Posts Tagged ‘thatcher’

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Different times call for different remedies. Depending on your own interpretation of Mrs Thatcher, she either saved or destroyed Britain. She may have put the ‘great’ back in Britain, or put the ‘greed’ back in Britain. But whatever your conclusion, it does not mean the UK needs Thatcherism today and here is why.

The period 1868 to 1914, was a golden age for the UK economy. See: The Age of Symmetry. It was a golden age because it saw more innovation than any other period in history. It was not that golden for economic growth, however.

That’s the thing about innovation. It can sometimes have the effect of destroying jobs. An economy that has seen a burst of innovation has to learn how to ensure demand is there to meet all the potential supply. After World War I the global economy struggled to learn how to adjust. In the US a boom followed, but this was built on leverage to a large extent. World War II changed things. After the war, the UK became a more equal society partly because those who had fought for King and country demanded something in return. In part it was because of ideas of Keynes had become widely adopted.

In a more equal Britain, and an economy dominated by Keynesian demand creation, the UK finally learnt how to make use of that legacy of innovation, and the UK boomed as it caught up with potential. The UK was not alone; the post war period lasting around 25 years saw the highest levels of growth ever recorded. Germany learnt a different lesson from Britain, however. To a large extent it found a way to catch up with potential by selling its products overseas. Germany still relied on growing demand but the growth in demand came from outside its borders.

By the mid-1970s, all the potential growth coming from previous innovations had pretty much been used up. The UK went from high growth to playing with recession and stagnation. Something had to change, and change came in the shape of Mrs Thatcher. In many ways Thatcherism seemed to sound the death knell of Keynesian economics. Under her the UK learned to see the economy in much the same way that a savvy housewife managed the finances of her household.

The UK switched from being a country dominated by economic policies designed to increase demand, to one that emphasised supply-side. As part of this adjustment, taxes were cut, and especially for those on higher salaries. The UK became less equal. But this may have been what the UK needed for that era.

It is not like that today. Innovation is all around us. Jobs are being lost to automation. Corporate profits to GDP are at a new record. See: US corporate profits to GDP at all-time high 

Many of the larger companies do not know what to do with their mountains of cash. Money being generated by the corporate world is not being spent. The UK has become a far more unequal place, and that lack of equality has meant lack of demand to buy the products that business is capable of producing.

Keynesian economics may have lost its relevance in the 1980s, but that does not mean it is not relevant today.

And things are different in another way. The UK is now more reliant on the rest of the world than ever before. Globalisation has changed the shape of the global economy. The UK is virtually impotent. The UK government can implement measure to stimulate demand, but needs other countries to adopt similar policies or the result will be a rise in imports and the UK government may run up even bigger debts.

Mrs Thatcher became Prime Minister at a time when the global economy was changing in quite a profound way. She was more than the UK’s leader; she influenced world opinion. Thatcherism and Reaganomics were adopted internationally. Maybe Thatcherism and Reaganomics were responsible for ending the Cold War.

In one sense we need another Mrs Thatcher. We need a Prime Minister who can galvanise world leaders. It is just that we need our new Mrs Thatcher to hold quite different views from the first version. We need someone who supports measures to stimulate global demand, more equality, but as a global mantra, and indeed someone who supports minimum international taxes, such as a minimum corporation tax, so that governments can tax company profits without running the risk that companies will set-up shop elsewhere.

We need a system for addressing global imbalances as was proposed by Keynes in 1944 at Bretton Woods. And we need charismatic leaders who can light the way. Yes we need another Mrs T, but just not her ideas.

©2013 Investment and Business News.

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The fans of free markets say businesses need to be allowed to fail; that when businesses fail – and indeed when an entire industry fails – a vacuum is created. New and dynamic businesses with bold ideas can then fill that vacuum. If instead, continues the argument, we protect businesses, or industries, newer companies are crowded out, and struggle to get a foothold.

Under Margaret Thatcher we saw lots of destruction. We saw destruction of industries, whole sectors of the economy and of ideas.

Before Mrs Thatcher they used to talk about the right to work. Post Thatcher attitudes changed to reflect the new belief that jobs were only available if they provided a benefit. The right to work was replaced by the dictates of the markets.

It was not just the profit motive that become more popular. During her era, an attitude developed, or perhaps returned, that a company existed to provide goods and services that people wanted. Profit was the reward for achieving that objective. Before Mrs Thatcher, many of the UK’s largest businesses seemed to be about creating jobs, rather than creating goods and services in the best possible way.

Mrs Thatcher slashed taxes. Not just the taxes paid by the richest, but across the board. And in so doing she created new incentives. Her privatisation campaign changed the face of the UK economy. Her policies towards home ownership created millions of new home owners.
But in many ways the policies of Mrs Thatcher sowed the seeds for the financial crisis of 2008. The short termism of the city surely had its roots in Thatcherism. Although the greed of the boom years may not have fitted in with Mrs Thatcher’s own views on morality, it was a consequence – or at least a partial consequence – of her policies.

There is, however one legacy of Thatcherism that is pretty unambiguously negative.

Some regions of the UK were transformed for the worse. Sure you may say that actually the blame rests with the unions, and argue that Mrs Thatcher was left with no choice. Be that as it may, the devastation happened nonetheless.

Creative destruction may have worked in many ways, and in many regions of the UK, but some regions never have recovered from that era.

If you live in one of the UK’s wealthier regions you may hold her up as the reason for much of the prosperity this country has now – even in the midst of a nasty downturn. But in the more depressed regions there was no legacy. Creative destruction has not worked.

You can blame the benefit culture for much of the UK’s problems if you like, but would such a culture have been created if we had not seen the decimation of so many jobs?

Maybe such changes had nothing to do with Mrs Thatcher; she was merely a child of her times. Unions caused much of the destruction of British industry, and the problems being suffered across much of Europe today – as traditional industries look increasing obsolete – were merely played out earlier in the UK.

Here is a thought. Maybe Thatcherism was right for the 1980s – or at least may it was right for certain regions – but does that necessarily mean that today we need even more supply-side reform? Is the key to regenerating the UK’s more depressed areas more free markets, less benefit, greater incentives to work, or are investment and ways of increasing demand the key to growth ? Read on Thatcherism is not the answer today 

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

Imagine you have a number of individuals who are mildly risk averse.  What happens when you put them into a group scenario? Answer: studies show the group becomes so risk averse that they find it hard to agree to do anything.

What happens when you have a number of individuals who are mildly happy to take the odd flutter, a modest punt every now and again? Studies show that if you put such people into a group scenario, they become mad risk takers.

It’s what they call group  polarisation, crowds or  groups exaggerate.

Now supposing something happens. Supposing something happens that means people change, that a new set of beliefs starts to become dominant. If the idea of group polarisation is right, these new views start to become exaggerated in a group.

Let’s take the late 1970s. The economy was in crisis.  Inflation had been rising.  The ideas that had dominated thinking for 25 years were in disarray. During the post war years it was felt governments could create jobs, that a little bit of inflation was okay, that business existed to create work. It was a more equal time, when marginal tax rates for the very richest were through the roof.

It was in reaction against this crises that Mrs Thatcher moved into number 10, and Mr Reagan into the White House.

It is not being suggested that their reforms were not necessary.

Under Thatcher attitudes changed. Business existed to make profits, and somewhat fortuitously  that meant more jobs. If we taxed people less, they would work harder, and the economy would benefit, jobs would be created.

There was nothing wrong with these changed attitudes.

But then group polarisation set in. And beliefs became more extreme.

Economists fell for the idea of perfect expectations, that there was nothing the government can do to stimulate an economy, for if a government increased spending, households would anticipate a future tax rise, and save more, thus cancelling out the benefit of the stimulus. From this grew the idea of the efficient market hypothesis, that the markets always know best.

In 1776 Adam Smith said “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. “ That saying summed up attitudes. Smith himself was promoted to having his likeness appear on the £20 note. And from it was accepted that “greed was good.”

Some critics of bankers say they need to be more Victorian. We need a return to the Protestant work ethic.

Perhaps all we really need is to be less extreme.

In the backlash, there is another danger of group polarisation as we swing the other way.

Anyway, group polarisation is another topic in that book, again, the Blindfolded Masochist, click here

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here