A Rustproof Iron Lady

Journal of the History of Economic Thought, Vol. 24, No. 3, September 2002, London

How will history judge former Prime Minister Margaret Thatcher’s changes to British public policy in the 1980s? It is already clear that 21st-century commentators will be kinder than her contemporaries were. When the Conservative Party lost the general election to the Labour Party in 1997, The Independent newspaper carried the banner headline, "Everything has changed." In fact, surprisingly little changed. Labour did not reverse Thatcher’s most distinctive reforms: privatization, reduction of trade unions’ power, and elimination of subsidies to inefficient industries. Neither did it reintroduce exchange-rate controls or the price and incomes policies her government scrapped in 1979.

Rather, the Labour government maintained existing income tax rates and endorsed Thatcher’s macroeconomic framework, wherein both monetary policy and a prudent fiscal policy were aimed at combating inflation. Astonishingly, newspaper columnists now refer to Labour Prime Minister Tony Blair as "Thatcher’s heir," and he does not seem embarrassed by this description.

The September 2002 issue of the Journal of the History of Economic Thought carries a set of articles on "the political economy of Margaret Thatcher." Given the extent of acceptance by former Thatcher opponents, the papers seem curiously dated and negative in tone. Roger Backhouse, a Birmingham University economist, provides the least hostile assessment. Many British economists in the early 1980s thought both Thatcher and her monetary approach to inflation were mad, and 364 of them wrote a letter to The Times in 1981 saying as much. Backhouse is more balanced. He sees the radical post-1979 changes as an intelligible response to the policy failures and macroeconomic instability of the 1970s. He also welcomes the increasing productivity of Britain’s manufacturing sector during the 1980s.

But his discussion of monetary policy — supposedly such a crucial area of what Thatcher wrought — is too close to the conventional wisdom. It is therefore uninteresting and largely wrong. Backhouse argues that the government abandoned money supply targets because of the difficulty in hitting them. This comment is reasonable, but he is quite wrong to say that "monetary aggregates lost their significance." As Geoffrey Howe, Thatcher’s first chancellor of the exchequer, noted in his own memoirs, the money targets were met in his last year as chancellor (1983), and inflation rates had come down as planned. Unfortunately, when Nigel Lawson (Thatcher’s second chancellor) dropped the broad money target in late 1985, money supply growth in the following year accelerated sharply. Thatcher famously insisted that she was "not for turning." But the sad fact is that Thatcher — or, at any rate, her ministers — did make a U-turn, allowing rapid money supply growth and therefore stimulating a silly boom and causing inflation to rise to 10 percent in 1990.

The tragedy of monetary mismanagement in the late 1980s can be seen as a sequence of squabbles between Thatcher and Lawson. But it is better interpreted as the revenge of the 364 — that is, a complete lack of understanding among British economists of how money supply and the economy interact. Backhouse also misses this connection.

In another article, Joel Krieger, a Wellesley College political scientist, looks at Thatcherism from a sociological standpoint. Krieger seems nostalgic for the representation of trade union and senior business people in the high-level corporatist bargaining seen in Britain in the 1970s. Perhaps he thinks that the centralized determination of prices and incomes is the best way to bring down inflation. Someone needs to tell him that no one of any political significance in Britain today — including Blair — shares this nostalgia. For all the problems of the 1980s, those years proved Thatcher was right on one point. Monetary policy, not incomes policy, is the right way to control inflation.