Michael Hudson: Thatcher’s Legacy of Failed Privatizations

Yves here. Be warned this piece is long but very much worth your time, since it demolishes the myth of the attractiveness of privatizations by looking at its record in England, where it was first undertaken on a widespread basis.

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is “The Bubble and Beyond.”

As in Chile, privatization in Britain was a victory for Chicago monetarism. This time it was implemented democratically. In fact, voters endorsed Margaret Thatcher’s selloff of public industries so strongly that by 1991, when she was replaced as prime minister by her own party’s John Major, only 35 percent of Britain’s voters supported the Labour Party – half the proportion registered in 1945. The Conservatives sold off public monopolies, used the proceeds to cut taxes, and put the privatized firms on a profit-making basis. Their stock prices rose sharply, making capital gains for investors whose ranks included millions of Britons who had been employees and/or customers of these enterprises.

Yet by 1997 the Conservatives were voted out of office by one of the largest margins in their history. What concerned voters were the results of privatization that Mrs. Thatcher had not warned them about. Prices did not decline proportionally to cost cuts and productivity gains. Many services were cut back, especially on the least utilized transport routes. The largest privatized bus company was charged with cut-throat monopoly practices. The water system broke down, while consumer charges leapt. Electricity prices were shifted against residential consumers in favor of large industrial users. Economic inequality widened as the industrial labor force shrunk by two million from 1979 to 1997, while wages stagnated in the face of soaring profits for the privatized companies. The tax cuts financed by their selloff turned out to benefit mainly the rich.

Opinion polls showed that voters had opposed privatization at the outset (as did the press and many Conservative back benchers), but the Conservatives pointed out that Tony Blair rode to victory in part by abandoning “Clause Four” of the Labour Party’s 1904 constitution, advocating state control over the means of production, distribution and exchange. Most voters wanted tighter regulation in the public interest, but not a return to state ownership. On the other hand, they feared the prospect of selling off the post office, the BBC and the London tube (subway) system.

Nearly everyone agreed that companies were run differently in private hands than was the case under public ownership, even when the same managers remained in charge. Privatization was praised by Mrs. Thatcher and her allies – and blamed by many others – for managing these companies to generate capital gains for stockholders rather than to serve broader social ends.

Many people did not believe that essential public-sector industries should be run as commercial gain-seeking enterprises. Among the norms of public service, making a profit certainly was not one of the yardsticks used by the bureaucracy put in charge of these companies. Public-sector labor unions aimed more at maintaining employment than at producing revenue for the state as owner. The purpose of taxes, after all, was to subsidize basic services to the population.

This attitude had long been shared by many Conservatives, as well as by Labour. When Benjamin Disraeli created the Conservative Party in its modern form in the mid-nineteenth century (replacing the old royalist Tory Party), his major ideological adversary was not socialism but the free-trade liberalism that led Britain to repeal its protectionist agricultural tariffs (the Corn Laws) in 1846. Indeed, as a novelist Disraeli sought to expose the horrors of unbridled laissez faire. In Sybil, or The Two Nations, written in 1845 (three years before the Communist Manifesto), he described the rich and the poor as constituting “two nations between whom there is no intercourse and no sympathy, and . . . who are not governed by the same laws.” His novel assigned the loftiest ideals to Sybil, the daughter of a factory worker, but placed his hopes in a morally regenerate aristocracy. And in due course, Disraeli’s social welfare legislation, especially the public health system introduced from 1874 to 1881 (he said that his motto was Sanitas sanitatum, “Health, all is health”), helped the Conservative Party evolve as a nationalist and sometimes “state socialist” party, especially after World War II under Harold Macmillan in the 1960s and even Edward Heath in the ‘70s.

But it was the Labour Party that pressed for nationalization of the major industries. Fabian socialists such as Sydney and Beatrice Webb, George Bernard Shaw and other wealthy opinion-makers typified the degree to which many of Britain’s leading upper-class intellectuals supported nationalization as a cure for the ills of industrial capitalism. Indeed, the aristocracy underwent a schooling in personal economic values that resembled of those of ancient Greece and Rome in their disdain for the idea that one’s life should be devoted to so lowly a purpose as commercial gain-seeking.

Britain’s government was controlled about half of the postwar period by the British Labour Party, which in turn was controlled by the trade unions. This gave the unions more political power than in any other country. Conversely, the Labour Party’s strength was based on the unions. Most workers employed by the public utilities and other government enterprises belonged Transport and General Workers’ Union (TGWU). Although the number of individual party members was relatively small, all of the TGWU’s approximately one million members were deemed to belong simply by virtue of their union membership. The union’s general secretary cast their votes as a bloc at the Labour Party’s annual convention.

Trade unions were given broad privileges in 1906, subsequently restricted by the Trade Disputes Act of 1929 passed largely in retaliation against the 1926 general strike. This act made it mandatory for union members to opt in to the payment of the union’s political levy to the Labour Party. After World War II the rule was changed to give unions a right to opt out of paying the political levy. This had the ironic effect of placing the Labour party finances more firmly in the hands of the union leaders. At the Labour Party conferences these leaders voted on behalf of all their members who had paid the levy. The TGWU thus was placed in a position to cast one million of the party’s roughly six million votes.

Labour endorsed the nationalization of industry so as to serve the interests of workers. As noted above, Clause Four of its 1918 constitution (added in 1919 in the aftermath of World War I) called for the state to control the means of production, distribution and exchange. In 1945 the incoming Labour government nationalized the gas and electric utilities, as well as most transport lines that remained municipally or privately owned. Nearly all were run at a loss, which duly was covered by public subsidy.

World War II had been the great catalyst for faith in public ownership and national planning. Some four-fifths of Britain’s gross domestic product (GDP) was commandeered by the government. By the end of the 1940s most utilities and natural monopolies were in public ownership at the national or local level, or (as in the case of water) were held by public companies with restricted returns for the owners of their equity shares. The coal mines, gas and electric utilities, road transport and railways all were nationalized. The foundations and basic cost structure of Britain’s economy thus were shaped by these public utilities, public housing and socialized medicine, not to mention British Petroleum (BP) and, in time, the government’s North Sea oil holdings. And in due course the automotive, steel and aircraft sectors were rescued from collapse by being nationalized, henceforth to be run at heavy losses subsidized by taxpayers.

Clement Atlee’s Labour government of 1945-51 cited five reasons for nationalizing British industry. As Mrs. Thatcher’s Treasury Chancellor Nigel Lawson. has summarized, the first reason was to improve industrial relations. In practice, he retorted, this meant caving in to the trade union leaders, especially inasmuch as a second objective of postwar nationalization was to ensure full employment. The effect was to inflate wage rates through make-work programs and featherbedding.

A third reason for nationalization was to maximize productivity gains, by removing absentee rentier owners from the scene. The actual result, pointed out the Thatcherites, was an uneconomic management of the labor force. Nationalization also had focused on regulating natural monopolies in the public-interest – that is, by politicians – by administering prices and providing service on a basis other than profit objectives. The monetarists would argue that straight profit objectives were more efficient.

A fifth argument for nationalization had been the strongest. It was intended to replace short-term profit maximization by wider national and social priorities. But governments tend to live just as much in the short run as do corporate managers. More to the point, politicians seek to win votes by placating labor on the eve of elections. “The nationalized industries,” argued Lawson, “so far from improving industrial relations, proved the source of the biggest threat to industrial peace – doubtless because of the combination of centralized union power and recourse to the bottomless public purse.” At least, this argument was more understandable in 1979 than it had been in 1949.

If it seemed that government enterprise could succeed where private management failed, the reason was to be found largely in its claim on the public purse. The losses run up by these enterprises were financed by income taxes whose rates for business and the upper brackets were among the world’s highest, as were inheritance taxes. Indeed, many considered Britain to have been turned into Europe’s most socialist economy after 1945. Yet the objective seemed not to be the provision of efficient service at world-class levels. Public housing, originally a showpiece, deteriorated into what some called “modernist trash,” while the telephone system remained archaic. Public bureaucracies came to be seen as personal baronies whose administrators made little attempt to apply business methods or cost accounting. Yet their book cost far exceeded the stock-market valuation of private companies.

Most Conservatives acquiesced in the idea of national planning as the government increased its share of the economy from 40 per cent to over 60 per cent by the late 1970s. As Mrs. Thatcher observed, “It was, after all, none other than Harold Macmillan who in 1938 proposed in his influential book The Middle Way to extend state control and planning over a wide range of production and services.” Most social legislation since World War II was bipartisan, including the new National Health Service and the National Insurance legislation of 1946. Running a public enterprise was prestigious for many members of the upper classes. And the government was willing to bail out industries when they went bankrupt, with full compensation to investors – something that the market could not have done.

Margaret Thatcher’s Monetarist World View

Mrs. Thatcher has described how her upbringing living over her father’s grocery store in the small town of Grantham shaped her impressions of how society worked. “There is no better course for understanding free-market economics than life in a corner shop.” It was an experience that inoculated her “against the conventional economic wisdom of post-war Britain,” that is, the faith in government planning and the disdain felt among the literati for entrepreneurial values. Hers was the world of “Methodism, the grocer’s shop, Rotary and all the serious, sober virtues cultivated and esteemed in that environment.”

This Babbitt-like view of the world did not prepare her to think about the economic impact of debt, a serious blind spot for nearly all monetarists. She confessed that her idea of debt management was based balancing the family checkbook, as if this was a proper analogy for public finance and government control of the printing press and a central bank to create money at will. To Mrs. Thatcher a government deficit simply meant more debt, and hence more taxes to be paid. “Thrift was a virtue and profligacy a vice,” she wrote. Taxes were “a deterrent to work,” not the means by which vital public services were supplied. It was as if such services had no economic value. Income policies were epitomized by the undeserving poor living better on state subsidies in public council housing than hard-working families who struggled to pay their rent or meet their mortgage payments. This was a view reflecting middle class resentment against subsidized services extended to families lower on the economic scale.

One does not learn much about macroeconomics from a store. A shopkeeper buys what already has been produced; how it is made is not of much concern. In fact, Mrs. Thatcher’s world view was naturally akin to that of Chicago School monetarism. The focus was simply on how to undercut the prices of one’s competitors, preferably by cutting taxes and the costly social welfare schemes on which they were spent.

The ideological pedigree for the Chicago School’s narrow-minded economics was provided by Frederick Hayek and Milton Friedman. Hayek’s most famous book, The Road to Serfdom (1944), opposed any and all government planning in principle as leading inevitably to either fascist or Communist authoritarianism. When Keith Joseph gave Mrs. Thatcher a copy of this book she readily responded to his hard line. “Hayek saw that Nazism – national socialism – had its roots in nineteenth-century German social planning. He showed that intervention by the state in one area of the economy or society gave rise to almost irresistible pressures to extend planning further into other sectors. He alerted us to the profound, indeed revolutionary, implications of state planning for Western civilization as it had grown up over the centuries.” This would underlie her opposition to European unification under the Maastricht Treaty.

To most people the government appeared as the benign sponsor of the welfare state that emerged from World War II’s mobilization. But by the late 1970s the sclerosis of public industries threatened to make Britain economically ungovernable. In these circumstances the Chicago School’s anti-statism found an increasingly fertile intellectual ground.

It was natural for self-made people such as Margaret Thatcher to prefer a private-sector market economy to a state bureaucracy. Private enterprise beholden to shareholders hardly can afford patronage and cronyism. Of former Conservative Prime Minister Harold Macmillan’s broad and inclusive politics, she acknowledged disdainfully that “The traditional economic liberalism which constituted so important a part of my political make-up . . . was often alien and uncongenial to Conservatives from a more elevated social background.”

She and her supporters stood more in the tradition of the old Liberal Party, dressing up the ideas of Adam Smith in monetarist Chicago garb, seeing in government planning a road to serfdom at worst, and incompetence at best. She warned against the dangers of inflation spurred by government borrowing, but said little about private debt.

Mrs. Thatcher thus was ideologically harder than her pragmatic Conservative predecessor Edward Heath, and represented a break from her party’s traditions. She admired what the Chicago Boys had done in Chile, and would find kindred monetarist souls among Russian “reformists”. “Let us glory in our inequality,” she preached at one banquet, explaining that more inequality meant that more wealth was being created by “savers” at the top of the economic pyramid, presumably to trickle down via new direct investment. However, she recognized that such policies could be introduced in England only by an elected government. The task she set before herself was to win British voters to support her reforms voluntarily, for imposing them by armed force was out of the question.

It was taken as a matter of faith that financial gains would be invested in upgrading the enterprises once they were privatized, installing new machinery and hiring more labor to provide better service while increasing output at falling prices. Workers were invited to think of themselves as finance-capitalists-in-miniature, earning dividends and capital gains by investing their savings in the shares in these companies. This was the essence of Mrs. Thatcher’s “popular capitalism.” In her pursuit of these objectives the Iron Lady became Britain’s first prime minister to be elected for three consecutive terms, to retain this office for over ten consecutive years, and to have an “ism” named after her.

But first, she had to convince her fellow Conservatives. This became her major initial fight, within her own party.

How British Monetarism Planned the Neo-Conservative Takeover

No economic theory can be promoted successfully today without institutional sponsorship. In America, monetarist ideas were spread by policy institutes such as the Heritage Foundation, the Cato Institute and the American Enterprise Institute. Likewise in England, if the history of privatization is dominated by Margaret Thatcher, her victory was largely a product of British monetarism’s main policy institute, the Centre for Policy Studies (CPS), founded in 1974 by her mentor Keith Joseph (then a Member of Parliament). With Mrs. Thatcher as its President, the CPS used the economic philosophy of Frederick Hayek (the “father of monetarism”) and Milton Friedman to launch the “Thatcher Interlude” that culminated in 1979 with her election as Prime Minister.

Britain could claim the Austrian-born Hayek as one of its own. He had become a British citizen in 1938, and held the Tooke Chair in economics at London from 1931 to 1950. (Ironically, Thomas Tooke was the great anti-monetarist, a century and a half earlier, in the 1830s.) To help spread his political philosophy, he helped create the Institute of Economic Affairs in 1957, the Adam Smith Institute in 1977 (serving as its first chairman), and the Social Affairs Unit in 1980.

Hayek wanted to abandon all public regulatory structures. Followed by Friedman, he argued that all attempts by government to shape markets were doomed to failure. Planning itself was wrongheaded in principle. As Nigel Lawson summarized this philosophy: “Economic planning was both impossible and unnecessary. . . . The price mechanism . . . was a much more efficient means of transmitting consumer wants and needs than the vast bureaucracies of Whitehall and the nationalized industries.”

This view of idealism as serving to strengthen state power enabled the Conservatives to take the moral high ground, Lawson continued, “by elevating private actions above public direction and dismissing ‘social justice’ as both vague and arbitrary.” The only valid idealism was to destroy the state. This could best be done by cutting off the government’s financial taproot, the ability to create the money needed to finance its budget deficits. The alternative to government bureaucracy, Lawson concluded, was to create a new political ideal for capitalism: to turn “profit” and “capitalism” into words of praise; “planning,” “government” and “taxes” became the new terms of invective.

Hayek joined the Chicago economics faculty in 1950, two years after Friedman, who spent 1953-54 in England as a visiting Fulbright Lecturer at Cambridge. At that time, he reminisced (in Capitalism and Freedom), “Those of us who were profoundly worried by the danger to freedom and prosperity posed by the growth of government, the triumph of the welfare state and Keynesian ideas, made up a small minority and we were considered eccentric by the vast majority of our intellectual colleagues.” Monetarism was deemed eccentric because it saw in government only the power to tax and oppress, not to protect and support. (Herman Kahn’s wife, Jane, likes to tell the anecdote of how, Milton Friedman once replied to her when she asked whether social spending on needy children was not be one type of public welfare that was well justified: “Mrs. Kahn, why do you want to subsidize the production of orphans.”) To the monetarists, all socially ameliorative spending appeared only as an economic distortion on the expenditure side, and as a burden on industry on the tax side of the tax-and-spend equation.

Mrs. Thatcher’s truculent Joan of Arc personality found a kindred soul in Alfred Sherman, CPS’s Director of Studies, whom she described as an ex-Communist who brought a “convert’s zeal” to the monetarist cause. Like so many former left-wingers, he seems never to have forgiven the working class for not following his early entreaties. And much like a spurned lover, he got his revenge as a Tory. But he retained from Marxism an awareness of economic theory’s political service as apologetics for one class or the other. He found in monetarism not so much an objective analysis of money and credit as a means of blaming inflation on government spending. Cutting off the government’s ability to run into debt would leave the power of private capital (“the market”) to take its place.

If Sherman was the ideological gadfly, Mrs. Thatcher was the master of political tactics. Her genius lay in seeing that public bureaucracies were ripe for the plucking, along with the Keynesian macroeconomic theory that served as their intellectual foundation. Most Britons believed that once a path was embarked upon, it could not be changed, to say nothing of being diametrically reversed. The denationalization of industry appeared politically impossible. Indeed, Labour governments believed they could bring one sector after another into the public domain. To Mrs. Thatcher this was the road to serfdom, and she sought to reverse the trend. She alone had the confidence to go on the offensive rather than passively decrying the trend towards larger public control of the economy. It was largely a result of her initiative that Britain, the nation with Europe’s strongest social democratic tradition and the most highly developed public sector, became the first to reverse what seemed initially to be an inexorable trend toward greater state control.

The Monetarist Attack on Full-Employment “Demand Management”

Mrs. Thatcher, Keith Joseph, Alfred Sherman and Nigel Lawson challenged the idea that economies could be managed by income policies aimed at achieving full employment. This objective, voiced by John Maynard Keynes in the 1930s in his General Theory, had become political orthodoxy throughout most of the world by the 1950s and ‘60s, and was endorsed both by Conservatives and Labour.

In America, the (“Full”) Employment Act of 1946 had replaced what Marx called the chronic “reserve army of the unemployed” by employment policies aimed at absorbing surplus labor through public spending. This policy met its Waterloo at the hands of Gardner Ackley of the Council of Economic Advisors and Robert McNamara, who tried to calculate just how much war America could afford, and indeed how much was needed to create “effective demand.”

In England, Mrs. Thatcher and her allies opposed Keynesian income policy on the ground that it supported wages (and hence, priced British goods out of world markets) simply to create “demand,” without regard for productivity. The achievement of “full-employment stability” was illusory, the monetarists accused, for it entailed monetary instability. Acting as the employer of last resort (or injecting enough “effective demand” to ensure full employment), governments created inflationary pressures by monetizing public debts. The ensuing inflation threatened bondholders and hence deterred their motivation to save, by reducing the purchasing power of their rentier income. The tacit assumption was that their “saving” would have funded new direct investment and employment rather than real estate or stock market speculation in assets already in place.

The major backers of monetarism duly became the rentier interests (banks, insurance companies and other institutional investors, as well as wealthy coupon clippers) who feared seeing the value of their bonds, loans and other claims on the economy’s wealth eroded by inflation. It was not hard for monetarists to show that their self-interest lay in backing an economic doctrine which depicted governments as being inherently inefficient, wasteful and/or corrupt, dominated by vested interests such as the labor unions. The Thatcherites argued that wherever public enterprise played a major role, it suffered from bureaucratic inefficiency and waste. Decision-making by entrenched constituencies (the labor unions in Britain, party members in the USSR and Argentina, and campaign contributors in the United States and Japan) led publicly owned companies to be managed uneconomically.

The way to stop this process was to turn off the monetary spigot which funded public spending. Contrary to Keynesian prescriptions, the monetarists argued, governments should limit their regulatory activity to control over the money supply, increasing it at a constant rate. They could do this only by not running into debt in the pursuit of full employment programs and other social spending. In sum, whereas Keynes had provided a rationale for government planning to sustain full employment, with an inflationary bias that he welcomed as leading to the “euthanasia of the rentier class,” monetarism took the side of creditors in urging fiscal austerity of the type imposed by the IMF on debtor countries.

Inverting Lenin’s view of governments as being the board of directors for the ruling class, the Thatcherites depicted government (at least Labour Governments when in power, which was about half the time under Britain’s two-party system) as the Board of Directors of the labor unions. They argued that industrialists could not manage in the face of unequal competition with the unions. Creditor-oriented monetarism thus merged with free-market economics of a particular kind. A Keynesian “market,” the Thatcherites accused, was very different from what an ideal market should be. The kind of competitive market that union leaders wanted was one of low unemployment conducive to wage-push inflation. For the Thatcherites, creating a “competitive market” and price stability became euphemisms for breaking trade union power.*

Creating a Populist Opposition to Public Spending

Monetarists recognized that in order to reduce taxes (without increasing the public debt), it was necessary to cut back public spending proportionally. This was, conveniently, part of their plan to scale down government in general. The path of least resistance was for politicians to create a backlash against government waste, and to reduce everyone’s taxes somewhat, while “simplifying” the fiscal system by shifting taxes away from wealth (especially in the finance, real estate and insurance sectors) onto consumers via sales taxes, excise taxes and the value-added tax (VAT).

The biggest problem faced by Mrs. Thatcher in pursuing this regressive fiscal policy was that most voters initially viewed the government as subsidizing essential public services, ensuring economic security and helping families in need. But voters also were taxpayers. Mrs.Thatcher played on their resentment against public subsidies to those who were less hard working (i.e., poorer) than themselves. Seeking to attract voters to her cause through their perceptions of the existing system’s unfairness and visible inefficiencies. Although most came from wage-earning families and their natural sympathies lay with labor, she was able to denounce trade unions for their featherbedding and extortionate wage demands.

In sum, Mrs. Thatcher made no apology for fighting against tax-and-spend policies, trade unions and public ownership. What she challenged was nothing less than her society’s traditional value system. She appealed to the narrowest and most immediate self-interest of voters, not to their idealistic hopes. Her success is reflected in the fact that the 1980s became a decade in which income and property taxes were rolled back and governments began to be downsized not only in England but throughout the world.

Opposition to public spending – and the taxes to pay for it – was fanned by warnings about the dangers of inflation eroding the purchasing power of wages. What was not stressed was that the main source of global inflation was the United States, whose war in Southeast Asia had created a budget deficit and forced the world off gold. America quadrupled grain prices in 1971-72, and OPEC countries followed suit with oil prices. By the end of the 1970s the U.S. Federal Reserve raised interest rates to 20 percent in order to end the inflation by deterring bank lending. This plunged England and other countries into economic crises of their own. Future historians no doubt will find it remarkable that they sought to cope by curtailing their own budget deficits and money supply.

The monetarists viewed inflation as a domestic phenomenon that could be countered by cuts in public spending and general austerity. But their policies only made things worse, by collapsing employment and output. Falling tax revenues pushed government budgets even further into deficit, and rising interest rates increased rather than lowered prices. (Economists call this the Gibson Paradox.) High interest rates collapsed the stock and bond markets, leading to capital outflows and lower foreign-exchange rates. This increased the price of imports, pushing up prices accordingly. But monetarist politicians single-mindedly blamed the inflation on not following their austerity policies even more stringently and not cutting government spending by even more!

What the Thatcherites feared was not so much government as such, but the degree to which the trade union bureaucracy controlled the Labour Party. Like America, Britain was ruled by what was essentially a two party system. And when one party remained in office so long that its vested interests overplayed their hand, the other party was voted in, and typically tried to reverse what its predecessor had done. Labour was bound to come to power every five to eight years or so. Under Britain’s “pendulum politics,” the prospect was for it to act as the arm of the trade unions that made up the bulk of its constituency, and to re-nationalize companies that the Conservatives had denationalized.

At the Centre for Policy Studies, Keith Joseph stressed in a 1976 pamphlet, Monetarism is not Enough, that monetary deflation by itself could not solve Britain’s problems. Workers had to be laid off. But Labour’s featherbedding practices blocked the needed downsizing. Indeed, union power was strongest in government departments and public enterprises. To be run efficiently, these had to be shifted to non-union labor. This perception helped promote the privatization of key public industries and government operations.

Mrs. Thatcher’s Anti-Union Strategy

After reducing taxes on wealth and fighting inflation by cutting back government, the monetarist objective was nothing less than to destroy British trade union power. Mrs. Thatcher nurtured a popular reaction against the unions, choosing her battles carefully. Biding her time so as not to alienate public opinion, she waited for the unions to misplay – and then acted with tactics planned in advance both from a legal and public relations vantage point.

By the time her tenure as prime minister ended, Mrs. Thatcher had carried through her program, hinted at already in the late 1970s (see Thatcher 1995:424f.). The 1988 Employment Act gave union members the right not to join in strikes their unions called without holding a ballot. The 1990 act, she wrote, “concluded the long process of whittling away at the closed shop,” by forbidding unions from excluding non-union workers from being hired.

Already in the aftermath of the 1974 coal strike, Edward Heath’s government had scaled back union immunities from law suits making it a legal tort – that is, an actionable offense, punishable by fine – for unions to picket or boycott suppliers (or customers) of companies being struck. Monetary judgments henceforth could be levied against the unions.

Mrs. Thatcher also hit upon the strategy of insisting on union democracy as a ploy to counter hard-line union leaders. The traditional British procedure was for workers to vote for shop stewards (typically the most militant union members) to represent them in casting their votes for the union heads who in turn did the voting for strikes and also wielded power at the Labour Party’s annual convention. Mrs. Thatcher knew that it was much more difficult to frighten these activist shop stewards into submission than to intimidate the rank and file. Her idea accordingly was to insist that all major decisions, above all whether to strike, should to put to a full union vote in open secret-ballot elections. Without this reform, she wrote, “the rest of our programme for national recovery would be blocked. . . . Winning the next [1979] election, even by a large majority, would not be enough if the only basis for it was dissatisfaction with Labour’s performance in office since 1974. Therefore, far from avoiding the union issue – as so many of my colleagues wanted – we should seek to open up debate. Moreover, this debate was not something to fear: the unions were an increasing liability to Labour and correspondingly a political asset to us. With intelligence and courage we could turn on its head the inhibiting and often defeatist talk about ‘confrontation.’”

As one Conservative remarked, “What other right winger would ever have had the cleverness to trust the common sense of the ordinary union member so sincerely? The union bosses were put in an impossible position. As the self-proclaimed tribunes of the workers they could not refuse democracy. They tried to use the argument of the expense of ballots to avoid them, so Maggie said, ‘That’s alright; the government will pay.’ Love her or hate her, one has to admire the accuracy of her perception.”

The unions overplayed their hand in the Winter of Discontent, 1978/79, but the time was not yet ripe for a showdown. “From 1980 we pursued a ‘step-by-step’ programme of trade union reform,” Mrs. Thatcher later reminisced. The 1982 “Tebbit Acts” removed the traditional union “immunities from common law tort action for damages, except for ‘primary’ strikes sanctioned by a majority in secret ballot,” observes one of her advisors, Patrick Minford. This legal chess game set the stage for her to checkmate Arthur Scargill’s coal miners in 1983 (her counterpart to Ronald Reagan’s 1981 destruction of the Air Controllers’ Union), by making union funds subject to awards for damages.

In 1981, Mrs. Thatcher gave into the union rather than engage in a fight she felt she could not win in the public’s eye. She knew just how far she could go up against them, and her sense of timing enabled her to succeed. Her defeat of the 1984-85 miners’ strike (described in the next chapter) effectively cemented the new order. “In 1990, my last year as Prime Minister, the number of industrial stoppages was the lowest in any year since 1935.”

The decline in union power enabled the privatized companies and others to downsize their labor force. Between 1979 and 1986, union membership fell by three million persons. Two million industrial workers were put out of work, including over a million miners. “The new service industries, such as computer software and biotechnology,” Mrs. Thatcher wrote in 1995, “are in any case not easily unionized, and so not held back in the application of new techniques.”

A Conservative politician summed up matters: “The original purpose of privatization was to break up Trades Union Monopsony rather than manufacturer/utility Monopoly.” The politicians who joined Mrs. Thatcher’s inner circle focused on labor’s cost-push inflation, to the extent that British wage rates (and hence, product prices) were negotiated between strong-willed union leaders and (so Mrs. Thatcher claimed) weak-willed government bureaucrats.

The Conservatives depicted their warfare against the unions as being waged not against labor, but against adventurist opportunists using their constituencies for their own glory. Even communists such as Leon Trotsky had attacked craft unions such as America’s American Federation of Labor as representing particular layers of the labor force acting in their own narrow self-interest. Mrs. Thatcher subtly froze the union leaders out of the policy picture simply by ending the traditional ritual of beer and sandwiches in Downing Street. The trade union bosses found themselves cut off.

Mrs. Thatcher ended by excluding children and young adults under twenty-one from the minimum wage regulations, and finally abolished the laws outright. These transformations of the labor market, she concluded, “allowed management once more to manage and so ensured that investment was once again regarded as the first call on profits rather than the last.” But a double standard seems to have been at work. The first call on profits seemed to be for higher salaries and stock options for senior managers. She denounced high taxes for deterring their efforts and praised high salaries for motivating them, yet what seemed to motivate manual workers was poverty and the loss of job security. Her rather vindictive world view did not recognize falling real wages as deterring productivity gains; only falling profits and dividends for the well-to-do led to inefficiency in the monetarist world view.

In the process of privatizing the large public enterprises, Mrs. Thatcher seized labor’s pension funds, wiping out company liability for the pensions saved up by their employees. It took several years for the European Community to rule her act illegal. The money belonged to the workers, not to the buyers of these companies.

But just who were these buyers? Where did workers fit into the picture, via their personal shareholdings and those of their pension funds?

“Popular” or “Peoples’ Capitalism”

Mrs. Thatcher recognized that an anti-union policy by itself would not suffice; she had to give workers something in return. What was needed was to cast monetarism’s anti-labor philosophy in a more positive rhetoric. Her solution was “popular capitalism,” an elaboration of what Anthony Eden and other earlier Conservatives had called a property-owning democracy.

The idea of getting workers to think of themselves as property owners had long been voiced by Conservative politicians. It began with the idea of them owning their own homes, bought on mortgage. Mrs. Thatcher started the process with Council house sales. No less than £24 billion were sold off, larger than any single other public industry. But the privatization that really inaugurated “popular capitalism” was the sale of British Telephone in November 1984. The idea was nothing less than to win workers over to the cause of capitalism as an ideal, by turning them into stockholders in the economy’s commanding heights. This, she hoped, would shift their faith away from socialism in the future to capitalism in the present. “Privatization not only widens share ownership (desirable in itself),” claimed Lawson, “but increases employee share ownership, which previous privatizations show leads to further improved performance.” More politically to the point, giving property to citizens would create “a society with an inbuilt resistance to revolutionary change.”

Lawson hoped that workers would value their shareholdings more than they would resent their falling real wages. In any event, he added, “I give away few political secrets when I say that Governments are likely to be more concerned about the prospect of alienating a mass of individual shareholders” than they would be about offending a few dozen Conservative investment managers. Future Labour governments thus would have to hesitate before taking steps that would threaten the value of shares held by large numbers of workers.

Every attempt therefore was made to spread share ownership as widely as possible, for “the more widely the shares were spread, the more people had a personal stake in privatization, and were thus unlikely to support a Labour Party committed to renationalization. And if this forced Labour to abandon its commitment to renationalization, so much the better. For our objective was, so far as practically possible, to make the transfer of these businesses irreversible.” However, another Conservative politician has assured me that the small private investor “was never more than icing on the political cake.” In the end, it was the large campaign contributors who mattered after all, for their funding enabled the party to buy TV time and media space to attack Labour in the usual ways, which had little to do with the economic self-interest of workers as such.

Mrs. Thatcher’s ideal was for every employee and customer of British Gas, British Telephone and other major utilities to buy into them and thereby to acquire a stake in their efficient management. Workers who were not deemed redundant would find their wages supplemented by dividends (and capital gains) from the stocks they were able to buy with their savings. In good capitalist form they would become owners of the means of production, at least as minority shareholders. This prospect was supposed to gain popular support for breaking the trade unions, dismantling government protection of labor and withdrawing subsidies from public services. Politics became an exercize in the degree to which the perspective of labor’s economic self-interest could be foreshortened and sidetracked.

Lawson had proposed the term “people’s capitalism,” but Mrs. Thatcher felt that this sounded too much like the communist people’s republics, and preferred “popular capitalism.” This still sounded like General Pinochet’s “labor capitalism,” and indeed was a similar program of monetarist austerity, dressed up in populist rhetoric.

The attempt to make privatization irreversible shaped its tactics from the outset. In this respect its history in Britain is as much the story of political expediency as one of economic principles in the abstract. Mrs. Thatcher sought to protect the newly privatized status quo by endowing a coalition of beneficiaries who would form a bulwark against any future attempts by Labour to try to re-nationalize the enterprises being sold off. One constituency of “popular capitalism” was created by giving workers a stake in preserving the value of the shares they held in these enterprises. Another constituency consisted of the buyers (often the former managers) of the enterprises being sold off. Yet another was created by selling shares to foreign investors, so that any attempt to denationalize would have to confront not only British financial institutions and worker-shareholders, but American and other global diplomatic pressure. The strategy was to spread shareholding so widely that it could not be reversed.

This political strategy shaped the early privatizations. It led Lawson to offer shares at a fixed price rather than by auction, on the ground that small subscribers wanted to know just how much they would have to pay in order to be willing to buy. He later ruefully admitted that this political ploy led to an underwriting strategy that resulted in huge losses to the government (and unwarranted gains for the City financiers) as compared to what an open auction of shares would have yielded.

How Britain’s Public Enterprises were Strangled: The Needless Fight over the PSBR

The Thatcherites argued that private ownership would be inherently more efficient than government control, assuming that sound management depended on ownership alone. Lawson insisted that “you can no more make a State industry imitate private enterprise by telling it to follow textbook rules or to stimulate competitive prices, than you can make a mule into a zebra by painting stripes on its back. There is no equivalent in the State sector to the discipline of the share price or the ever-present threat of bankruptcy.” Only the prospect of economic gains would lead enterprises to cut costs, improve service and become more businesslike in general.

One economist (John Kay 1988) pointed out that, “all State-owned corporations improved their productivity remarkably in the 1980s, whether they were privatized or not.” However, Lawton replied, “it was the process of preparing State enterprises for privatization . . . that initially enabled management to be strengthened and motivated, financial disciplines to be imposed and taken seriously, and costs to be cut as trade union attitudes changed.”

The real problem was that Britain’s Treasury refused to authorize the funds needed for investment as long as the enterprises remained in public hands. To stop the inflation that was distorting nearly all economies in the mid-1970s, monetarists had argued that it was necessary to cut budget deficits. The IMF won Labour adherence to this principle already under Dennis Healey after Britain’s 1976 foreign-exchange crisis,. He succumbed to IMF austerity in order to get loans to support the value of sterling. The ensuing impoverishment of Britain contributed to Labour’s 1979 downfall. Rather than leaning against the monetarist wind, Labour itself blocked public industries from financing modernization. Raising the required funds would have increased the Public Sector Borrowing Requirement – the PSBR. Having little idea of how to make public enterprises function efficiently, Labour fatally undercut the viability of these enterprises by letting monetarists control Treasury policy.

Monetarists argued that the way to control inflation was to control the money supply. Friedman explained that this meant in practice the control of the public debt. Monetarists accordingly made a bee-line for the Finance and Treasury ministries in every country. In Britain they were able to control the government through the PSBR, placing a stranglehold on public finances. This forced governments to choose between transferring assets to the public sector, or making do without capital investment and modernization.

The problem could have been cured by letting government departments operate as independent public agencies off the balance sheet, like America’s Tennesee Valley Authority (TVA) and other such entities. But the monetarist objective was not to make governments work better. Just the opposite: it was to claim that they could not work efficiently. Finance or Treasury departments in each country subject to IMF monetarist pressures made sure that this would be the case. This was the prelude in the 1970s setting the stage privatization in the ‘80s.

A double standard was at work. The private sector was assumed to be able to look after itself and not to run into debt imprudently. The financial sector accordingly was deregulated, and promptly created a crises of irresponsible lending. One pitfall was that the PSBR failed to distinguish between productive and unproductive public debt. The idea of productive borrowing outside of PSBR constraints was rejected as being merely a reformist or even left-wing rationale to increase public borrowing and thereby increase the power of government. The last thing Mrs Thatcher and her advisors really wanted to see was a reform that would enable public enterprises to be run more efficiently. In any event, public borrowing would not have generated revenue for directors, after labour’s wage levels had increased. Nor would it have generated the remarkable underwriting fees that resulted from privatization. The upshot was that British Telephone and its other monopolies needing technological revamping in the world of the 1980s could be modernized only by being privatized.

Privatization’s ultimate beneficiary was the City of London, the square mile of financial institutions that obtained the quickest benefits and turned the program into something rather unanticipated by Mrs. Thatcher and Mr. Lawson. The rentiers for their part seem to have perceived the Thatchers and Friedmans as pawns, an advance infantry of promoters wrapping austerity economics in populist garb – policies that otherwise would have been difficult (if not impossible) to sell to voters.

The irony was that most of Mrs. Thatcher’s friends and heroes were businessmen, manufacturers who made or dealt in products, not financial manipulators. But inevitably, her privatization policy led her to rely on the City financiers. Her autobiography and that of Nigel Lawson reflect their growing annoyance and even fury with the way in which the bank underwriters chosen to advise the government turned privatization into a vehicle to grow rich very fast. Mr. Lawson is scathing as to the the City institutions’ lack of competence, exceeded only by their greed (always pointing out how much more venal their global partners were, to be sure). But once the government had chosen these institutions as its partner, the die was cast. It was unable to find a way to control the underwriters, and feared to disengage.

To the investment bankers placed in charge of underwriting over £65 billion (over $105 billion) of enterprises, at fees of over three billion pounds during 1979-97, and probably at least as much in short-term trading gains, the monetarist politicians appeared out of Britain’s ideological woodwork as well-meaning fools, political front-persons presenting privatization – and hence, City underwriting fortunes – as “popular capitalism.” As far as the City financiers were concerned, their disdain for the City enabled them all the better to act as political spear-carriers for a policy that turned control of the British economy over to themselves. What Margaret Thatcher provided was a populist and even idealistic legitimization for their gains.

The Winter of Discontent, 1978/79

Mrs. Thatcher was lucky. Accident – and indeed, the weather – intervened to play a fateful role. Under normal conditions Britain is warmed by the Gulf Stream bringing tropical water across the Atlantic Ocean from the Caribbean. This creates a warm westerly breeze that keeps British winters free of the ice that normally exists at such northerly latitudes (Britain is as far north as Canada). But occasionally – in the winter of 1947, sixteen years later in 1963, and again sixteen years later in 1979 – the wind blows from the east, bringing cold air from Russia and central Europe. Starting in November 1978, Britain was subjected to sharply below-normal temperatures that persisted right up to election day, May 9, 1979.

This 1978/79 winter descended precisely at the time when British labor unions chose to go on strike to demand pay raises in an attempt keep up with the inflation. Like the rest of the world, Britain was suffering from the inflation and high interest rates emanating from the U.S. economy under the hapless Carter presidency. As high prices spread throughout the world, the inflation ate into the purchasing power of wages. The Labour Party had cut its political wrists by subjecting Britain to IMF austerity in the face of this inflation, and stifling new investment and hiring by public enterprises by letting the PSBR put a stranglehold on their financing. The strikes were directed against these public enterprises, for as noted earlier it was here that unionization was strongest.

The British are not equipped to deal with long periods of severe weather even in normal times, given its rarity. As a result of the public-sector strikes, the roads remained unsalted and were not gritted. Few drivers had snow tires for their cars (expecting winters normally to be mild). Traffic along the M6 motorway around Birmingham and other Midlands districts slowed to a crawl, grinding Britain’s industrial heartland to a standstill.

This became known as England’s Winter of Discontent. It turned a majority of voters, who normally had voted for the Labour Party, to resent its alliance with the unions. As Mrs. Thatcher described the political situation, on December 12, 1978, “trade unions representing National Health Service and local authority workers rejected the 5 per cent pay limit and announced that they would strike in the New Year.”

The next three weeks brought heavy snow, gales and floods. Matters came to a head on Wednesday, January 3, when “the TGWU called the lorry drivers out on strike in pursuit of a 25 per cent pay rise. Some two million workers faced being laid off. Hospital patients, including terminally ill cancer patients, were denied treatment. Gravediggers went on strike in Liverpool. Refuse piled up in Leicester Square. . . . In short, Britain ground to a halt. What was more damaging even than this to the Labour Government, however, was that it had handed over the running of the country to local committees of trade unions.”

Mrs. Thatcher emphasized that Labour Prime Minister Callaghan “had based his whole political career on alliance with the trade union leaders. For him, if not for the country, it had been a winning formula. Now that the unions could no longer be appeased, he had no other policy in his locker. . . . The Government could not even decide whether to declare a State of Emergency.” Mrs. Thatcher for her part was not particularly eager to promote a government settlement with the unions; she preferred to mobilize public reaction against them. In fact, she worried that “The Labour Party might just be persuaded to agree to the negotiation of no-strike agreements in essential services, the payment by the taxpayer of the cost of secret ballots in trade unions and even a code of practice to end secondary picketing – though the last was doubtful. Equally, I was clear that if the Government did accept, we were honour-bound to keep our side of the bargain.” However, she made it a condition of support for the government that it should end the closed shop, thereby stripping unions of much of their power – something no Labour government would agreed to do.

On January 16 she opened the debate in the House of Commons by describing how the “transport of goods by road was widely disrupted, in many cases due to secondary picketing of firms and operators not involved in the actual disputes. British Rail had issued a brief statement: ‘There are no trains today.’ . . . many firms were being strangled, due to shortage of materials and inability to move finished goods. There was trouble at the ports, adding to the problems of exporters. At least 125,000 people had been laid off already and the figure was expected to reach a million by the end of the week. The food industry, in particular, was in a shambolic state, with growing shortages of basic supplies like edible oils, yeast, salt and sugar. And all this on top of a winter of strikes – strikes by tanker drivers, bakers, staff at old people’s homes and hospitals; strikes in the press and broadcasting, airports and car plants; a strike of grave diggers.”

She reported that Labour’s George Brown had complained to her that “the unions had been falling more and more under the control of left-wing militancy.” But Prime Minister Callaghan then urged that the government make further concessions to the unions, including “exemptions from the 5 per cent pay limit, tighter price controls and extension of the principle of ‘comparability,’ under which public sector workers could expect more money. All these were intended as inducements to the unions to sign up to a new pay policy. But he signally failed to address what everyone except the far Left considered the main problem, excessive trade union power.”

Using language recalling that used to denounce weak-willed opposition to Hitler on the eve of World War II, she heaped scorn on Mr. Callaghan for “appeasing” the unions. Rather than fearing to alienate them, she urged her own party leaders to seize the opportunity to gain public favor by riding on wave of reaction against union over-reaching. British wages no longer were set by fair bargaining between workers and their employers, she claimed, but were negotiated by trade union leaders dictating terms to weak-willed government managers. The alternative, of course, was the kind of austerity dictated by IMF monetarists maintaining an employers’ market by imposing chronic under-employment and shifting enterprise out of the unionized public sector to newly privatized, non-unionized enterprises – precisely the kind of austerity that Keynesian income policies had sought to prevent.

Upon winning the general election, Mrs. Thatcher appointed loyal monetarists, who developed a more subtle alternative to the tight-money programs imposed by the IMF on hapless third world counties. A general monetary stringency would have lowered profits and stifled capital gains as well as wages. Britain’s monetarist strategy was to depress wage levels through “structural reform” or “structural adjustment.” The restructuring was achieved not by macroeconomic policies affecting the overall money supply and incomes, but by changing the legal framework and institutional structures within which markets operated. Union power was broken by changing the legal rules, while government economic power was dismantled by cutting taxes and selling off enterprises. The industries being privatized were subjected to much the same downsizing and asset stripping as private companies taken over by corporate raiders and/or leveraged buyouts in the 1980s.

How Monetarism Laid the Groundwork for Privatization

Ostensibly a theory of money and prices, monetarism became an ideology to attack government spending and organized labor. The theory’s guiding idea was that price levels could be determined by controlling the money supply – by the central bank managing the rate at which government deficits were monetized. Meanwhile, wage-push inflation could be countered by taking legal steps to break the power of unions to strike and to declare boycotts. The effect was to remove economic planning from the hands of government. The vacuum would be filled by global investment bankers. Efficient management was to take the form of maximizing stock-market gains, not the promotion of full employment and other non-market social welfare objectives.

Keynes had been a monetary theorist of a different stripe. He saw that money, in the sense of spending power, comprised effectively the entire credit superstructure. Any income-yielding asset could be collateralized as the basis for credit. Indeed, credit – and in effect, purchasing power – can be created simply by companies not paying their bills. These unpaid bills became assets on the books of their suppliers (“receivables” that could be financed through the banking system). In this respect the volume of credit and near-money is virtually synonymous with the economy’s overall volume of debt. This perception forms the basis for post-Keynesian “creditary” or “balance sheet” economics, a more comprehensive alternative to monetarist doctrine. (Gardiner 1993 provides a technical discussion.)

Monetarism reveals its political bias by singling out only public debt as the source of inflation, ignoring the mushrooming private debt. This one-sidedness has proved to be its Achilles Heel. Yet it was precisely this narrow anti-government focus that attracted Mrs. Thatcher and other libertarian politicians to monetarism in the first place.

Monetarism’s appeal is political and rhetorical, not based on sound economic evidence. (Its correlations of money and prices fail to acknowledge the arrow of causality, especially at the foreign-exchange margin. See Hudson 1992 for a detailed critique.) Controlling the public debt by reining in government can represent only part of a comprehensive system of monetary management, for in practice the money supply – the means of settling obligations – turns out to be nothing less than the overall credit supply. This in turn includes the economy’s “near-money” in the form of all marketable assets and debt instruments. Attempts to manage money, narrowly defined as government debt, are thus in vain.

The real reason why monetarists seek to control the Treasury or Finance Department and the central bank in every country is to achieve their political ends. From their position in these financial control centers, they put the brakes on government operations across the board, or promote other pet policies. Monetarist doctrine provides the ideological wrapping to present this control as a form of idealism and individualism.

Although privatization was not a centerpiece of Mrs. Thatcher’s original program, she placed members of her inner circle in charge of the financial ministries and the public enterprises first in line to be privatized, to set about preparing them for sale. In addition to helping the government budget, privatization would remove enterprises from control by the trade unions. And turning power over to privatized management would enable them to begin economizing by downsizing their labor force.


* Friedman did not join in this anti-labor invective. He blamed British managers for the “British disease” of stagflation (high inflation with slow growth). The nation’s industry had become hidebound rather than undertaking research in product innovation and marketing. In any event, he explained, no inflation could be cured without limiting growth in money supply, and hence government budget deficits, for the monetization of government debt formed the monetary base of “high-powered money.”

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  1. mcgee

    Thanks to Mr. Hudson and NC for this piece. The adulation for Thatcherism being heralded throughout the media was depressing. I judge Thatcher and Reagan as the two tools that started the long deprivation of an equitable society in the west. Hopefully 50 years from now they will both be properly tarred by the future they helped create.

  2. The Dork of Cork.

    She was merely the political agent for a much longer darker project which I imagine began not long after Suez.

    The goal which was achieved in spectacular fashion during both Left & Right wing administrations was the replacement of domestic workers in the primary & secondary industries of the UK with external workers in the primary & secondary Industries.

    So it was merely the subtraction of labour value via arbitrage…….capital holders of the UK could then extract labour value and spend their loot on “services”

    The result : real goods trade deficit of the UK in the year of our Lord 2012 was £106 Billion or a simply massive 6.9 % of GDP.
    Thats a hell of a lot of free stuff.

    Its very ironic for sure.
    But her monetarist / anti home industrial polices during the big bang era of the early 80s was vital for the development of the growing mercantilist euro soviet regime as you can’t have one without the other.

    But life goes on for the remaining hobbits. (I have always admired their community spirit)


    But they really have no idea of the dark forces which orbit them.

    On the + side England is now a much greener land then the Get Carter years of 1970 when all of its coal consumption was domestic production.
    But it has come at a extreme cost for the rest of us Orcs.
    We were Elf like once upon a time ……………but we have become corrupted ……

    1. Susan the other

      Suez set the stage for NATO inter-tribal warfare and brought us the assassination of presidents and politicians and the hollowing of our economics in favor of imperialist goals?

  3. The Dork of Cork.

    As I said above – the free lunch continues.
    106 billion or real goods trade deficit is BIG……….

    106 billion may not seem like much in todays world of hyperinflated claims on wealth but that 106 billion Sterling is not claims on wealth – its wealth.

    If Ireland increased its food clothes and transport imports by even a couple of Billion it would have a large affect on the domestic economy.

    The city has managed to externalize the capital destruction of the North Sea yet again.

    The Thatcher legacy.

    The excellent quarterly British energy trends publication out now.
    looking at the final quarter of 2012 and summing up the disastrous energy situation in the UK.

    The main points for 2012:
    1. Total energy production was 10½ per cent lower than in 2011.

    2 . Imports in 2012 were at a record high, with exports at their lowest level since 1989. As a result, net import dependency climbed to 43 per cent, its highest level since 1976

    3. Oil production was 14½ per cent lower than in 2011, the lowest annual production volume since our current reporting system began.

    4.Natural gas production was 14 per cent lower than in 2011, and at the lowest level of production since 1985

    5. Coal production was 10 per cent lower than in 2011, and at a record low level. Coal imports
    were 37½ per cent higher. Generators’ demand for coal was higher by 31 per cent. Coal
    stocks were 18 per cent lower, and at a record low for the year end.

    However the UK is consuming more (mainly lower quality energy – imported coal)

    6. Total primary energy consumption for energy uses rose by 5 per cent. However, when adjusted
    to take account of weather differences between the fourth quarter of 2011 and the fourth
    quarter of 2012, primary energy consumption fell by ½ per cent.
    • Final energy consumption was 6½ per cent higher than in the fourth quarter of 2011. Domestic
    consumption rose by 19½ per cent, with average temperatures being 2.3 degrees cooler than
    2011. On a seasonally and temperature adjusted basis final energy consumption rose by ½ per

    Refer to the special feature near the bottom of the publication – “Coal in 2012″

    See chart 1 in particular.
    Coal only began to be imported in the UK after 1970…………..

    UK income data from the rest of the world and what is the real significance of its massive decline (especially in Europe) ?

    Y2011 : £ 25,871 million
    Y2012 : £ 2,127 million

    remember these are not hyperinflated claims.
    This is the real yield from these hyperinflated claims.

    Remember in Q1 2008 its income yield from the rest of the world reached a record £14.1 billion.

    This is when RBS type operations came to a end.

    In my opinion the UK is now choosing real goods over income from the rest of the world (especially Europe)

    This is a very big deal me thinks.

    Also if a country went through this turnaround things in the country would get very bearish unless it could externalize the losses.

    British trade ( fuels) surplus / deficit.
    Y2000 : £ + 7,041 million (peak)

    Y2003 : £ + 4,262 million

    Y2012 : £ – 21,624 million

    Thats a swing of over £28 billion + !!!!!

    It must get fuel from outside its political (but not economic) hinterland which means less for us Euro commies.

    A zero sum game.

    1. William C

      An interesting piece but unhappily with some points of detail incorrect (I will not be so pedantic as to go through them).

      More significantly in terms of the overall analysis, I think it downplays a few matters.

      In breaking the power of the unions, the creation of mass unemployment in the early 1980s was very important in creating a climate of fear which discouraged industrial action and weakened the hands of the union leaders (at least one of whom it is claimed was in the pay of the Soviets by the way). This was principally a result of extremely tight macroeconomic policies which sent sterling up to a level which made much of UK manufacturing uneconomic.

      The split in the Labour party, which resulted in the creation of the Social Democrat Party, played into the Thatcher Government’s hands by guaranteeing a landslide victory in 1983 and a second term for Thatcher (as a result of a split opposition vote rather than any swing to the Conservative Government). The left wing of Labour seriously misplayed their hand, assuming that mass unemployment would discredit the Conservatives to such an extent that the left would no longer need the support of the moderates, so drove them out of the party. Disaster ultimately ensued for the Labour left which is now to all extents and purposes extinct.

      1. bhikshuni

        The piece also fails to mention the role Thatcher had in destroying free press journalism by crowning Rupert Murdoch and his thugs who literally drove over picketers on Fleet Street.

        Now these criminals are getting tea at the White House and dibs on the LA Times.

        We can thank Thatcher (and Reagan) and Murdoch for our Fox News “culture,” not to mention Iran-Contra, which along with the rest of disastrous US policies in Latin American and West Asia, is still threatening world peace and continuing to leave the stinking legacy of suffering.

  4. The Dork of Cork.

    What the British based banks are up to is interesting.

    “While UK banks were cutting their exposure in the periphery in an effort to square their books
    and reduce their redenomination risk, they were increasing their net local positioning in
    Germany. In the first quarter of 2012, UK banks increased their claims on the German public
    sector, which includes both claims on the government and on the Bundesbank, by almost €100
    billion. Significantly, the claims on the German public sector were booked mostly by their
    offices in Germany. The preference for locally booked claims may reflect fears that, in any redenomination, cross-border claims might be treated differently.
    UK banks stand out among
    banks from outside the euro area, as well as from within the euro area (Graph 10).
    The scale of the increase in claims on the German public sector is an order of magnitude
    larger than the scale of decrease in net local claims of UK banks in the Iberian peninsula.
    While it is instructive to think of banks in a single group reducing their net claims on Spain and
    increasing their net claims on Germany, this seems to be something else. Whatever the
    motivations of the shift of euros by UK and other banks into claims on the German public
    sector, the shift has resulted in an extraordinary development. In particular, banks in Germany,
    including offices of foreign banks, have flipped from providing euros to banks in the rest of the
    world to absorbing euros from banks in the rest of the world, as shown in Allen and Moessner
    (2012) and in Graph 11. Banks in Germany include both German-owned and foreign-owned
    banks, and the counterparties outside Germany include both affiliated and unaffiliated banks.
    This is an extraordinary development for a creditor country – that its banks become net
    recipients of home-currency funding from banks in the rest of the world. While there has been
    much discussion of retail investors shifting their deposits into banks in Germany, the bank-to bank channel shows a shift of hundreds of billions of euros. “


    What they wish to achieve is simple
    The Brits want real German goods at the expense of Income from PIigland.
    All Euro resources will be pushed into North Sea trade to sustain its real goods deficit.

    1. shtove

      So parts 5 & 7 show UK banks betting on a € break-up?

      I don’t understand – are US banks placing their bets through the Square Mile?

      That’s hostile, to the point an endgame is being played out. I can understand Germany bracing itself for a currency with middle-Europe only, exporting to Asia, but if state-subsidised banks are being used to play this game between the US and EU it seems like war.

      1. The Dork of Cork.

        Germany needs the UK as much as the UK needs Germany…..as Germany has overcapacity of production.
        The purpose of the above is to transfer capital (fuel) North so as to sustain Industry for the special few.

        This Hanseatic trade is vital for UK interests as the bulk of UK trade (especially imports) orbits the North sea.
        Asian trade despite spectacular growth of China imports (although a decline recently) remains less important.

        1. The Dork of Cork.

          The UK burns other countries coal indirectly.
          Self suff. coal Poland
          Y2000 : 1.26
          Y2010e : 0.997

          Uk trade in Goods by area (Balance of payments, £ millions)
          Y2002 : +50
          Y2003 : – 84
          Y2004 : -412
          Y2005 : -664
          Y2006 : -879
          Y2007 : -1330
          Y2008 : – 1307
          Y2009 : -1870
          Y2010 : -2309
          Y2011 : -2768

          1. The Dork of Cork.

            UK trade deficit with Poland

            Y2012 : -3,958 !!!!!

            From a balanced trade position in 2002 to a extreme deficit in 2012.
            This is how the UK operates.
            The European Soviet is the UKs plaything.

  5. Hugh

    Privatization is all about the looting of the commons. What is interesting is that kleptocracy began to entrench itself in the UK under Thatcher just about the same time it did in the US. Certainly the ideas behind kleptocracy had been present among elites in both countries for some time. I for one date the current construction of kleptocracy, that is when disparate kleptocratic tendencies began to coalesce into a single overarching system, to Carter. Here I am thinking principally of the passage of the Airline Deregulation Act which ushered in the age of deregulation and the Civil Service Reform Act which set up the Federal Labor Relations Authority to oversee collective bargaining with federal workers. This was a first salvo in the ensuing war on labor and set up the mechanism for Reagan’s decertification of Patco three years later. It was also Carter who appointed Volcker to head the Fed in 1979 and it was Volcker who inaugurated the Fed policy of viewing any wage increases going to labor as inherently inflationary and to be suppressed, resulting in the massive transfer of wealth from labor to capital which has created the grotesque wealth inequality we now have.

    1. Bill Smith

      Let’s not forget the drastic flattening of progressive taxes, the lowering of effective corporate tax rates by more than half, banishing the “tax and spend democrat” to wherever dragons went, and the subsequent emergence of the multi-billionaires running the show.

    2. rob

      It seems the infamous “powell memo” of 1971.Wherein the then future supreme court justice lewis powell lays out the business assault on labor and the working class.which was wholeheartedly adopted by the future creators of the heritage foundation and the cato institute among others and the chamber of commerce,et al.coors,koch,and the rest of the bastards who “stole the american dream”.This was the playbook for this phase of deregulation,chicago school of economics theory takeover..that seems to be the establishment rebuttal to sixties style protest,and popular attempts to take their rightful place in a democratic republic.Thatcher was just one of the players on the world stage.Considering the ties of the “anglo-american” establishment,it is no wonder that both sides of the pond did the same thing at the same time.
      The game plan laid out in the “powell memo of 1971”, has shaped what is this new century.Just like when john ruskin spoke before the students at oxford in 1870.One of who was cecil rhodes, who along with the others who formed the british roundtables, who then formed the council on foreign relations and the royal institute of international ,which really did shape the twentieth century.Which then is shaping the twenty-first.

  6. Klassy!

    I still have three sections to go, but thanks for this piece. Thatcher does deserve such a long article.

  7. The Dork of Cork.

    Whats really interesting is that the UK is now incapable of producing goods.
    It NEEDS its colonies in Euroland , Norway and China to survive.

    Back in 1914 the UK was in much the same position as the US & UK is now.
    This was the last neo liberal globaization era before this particular episode.
    Given that it had control of Canadian & South African gold & trade surplus India) it could remain in real deficit while filling the freindly French and hostile German coffers with Gold claims (they were both the biggest holders of above ground gold at that time)

    The UK post 1914 was forced to nationalize its industries as it could not win a war using neo liberal policy choices.

    After Suez it went back to type.

      1. The Dork of Cork.

        Who burns their oil & gas ?

        Paper for oil ?

        Not a good trade – me thinks

        Norwegian / UK trade in the North Sea is No2 in the region (after Germany)

      2. The Dork of Cork.

        UK / Norway trade balance (millions Sterling)

        Y2003 : -4,677
        Y2007 : -11,256
        Y2011 : -21,820 (peak)
        Y2012 : -18,722

        Sterling paper only good in the medium term if they can burn down what remains of Europe.

      3. The Dork of Cork.

        The Jewel in the crown…a finished goods paradise.
        Trade balance UK /Germany (millions Sterling)

        Y2003 : -12,841
        Y2007 : -19,967
        Y2011 : -17,893
        Y2012 : – 20,328 (peak)

  8. ScottS

    What a mind-bomb. I’m still digesting it. Fascinating how labor undid itself. Also fascinating how Maggie was a true believer as well as cunning and shrewd, but still a pawn of financiers whom she wasn’t necessarily cozy with.

    1. RepubAnon

      Yes, I had forgotten the downside of unions when there is no effective check on their actions. It is particularly unfortunate that they kept up strikes as their sole methodology into the 1980s. The Union pension funds at that time had substantial assets – they’d have been much better off threatening leveraged buy-outs to replace management than constant strikes. It’s the problem with an adversarial model for labor/management relations – whenever one side gains too much power, the health of the overall organization suffers.

      It is also true that nationalization of industries and universal privatization are like all other broad policies: although each is useful in certain limited circumstances, they are not universal cure-alls. As first-year Econ students were once taught, society as a whole benefits from keeping natural monopolies in public ownership, while maintaining private ownership of all other industries. Nationalization /public ownership of industry of industries such as water systems, roads, public transit, power grids, and telecommunications infrastructure makes good sense by avoiding wasteful double-investment in expensive infrastructure. Most other industries (such as banking) are better left in private hands, with appropriate regulations to limit the societal impact if that business goes under.

      The amusing thing is that so many capitalist thinkers praise efforts of workers to buy stock in their own companies… thus encouraging the workers to own the means of production. Was Karl Marx a capitalist at heart, or are these capitalists secret Marxists?

      1. jrs

        The amount that workers are usually allowed and able to invest in the company is not a controlling interest. Nah not even in startups compared to venture capital etc.

    2. Susan the other

      I know, right? I always used to think of Thatcher as Maggie the knife. This makes her look naive at worst. Which is still bad.

  9. The Dork of Cork.

    The JAP Nuclear shutdown has had a major affect on the British domestic economy and has exposed a country dependent on trade for its lifeblood but yet does not now have a blue water Navy , ironically destroyed by their Naval Joan of Ark and the Labour party of the 60s & 70s.

    Qatar LNG supplies have been flowing east since the explosion.
    The UK was its biggest customer until Jap shutdown…..

    Its banks are its only Dreadnoughts now although quite effective if countries in Europe remain non national.

    However its dangerous to rely on only one weapon system.


    1. Susan the other

      Interesting that the one country that was most rabidly anti-EZ is now holding up the inner sanctum of the Euro. IF Germany failed before the periphery failed then the UK couldn’t come together in some northern alliance to trade Russian gas and oil for financial services. Other than financial services, what resource can the UK trade? (And financial resources require dreadnoughts.) It’s like the world has come down to only one resource: energy. All the rest doesn’t trade in a high-tech globalized world – where each country can manufacture their own goods to their own benefit. Gee, no wonder we panicked and went to war in the middle east.

  10. Bill Smith

    I think this article goes overboard with linking “monetarism” with privatization.

    There is nothing wrong with monetarism, as invented by Irwin Fisher and his “money equation”, other than it is rather difficult to get it to work in practice. But then we have fiat currency and fractional banking, so we are kinda stuck. I think the only gripe Keynesians had with it was it was too simplistic and should include credit, but then you still have two components to treat, currency and credit.


    Now Milt was a big fan of Fisher, but he was also a libertarian. So if you would say that libertarians had a lot to do with privatization – then there would be less to argue about.

    And the way I understand monetarism is not they way it’s presented in this article. A quantity of money is created by the central bank by buying government debt. That is not monetization because the FOMC will buy and sell this debt to control interest rates. The Fed balance sheet was $900 billion before the GFC. This was enough base money for our $15T economy. The Fed does slowly grow this amount over time as the economy gets bigger. It took 100 years to get up to $900B. They are not trying to somehow monetize the entire national debt of $16 trillion, at least not yet. Interest rates are used to regulate the velocity of transactions and cost of credit creation.

    Plenty not to like, like how we created bazillions of credit derivatives to insure credit, so the cost of credit is reduced on paper, making Fed policy even less effective and created a huge risk of “unregulated insurers with no money and a government backstop”.

    Then as Steve Keen likes to point out, monetarists and Keynesians blew it by ignoring the 300% of GDP of consumer credit in the US, and even worse levels in Britain.

    1. The Rage

      The FED only buys with the one year note to “control interest rates” in terms of price moves.

      In otherwords, there is so much demand for US treasuries, the FED can try to force money out of treasuries by buying those same treasuries and thus “dirtying” the milk. Thus we have QE and the reflation technique that Hayek and Friedman would approve of.

    2. H. Alexander Ivey

      “as Steve Keen likes to point out, monetarists and Keynesians blew it”

      I’m not sure Keen would agree with putting monetarists and (the real) Keynesians together in one sentence. Keynes really understood a credit driven economy, the monetarists are still stuck with a wrong headed idea of fiat money.

      1. Bill Smith

        From the wiki article:

        Here’s mention of Steve Keen adopting Fisher. So I would say the Keynesians understand how to blow credit driven bubbles even better than monetarists, and Steve decided the original monetarist really did understand that it’s bad when they pop.



        Following the stock market crash of 1929, and in light of the ensuing Great Depression, Fisher developed a theory of economic crises called debt-deflation, which attributed the crises to the bursting of a credit bubble. According to Fisher, the bursting of the credit bubble unleashes a series of effects that have serious negative impact on the real economy:
        1.Debt liquidation and distress selling.
        2.Contraction of the money supply as bank loans are paid off.
        3.A fall in the level of asset prices.
        4.A still greater fall in the net worth of businesses, precipitating bankruptcies.
        5.A fall in profits.
        6.A reduction in output, in trade and in employment.
        7.Pessimism and loss of confidence.
        8.Hoarding of money.
        9.A fall in nominal interest rates and a rise in deflation-adjusted interest rates.

        This theory was largely ignored in favor of Keynesian economics, in part because of the damage to Fisher’s reputation caused by his public optimism about the stock market, just prior to the crash. Debt-deflation has experienced a revival of mainstream interest since the 1980s, and particularly with the Late-2000s recession.

        Steve Keen’s Debt-Reset Theory predicted the 2008 recession by incorporating some of Fisher’s work on debt deflation. Debt deflation is now the major theory with which Fisher’s name is associated.[7]

      2. digi_owl

        I think the terms Keen uses are neoclassic (also known as New Keynesian), mostly a bastardization of Keynes and should really be called Hicksian economics, to separate them from post-Keynesians who carry on Keynes work more accurately.

  11. craazyman

    Well I’m about half way through and worn out for one day. Did Dr. Hudson start writing this when Mrs. Thatcher was born? How did he know what would happen? bwaaaaaaak! jes kyding. Will read the rest tomorrow.

    It’s amazing how nearly everybody mentioned in the post is a complete lunatic living in their own dream world of symbols, which they will quite happily ram up your butt as far as they can.

    There would be a DSM category for this if Jung hadn’t been such a woo-woo-foo-foo wacko. When he wrote the book about UFOs (“A Modern Myth of Things Seen in Skies”, you can google it, it’s true, if you don’t believe me. I’ve read it myself and I can tell you it’s a real book) that was probably the end for him.

    1. emptyfull

      I’ve read it too, Craazy, but as I remember it, his main point was that “UFO/alien” sightings weren’t a fundamentally new phenomenon; they were a modern iteration of what were once called “angels.”

      According to his theory of subconscious archetypes, they’re basically the same thing in different clothes.

      1. Yves Smith Post author

        I read a biography of William Blake that said he saw angels all the time and his father (IRC a minister) beat him for it.

        However, this was not as weird as it might seem. Apparently it had been normal maybe 70 years before Blake was born to see angels a lot. They appear to have died out with the Industrial Revolution.

        Blake also promised his wife he would never leave her. But he died before she did. She reported he’d visit her every day for a couple of hours even so.

  12. psychohistorian

    Some of the people waking up to our current reality are having to adjust their brainwashed understanding of some of history’s actors.

    Saint Ronnie needs to be further demonized as the effective puppet he was.

  13. SóloSéQuéNoSéNada

    A true class warrior she was. Curious, however, that her upbringing and sympathies were supposedly with the middle class and industry, but her policies turned British capitalism into a minor player in manufacturing and utterly devastated the middle class. As Dr. Hudson’s article makes clear, the beneficiary was the sector she claimed to disdain. As the headlines read in Bloomberg and Businessweek: “Thatcher Praised by London Financiers for Reviving City Fortunes.”

    1. LifelongLib

      Living in the U.S. I’m surprised how many small-business people identify more with Wall Street tycoons than they do with people of similar origins to their own who work for a salary. There’s also a lot of anti-government sentiment in small business, I guess because of permits, inspectors, and complicated tax laws etc.

      1. H. Alexander Ivey

        Never underestimate the desire to improve one’s social standing or class. Many small business owners are not just interested in moving up the economic ladder, they also want to move up the class or social ladder. And that truly is a zero sum game.

      2. jrs

        well the economy they operate in sometimes really resembles the “free market” libertarian ideal, far more dealing with actual market forces. Unlike all the sheltered big guys and all the real power which is corporatism through and through.

    2. digi_owl

      That’s because she and here entourage was blind to the effects of private credit on the public economy. She was convinced that if she ran the government economy as her dad had run the stores economy, everything would be fine.

      Also, she likely had a innate hatred for unions because they interred with the operation of pri9vate enterprise.

      End result, the City was largely ignored while she was busy union busting and fighting a war of colonial remains.

      Honestly, if anyone want to compare a national economy to a household they need to be damn sure that only the head of the family have the ability to issue IOUs on behalf of the family.

  14. Cyrus Rex

    It’s late and perhaps I missed something here but it seems to me that the second half of this post has gone missing. The part about Mrs. Thatcher’s Failed Legacy of Privatizations doesn’t appear to be attached. All I can find is some rather interesting historical descriptions of how she managed to accomplished these privatizations via some rather creative political ploys, but little or nothing concerning the failures of these same privatizations.

    Certainly, we know the end results from the Thatcher and Reagan “revolutions” from observations over the years, but it would have been a bit more useful had Professor Hudson actually included descriptions of these failures in his post. Beyond a limited comment concerning the results of financial deregulation leading to bursting bubbles, I couldn’t find anything of this nature in the article.

    Understand, that I don’t disagree with the premise, I would just have liked to have seen it spelled out in some detail. I run a seminar discussing these issues and this would have been very helpful. Perhaps the second part will follow; or, at least, I hope so.

    1. Yves Smith Post author

      You seem to have missed this:

      Yet by 1997 the Conservatives were voted out of office by one of the largest margins in their history. What concerned voters were the results of privatization that Mrs. Thatcher had not warned them about. Prices did not decline proportionally to cost cuts and productivity gains. Many services were cut back, especially on the least utilized transport routes. The largest privatized bus company was charged with cut-throat monopoly practices. The water system broke down, while consumer charges leapt. Electricity prices were shifted against residential consumers in favor of large industrial users. Economic inequality widened as the industrial labor force shrunk by two million from 1979 to 1997, while wages stagnated in the face of soaring profits for the privatized companies. The tax cuts financed by their selloff turned out to benefit mainly the rich.

      They were such obvious failures the point did not need belaboring. So the more interesting question was how such a questionable idea came to be seen as legitimate.

      1. leroguetradeur

        The corollary would be you’re in favor of nationalization, if you don’t like privatization. Are you?

          1. jrs

            I’ve always like the idea of implementing anarchistic socialism with the banks. Nationalize them, break them up, re-privatize them all as credit unions with real regulation of course.

      2. Susan the other

        Why indeed. The thing that is happening now, in an enlightened mindset using a different vocabulary, is that all former imperialists whose imperialism foundered on the shoals of modern technology, must finally admit it is a new world. They are now caught in a democratic dilemma. Their denial, and the enablers of that denial (the plutocrats), can no longer suck other countries dry and can no longer suck dry their own lower classes. I think it’s over. Pretty much. No economics should go forward now that is inequitably harsh or generous on any group of people.

      3. Cyrus Rex

        I don’t disagree that those of us who witnessed the Thatcher/Reagan days first hand could recognize the failings; but given the title of the post it would have, I believe, been very useful for those who did not live through them to have some concrete examples of just why these ideas were and continue to be utter failures.

        Given the current tenor of the times, the youth of today will get to see similar, if not worse, outcomes, but it seems to me that Dr. Hudson could have done them a great service by providing more information on both the failure and why these policies do not and cannot work for anyone but the plutocrats. There remain far too many believers in the “greatness” of the Reagan/Thatcher legacy — and the myth continues to grow.

        1. JTFaraday

          I thought it was a very clear and informative account of how she put over said privatizations, but I agree that it doesn’t live up to its title in terms of demonstrating that these were failed privatizations.

          I like Hudson’s work and think it would be great to hear more from him on this.

    2. Chris

      I read somewhere that the railway system needs GBP 3 billion a year, as compare to GBP 140 million before privatization. That doesn’t include higher prices for consumers and lost services as “unprofitable” routes are shuttered. Pathetic.

  15. Doug Terpstra

    Glenn Greenwald: “Margaret Thatcher and misapplied death etiquette”


    “The dictate that one ‘not speak ill of the dead’ is (at best) appropriate for private individuals, not influential public figures”

    Accordingly, the mealy-mouthed Obama called this late reincarnation of an Antebellum plantation queen “a champion of freedom”. It doesn’t get more Orwellian than that.

    So, for the objectivist heroine who coddled Pinochet and condemned Nelson Mandela as a terrorist, how about a song instead : “Ding dong!…

  16. ozajh

    One thing that Mr Hudson does not mention is the impact of North Sea Oil. Thatcher was lucky enough to take power at the exact moment when the UK transitioned from a large oil importer to a breakeven producer (and even a fairly large exporter for a few years).

    This had a DRAMATIC impact on the UK Balance of Payments, and flowed through to other areas of the economy. It also exacerbated the North/South divide, since the lion’s share of the benefits were kept in the South-East (despite the oil itself being off the Scottish coast).

    The resultant improvement in the economy, within a strongly inflationary environment, also ensured that her government’s introduction of Right-to-Buy legislation for housing owned by local governments would be wildly popular, especially in the aforementioned South-East. Long-standing tenants in and around London were made wealthy at a stroke, given the discounts involved. Even in the Midlands where prices were a lot lower, some of my own relatives had windfall increases to their net worth equivalent to several years’ income.

    1. Mark P.

      Re. the North Sea Oil issue, exactly true.

      In 1987, one author writing in the LRB nailed that and the rest of Thatcherism with surgical precision and the LRB reprinted today what this author wrote then. It’s a fascinating example of the ironies that time and history work on us when you see who that author was….

      “What makes things even worse for radical, progressive spirits is that the Ultra-Right appears to be even more in control of the Conservative Party this year than it has been previously. Mrs Thatcher clearly regards herself as a dea ex machina, sent down from on high to ‘knock Britain into shape’. She will wield her power over the next few years dictatorially and without compunction….

      “Mrs Thatcher has enjoyed two advantages over any other post-war premier. First, her arrival in Downing Street coincided with North Sea oil. The importance of this windfall to the Government’s political survival is incalculable. It has brought almost 70 billion pounds into the Treasury coffers since 1979, which is roughly equivalent to sevenpence on the standard rate of income tax for every year of Tory government. Without oil and asset sales, which themselves have totalled over £30 billion, Britain under the Tories could not have enjoyed tax cuts, nor could the Government have funded its commitments on public spending.

      “More critical has been the balance-of-payments effect of oil. The economy has been growing under the impetus of a consumer boom that would have made Lord Barber blush. Bank lending has been growing at an annual rate of around 20 per cent (excluding borrowing to fund house purchases); credit-card debt has been increasing at a phenomenal rate; and these have combined to bring a retail-sales boom – which shows up dramatically in an increase in imported consumer goods. Previously such a boom and growth in imports would have produced a balance-of-payments deficit, a plunging currency and an immediate reining-back on spending, with lower rates of growth.

      “Instead, oil has earned foreign exchange and also produces remittance payments from overseas investments bought with oil money. The situation is neither stable nor healthy in the long term: but in the short term it allows the living standards of the majority to rise rapidly, even though the industrial base, the ultimate foundation of a successful economy, is still only achieving the levels of output of 1979. The fact that we have failed to use oil to build a productive and modern industry for the future is something historians will deplore.”

      The LRB comments: ‘Imagine if the man who wrote that had become prime minister.’

      The author was Tony Blair


    2. The Dork of Cork.

      The UK remained in current account deficit from the early 80s.(big bang) despite epic falls in consumption.

      The UK increased its income from the rest of the world when the price of oil was low.(it was not just about North Sea oil)
      Now its all about obtaining real finished goods & fuel at the expense of others (European) consumption.

      This is a dramatic turnaround.
      The game has changed.

  17. Claudius

    Thatcher came to power, principally, on a single, public, mandate: Reform the unions. The rest was icing.

    The Thatcher reforms succeeded in not only reducing union power and increasing the incentive to work — and may have increased the responsiveness of wages and employment at the micro-level. However, they did not improve the response of real wages to unemployment (or the transition for men out of unemployment), which resulted in rising wage inequalities. Overall, the reforms resulted in a mixture of the worst of two possible worlds: massive wage inequality of the decentralized labor market together with high and lengthy spells of unemployment.

    However, it wasn’t all ideology, it was also demographics; the sixties baby boomers had become Margret Thatcher’s ‘New Conservatives’, the aspiring middle class. More educated than their parents, politically empowered, and economically secure these young voters (many voting for the first time when they voted Thatcher into office)had little knowledge of or relation to the ‘socialist’ struggles of a previous generation, who had not only fought the last great war but, had also fought for and delivered social, industrial, and economic reforms.

    The baby boomers lived the socialist dream, one that their parents and grandparents had struggled to deliver; but like a spoiled child raised by overly coddling parents they never knew that they were the generation that “have never had it so good”. They saw the blunt force power of the ‘strike ‘as outmoded; and working class prima donnas such Arthur Scarghill (president of the Miners Union) Jack Jones (president of the Transport and General Workers Union) as representative of an older, “less civilized” way of negotiating wages and conditions for workers.

    Even, the working class that these leaders represented was ambivalent; none better exemplified than union leader ‘Red Robbo’ (Derek Robinson; described by Margret Thatcher as “notorious agitator”). After being fired for putting his name to a pamphlet that criticized management, Robinson famously stood above a throng of 20,000 car workers, demanding a union ballot on a ‘strike in sympathy’, but the motion was not carried; votes being 14,000 against a strike and only 600 in favor.

    In particular, the reforms failed to recognize the power of insider pressures for rent-sharing and related policies that segment decentralized labor markets in periods of less than full employment. Thatcher’s conservative reforms missed the fact that “free market “reforms require exceptionally tight labor markets to succeed; as such, successive thatcher governments could not deliver their promise in the 1980s-1990s because, ironically, of the high rate of unemployment.

    The New Conservatives walked the road to neo-classical Nirvana in the same way that Chile, some 10-15 years before. By 1988, Mrs. Thatcher thought that her reforms had cured the “British Disease”, but the reforms were premised on an improper understanding of how the labor market operates; which ultimately lead to the Conservative party (though not conservatism) being banished to the political sidelines by the electorate , while Tony Blair’s New Labour continued along the same path to Nirvana.

    1. Chris

      I’m interested in learning which policies led to: “increasing the incentive to work”.
      I’m aware of the rampant unemployment that Thatcherism led to – the highest since the Great Depression. Are you perhaps suggesting that putting people out of work led to increased incentive to work?

      1. Claudius

        Chris, I meant it quite literally, though could equally have placed it in ironic quotes.

        Thatcher made unemployment such a devastating and demoralizing state (driving 50% of all unemployed below the poverty line and many more to poverty – as a matter of policy), that it created a disincentive to stay unemployed at any almost any cost.

        In Thatcher’s worldview, doing nothing and being paid for it was worse than doing anything and receiving nothing for it. As Thatcher said:

        “…the unconditional supply of social benefits to those who were thought incapable of coping undermined the incentive to work and undercut the family unit. It promoted habits of idleness and delinquency. It permitted single-parenthood to become a financially sustainable, alternative way of life. By undermining the self-respect of so many of the most vulnerable members of society — the respectable poor struggling for decency against the odds — the dependency culture weakened society as a whole.”

        The incentive was there, even if the means were absent – given that this was at a time when there were a recorded 3.5 million unemployed and a million more unrecorded (regarded as ‘self-sufficient’ due to having cash saving, a house, or alternative means of income) culminating in protest riots, that on one occasion left the iconic Trafalgar Square a smoldering mess.

        Norman Tebbit (Employment Secretary) optimized the tin ear of the conservatives and the Thatcher philosophy, with his own morose anecdote when in a Party speech he referenced his own once unemployed father: “He didn’t riot. He got on his bike and looked for work.” The conservative conference gave him a standing ovation for that remark. The electorate gave a landslide victory to the New Labour Party.

          1. Claudius

            Agree, though Thatcher’s reelection in 1983/87 was less politics and more jingoistic triumphalism at the outcome of the Falklands war. Those ’79, late-teen, baby-boomer ‘new Conservatives’; whose worldview, over a fifteen year period, transitioned from wide-eyed naiveté to a stark acceptance that what their parents’ generation had delivered to them was being undone – the peak unemployment, riots and poll-tax of the late eighties being the harshest, final lesson.

  18. TomTom

    This is an excellent assessment by Michael Hudson. He omits however Amersham International and Cable & Wireless which were key businesses, the latter being set up as a competitor to BT with Mercury……complete failure as BT was privatised as a monopoly with control of infrastructure and was the only European telco to fail to develop an Internet presence. Further, it was forced by the Government into a Mobile JV with the sluggard private sector group Securicor called Cellnet to compete with Vodafone owned by Racal, a major Defence contractor.

    Now Cellnet having been spun off by BT so it owned no mobile operator is part of Telefonica of Spain as O2 and BT is still a dog. The success story of Mobile was Orange owned by Li-Kai Shing, now moribund under France Telecom. In short, British Management simply could not hack it and wanted easy returns and big payoffs.

    There is little entreprenurialism in Britain because Corporate Fatcats get so well paid and rewarded especially for failure – just look at the fact that EVERY demutualised S&L (Building Society) has gone bust since 2000. Two major banks have been nationalised something Labour pledged to do in 1983 Manifesto but never achieved until 2008.

    The country is debt-laden with every asset hypothecated serially and with a dilapidated infrastucture and utilities using cheap plastic liners in cast iron pipes to effect repairs; gas leaks smell on every street corner, and water leakage rates are horrendous, electricity transmission in Northern England belongs to Warren Buffett and gas transmission to Hong Kong Electric.

    1. Chris Rogers


      Hear, hear.

      As you have pointed out, Thatcher’s legacy is that of selling off the family silver in Harold MacMillan’s famous words and destroying social democracy in the UK – New Labour being a fitting epitaph for her.

      As for the abilities of UK management, as you have pointed out, they are dire, indeed, Thatcher imported US businessmen to run the UK, among them Ian McGreggor and numerous spivs from Wall Street, basically, this was the death of the UK’s merchant banking sector.

      As an aside, one would gauge that by reading Michael’s long essay that after 1945 successive Labour and Conservative governments nationalised all in sight, the reality was quite different and again epitomised all that was wrong with the UK then and today, namely a dearth of talented management epitomised by the nationalisation of much of the UK’s car manufacturing sector in the late 60’s, a lack of investment in manufacturing – continued to this day, and short termism.

      What Thatcher and her accolades forget is that Rolls Royce in the early 70’s nearly went tits up and if it were not for government interjections, the Trent Jet Engine would never have been born – this episode sums up all that is wrong with the UK, its workers, engineers and technical management are not stupid or lazy, its just that people and business rather be rentiers than producers and this is destroying the nation and rather than changing this fact, Thatcher’s policies increased it.

      1. TomTom

        I have a soft spot for Rolls-Royce and know how much Government pushed the company to develop. Henry Royce had wanted to shut down in 1914 for the duration of the war but was instructed to produce Silver Ghosts for the military, then in 1915 to copy the Renault aero-engine; W O Bentley had already stolen a Daimler aircraft engine for Royce to look at. The Government told Royce to produce aero engines.

        Neville Chamberlain as Chancellor, in 1935 underwrote the PV12 Project ie. Merlin engines and arranged for Rolls-Royce to set up Shadow Factories and a Subcontractor Supply Chain with the Government paying for the Crewe factory. Rover was instructed to take over Rolls-Royce tank factory and turn over the Whittle jet-engine project to Rolls-Royce together with a factory in Barnoldswick. Churchill subsequently gave the technology to FDR in 1943…..the US Government told GE to build jet-engines and Pratt & Whitney to stay with turbo-props.

        Heath nationalised Rolls-Ryce (thankfully) when the RB-211 Project for Lockheed bankrupted the company because of high R&D costs spinning off the car business to Vickers.

        I think this was Government action at its best in all these instances. It is how MITI operated in Japan and how Korea and Taiwan developed. The West simply lost the plot.

  19. Chris Rogers


    I agree with a number of posters that Michael’s article is overly long and in urgent need of some ‘sub editing’.

    Further, and as someone who grew up with Thatcher – my milk allowance being removed from School when she was Education Secretary under Heath’s 1970-1974 administration – I can assure you and many readers that around my neck of the woods, South Wales, Mrs Thatcher was in the most detested.

    Having endured nearly 11 years of Thatcher, topped off by 5 years of John Major, one yearned for a Labour Government after Kinnock’s defeat in 1992, regretfully, what we got was neoliberalism on steroids via Tony Blair, who in many a left-wingers eyes was Thatcher in drag.

    I digress though, first and foremost, Michael fails to appreciate that by 1982 Thatcher had all but abandoned monetarism, which had managed to destroy more than 2 million jobs in two years – unemployment breaching 1 million in 1978 and reaching 3.5 million by 1983, or 1 in 10 of the workforce.

    As for her detestation of Trades Unions, one gets a little annoyed with all the focus on the miners, when in fact the first casualties of her zeal were the Steel workers who withdrew labour in 1981 – they were beaten after 12 weeks – more importantly though, neither the miners or railway workers came to their Unionist brothers assistance, and it was this split in the Union movement that assisted Thatcher in beating the miners in 1984-85 – the cost of which was huge to the public purse and is much ignored.

    However, having abandoned monetarism having decimated much of the UK’s manufacturing ability, Thatcher’s ‘popular capitalism’ epitomised by mass privatisation’s and the ‘right to buy’ council house policy certainly hit a cord with many – regretfully again, many ignore the fact that Institutional Investors were given precedent over the public in these sales and that the public could only subscribe to a ‘capped’ number/value of shares, many of which were sold quickly at a profit to the II’s.

    One could go on, specifically, Thatcher laid much of the groundwork for the crisis we now have in the UK and austerity being inflicted on multiple parts of the nation, specifically, the spiralling cost of housing social welfare claimants and addiction to rent seeking activities rather than productive activities.

    As an aside, and despite all the eulogies that no doubt are being spewed the world over at Thatcher’s demise, I’d like to remind readers that another prominent woman politician who was superior to Thatcher in so many ways is often ignored, and yet history would be so much different had her policies been implemented in the late 1960’s. One is of course referring to Labour Barbara Castle and her White Paper on Industrial Relations, ‘In Place of Strife – had Harold Wilson adopted this Thatcher would never have existed, hence, as a historian, one charts the UK’s downfall as far as social democracy is concerned, from this period, rather than with Thatcher herself, or the IMF bailout with monetarist strings in 1976.

    No need to say where I stand, indeed, as I posted on The Guardian yesterday, in South Wales, rather than any mourning, the opposite will be the fact, and utilising Thatcher;s words after the liberation of Port Stanley in 1983; ‘Rejoice;Rejoice; Rejoice.”

    1. Dan L

      >I agree with a number of posters that Michael’s article is overly long and in urgent need of some ‘sub editing’.

      For someone familiar first-hand with the details of Thatcher policy, perhaps.

      Personally, I wish it had been longer.

    2. Knute Rife

      A few council houses were allowed to slip to individual buyers to mask what was really happening, namely a massive transfer of public assets to a select few private institutions. Ultimately the institutional buyers got it all when they forced the individual buyers out of what they thought they had bought.

  20. The Rage

    Frankly I always found “everybody” should own property line of free market thinkers very anti-conservative.

    To a true conservative, not everybody should not own property because they are not up to the challenge so to speak or if you want to Evola or Spengler it, they aren’t elite enough.

    The free enterprise system is very anti-tradition while excessive capital ownership degeneratives them into wannabe royality. Socialism at times is used as much a reaction against the rise of liberalism and the final destruction of the caste system.

    If the United States nationalized its energy production and ignored global markets, that to me would be a quite conservative reaction. It would allow the US to take what it wants(through war and genocide) in energy production and leave the rest of the world on their knees at our feet. We could take over the entire middle eastern oil fields and wipe out the native populations making the siezure quite easy. Compare that to the Neo-con game in Iraq when the goal was to make money for the private energy cabal itself, not helping America in the slightest.

    Thatcher represented the degeneration of the western civilization. When the word conservative died as anything meaniful. She was a typical petty bourgeois women with a puritan background. Not only was she degenerative in worshipping the merchant caste above all other, but intellectualizing the puritanical intincts toward business as the all mighty was absolutely degenerative.

    I can agree with Thatcher that homosexuals are “weirdos” but for totally different reasons.

    1. Chris

      I’m sorry but I found it hard to ignore your blatant implicit support for aggression and genocide. How American of you!

  21. larry

    On the economic question of how a great economist of the time, Nic Kaldor, viewed her oil (and other) policies, I recommend his The Economic Consequences of Mrs Thatcher, which were speeches given in the HoL during Thatcher’s first term. Unfortunately, he died soon after.

  22. McMike

    At some point, conservatives are going to HAVE TO confront the natural consequence of economic lawlessnes – that just as criminal lawlessness leads to violent anarchy; economic lawlessness leads to monopoly and rent-seeking.

    Both forms of deregelation eventually regress until only a few ruthless players dominate, and everyone else hides under rocks all day and stops going to work.

    The evidence after thirty years of Reaganism is overwhleming. The US economy is a top-heavy empty shell run like a drug cartel, a third world kleptocratic plutocratic banana republic.

    Meanwhile, the conservatives are still bloviating about socialism like we are still stuck in 1972 or something. The disconect is surreal. They are going to HAVE TO confront reality, aren’t they?

    Is there any chance that some cons might say; “gee, I think we took this idea of free market fundementalism too far…” (I know some have, like John Gray and Kevin Phillips). Or maybe some might come to understand that just as communism is doomed to get derailed on its road to utupia, so too is extreme deregulation, when overdone and pursued as a policy rather than an ideal.

    […someone please tell me they are going to have to confront reality…]

    1. McMike

      John Gray was a social conservative who came to see early on (in Britain) that the net effect of free market fundamentalism policies was to DESTABILIZE familes and break up communities – the opposite of putative conservative goals.

      Phillips was an economic conservative who came to see through an honest study of ecnomic history that wealth and government work always hand in hand, and so as a progamatic academic, he relaized that being guided by myths and wishful thinking was not at all conservative.

      So, who are the conservatives of our era who are willing and able to confront reality now?

      [I am not talking about the opportunistic chameleons either, those on the right who blithely change their justifications like Humpty Dumpty to suit their policy reversals]

  23. duffolonious

    On British Telecom (amusing reads from the US side of things – not that every ISP over here is super awesome):


    “This would be funny if it wasn’t so sad — and scary; how is it that people like this are allowed out into the community rather than being kept in secure institutions where they can’t pose a danger to themselves or others?”

    If BT sucked before (they were very antiquated by US standards, going back to … forever probably (but at least the 70’s) – they still suck it would seem.

    I’m of the mind that company sells offs are very difficult – they would have been better off allowing competition (allowing leased copper at cost + small % rates – something that has to be done for cable co’s in the US), not just selling the company to the same incompetent managers.

  24. clarence swinney

    Since 1980
    Republican have done these things:
    20 years White House control
    18 years Senate control
    15 years House control
    numbers rounded
    Took 600B budget to 3500B
    1000B Debt to 12,000B
    Surplus to 1400B deficit
    218,000 new jobs per month to 99,000.
    Initiated our involvement in 9 foreign conflicts
    Hundreds of thousands of innocents killed
    Ruined great middle class Savings and Loans Industry
    Repealed Glass-Steagall
    Today 5 Big Banks hold 50% of all deposits in about 7000 banks
    10 banks hold 80%
    Created world’s biggest gambling Casino by 2000 Modernization of Commodities Market
    Sent 3,700,000 good American jobs to just China during Bush II administration
    after 2000 Open Market agreement with China
    Flushed Wealth to top 10% who now own 73% Net Wealth, 83% Financial Wealth, get 43% of individual Income and pay 15% or less Tax Rate. Put 46 million on Food Stamps.
    Ruined Housing Industry
    Created a Great Recession
    Shame on them

  25. digi_owl

    Adam Curtis’ Pandora’s Box episode The League of Gentlemen covers this period. From there i got the impression that a lot of it started thanks to a Conservative push for growth by public spending, then later on a liberalization of credit leading into the infamous stagflation.

    As such the stagflation was perhaps a creation of the “Keynesian” economists ignorance of private credit. Meaning that the mounting private debt was pushing money into a economy without the ability convert it into products and services and so getting rising prices even when the rest of the economy was going level.

    The ironic thing being that the monetarists that followed were just as ignorant, and what seemed to have kept the iron lady in power was a certain war.

    1. William C

      There was very rapid growth of the UK money supply in the early 1970s – the Barber boom – following the collapse of the Bretton Woods agreement and corresponding monetary growth in the US (Nixon pressurising the Fed to ensure his reelection?). This led to a property boom which crashed in late 1973 at the time of the first oil price shock. The unions pushed for wage increases as the economy overheated and to ‘catch up’ with soaring house prices. The resulting wage inflation pushed up the costs of goods and services at the same time as the oil price shock hit the real economy. The result was rapid inflation at the same time as a sharp fall in GDP – the notorious ‘stagflation’

      1. TomTom

        THe Barber Boom was caused by Competition & Credit Control Act 1971 which deregulated Banks. Heath was a MkI Thatcher following Selsdon Man dogmas but failed, Thatcher was Mk II. She had been a high-spending Minister under Heath. Barber deregulated The City and set off a property boom and led to the collapse of Midland Bank which had to be rescued and the frinfe banks went under. This collided with the 1973 OPEC Blockade and strikes in the Mines which had been run down since the 1960s in favour of cheap oil. Heath ended up with electricity rationing and a 3-day week and a State of Emergency in 1974.

  26. JEHR

    I have to tell you that our Prime Minister Harper told us that Thatcher gave him a lot of pointers on how to run the country. Woe is us!

  27. allcoppedout

    There’s a lot more to say on this. The collapse was also a collapse in decent training and education in the nationalised utilities and heavy industry.
    Thatcherism predates the Iron Lady by a decade or more to the days of Wilson and Healey – the Labour leaders who ran our ‘secret’ war in Indonesia.

  28. Maggie's Ghost

    I’d forgotten what great economies we had in the 70’s..

    Low inflation, high growth…

    Ronnie and I should have let things continue as they were..

    Great times they were…..

    1. jrs

      Not really. But I can see how one might thing so only in comparison to the present situation.

  29. walter_map

    What was it that made Thatcher, and others like her, think that destroying the lives of so many millions of people was a ‘good thing’? Sheer sociopathy?

    Even an atheist can plainly see that Paul was right: the love of money is the root of all evil – wealth in amounts far in excess of what could be lavished on material comforts, in amounts that cannot have any purpose other than to cultivate greed for its own sake, by deliberately sending millions into misery by cheating them out of what little they have, and adding it to the pile. Most people hope to have enough money to buy a comfortable life, or to at least avoid want and need, but for the hyperrich, it is a weapon of mass destruction.

    That is how they are using it, and all they really want is more victims, which is why Thatcher was one of their goddesses. She delivered victims.

    “All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.”

    – Adam Smith, ‘Wealth of Nations’

    It’s going to get ugly. After that, it’s going to get _weird_ ugly. It is already so, for billions of people, so what’s a few hundred million more?

    1. TomTom

      Lack of knowledge of History. If you don’t know that your ideas are not new but are derived from some previous experiment you are arrogant. Thatcher simply returned to the 18th Century or pre-Victorian England which was when Early Victorian England gave way to late-Victorian England with social lrgislation and Banking Acts and Companies Acts and Working Hours Acts and the wild excesses of Railyway Mania and Banker Fraud were brought more under control.

      She lacked a knowledge of the history of her own country and like a Marxist – and some of those around her were ex-Communists like the US Neo-Cons are often (Kristol) ex-Trotskyites – think History is Bunk and can be by-passed by Ideology. Thatcher simply acted as a Marxist imposing Capitalism as an ideological system not an economic one

  30. hanns

    very, very good article. Could you give the original source, too? In case someone wants to cite it.

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