein the Thatcher cabinet would have been slaughtered for the economic destruction of the preceding 3 years. The Falklands War is what doubled the popularity of Thatcher, which left 910 dead, as the rising tide of nationalism gave them something to ride into the election against socialist Michael Foot. The War became a football match with guns, the people were mobilised through 'national pride' to save Thatcherism. In a post-colonial era of decline Britain was particularly vulnerable to despair, especially given the reliance on tradition to uphold the fabric of society rather than a constitution as in the US. So it should be a surprise that the Thatcherites were able to surf on a tidal wave of jingoism into a second term in 1983.

Triumphantly the Thatcherites then moved to privatise gas, electricity, telecommunications, steel and the airline. The government effectively declared war on the unions, the point at which the ideological battle shifted in full to the favour of government was when the Miners' Strike was finally brought to an end in 1985 with the defeat of the NUM. The concerted effort to crush the unions went as far as M15 surveillance . The impact of the defeat could be seen by 1990 when the working-class were subject to some of the biggest wage-cuts in the world and the number of poor in Britain had increased by 100% throughout the Thatcherite era (1979-1997). The gap between rich and poor peaked in 1991, though Britain is still far more unequal than it was in 1968 and the impact of inequality has been seen in various forms of social deprivation. It has been estimated that the costs of the increased inequality and unemployment to lie within the range of 5% to 8% of GDP, compare this to the productivity (which increased alongside wages before Thatcher) gains of 5% to 10% under Thatcher.

Inflation finally dropped to 3% in 1986, but monetarism had been quietly discarded by the Thatcherites long before. It was in 1985 that Margaret Thatcher claimed to have never subscribed to some of the theories of Milton Friedman. The theories of monetarism would be replaced by Goodhart's Law which held that if the government ever adopted a particular theory or doctrine as a basis for policy, the relationship between theory and policy would quickly fall apart. The government was incapable of creating a better world, therefore it should not disturb the markets too much and leave individuals to make the best of the situation. Later the destruction caused by the policies would be "justified" by a boom which ultimately led to the Crash of 1987 and ended in the recession of the 1990. The financial crisis in 1987 came just after the election and Thatcher was safe until 1990, when events would lead to her being ousted so that John Major could lead the Tories to victory once more in 1992.

The neoliberal theories of Milton Friedman came to influence policy and were the expression of a convergence of particular interests manifested in government, in order to devastate the working-class that had done so well in the post-war settlement. By raising unemployment and crushing the unions Thatcher succeeded in creating a reserve army of labour that would be desperate enough to work for stagnant wages. Similarly the work of Adam Smith was used as window-dressing. This can be seen in 1990 when some of the biggest wage cuts hit the working-class in Britain, which could generate greater profits. The selling-off of council houses and the deregulation of finance opened up possibilities of investment for the future, just as manufacturing began to go into decline, where money could be made from money and not wasted on unprofitable ventures. This has been the source of boom years ever since the late 80s, property and finance have taken the place of industry.

The boom of the 80s was a result of the deregulation of finance, a huge increase in arms deals and a property boom created by the selling-off of council houses. The low interest rates were conducive to the property boom. The tax-cuts increased the wealth of the richest 10% of the population, majority of investments were made in property and finance where there were stupendous profits to be made at the time. Manufacturing went into decline and employment in that area declined by 30% between 1979 and 1990. Though it should be noted that the boom had little to do with Thatcherite cuts, the recovery had a lot to do with international events as there was a supply-side stimulation in America that helped keep Britain afloat for a while. Similarly the deregulation of finance in Britain coincided with a new regime of accumulation kicking off in South-East Asia. It was only a minority of people who benefited from the boom, rates of growth might have fluctuated around and above 5%, but the growth was not unprecedented by historical standards.

The fall of Thatcher in 1990 came after the Poll Tax demonstrations descended into riots in Trafalgar Square, unemployment reached around 7%, working-people had been by some of the biggest wage cuts in the world as inflation began to rise into double figures once again. Without the leader that had never been as popular as her own party the Conservatives secured one last victory and remained in office until 1997. After 18 years of Thatcherism the public expenditure had returned to slightly over 42% of GDP, which is what it was when she took over. Just as the rates of growth had not been spectacular (though profits were stupendous) nor was the "reduction" of debt and the "rejuvenation" of Great Britain, which was left broken and unequal. The images of the 80s as crass and flamboyant, that we all know, represent the zenith of Thatcherism which had made a minority of citizens very rich from privatisation, deregulation of finance and the exploding cost of real estate.

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