Thatcherism: What went wrong?

Mustela nivalis

‘“Economics is the method; the object is to change the soul,” Margaret Thatcher declared in 1981, revealing the way in which Thatcherism for her was always about transforming values rather than simply GDP,’ writes Eliza Filby in the Guardian. Filby has also recently published a book about Mrs T., called “God & Mrs Thatcher – The Battle for Britain’s Soul”.

It is clear that in this goal of “changing the soul”, the former prime minister failed (which she herself admitted, apparently: “I cut taxes and I thought we would get a giving society, and we haven’t”). However, her basic idea was not completely off the mark, for the conflict between individual freedom and serfdom is pre-eminently a religious one.

I haven’t read Filby’s book, and if her article is anything to go by, I probably won’t. Filby is not an economist but an historian with a degree from Durham. Predictably, she flunks on the economic causes of Thatcher’s failure.

‘Thatcherism laid the foundations for a culture in which individualism and self-reliance could thrive, but ultimately it created a culture in which only selfishness and excess were rewarded. Thatcher liked to quote John Wesley’s mantra, “Earn all you can, save all you can and give all you can,” and yet it was only ever the first instruction that was sufficiently encouraged.’

Yes Eliza, but why? Why was ‘saving’ not encouraged? And why not ‘giving’ either?

Filby suggests: “Thatcher’s naivety was perhaps her greatest flaw: her understanding of capitalism for example was more a provincial than global one; Alf Roberts behind the counter of his grocery shop rather than the yuppie on the trading floor was the image of market transaction in her mind. It is little wonder then that she could not understand the world she had created, where the nation’s homes and household budgets were entwined with a global financial services sector that made up an ever-growing percentage of Britain’s GDP, largely internationally owned and in the hands of speculators concerned with short-term gain and distant from the deals and lives they were gambling on. In private Thatcher used to rage against bankers and their bonuses. Why did they not follow the example of those in the army she would cry, which in her view was the model demonstration of responsibility to one’s fellow man.”

Laws of economics do not differ with the size of the economy. 1 + 1 = 2 whether you are adding units, hundreds, thousands or quadrillions (as we soon will be). At a lower price, demand rises, whatever the numbers. So Filby’s wrong here. But what was the problem? Why did Thatcher’s ‘attempt to change the soul’ fail? Why did Thatcherism create an ‘earn all you can’ culture without nurturing a ‘save all you can, give all you can’ culture? It’s important to know, because that would have indeed resulted in a society in dynamic balance, withering away the nanny-police-state. It’s not that the soul (or, if you prefer, the mind) can’t be changed. The left-wing neo-puritan PC-Frankfurt-School crowd have been doing this to a great many people for the past 50 years or so.

It mostly comes down to monetary policy. (I’ll briefly mention the other causes further below.) Thatcher believed in monetarism. Like most monetarists, she thought this was the antithesis and antidote to Keynesianism, which they (correctly) saw as a half way house and slippery slope towards socialism. However, they overlooked that monetarism, just as Keynesianism, is a variant of government intervention. Only they thought it was ‘better’ government intervention. Keynesianism says: when the economy is flagging, pump (new) money into demand – e.g. welfare (to work) programs. Then, demand will create supply. Monetarism says: When the economy is flagging, pump (new) money into supply. Then, supply will create demand. So, both have very similar prescriptions: shovel money around the whole economy, take it away from A and give it to B, and add new dough when the old proves too sticky. There are only two significant differences between the two: One is the direction of the shovelling. The other is that monetarism warns that the amount of new money must not exceed the growth of production in an economy, otherwise inflation will result.

In itself, this last monetarist recommendation is as correct as it is useless: If the nominal amount of new money added into a system is greater than the real value that was added in the same time frame, the monetary price of everything has to rise eventually – OK. However, when trying to put this into practice, an unsolvable problem arises: At some point the decision will have to be made how much more money to produce (or rather, how much the commercial banks will be allowed to expand credit). At any such given point it is sheer impossible to measure with sufficient exactitude how much more value actually has been added to the economy. It’s hubris to presume this could be done.

Another, more fundamental contention against monetarism (let alone Keynesianism) is this: If the economy were allowed to add real value WITHOUT an accompanying artificial money production, the price level will necessarily fall. If nominal incomes remain unchanged, real incomes then rise. Wouldn’t that be great? This is what happened, more or less, during most of 19th century Europe and North America, after Waterloo. A real peace dividend. The gold standard (not perfect, but miles better than the no-standard we’ve got today) limited the ability of governments and their cronies to produce money out of nothing. Real productivity outpaced nominal money making. (The US civil war was an exception to the rule.) Monetarists counter with the spectre of deflation. This is another kettle of fish which I won’t go into today. But they’re wrong. “Austrian” economics shows the way: if the economy flags, leave it alone, allow the bad investments to be liquidated and allow the good investments to pick up the slack. Then downturns may be sharp, but will be short. Like the one in the US 1921, which no one remembers.

Thatcherism went wrong mainly because it ignored Austrianism and chose to keep in place a basic flaw of monetary policy: A policy of managing, or centrally planning, the money supply. Central command knows best. Thatcherism was supposed to be all about market forces. Liberating them. But money, the circulating life blood of the economy, was to be kept “ring fenced” out of the market – a massive contradiction which would soon bear evil fruit.

It is easy to see why this happened. Huge, monstrously strong vested interests would not have allowed anything other. Had Thatcher seriously attempted – assuming she even understood the relevance – to open up a market of private currencies as F.A. Hayek suggested, she would have been gone before you could say Malvinas, let alone Jack Robinson. The sad truth is that by the late 1970s Britain had long become a US satrapy and was no longer sovereign, although Thatcher long pretended that it was (maybe even to herself). And that is why ‘the yuppie on the trading floor’ thrived so much more under her government than the grocery shops. As opposed to the common-or-garden lefty I have nothing against ‘yuppies on the trading floor’ and ‘speculators’ as such. They have an indispensible role to play in the (re-)evaluation and (re-)allocation of resources. But they were the beneficiaries of an unbalanced economy, because they were closer to the source of the new money than most other people. In previous decades, other special interest groups were the beneficiaries of a differently unbalanced economy: trade unions and thuggish bureaucrats. The latter are still very much in the money, by the way.

There were two other major areas where Thatcher failed tragically to make an impact: education and culture. Ever since the socialists finally lost the rational argument against free marketers, ca. 1890 that is, they concentrated their efforts on bending our minds (or, if you want, ‘souls’). One way to do that was to capture our emotions via the media. Songs, plays, novels, films, radio and then the jackpot: television. The baddy is always the capitalist. The other way was the systematic erosion of our ability to think, by a) forcing everyone into school when they could have already been productive and learning something useful on the job, working themselves up, and b) then forcing the captive impressionable audience to memorise more and more useless or even damaging stuff. Now we are all bleating: Four legs good, two legs bad. State good, business bad. State-reliance good, self-reliance stupid.

Back to monetary policy. Monetarism, like Keynesianism, does nothing to encourage ‘saving’ and (private charitable) ‘giving’. In fact, they discourage it. Because under centrally managed monetary policy of any flavour, money will inevitably seem to be growing on trees. There for the picking. All you need to do is vote for, or better still, know personally, the ‘right’ people. There is an eminently Christian argument against central banking. “Austrian” economist Guido Hülsmann has written extensively about this in his book “The Ethics of Money Production”. Central banking, in combination with unbacked fractional reserve banking, is institutionalised counterfeiting. This runs counter to the Eighth Commandment: ‘You shall not bear false witness against your neighbour’. Hülsmann also points to various other places in the Old Testament (e.g. Leviticus, Deuteronomy and Proverbs) and which specifically forbid falsifying ‘measures of length and weight’ which of course includes money.

Thatcher saw the tenet of Christianity as being not “love”, but “choice”. This fits in with what Gary North teaches about the “three basic religions”: Dominion religion (accepting the creator as ruler of the world, adhering to his rules, as deviating from them has, over time, negative consequences, and keeping to them leads, over time, to blessings for individuals, families and nations); power religion (some powerful people create arbitrary laws that suit them, enforce them in a way that suits them, and allow a system of worship to emerge with themselves and their heirs at the top of the hierarchy – a ruling class); thirdly escapist religion which accepts neither another man nor a supernatural creator as Lord, which in other words does not want to choose between the other two but ends up following the currently more dominant one of those, whichever it is.

It seems that Thatcher understood the religious nature of the life-and-death conflict with socialism (the current form of power religion) we are in – at least, basically. She failed because she didn’t, or couldn’t, apply this creed with the necessary consistency in monetary, educational and cultural policy. But leftists, in love as they are with power, i.e. worshippers of the power religion, will not even begin to look at this cause. Instead, they want to say: ‘Look, Thatcher tried to create a “giving society” by cutting taxes. She failed. Therefore it is wrong to cut taxes. And it is right to leave the “giving” to the state. “Saving”? What’s that?’ That seems to be the essence of Eliza Filby’s article.

Thatcher was right to want to ‘change the soul’. She was right to think that economics is the proper vehicle. But it is not the only one, and even it will get you nowhere if you read the wrong instructions.


  1. Mrs Thatcher was ill served by the, basically Chicago School, advice she received.

    For example both the “Single European Act” and the “Big Bang” (1986) were sold to Mrs Thatcher as free market moves – they were nothing of the kind.

    A free market is not the creation of government – a free market is just what people voluntarily do.

    Giving more power to the EEC (not the European Union) to “create a free market” was bound to be used to impose a vast web of regulations – Mrs Thatcher was soon regretting this measure, but it was too late (the British veto had gone – in many areas). Christopher Booker has carefully explained how the Single European Act led to the opposite of what Mrs Thatcher was told it would.

    “Big Bang” in the financial services was the same.

    There was no law saying that the London Stock Exchange was the only stock exchange (for example there was the Liverpool Exchange) and trading “off exchange” was also perfectly legal.

    However, the courts declared that the evolved ways of doing business in the old clubs and private companies (mostly partnerships or self employed people) that made up the “City of London” were “restrictive practices” – and so the government TOOK OVER the City (under the mask of “free market reform”).

    I may oppose the late Murray Rothbard on many matters of history and politics – but he did understand that a “restrictive practice” is only something that is imposed by FORCE, not the rules of private clubs that no one had to belong to.

    A guild is only evil if membership is compulsory.

    And the vast web of government regulations that came after “Big Bang” are a “free market” in the same way that I am six foot man with a full head of hair.

    And then there was the monetary policy………

    Nigel Lawson and the credit bubble – which led to the boom of the late 1980s and the bust which ultimately helped lead to Mrs Thatcher’s fall from office.

    True the Chicago School would condemn Nigel Lawson’s policy of a fixed exchange rate (shadowing the D. Mark).

    However, it would not warn that just because the “price level” is not going up does NOT mean that there is not damaging monetary inflation – a boom that must lead to a bust.

    The modern Chicago School follow Milton Friedman, who was a follower of Irving Fisher (the “greatest American economist of his time” – in the late Dr Friedman’s, utterly wrong, opinion).

    Sorry folks but Frank Fetter was right and Iriving Fisher was wrong – just because the “price level” is not going up does NOT mean that monetary expansion is not causing massive harm (twisting the capital structure of the economy).

  2. However, the Chicago School can not be blamed for the central failing of the government that Mrs Thatcher headed – the failure to really tackle the WELFARE STATE.

    Right from the start in 1979 – after all the first thing the new government did was to ACCEPT the “public sector” wage settlements of the outgoing Labour government (the product of the “Winter of Discontent”).

    It is often forgotten that in spite of all the talk of “cuts” – government spending dramatically INCREASED in 1979.

    This was why the recession was so much worse in Britain than in other countries – this and the utter failure to reform the labour market between 1979 and 1982. Government laws (going back to those of 1875 and 1906 – but including much more recent ones) had given unions a stranglehold on the labour market (one they used ruthlessly).

    Output fell, real wages did not – result? MASS UNEMPLOYMENT.

    It is true that the government later got a grip on government spending (although it was never really cut) and there was some labour market reform (after Norman T. became Employment Secretary – the left who denounced him got things exactly wrong, without the reforms of the labour market that Norman T. pushed through the MASS UNEMPLOYMENT would have continued, as it is in Greece, Italy, France, Spain and Portugal all of which have a totally dysfunctional labour market because of government interventionism).

    However, the Welfare State was never tacked – on the contrary, Mrs Thatcher constantly boasted of how much extra money the government was spending on the National Health Service and on various welfare schemes and government “training”.

    Enoch Powell had difficulty in making up his mind which was worse – government monetary policy or government fiscal policy.

    However, throughout the entire period the opposition were WORSE.

    The insane ravings of the Labour party (on monetary policy, on government spending – on everything) were almost beyond belief.


    It was a success – as far as it went (although the regulations imposed on the new companies were a blunder).

    However, it was the continuation of a trend.

    The share of industry owned by the state peaked as long ago as 1951 – at about 20% (if my old memory serves).

    By 1979 the decline of the (terribly managed and horribly unionised) government owned industries meant their share of the economy was about 10% of the economy.

    The privatisations of the period of Mrs Thatcher took that to about 5%.

    A good thing yes – most certainly.

    But dwarfed by GOVERNMENT SPENDING.

    Never under Mrs Thatcher (not even in the best year) was government spending really below 40% of the economy.

    True not as bad as now (when it is nearly 50%), but still incredibly high.

    Government spending (mostly on the Welfare States) now has a stranglehold in all major Western countries.

    These schemes were created for ideological reasons (it was NOT “pressure from below” or “socio economic pressures” ) it was ideology that established these schemes – and their growth (from small origins) has been one of the most important developments of the modern age.

    As with education in the 19th century, what were functions of Civil Society (old age provision, health care, unemployment, disability) have become functions of the STATE – not families, churches, “Friendly Society” fraternities, private insurance companies and so on.

    I do not believe this fundamental transformation from Civil Society to STATE will turn out well.

  3. Specifically on taxation.

    Overall taxation went UP under Mrs Thatcher – especially in the early years.

    As taxes on sales (VAT and so on) went up, more than income tax went down.

    However, the cuts at the higher rate of income tax also produced MORE revenue (and were intended to).

    Nigel Lawson got a lot of things wrong – but he got this bit right.

    A top rate of 40% will, over time, produce more (not less) revenue than a top rate of 60% or 83% (and so on).

    Indeed the taxes on investment (so called unearned income) by Labour in the 1970s and 1960s were over 90%.

    This meant that British industry had a “glass jaw” – due to underinvestment over decades.

    Who would invest in a unionised nightmare – especially if, by some miracle, you managed to make a profit this profit was then taxed away.

    Cutting taxes out of principle – out of a Gladstone style (or Alfred Roberts style) view that money belongs to private owners (not to the state) was in line with a lot of the talk of Mrs Thatcher’s period – but not of policy.

    Had the suggestion been made “let us cut income tax simply to take less money from people – not in the hopes that lower rates will produce more revenue over time” it would have been considered a mad suggestion.

  4. “A free market is not the creation of government – a free market is just what people voluntarily do”

    This is the exact opposite of what a free market is. The natural end of a truly free market, that is one without state interference, is monopoly or at least greatly reduced competition. That is because human beings will always naturally try to give themselves an advantage to protect what they have against others . The entire laissez faire ideology is built upon a false premise and riddled with outright abrogations of what the laissez faire ideologues claim erroneously is a free market, for example, limited liability, copyright and patents, all state granted privileges.

    The only way what the laissez faire claim to be a free market can be achieved, insofar as it is ever achieved is by state regulation. That is why all supposedly capitalist economies have anti-monopoly laws.

    See my https://livinginamadhouse.wordpress.com/2012/04/20/free-markets-and-free-trade-elite-propaganda/

    • Intellectual Property is a state intervention and one that pretty much everybody here is against.

      Also the history of anti-monopoly (anti-trust to the Yanks) laws is not about protecting customers against big successful corporations, but rather protecting their less successful (less desired by customers) competitors.

      So both substantial cases against totally free markets in all things that are subject to economic scarcity are hollow and easily discarded.

      • Precisely Julie. That is why the laissez faire brigade are a at best absurdly deluded and at worst deliberately dishonest. What they call a “free market”, with its anti-monopoly laws and monopoly privileges such as patents , is a very heavily state regulated market.

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