Cabinet papers remind us of Thatcherism’s ongoing legacy

As George Osborne announces more cuts to welfare, again causing an even more divided and unequal society, we must learn the economic lessons of the past.

When the release of the 1984 cabinet papers showed there had been a secret deal to close 75 coal pits, what was most startling was not the duplicity of the government, but that the Thatcher administration was willing to cut 64,000 jobs without a second thought as to the social consequences.

It was a timely reminder of the savagery of the economic theories of the time whose legacy lives on today.

Prior to the Thatcher administration, both Conservative and Labour governments saw it as one of their main roles to actively strive to get employment levels as close to full employment as possible without overheating the economy.

With Thatcherism this changed as a certain level of unemployment was deemed a good and necessary thing: Milton Freedman’s still used and still untested theory of there being a “natural rate of unemployment” was coupled with the belief that government should not intervene in industrial policy.

The free market would create the new industries and jobs for workers who, being unfettered by powerful unions, would move, retrain and ultimately be redeployed by the constant flux of the perfect market.

Now, 30 years on, we have the long-term statistics of the post war period to show the effects of this paradigm shift in policy.

Below our analysis of the Office of National Statistics (ONS) unemployment data shows that, previous to the election in 1979, unemployment averaged 2.64 per cent; after the election of Thatcher it has averaged 7.78 per cent, with the average during the Conservative government of 1979 to 1997 being 9.1 per cent.

Unemployment rate Ranjit
The unemployment within the Conservative administration was over three times as high as the average of the previous 34 years.

What we must factor in is the effect to society of this structural change in the average unemployment rates over the years since 1979 and the long-term impact of government non-intervention. A comparative example is instructive:

Germany was asked a similar economic question, but on far more drastic and vaster scale in 1990: what to do with the reunification of a geographical area half its size with a population of 16 million people with a rust-bucket industrial base.

For reasons of political necessity as well as economic they invested, as Alex Weber, President of the Bundesbank, said in Davos in 2010, Germany in the 20 years since reunification had invested the equivalent of its yearly GDP ($1.2 trillion) in infrastructure and industry to modernise the East. An example of this is the former Eastern German states becoming world leaders in Solar power as well as new technologies.

Germany is now seeing the benefits of this foresight. The investment has made domestic demand stronger, empowering those 16 million people to become creators and consumers of the German economy. Further, by minimising, but by no means eradicating, structural regional unemployment, German unemployment has got back to 5 per cent, something we can only dream about in the UK.

Most Conservatives would probably argue that by ripping out those inefficient industries the UK became more productive. Again, looking at the facts the evidence for this is weak.

Below our analysis of ONS official data from 1960 to 2013 shows that productivity after 1979 on average is 44 per cent lower than from 1960 to 1979 (2.75 per cent to 1.91 per cent).

Although productivity is not an exact science, what the official productivity measurement of the ONS does show is that there is no compelling evidence of any structural change to productivity after the election of Mrs Thatcher in 1979.

Graph Ranjit 3

A Country’s productivity is a complex area to measure but most now have the common sense view that the most sustainable way to increase productivity is not for government to step away, but to help investment in infrastructure and technological advances and improve the workforce through better education.

This has been the lesson across the world from both modernised and modernising economies. Unfortunately, as I have pointed in an earlier article, investment is something the UK is lagging behind its international competitors.

Free-market economics failed before through trickle down economics and has failed again in its new clothing of austerity. Like the Marxist who faced with the horror of Soviet Union could not accept the fundamental failings of their ethos, so the free-marketers of today suffer the same blind obedience to their ideology.

As George Osborne announces more cuts to welfare, again causing an even more divided and unequal society, we must learn the economic lessons of the past.

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