November 24, 1999 | Lecture on Political Thought
Margaret Thatcher has her place in world as well as British history. Her very name is used to denote a way of thinking: Thatcherism. She herself was not an original thinker, and on her resignation the editor of the Daily Telegraph described Thatcherism as a powerful collection of beliefs about the capacities of human beings in a political society. The ideas were not new but were put into operation by a very remarkable woman. It was the happy coincidence of the right person, in the right place, at the right time.
When she became leader of the Conservative Party in 1975, Britain was on the brink of disaster, threatened by total collapse. The weak Labour government with a small majority presided over a bankrupt economy in hock to the IMF and threatened from within by a challenge to law and order itself. When she was forced from power in 1990, she left a sound economy and a confident and well-ordered society. The lessons are writ large.
The achievement was remarkable, starting with the fact of being the only woman Prime Minister in British history -- something America has yet to emulate. She enjoyed 11 and a half years in office, longer than any other 20th century politician (in fact, the longest since Lord Liverpool in the 19th century). She won three successive general elections, two of them being landslide majorities, and lost none. The secret of her success lies in a combination of qualities, which both saw her into leadership and were the essence of her period in power:
Clear beliefs held with an evangelical zeal. During the 1979 election, she ridiculed the Socialist Prime Minister Callaghan saying, "The Old Testament prophets did not say `Brothers, I want a consensus.' They said, `This is my faith; this is what I passionately believe; if you believe it too, then come with me.'" Her crusading qualities were embedded in her Methodist background, which gave a moral purpose to all she did.
Monetarism underpinned all Margaret Thatcher's policies. The beliefs were clear and are still what a free country needs to prosper. The aims were clear: to reduce the power of government, to reduce taxation and thereby promote private enterprise and individual rights, to give incentives to businessmen and encourage competition. Margaret Thatcher believed that these aims would produce economic and fiscal benefits for the people and enable her to use the political process to further the free society in all its aspects.
The economic lessons of these beliefs are going to be dealt with by Antonio Martino. In this he is fortunate, for monetarism and the free market are what most excited Margaret Thatcher. Suffice for me to say that what Thatcher pledged in her manifestos was delivered. She used simple imagery that everyone could understand. She was the grocer's daughter, the housekeeper of the nation who would balance the budget and the nation would only spend what it could afford.
It was only after 1987 when Chancellor Lawson shadowed the deutsche mark and Britain entered the ERM that the Conservatives learnt you cannot buck the market. The price was failure in 1997. But it is important to remember that at no point did the public lose faith in the free market which Margaret Thatcher did so much to encourage. The opposition have adopted this policy, and the last election was fought partly on the basis of who could best implement that policy -- a key part of Thatcher's legacy.
The monetary reforms of Margaret Thatcher were paralleled by moves to curb the power of the trade unions in Britain. Just as the Conservative Party already had taken up free market ideas in its manifesto for the 1970 election, so the intention to work with the trade unions was not entirely new. The Labour Party under Harold Wilson had introduced legislation "in place of strife," and when it failed, the floodgates of intransigence were opened.
Callaghan (himself a trade unionist) had tried to build a social contract between the Labour government and the trade unions. When consensus patently failed, in the winter of discontent of 1979, it left the field open for Margaret Thatcher. The time was ripe, but she made the difference. She had a will of iron and stood firm against a barrage of strikes and intimidation, until between 1982 and 1988 the unions were brought step by step within the law. After the final confrontation with the steel and coal industries, the proper balance between employer and workforce was restored. Men no longer had to join a trade union, and this, combined with the program of privatizing nationalized industries, resulted in a reduction of union membership from 13 million in 1979 to 8 million in 1996.
The defeat of the trade unions, together with privatization, represented one of Margaret Thatcher's greatest successes. The effect was to bring large sections of the working class within the Conservative fold. She had extended to them what had been regarded as middle-class ideals and had, through privatization, created popular capitalism and the beginnings of a shareholding democracy.
When Margaret Thatcher took office, there were 3 million private shareholders; when she left, there were almost 11 and a half million. The tabloid newspapers latched onto this and joined their broadsheet cousins in publishing alongside the racing columns share market information and news. The popularity of privatization increased as each industry was floated on the stock exchange. When the gas industry was launched, the shares were oversubscribed by 500 percent.
Working people were given a further stake in society by the sale of locally subsidized housing, in which many of them lived. They were sold to tenants at knockdown prices, and between 1979 and 1989 owner occupation increased from 55 to 63 percent. Despite the setback of the recession of the early 1990s, the ambition of most of the electorate remained to own their own home.
As Margaret Thatcher drew the wider electorate into her beliefs, it should be remembered that she had originally had to fight all the way within her own party. Unlike an American President, who takes with him his whole machine, Margaret Thatcher was an outsider who inherited a Cabinet and party machine, both of which were consensual in attitude. This applied even more so to the civil service, which for 15 of the previous 19 years had been under socialist direction.
She used similar tactics to turn round all three to her way of thinking. She bypassed them until she had the members she wanted. She used subcommittees instead of full Cabinet to ensure her policies. She used outside think tanks: the Institute of Economic Affairs, which had given her the early tutelage in monetarism, and the Centre for Policy Studies, founded by her guru, Sir Keith Joseph. Like Heritage in America, they created the intellectual ideas for she and her followers to implement. She brought in outside advisers: academics like Alan Walters and Terry Burns and successful businessmen like Sir John Hoskins (computer magnate), Derek Rayner (M&S), and Sir Robin Ibbs.
The need to cut bureaucracy and public spending was tackled from the outset, and between 1979 and 1987 the number of civil servants was reduced by 22.5 percent (732,000 to 567,000). The truly radical changes were introduced between 1987 to 1990, inspired by Sir Robin Ibbs. Only a small core of advisers was to be retained to run government machinery, and most civil servants would work for new executive agencies, attached to ministries. Precise targets were to be set and held to. Although the reforms were properly effected after Margaret Thatcher had left office, she had changed the culture of the machinery of government.
It was more difficult to bring about cost cutting and reform in local government and the welfare services of health, social security, and education. The welfare needs were seen by the electorate as free and of right. It is difficult to take a bone away from a dog, and the early years of her premiership were taken up by more pressing matters.
Cost-cutting measures were undertaken in
all the services, but despite cash limits being imposed, overall
spending rose. (For example, in health, from 1980 to 1987 it
increased by 60 percent). In education, my voucher scheme was
turned down by
Cabinet, and only minor changes were introduced.
In local government, cost cutting had perverse repercussions. The spendthrift city authorities controlled by the extreme left were rate-capped and the worst of them all, the Greater London Council, abolished. Unfortunately, it allowed Councillors to blame government for shortfall in services and increased centralized control, which reduced freedom.
Margaret Thatcher's populist instinct had made her more cautious in these areas, but after the election success of 1987, when she saw her monetary policies threatened by runaway costs, she introduced dramatic reform in all these areas. Again they were not properly implemented until she had been forced from office.
The changes that had been undertaken were to prove part of her undoing. The poll tax, which was an individual tax which replaced a property tax, was so unpopular it had to be withdrawn. The health and social security changes frightened the electorate and led to the debacle of 1997. In education, the setting up of grant-maintained schools to bring power and responsibility to individual schools as against the local authority was overturned by the present government.
There is a lesson in all this: Always tackle the controversial or unpopular measures at the beginning of an administration. Margaret Thatcher thought she was doing this after her great election success in 1987. She could not have foreseen she would have been forced out of office in three years. It was not that the ideas were wrong; the think tanks had provided mechanisms to introduce market principles. In these areas, however, only a few politicians had been willing to preach their virtues. Their time is yet to come, the message must still be reiterated.
Few politicians in history have the opportunity or ability to shine in domestic and foreign policy. Margaret did both. She was patriotic and had no compunction in unfurling that flag. Her patriotism was instinctive and struck a chord with the British people. They saw her as a powerful leader who stood up for Britain.
She didn't pretend to be a diplomatist, and actually said of herself, "I know nothing about diplomacy, but I just know and believe I want certain things for Britain." These were increased respect for Britain as a leading power, limitations on European pretensions, and a close alliance with the U.S.
This latter was the most important and productive, and was cemented by the mutual attraction and meeting of minds of President Reagan and Margaret Thatcher on most issues. It enabled her to fight a war 8,000 miles away in the Falklands. She had the backing of the British people, but she needed American help. It was given, and she never forgot this. Neither did she forget European procrastination and obstructiveness. Later, she was to use her prestige to nudge President Bush into the Gulf War.
Britain remained America's strongest ally. She stood with America against terrorism in the Libyan crisis. Most important, she stood with President Reagan on the Strategic Defense Initiative but ensured that what was good for America did not undermine NATO, nor undermine the nuclear deterrent necessary for the rest of the West. It proved to be the final piece in the jigsaw that saw the end of the Evil Empire and the collapse of Russian Communism. The Iron Lady had played her part, and the chemistry that had worked with Reagan similarly worked with Gorbachev.
The repercussions of the changes that were pursued by the action of these three people were immense. The world was made a different place. As Margaret Thatcher herself said after leaving office, "The US and Britain have together been the greatest alliance in the defence of liberty and justice that the world has ever known."
Margaret Thatcher's part in the fall of Russian Communism bridged her American and European policies. She wanted the Eastern European countries free and absorbed into the European Community. This would dilute French and German dominance of Europe and make more likely a community of independent national states. From 1980 to 1988, she visited Eastern Europe as often as she could -- Hungary, Czechoslovakia, Russia, and Poland. She was popular and was seen as the champion of the values they wanted -- national determination, liberty, and the free market. She raised British prestige and gave the people of Eastern Europe hope.
Her dealings with the European Community were a different matter. There was no meeting of minds with her European partners. The protectionist, bureaucratic structure was contrary to British tradition. The Foreign Office and the majority of her Cabinets were pro-Europe and believed in consensus. Margaret Thatcher didn't, and in British interests managed to have the Common Agricultural Budget reduced and in 1980 handbagged the Commission into agreeing to a rebate for our contributions.
The price she paid was high. The economic recession in the late 1980s persuaded her into the single market. She saw it as beneficial for commerce and the extension of free trade. Her continental partners saw it not only as economic but political: the move to a single European state.
All three parties and the British public have moved their stance on Europe since 1970, when we first joined the Community. The present Conservative position of wanting to keep Sterling and against political integration fits the mood of the majority of the British people. The party should shout this loudly from the rooftops. It is a potential election winner. Europe however, was Margaret Thatcher's nemesis. Perhaps it is fitting she was in Paris when her fate as Prime Minister was sealed.
Margaret Thatcher was a conviction politician and left a remarkable legacy. Beware Mr. Blair: There is no third way. He has benefited from the sound economy he inherited. He also has the precious legacy of an electorate well-versed in monetarism during the 18 years of Conservative government. He has pledged to continue the fiscal policies for two years. They are now up, and the pressure is mounting within factions of his party for him to spend.
Significantly, the crude banners of a pressure group demonstrating outside the Labour Party conference last week read: "Stuff the market, tax the rich." His continuation of the privatization policy is compromised by government private partnership. His rhetoric to keep the trade unions at arm's length is already undermined by his actions. Privileges have already been introduced via the back door of the socialist-led European Community laws.
We should all remember that the three most successful Conservative leaders who won three successive elections were Lord Liverpool (early 19th century), Lord Salisbury (late 19th century), and Margaret Thatcher. They were all right-wing. They did not seek the center. When Margaret Thatcher was given the Winston Churchill Award by the U.S., the citation read: "Like Churchill she is known for her courage, conviction, determination and willpower. Like Churchill she thrives on adversity." They were both loved and hated but left their mark.
-- Sir Rhodes Boyson was one of the architects of the Thatcherite Revolution and served in several senior posts in the Thatcher government. He delivered these remarks at a meeting of The Heritage Foundation's Windsor Society in Sea Island, Georgia, on October 3-6, 1999.
What role did leadership play in making the last two decades of this century so radically different from the first eight decades? I shall argue that Margaret Thatcher's and Ronald Reagan's leadership has translated the revolution in economic thinking into actual policy changes.1 Also, by bringing those ideas out of the ivory tower and into the political arena, they have contributed in shifting the focus of political debate in a direction more favorable to a free society. If today's political discourse is so radically different from what it has been for the greatest part of this century, this is certainly due to the intellectual giants that have prepared the revolution -- Friedman, Hayek, Buchanan, Stigler, to name just a few -- but also to a great extent to two world leaders -- Reagan and Thatcher -- who have allowed those ideas to be implemented and, by so doing, to be known to the masses.
It is gratifying to look back at the political climate which has prevailed for most of this century and compare it to the present one. The century that is coming to its end has been the century of the State, a century of dictators, the century of Hitler and Stalin, as well as the century of arbitrary government and of unprecedented intrusion of politics into our daily lives. It has produced the largest increase in the size of government in the history of mankind.2 Just to mention a single, but very significant, indicator: In 1900, the ratio of government spending to GDP in Italy was 10 percent; in the 1950s, 30 percent; and it is now roughly 60 percent. Similar considerations apply to most countries.
For the greatest part of the 20th century, the prevailing intellectual climate has been in favor of socialism in one form or another. The future of freedom, of a society based on voluntary cooperation, free markets, and the rule of law, appeared uncertain, to say the least.3 Many people had become convinced of the "inevitability of Socialism."4 There is no need to insist on this point. We all remember how gloomy the political scenario was for freedom fighters until recently.
In the course of the 1970s, things started to change.5 Gradually, pessimism subsided and a new mood started to take hold. More and more people were expressing dissatisfaction with the old socialist prescriptions and indicating a preference for market mechanisms. Socialists of the old school became fewer and fewer. As a result, believers in a free society began to hope for the future of a liberal order.
A notable precursor of the change and a conspicuous exception to the then prevailing climate of pessimism was Arthur Seldon, co-founder of the Institute of Economic Affairs in London. In a letter to The Times on August 6, 1980, he went as far as to predict: "China will go capitalist. Soviet Russia will not survive the century. Labour as we know it will never rule again. socialism is an irrelevance." At that time, this view was regarded as preposterous, an eccentric example of English witticism. Ten years later, it seemed prophetic if not obvious.
The Role of Ideas 6
The epochal change in public policy began as an intellectual revolution. This is not as obvious as it sounds. On the practical importance of their ideas, economists disagree. As is well-known, Keynes was very sanguine: "the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else."7 Alfred Marshall, his Economics teacher, on the other hand, was convinced that economists should preach unpopular truths:
Students of social sciences must fear popular approval, evil is with them when all men speak well of them.... It is almost impossible for a student to be a true patriot and to have the reputation of being one at the same time.8
This was also Hayek's view, when he stressed that the economist "must not look for public approval or sympathy for his efforts"9 Finally, George J. Stigler was convinced that the practical relevance of the Economics profession's intellectual output was minimal: "economists are subject to the coercion of the ruling ideologies of their times."10
I tend to disagree with Stigler on this point.11 There is no doubt in my mind that "the Great U-turn" of our times has been initiated by a legendary revolution in economic thinking. From the perspective of the ideological confrontation, I am convinced that -- thanks to the work of the great liberal scholars of this century -- we live in one of the happiest times in the contemporary history of mankind. It seems to me that never before has the case for freedom been more thoroughly analyzed and better understood. Also, more people are aware of the importance of freedom on a theoretical level today than at any other time in the past 50 or 100 years.12
In the 1970s, Britain's economy was in a sorry state: Many people were regularly referring to the "British disease." This was not an exaggeration: "during the nineteenth century and the first three fifths of the twentieth century the United Kingdom remained ahead [in terms of output per head] of nearly all the main European countries."13 "Since 1960, however, an absolute gap emerged...[and] by 1973 most European Economic Community countries were 30 to 40 per cent ahead of Britain."14
Productivity was much lower than in continental Europe: According to studies by international corporations, at the end of the 1970s net output per head was over 50 percent higher in German and French plants than in corresponding plants in the United Kingdom.15 To top this all, Britain experienced rampant inflation -- from 1972 to 1977, while the OECD price level rose by 60 percent, the British level rose by 120 percent -- and high unemployment -- by 1977, the British unemployment rate was 7 percent, or 2.5 percent above the OECD average.
This appalling record seemed paradoxical to the late Mancur Olson: "Britain has had more giants of economic thought than any other country," and "[m]ost of the great early economists, and certainly men like David Ricardo and John Stuart Mill, were classical liberals." Their work had a definite impact on British public opinion: "classical liberalism was more popular in 19th-century Britain than...in most countries of continental Europe." And yet, "Britain has suffered from the `British disease' of slow growth." He concluded: "[W]e need something besides the level of economic understanding to explain economic performance."16
It seems to me that Olson makes a mistake in lumping together the British economic thinkers of the 18th and 19th centuries with those of the 20th. First of all, while it is hard to dispute British supremacy in economic thought in the 18th and 19th centuries, I very much doubt that the same can be said of British economists in the 20th century. There have been notable exceptions, no doubt, but it seems to me that, compared to the previous centuries, the 20th century has been one of mediocrity as far as British economic thinkers are concerned.
Nor am I impressed by John Maynard Keynes -- whom Olson quotes as evidence that British supremacy in economic theory continued in the 20th century -- because his influence, in my view, has been disastrous. Britain and the world would have definitely been better off had Keynes devoted his tremendous intellectual powers to some other subject.
Finally, the majority of the Economics profession in Britain after Keynes' death in 1946 has been notable for its mediocrity and its contempt for the free market: Let's not forget the manifesto of 364 British economists against Mrs. Thatcher's policies. Contrary to what Olson thought, the "British disease" was another example of the power of ideas, of wrong ideas: The anti-capitalistic consensus among British economists has undoubtedly contributed to Britain's decline.17 In particular, let us see why Britain's stagflation in the 1970s and her relative economic decline did not take place despite the influence of John Maynard Keynes, but because of it.
Following Keynes' teaching, British economists were convinced that inflation was the unavoidable price of economic growth and a cure for unemployment.18 They also believed that it was possible to reduce interest rates through monetary expansion and that the economy could be "fine tuned" in the short term, thus avoiding the ups and downs of the economic cycle. Furthermore, inflation was not considered a monetary phenomenon but the result of excessive increases in wages due to what Samuel Brittan calls "union pushfulness," so that in order to combat inflation, one had to resort to wage and price controls, and come to terms with the unions, while at the same time pursuing expansionary monetary and fiscal policies to stimulate demand.
All of this sounds absurd today, and it certainly is, but it was the general Keynesian consensus at that time, shared by the Labour Party and to some extent also by the Tories. Everybody seemed to agree to the same Keynesian concoction: easy money, high taxation, deficit spending, and wage and price controls (incomes policy, as it was called in England).
Needless to add, all of these views have succumbed to the empirical evidence and the theoretical analyses of the last 30 years. The heroes of the counter-revolution are the great liberal thinkers I mentioned before: Milton Friedman, Friedrich Hayek, etc. We now know that there is no evidence that economic growth inevitably involves price inflation.19 The idea that one can reduce unemployment through inflation is thoroughly discredited. Only an accelerating inflation could keep unemployment below its "natural rate," but even that unappetizing possibility is dubious.20
Finally, as for the desirability of wage and price controls, we now know that the remedy was not only ineffective but also positively harmful.21 A side effect of these policies was that of making the problem of the excessive power of labor unions much worse. Britain in the 1970s confirmed the wisdom of Henry Simons who, in a famous 1944 article,22 had denounced the danger of labor unions:
labor monopolies...once established...enjoy an access to violence which is unparalleled in other monopolies.... Unions may deal with scabs in ways which make even Rockefeller's early methods seem polite and legitimate. They have little to fear...from Congress or the courts.23
It may be argued that Simons, writing in the U.S. in the 1940s, was slightly too pessimistic. His analysis, however, describes perfectly the U.K. of the 1970s. Keynesianism had convinced the overwhelming majority of politicians of both parties that there was no alternative to a policy aimed at appeasing the unions, while at the same time following an expansionary demand policy, through easy money and budget deficits. Wrong ideas resulted in stagflation -- slow growth, unemployment, and inflation -- and a rapid growth of the size of government.
To put it bluntly, by the 1970s Britain was a basket case. Many economists agree that the excessive power of labor unions was responsible for the sorry state of Britain's economy.24 For example, according to Samuel Brittan:
[M]any of the particular perversities of British economic policy stem from the belief that inflation must be fought by regulation of specific pay settlements. To create a climate in which the unions will tolerate such intervention has been the object of much government activity. This has involved price controls, high marginal tax rates, and a special sensitivity to union leaders' views on many aspects of policy. The post-1972 period of especially perverse intervention began, not with a change of government, but with the conversion of the Heath Conservative government to pay and price controls.25
Brittan is referring to the disastrous economic policies uniformly pursued by Conservative and Labour governments in Britain during the 1970s.26 In particular, the Conservative government to which Brittan is referring started with admirable intentions. In the Conservative manifesto for the 1970 election, one reads:
[W]e reject the detailed intervention of socialism, which usurps the function of management, and seeks to dictate prices and earnings in industry.... Our aim is to identify and remove obstacles that prevent effective competition and restrict initiative.27
[T]he Conservative government of 1970-74 was the most corporatist of the post-war years. Its economic policies ended in disaster and the Conservative party lost two elections in succession. Not surprisingly, Mr. Heath lost the leadership of the party....28
For most of the postwar period the real trouble has been...not average tax rates but the very high marginal rates of tax, both at the top and at the bottom of the income scale. The top marginal rates are not only higher than in other industrial countries, but reached at a much lower level of income. These are entirely political taxes. The revenue collected at the top is trivial in statistical terms; and the real effect is certainly to lower revenue.... As important...is the diversion of scarce energy and talent into trying to convert income into capital, or into benefits in kind not taxable at these rates.29
This was the background of the advent of Mrs. Thatcher. Wrong economic theories, entrenched interest groups, and a widespread aversion for the free market had resulted in economic sclerosis, inflation, unemployment, and general decline. She intended to change all of this, and she did.
Her first battle was in the field of macroeconomic policy, where there was a switch from reliance on fiscal policy as a means of managing aggregate demand to the use of monetary policy. In fiscal policy the aim was that of reducing the deficit (PSBR: Public Sector Borrowing Requirement). In the field of taxation, the goal was that of restoring incentives to work, save, and invest through cuts in all tax rates, especially at the highest levels. The underlying philosophy was that the restoration of incentives was more important than the search for equality.
[A]fter the inflation-fighting campaign of 1979-82, [she engaged in] non-stop reform of the supply side -- union laws, privatisation, deregulation, local government finance reform, housing, radical tax reform and much else.30
[Reagan and Thatcher] did make considerable progress in shrinking the role of government, and in expanding the reach of market forces in the microeconomy. Both did so, first, by taming the trade union power.... The President successfully broke a strike by air traffic controllers in 1981.... The Prime Minister equally successfully broke a strike in 1984-85 by coal miners determined to impose their leader's political agenda on an electorate that had rejected it.31
She also succeeded in shrinking government's direct role in the economy through privatization. It is generally recognized that "Thatcherism's success in converting state-owned to privately-owned enterprises...[was] a programme so radical in conception, and so successful in operation, as to have won the highest form of flattery from other nations -- imitation."32 Contrary to what people both on the right and on the left maintain, Mrs. Thatcher's successes do not include a reduction in total public spending: "Indeed, 18 years of Tory government left the state's overall share of the economy virtually undiminished: 44% of GDP in 1979 and 43% in 1996."33
To sum up, Thatcher succeeded in drastically reducing inflation in a country that had become dependent on it; taming the power of what were probably the most powerful labor unions in Europe; privatizing a large portion of a bloated public sector; enacting a tax code more favorable to entrepreneurship and investment; and establishing the conditions for long-term economic growth.
She put an end to the "British disease." She put Britain back to work. Last, but definitely not least, she shifted the focus of political debate on economic issues. Mr. Blair's economic program would have been considered Conservative in the 1970s. If Labour has been forced to drastically alter its position, this is largely due to Mrs. Thatcher's legacy. One can criticize some details, but overall hers has been a fantastic success.34
Ideas. There is no doubt that Thatcher's success is largely due to the power of ideas. She acknowledged the important role played by the Institute of Economic Affairs in providing the intellectual ammunition and the inspiration for her program. On the occasion of the 30th anniversary of the IEA, she said:
[T]he Institute began at a time when despite free speech in a free country, there prevailed what I would call a censorship of fashion. Anyone who dared to challenge the conventional wisdom of the post-war years was frowned-upon, criticized, derided and pilloried as being reactionary or ignorant.... You set out to change public sentiment.... May I say how thankful we are to those academics, some of whom were very lonely, and to those journalists who joined your great endeavour. I do not think they ever numbered 364. They were the few. But they were right, and they saved Britain.35
Without those ideas, Thatcher's revolution would have been impossible. However, let's not forget that most of them were already available 10 years earlier at the time of the Heath government. It can be argued that in 1979 the justification for a radical change in economic policy was stronger than ever before, but it is still true that ideas alone do not explain the revolution. They were a necessary, but certainly not a sufficient, cause for the change.
Circumstances. It is true that by the end of the 1970s, the evidence of the failure of the statist policies pursued by both Labour and Tory governments was overwhelming. I believe that circumstances did play a role in Thatcher's success. However, the evidence of the failure of those anti-market policies was already in existence in 1970, even though it was not as conspicuous as in 1979.
Furthermore, let's not forget that not everybody drew the same conclusions from that experience. Certainly not the Labour Party that in 1979 was as Socialist as ever. And, as far as academic economists are concerned, the vast majority was convinced that there was no need for a change in policy, as revealed by the 364 of them who signed a manifesto against the new policies of the Thatcher government. The evidence was undoubtedly there, and it helped Thatcher's cause, but it had been there before with no impact, and many educated people still failed to draw the correct conclusions from it.
Interests. The trade unions had abused their power, and this made the case for reducing their influence stronger than ever. However, even this was not new: The danger omnipotent labor unions pose to a free society had been obvious for years, yet nobody had ever tried to tame them.
Leadership. I believe that, while these factors played a role in Thatcher's success, the crucial element was her personality, her principled and uncompromising leadership. It can be said of her what Ted Kennedy said of Reagan:
It would be foolish to deny that his success was fundamentally rooted in a command of public ideas. Ronald Reagan may have forgotten names, but never his goals. He was a great communicator, not simply because of his personality or his teleprompter, but mostly because he had something to communicate.36
She dared do what no one else had had the courage to do in Britain for decades: challenge the prevailing consensus, the common wisdom, the entrenched interests, and drive a reluctant party and a befuddled country in a radically new direction.
I can testify to her unusual personality. I have had the chance to meet her several times even before I entered politics. Once, in 1991, there was a conference in Fiesole, near Florence, organized by the National Review Institute. During a coffee break, we were walking along the portico of the hotel. Tuscany's countryside looked magnificent under the afternoon sun. Mrs. Thatcher remarked: "Yours is a beautiful country, with a rotten government." To which I replied: "My dear lady, the opposite would be much worse."
Her straightforward, direct way of putting things, so unusual for a political leader, earned her some enemies among other leaders but made for a refreshing contrast with the hypocrisy and vacuity of the accepted political discourse. At times, she probably overdid it. For example, on that same occasion in Fiesole, during her summing-up of the conference, she came out with the statement: "Civilization is the exclusive prerogative of English-speaking peoples." I was the only non-English, non-American in the room. I looked at John O'Sullivan, who was sitting next to me. He smiled and said, "You have been consigned to barbarism!"
She can also be very kind and thoughtful. When we won the elections in Italy in 1994, she sent me a fax of congratulations. I called her to thank her for her kindness. She gave me her usual pep talk: "You must do for Italy what I did for Britain." I attempted to explain that we were at a disadvantage compared to her. I said: "You had a Constitution that was written in the hearts and the minds of your people. We don't. You had an independent judiciary. We don't. You had a clean and effective civil service. We don't. You had a single party majority. We don't. You had those think tanks, like the IEA, that provided you with the right ideas. We don't."
As to the relative importance of ideas and/or leadership, she gave her own view on the occasion of the celebration of the 30th anniversary of the IEA. After having listened to a series of speeches by distinguished academics, all praising the great importance of ideas, she thus concluded her remarks: "Speaking as the eleventh speaker and the only woman, I hope you will recall that it may be the cock that crows but it is the hen who lays the eggs."
The lesson to be drawn is quite simple and not particularly encouraging: Mrs. Thatcher's success owes much to the intellectual revolution in economic theory. She did not invent anything new; there was nothing novel or original in her economic policies. However, while those ideas had been available for a long time, they had not been translated into policy changes until she came about. It was her leadership, courage, determination, and intellectual integrity that allowed those intellectual insights to inspire actual economic policies and change Britain.
Which brings me to my unpleasant conclusion: The limiting factor in politics today is not the comprehension of the nature of social problems and of their desirable solution -- even though we still have a long way to go to make the case for economic freedom fully grasped by the majority of public opinion and of politicians. The really scarce resource is leadership. A principled and uncompromising leader capable of building a coalition, a majority consensus around his platform is essential if we want to move toward a freer world.
Unfortunately, however, the likes of Thatcher and Reagan are not in large supply, and we can't wait for another one to come about. "So long as the people of any country place their hopes of political salvation in leadership of any description, so long will disappointment attend them."37 We must continue polishing our case, making it more convincing, exploring new ways to enlarge our freedoms, and above all converting politicians to our cause. This is what Heritage is all about.
Antonio Martino is Professor of Economics at LUISS "G. Carli" University in Rome. He is currently on leave as a Member of Parliament. He delivered these remarks at a meeting of The Heritage Foundation's Windsor Society in Sea Island, Georgia, on October 3-6, 1999.
1. I plead guilty: I am
not qualified for a neutral, dispassionate evaluation of Mrs.
Thatcher's economic legacy. I am partial to her. Also, of the many
slurs I have received during my brief tenure in
government--Euro-skeptic, anti-European--the one that bothered me
the least was that supposedly ultimate insult: Anglophile. In many
ways, I am a confirmed
2. In this sense, a prophecy has been confirmed. In the entry "Fascism" in the Enciclopedia Italiana, signed by Benito Mussolini but apparently written by philosopher Giovanni Gentile, one reads: "If the 19th century has been the century of the individual (for liberalism means individualism), it may be conjectured that this is the century of the State...that this is the century of authority, a Fascist century."
3. In 1947, the founders of the Mont Pelerin Society thus expressed their concerns: "The central values of civilization are in danger.... The position of the individual and the voluntary group are progressively undermined by extensions of arbitrary power. Even the most precious possession of Western Man, freedom of thought and expression, is threatened.... These developments have been fostered...by the growth of theories which question the desirability of the rule of law...by a decline of belief in private property and the competitive market...." Their aim was to combat the prevailing consensus with an alternative vision of man, economy, and society. Their undertaking seemed hopeless. Joseph A. Schumpeter, for example, was not impressed. In 1949, after having listed a series of socialist principles which, as a result of the "disintegration of capitalist society," were being "taken for granted by the business class...and by the large number of economists who feel themselves to be opposed to (one hundred percent) socialism," he added: "I believe that there is a mountain in Switzerland on which congresses of economists have been held which express disapproval of all or most of these things (e.g. socialist policies). But these anathemata have not even provoked attack." Joseph A. Schumpeter, "The March into Socialism," 1949, reprinted in Capitalism, Socialism and Democracy, 3rd ed., Harper Torchbooks, The University Library, Harper & Row, New York, 1950, pp. 415-425.
4. Joseph A. Schumpeter, for example, like many others was sure that capitalism was doomed and that socialism would prevail: "Can capitalism survive? No. I do not think it can.... [T]he actual and prospective performance of the capitalist system is such...that its very success undermines the social institutions which protect it, and 'inevitably' creates conditions in which it will not be able to live and which strongly point to socialism as the heir apparent." Schumpeter, Capitalism, Socialism and Democracy, p. 61. By socialism, Schumpeter meant a society where "the control over means of production and overproduction itself is vested with a central authority--or [where] the economic affairs of society belong to the public and not to the private sphere."
5. Milton Friedman was among the first to show some optimism. In 1973, he declared: "There are faint stirrings and hopeful signs. Even some of the intellectuals who were most strongly drawn to the New Deal in the thirties are rethinking their positions, dabbling just a little with free-market principles. They're moving slowly and taking each step as though they were exploring a virgin continent. But it's not dangerous. Some of us have lived here quite comfortably all along." Playboy interview, February 1973, reprinted in There's No Such Thing as a Free Lunch, Open Court, LaSalle, Illinois, 1975, pp. 1-38. The quoted language is on p. 38. At about the same time, David Friedman was even more blunt than his father: "Socialism, as a coherent ideology, is dead and is not likely to be revived.... Yet many people...call themselves socialists. 'Socialism' has become a word with positive connotation and no content." David Friedman, The Machinery of Freedom, Guide to a Radical Capitalism, Harper Colophon Books, 1973, p. 129.
6. I have dealt repeatedly with this issue on several occasions. See "Are We Winning?" Occasional Paper 29, Centre for Independent Studies, St. Leonards, Australia, 1990, pp. 1-11 (Foreword by Michael James); "Liberalism in the Coming Decade," Cato Policy Report, Cato Institute, Washington, November-December 1990, pp. 1-13; Spanish translation "El Liberalismo en la Proxima Decada," CEDICE (Centro de Divulgacion del Conocimiento Economico) A.C., Caracas, 1990, pp. 3-25; republished in David Boaz, ed., The Libertarian Reader, Classic & Contemporary Writings from Lao-Tzu to Milton Friedman, The Free Press, New York, 1997, pp. 355-362; "Ideas and the Future of Liberty," in Libertarians and Liberalism, Essays in Honour of Gerard Radnitzky, Hardy Boullion, ed., Avebury Series in Philosophy, Avebury, 1996, pp. 288-297, reprinted as "Ideas y el futuro de la libertad," Topicos de Actualidad 813, January 1996, CEES, Guatemala; The Modern Mask of Socialism, The Fifteenth Annual John Bonython Lectures, October 21, 1998, Occasional Paper 66, Centre for Independent Studies, St. Leonards, Australia, 1998, pp. 1-19; and The Sir Ronald Trotter Lecture 1998, New Zealand Business Roundtable, 1998, pp. 5-32.
8. "If there is any set of opinions by the advocacy of which a newspaper can increase its sales, then the student...is bound to dwell on the limitations and defects and errors, if any, in that set of opinions; and never to advocate them unconditionally even in an ad hoc discussion." Quoted in A. C. Pigou, Economics in Practice (London, 1935), pp. 10-11.
9. "On Being an Economist," 1944, reprinted in What Do Economists Contribute? Daniel B. Klein, ed., New York University Press, New York, 1999, p. 146. Similar views have been expressed by William H. Hutt, for example; see Klein, ed., What Do Economists Contribute? p. 9.
10. Which would suggest that their output has little, if any, impact in shaping those ideologies. G. J. Stigler, "The Politics of Political Economists," The Quarterly Journal of Economics, Vol. LXXIII (November 1959), reprinted in Essays in the History of Economics, University of Chicago Press, 1965, pp. 51-65. "Lacking real expertise, and lacking also evangelical ardor, the economist has had little influence upon the evolution of economic policy." George J. Stigler, "The Economist and the State," American Economic Review, March 1965. "I believe that the economics profession has been basically more conservative than the educated classes generally" (pp. 54-55). However, he repeated that "economists exert a minor and scarcely detectable influence on the societies in which they live" (p. 63), and "[t]he main lesson I draw from our experience as preachers is that we are well received in the measure that we preach what the society wishes to hear" (p. 13). G. J. Stigler, The Economist as Preacher, Basil Blackwell, Oxford, 1982.
11. I concur with the view that knowledge is not merely information; "it is also interpretation and judgment…. By providing powerful interpretation and scrupulous judgment, economists can take a more vital role in public discourse…. Error may be corrected when the individual discovers a new interpretation: knowledge includes not only information, but also insight: insight, that is to new and superior interpretation." Daniel B. Klein, "Introduction," What Do Economists Contrib-ute? pp. 1 ff. The quoted passages are on pp. 5 and 6.
12. I realize that this is a strong statement. There is an inevitable distortion of our perspectives produced by chronological selection. Few people who are great thinkers in the eyes of their contemporaries stand the test of time and are still con-sidered great by future generations. As a result, we are often led to believe that there are more great scholars among our contemporaries than there were in the past. However, even if we allow for this distortion, it seems still true to me that a very large number of the great liberal thinkers of all times belong to this century. Furthermore, even though ideas always have parents, in the sense that their origin can be traced back to past achievements, the case for freedom as presented by today's thinkers is more consistently argued and better supported than ever before.
13. Angus Maddison, "Phases of Capitalist Development," Banca Nazionale del Lavoro Quarterly Review, 1977, 103, as quoted by Samuel Brittan, "How British Is the British Sickness?" The Journal of Law & Economics, Vol. XXI, No. 2 (October 1978), pp. 245 ff.
16. Mancur Olson, "How Ideas Affect Societies: Is Britain the Wave of the Future?" in Ideas Interests & Consequences, Institute of Economic Affairs, London, 1989, pp. 23 ff. He was also convinced that "there are special circumstances in which ideas can play a large role" and that "widely accepted ideas can sometimes overcome the strongest organized interests" (p. 24).
17. I feel strongly about this because from the late 1950s and on, socialist economic thinking has been massively imported from Cambridge, UK, into Italy with devastating consequences for our economy. Just to give you an illustration of the extent to which bad British economics has colonized our universities, according to one of my students' dissertation, of the 50 textbooks on macroeconomics most used in Italian universities, 49 are Keynesian.
18. J. Tobin and L. Ross, "Living with Inflation," New York Review of Books, May 1971; J. Tobin and L. Ross, "A Reply to Gordon Tullock," Journal of Money, Credit and Banking, May 1972; James Tobin, "More on Inflation," Journal of Money, Credit and Banking, November 1973; James Tobin, "Inflation and Unemployment," American Economic Review, March 1972.
19. On the contrary, there are good reasons to believe that monetary instability hinders long-term projects and makes economic growth more difficult, as evidenced by the experience of a number of Latin American countries.
20. There is no stable trade-off between inflation and unemployment: An unexpected acceleration of inflation may temporarily reduce unemployment below its "natural rate," but this effect is short-lived. M. Friedman, "The Role of Monetary Policy," The American Economic Review, Vol. 58, No. 1 (March 1968); M. Friedman, Unemployment versus Inflation? An Evaluation of Phillips Curve, London, Institute of Economic Affairs, Occasional Paper 44, 1975; M. Friedman, Inflation and Unemployment: The New Dimension of Politics--The 1976 Alfred Nobel Memorial Lecture, London, Institute of Economic Affairs, Occasional Paper 51, 1977; Gordon Tullock, "Can You Fool All the People All the Time?" Journal of Money, Credit and Banking, May 1972; Gordon Tullock, "Inflation and Unemployment: The Discussion Continued," Journal of Money, Credit and Banking, August 1973; Michael D. Bordo and Anna J. Schwartz, "The Importance of Stable Money: Theory and Evidence," Cato Journal 3, Spring 1983, pp. 63-82. Manipulation of monetary aggregates can influence interest rates only temporarily: As soon as inflationary expectations catch up with reality, the Keynesian "liquidity effect" is replaced by the "Fisher effect," which will more than offset the initial impact of the unexpected change in monetary policy. See Daniel L. Thornton, "The Effects of Monetary Policy on Short-Term Interest Rates," Federal Reserve Bank of St. Louis Review, May-June 1988, pp. 53 ff. Nominal interest rates tend to be higher, not lower, when monetary policy is loose. As for stabilization policies, it is now largely (though certainly not unanimously) agreed that our insufficient knowledge, unreliable short-run macroeconomic forecasts, and variable time lags in the impact of monetary policy decisions make it likely that policies aimed at stabilizing the short run may end up being pro-cyclical rather than anti-cyclical. Attempts at "fine-tuning" the economy often result in additional, avoidable instability. "Monetarists...favor stable policy rules that reduce variability and uncertainty for private decision-makers. They argue that government serves the economy best by enhancing stability and acting predictably, not by trying to engineer carefully timed changes in policy actions which are frequently destabilizing." Allan H. Meltzer, "Is Monetarism Dead?" National Review, November 4, 1991, p. 31. See Milton Friedman, "Commodity-Reserve Currency," Journal of Political Economy, Vol. LIX (June 1951), pp. 203-232; Milton Friedman, "The Optimum Quantity of Money," in The Optimum Quantity of Money and Other Essays, Aldine Publishing Company, Chicago, 1969; Gottfried Haberler, Economic Growth & Stability: An Analysis of Economic Change and Policies, Nash Publishing, Los Angeles, 1974; Christina D. Romer, "Is the Stabilization of the Postwar Economy a Figment of the Data?" The American Economic Review, June 1986, pp. 314 ff.; Meltzer, "Is Monetarism Dead?" pp. 30-32.
21. The devastating consequences of the attempt to cure inflation by controlling wages and prices were brilliantly shown by Samuel Brittan and Peter Lilley in The Delusion of Incomes Policy, Temple Smith, London, 1977.
23. Simons's analysis of the damages produced by restrictive union practices was absolutely devastating. Because of it, he risked being fired by the University of Chicago and was saved thanks only to the adamant defense of Frank Knight. He was well aware of the explosive nature of his criticism: "Questioning the virtues of the organized labor movement is like attacking religion, monogamy, motherhood, or the home. Among the modern intelligentsia any doubts about collective bargaining admit of explanation only in terms of insanity, knavery, or subservience to 'the interests'. Discussion of skeptical views runs almost entirely in terms of how one came by such persuasion, as though they were symptoms of disease. One simply cannot argue that organization is injurious to labor; one is either for labor or against it, and the test is one's attitude toward unionism." He thought however, that too much was at stake for an honest scholar to remain silent: "Here, possibly, is an awful dilemma: democracy cannot live with tight occupational monopolies; and it cannot destroy them, once they attain great power, without destroying itself in the process." In fact, the publication of the paper was delayed for three years. In the first of its footnotes, we read: "The manuscript of this article was prepared in 1941. It was designed, not for publication, but as an exercise in formulating privately some persuasions or prejudices which kept creeping into discussions of other subjects or problems. Later, several friends looked at the manuscript. Some of them, though not all, questioned the presumption against publication. So the matter was referred to the editors. After they decided to publish, one insert and a few footnotes were added to the original draft."
24. Olson attributes the gradual decline of economic performance to the accumulated power of vested interests: "The different rates of growth in different periods and places that I have described can be understood only if we look at 'distributional coalitions', or special-interest organizations and collusions.... Britain has indeed only gradually become one of the slowest growing developed countries. It also has the dense and powerful network of special-interest organizations, and these again have accumulated gradually...that is, organizations of firms or individuals that combine to increase the price of what they sell, or to influence the government, or to do both. The professional organization, the trade union, the farm organization, the trade association, and the 'oligopolistic collusion' are the leading examples of these 'cartelistic' and lobbying organizations." M. Olson, "How Ideas Affect Societies: Is Britain the Wave of the Future?" pp. 29-31.
26. These provide a wonderful illustration of the devastating power of wrong ideas, confirming Frank H. Knight's wisdom: "The problem is not that people know so little economics. The problem is that they know so much that ain't so."
31. Irwin Stelzer, "Reaganomics, Thatcheromics, and the Future," in Reaganomics and After, pp. 79 ff. The quoted passage appears on pp. 80-81. "In both countries the principal gain from taming public sector unions was not the direct saving in wage payments to the affected workers. Rather, it was the successful signaling to the US private sector that the government would not be frightened by the prospect of public inconvenience into intervening in labour disputes, and to the UK private sector that a new, non-inflationary attitude towards wage settlements by private sector employers would receive government support. In America, this contributed to a record stability in unit labour costs; in Britain, it provided an atmosphere and a legal climate in which courageous revolutionaries...could sweep away Luddite work rule which, until then, had prevented British industry from taking advantage of modern technology, and imprisoned it in a declining spiral acceptable to the ruling soft left of tenured academics, genteel, BBC-loving intellectuals, and paternalistic, 'wet' Tories."
34. One can definitely agree with the view that "the UK has generally experienced a successful experiment in Reaganomics. Perhaps, since the principles and intentions are so similar and since Mrs. Thatcher came to power 20 months before President Reagan, one can say that the USA has had a moderately successful experiment in Thatcherism." Alan Budd, "Reaganomics--A UK Perspective," pp. 89 ff., p. 109.