The Thatcher myth

Margaret Thatcher’s admirers and her critics are both overestimating the extent to which the former prime minister transformed the British economy and financial markets. Although she made some important changes an awful lot remained intact.

Let’s get the genuine shifts out the way first.

Perhaps the most dramatic was winning acceptance for the idea that there is no alternative to the market economy. It is easy to forget that before Thatcher became prime minister in 1979 it was widely accepted that socialism was an alternative to capitalism. By the time she left in 1990 relatively few held that belief.

To be sure this was not just a British development. The demise of the Soviet bloc in the late 1980s also played a key role in discrediting socialism worldwide.

A parallel trend was the marginalisation of the trade unions. Until the 1970s governments frequently consulted union leaders. Unions were in turn backed by millions of members who professed some attachment to the organisations. Since the Thatcher assault of the 1980s the unions have proved to exist largely on paper.

In relation to the financial markets the “Big Bang” deregulation of 1986 did make some important reforms in the City. For example, it opened the way for international firms to play a much larger role than was the case previously.

However, as I have argued previously on Fundweb, it is not true that the Big Bang ushered the City from a regulated world to a deregulated one. It would be more accurate to say that the forms of regulation changed.

Before 1986 the City was more like a gentlemen’s club. Most people knew each other and those who were caught misbehaving were blackballed. Since then an elaborate system of statutory regulation has emerged.

Indeed in many respects the City is much more regulated than it was. Financial firms typically have large compliance departments to ensure they conform to a huge range of rules.

Perhaps the biggest myth about Thatcher is that she ushered in a free market economy. Although she often used the rhetoric of markets, as well as limited government, she completely failed to reduce the state’s role in practice.

Public spending as a proportion of GDP rose early in her term then dipped. But even this change was large a cyclical effect as spending tends to rise around recessions (as it did in the early 1980s) then fall back a little during economic expansions.

The long-term trend is for public spending to remain resolutely high. Despite all the rhetoric about markets the state continues to play an enormous economic role.

Perhaps the most important thing to remember in the current debate is that Thatcher left office in 1990. There are many young adults who were not even born when she was prime minister and even more who are too young to remember her time in office.

Yet many, particularly among her critics, still talk as if she is shaping political and economic debate. For all that has happened since 1990, including the economic crisis, her successors, Labour as well as Conservative, should take responsibility.

This blog post first appeared today on Fundweb.