CPS: "Thatcher’s lessons forgotten"

I wrote another text for the Centre for Policy Studies, on Margaret Thatcher's legacy in the UK:

Vuk Vukovic, lecturer of Political Economy and Principles of Economics at the Department of Economics, Zagreb School of Economics and Management (ZSEM), writes on Margaret Thatcher's role in the specialisation of the UK workforce and its benefits, and points out her successors failed to understand the lessons she provided. 

Click here to see the rest of my CPS writings.

Here's the whole text: 

"Many leftists in the UK tend to search for a deeper cause of the current recession. For them, it wasn’t the irresponsible spending and a large welfare state creating a dependent economy during New Labour (and particularly their response to the crisis in 2008), but rather it was the “Big Bang” of 1986 and the abolition of exchange controls in 1979 made by Margaret Thatcher that led to a rapid accumulation of risk and power to the banking industry. Little do they know that these two policy decisions, among others, were the cause of a rapid political and financial rise of London, re-establishing it as a global centre of power, and making the UK more open and more attractive to foreign capital and investment.

Modernizing Britain

With the Big Bang in particular, Thatcher broke the class-based cartels in the City of London and made way for a new virtuous cycle of young individuals from around the world, enabling London to position itself as a global financial leader. Finance, Forex trading, and insurance replaced old inefficient industries like shipbuilding or mining. The process that Thatcher initiated was the beginning of a necessary restructuring and re-specialisation of the UK labour market, where a lot of old inefficient jobs were abolished and a lot of new jobs were created.

The effect of such a change was extremely beneficial for the UK in the long run. There was a generational shift from mining and shipbuilding (combined with a rapid increase in university engagement) towards financial services or anything that developed as support. Different signals were sent from the market and different patterns of specialisation were created.

The transition on the labour market was initially painful as a lot of workers got redundant and lost their jobs. But after a while they changed occupations and careers, even though they probably never got over the fact that their industries were destroyed. Think of how this affected their children in the long run. Instead of working in a shipyard, the children had an opportunity to get a good education and move to new buoyant industries. Think of the significant increase of personal wealth this brought to the average family. And think of the significant impact on newly created wealth for the UK as a whole. Closing inefficient industries (or more correctly, stopping support provided to them), opened up room for a range of other better, higher-paying industries. No one can predict where the patterns of new specialisation will end up, but provided that they are left without external interference they are very likely to produce a much more efficient and sustainable outcome. 

It is also interesting to note how a restructuring of the UK's and London's industrial advantage didn't come without significant resistance from those affected. Unions went on strikes to oppose these changes but they were irreversible. Even though the unions and their members will never admit that the change initiated by Margaret Thatcher was good for the UK economy, they too have been affected in positive ways and have achieved better lifestyles and more wealth than before. Thatcher has restarted the virtuous cycle of institutional and industrial development in the UK.

The rise of cronyism

The enormous opportunities for wealth creation brought by globalization in some instances did lead to a creation of new powerful elites (banking, political and media) which threatened the sustainability of the system. But it is here where the UK’s post-Thatcher leadership forgot her lessons.

Thatcher strongly opposed the accumulation of power by the elites and the consequential rise of cronyism. She advocated wealth creation and the principle of property ownership. But as much as she supported wealth creation, she was against wealth expropriation. She knew of the distinction of being pro-business and being pro-market. One does not imply the other. Being pro-market meant supporting competition and equal opportunity, not creating monopolies or picking industry winners.

Administrations that followed seemed to have forgotten this distinction. The accumulation of power and risk in the British banking system did not arise as an effect of Thatcher’s reforms, but as a consequence of what Charles Moore describes as a “devil’s bargain” between New Labour and the banking industry which has allowed “a huge amount of regulatory leeway in return for conferring commercial respectability (not to mention donations) upon the party”.

Margaret Thatcher for one would have stood firmly against the oligopoly position of banks which have undermined the interest of the customer. She would have also rejected the “too-big-to-fail” doctrine. Her insisting that there is no such thing as government money, but that it’s the people’s money strongly depicts how she would have felt and reacted to large nationalisations of Northern Rock or RBS.

When CPS Chairman Lord Saatchi recently told Lady Thatcher that the five leading banks had a combined market share of over 80%, Thatcher retorted ‘that’s impossible!’ What she meant by that was not that it wasn’t true, but that it was intolerable. She recognised that strong competition, particularly in industries with vast amounts of power, were necessary.

It was the creation of a crony capitalist mentality where politics aligned close with banking and media power (hint: Leveson inquiry, LIBOR scandal, etc.) that threw Britain into a state of unsustainable welfare dependency, irresponsible decision-making, and low probability of achieving substantial growth any time soon (unless the system is changed). Luckily this still hasn’t undermined Britain’s accumulated wealth, but it has certainly limited its growth.

Had her lessons not been forgotten, the UK would have ‘dodged the bullet’ and wouldn’t have been trapped in the downward cycle of a rising unsustainable welfare state and anaemic growth. The development of the finance industry and all the consequences it bared wasn’t Thatcher’s curse, it was her legacy. The problem was the interpretation of this legacy."