How and Why Did the UK Embrace Neoliberalism?
Updated: Dec 18, 2021
As capitalism once again finds itself in crisis, progressives should look to the past to understand how we got here.
The 1980s under the Thatcher UK government represented the largest shift in public policy in the developed world, fundamentally reshaping the country’s relationship between civil society and the state. This shift still holds relevancy to this day, in particular during a time which represents growing calls for a post-Keynesian consensus that is akin to past models. Today we will analyse this policy shift. First, we shall break down public policy into three defining lawyers to narrow down a point of focus. Second, these changes will be analysed by taking a particular look at structural and goal changes set by the Thatcher government. Thirdly, the paper shall explain why these changes occurred. This essay shall reveal various branches of policy theory including, but not limited to, various forms of power, policy communities, ideological themes and punctuated equilibrium theory.
From a broader understanding of public policy we consider the definition by Richards and Smith (2002), who argue that policy is a set plan by actors to meet a particular target, whilst the inclusion of “public policy” is one driven by a state actor. As this paper will study state actor changes in policy, the branch of economics considered must be reflective of this. Therefore, this paper shall analyse policy change under macroeconomics – specifically the changes in aggregate economic quantities and the economy as a whole (Dwivedi, 2005).
Academics contest the various definitions of “Thatcherism” and if it meets the definition of a policy framework. Gamble (1988) argues that Thatcherism exists as a “project” (pp. 14), in that is fundamentally challenged and restructured social democratic structures of the post-war consensus. This was done due to a range of policies in aim to change the relationship between civil society and the state, by government acting as a regulatory body and less often an interventionist actor.
Riddell (1989) counters this narrative, arguing that Thatcherism is a personality and leadership style rather than an ideology within itself. He cites the Conservative’s 1975 leadership election, in which Thatcher largely won because she was seen as an opposite to the failed leadership of Edward Heath. Further, Riddell points out the key tenements of Thatcherism were not clear in the 1979 Conservative manifesto (pp. 21). Any ideological origins were developed post-election and are largely innocent. Finally, Riddell points out the difference between Thatcher’s economic narrative and the reality of policies implemented, arguing many of her reforms had already started under Labour and were held back from her more radical vision (i.e. monetarism, housing).
There are primarily three problems with Riddell’s definition of Thatcherism. First, the personality behind Thatcher’s economic policy agenda plays a key role behind the paradigm shift of the 1970s, which will be further explored. Secondly, Thatcher’s inability to fully accomplish key targets does not diminish the change itself, as academics can almost universally agree on the key tenants of Thatcher’s policy change (Savage et al, 1990). Thirdly, Riddell’s claim of neo-Conservative policies developing post-1979 ignore the academic coordination of Austrian and Monetarist made pre-Thatcherism. Whilst Thatcher’s source for economic policies came from Friedrich von Hayek’s “The Constitution of Liberty”, the policy formation of Thatcherism came from her advisor Sir Keith Joseph. Austrian and Monetarist think-tanks became powerful lobbying bodies that managed to change the discourse on fiscal and monetary policy (Green, 1998)
The economics of Thatcherism was evidently opposed to the Keynesian consensus, with neo-Conservative bodies rejecting the notion of engineered economic growth. With the complexity of state institutions and engagement with the labour market, Thatcher instead wanted to create conditions conducive to growth. By creating the conditions of growth for markets, all corners of Britain would benefit. Thatcher and neo-Conservative bodies commonly set these targets whilst discounting relative poverty rates (Thatcher, 1988). Thatcher ultimately believed that public policy was a victim of complex systems, thus advocating for shared responsibility amongst multiple actors in private markets.
Thatcherism proposed markets represented the most efficient mechanism of producing and redistributing resources. This strategy, an element of wider neoliberal policy shifts, is part of Thatcher’s policy of rolling back government interventionism, to encourage wider market competition through deregulation. Linked to wider market competition and deregulation is the belief of individualism, in which each citizen should become self-reliant and responsible for their own actions. Not only is it a mistake for the government to regulate wider macroeconomic policies, but so too is it wrong for it to sway the behavioural factors of individuals. This was a key argument in Thatcher to either roll back or refuse to expand the programmes created within the Welfare State by previous Labour administrations.
Thatcher wanted to end “dependency culture” in which the state would cease becoming a handout to individuals in order for them to be less reliant on big government. Slashing certain taxes and welfare payments would, according to Thatcherism and wider neo-Conservatism, incentivise the individual to seek employment and purpose. Thatcher wanted to reanimate individual ethos and promote freedom. She often compared market freedom to the analogy of shopping at a supermarket - where you are either forced by the state to choose what you buy or picking for yourself. This was what many would deem pure competitive capitalism (Larson, 2018).
Whilst Labour government policy strategy had continued a Keynesian framework for almost 35 years, Thatcher instead shifted the timetable to a Medium-Term Financial Strategy (MTFS). This strategy, first presented by Chancellor Sir Geoffrey Howe in 1980, aimed for i) increased interest rates and decreased inflation rates ii) create private growth iii) increase employment iv) control government budgeting (Champroux and Sowels, 2015). The policy tools to deliver these targets were privatization, monetary levers and government fiscal spending.
With inflation dangerously increasing by the end of the 1970s, Thatcher pushed forward monetary policy in order to strangle Britain’s money supply. Specifically, the government aimed to reduce broader Sterling currency (M3) – a policy target similarly adopted by the previous Labour administration (Mitchell and Fazi, 2017). The range of reduction varied around a 10% target, however, meeting specific targets of M3 became more problematic than expected. This resulted in the Bank of England governor to communicate more closely to Thatcher on realistic policy expectations on a monthly basis from 1980 onwards (Goodhart, 2011).
The Bank of England was also instructed to allow a floating exchange rate in response to advice from the International Monetary Fund’s loan to the UK in the 1970s, but also to the advice of monetarists such as Friedman. On the rare occasion this was also policy advice sought out by Keynesian advisors to former Labour governments during the 60s and 70s, with economists Marcus Fleming and Robert Mundell proposing the Mundell–Fleming– proposal that policy could not adequately control rates with free capital and independent policy (Champroux & Sowels, 2015).
The sale of state monopoly assets to private actors was arguably the most defining policy elements of Thatcherism. Thatcher believed individual ownership through market shares was the most efficient way of developing democratic capitalism. Or as Hayek argued, each consumer was effectively a voter and used their choice of consumption as a vote of endorsement (Larson, 2018). If businesses were competing for votes, then this would lead to greater competition, investment, and freedom of choice amongst citizens. The privatization of firms also aided the government attempt to reduce expenditure and instead save for potential future recessions (Rhodes et al, 2014).
Notable state monopolies sold off to markets included British Petroleum (1979), British Aerospace (1981), National Freight Corporation (1982), British Shipbuilders (1983), British Telecom (1984), British Gas (1986), British Steel, National Express (1988) regional water agencies (1989) and National Power (1990). Shares for the company were intentionally sold off below market values, for private actors to receive an immediate surplus in income (Cato, 2017). The UK oversaw the largest scale of privatisation across the globe, making up 40% of world’s proceeds of privatisation (HMRC, 1997; Albertson & Stepney, 2019). These funds offset some of the effects of the 1970s recession, whilst still managing government accounts minimally. Furthermore, these funds also offset Britain’s weaker currency exchange rate and increasing market exports to the world near the end of the 1980s (Brittan, 1984).
Whilst government account books reveal raised funds, there is little data or policy analysis on the effects of greater competition through privatisation (Hall, 2014). Some evidence suggests that the increase in private assets locked out consumers from markets, as household income had lagged behind in growing prices. Whilst Monetarist policies had reduced the burden of inflation, the excess wealth of private actors lead to the overcharging of private utilities (Albertson & Stepney 2020). Some suggest the lack of investment is a result of higher interest rates, as the behavioural implications of individuals saving had resulted in a strangle on wider investment.
Thatcher’s welfare policies are deemed the most criticised aspects of her career, which many claim to be the driving force to doubling unemployment from 1.7 million in 1979 to 3.1 million in 1982. However, Thatcher’s plans to reduce the welfare state were never met. Spending in this area as a percentage of GDP actually remained in line with growth (despite fiscal spending decreasing from 46.6% of GDP in 1979 to 39.1% 1990). The Institute of Fiscal Studies analysed this trend and showed 10% of national income was diverted to spending on welfare by the end of Thatcher’s term. Considering unemployment largely caused this spending to remain level, then so too would it be under the UK’s aging population (Hills, 1998). So if the aim was to shrink the welfare state, then from a macroeconomic perspective this is arguably a failure of Thatcherism to mitigate its own damage (Mabbet, 2013).
Despite overall spending not decreasing, individual benefits were significantly reduced, in line with cutting taxes for middle earners in an attempt to generate growth. First was the State Earnings Related Pension Scheme (SERPS), which Thatcher significantly reduced the rights to access this scheme in order to push back against the UK’s basic flat rate for pensions. This meant that by 1996 more than 500,000 pensioners had been advised, or pressured, to accept lower valued pension from private actors due to this change. This was also met with sharp reductions social security for social housing in the early 1980s. However, Thatcher eventually u-turned on housing benefits with the Housing Defects Act 1984 after revelations of dangerous structural and health issues were discovered with degrading social housing. Once the majority of social houses had met these repairs, Thatcher once again cut these grants in her 1988 Housing Act (Fee, 2009). The reduction in grants largely locked out lower-income families from accessing many areas of social housing, especially with the introduction of Right-To-Buy.
Thatcher notably introduced the welfare concept of Le Grand – which an absent parent of a child would still be expected to contribute to the child’s welfare under a legal obligation. This was notable as under HRMC accounts this was not marked under welfare payments, but instead public control. This was an attempt by Thatcher to break down welfare policy into three roles: those who provide, those who finance and those who control it. Thatcher, whilst accepting the state would be the ultimate provider, attempted to marketize the provision and financing of benefits. Other methodological changes through welfare payments also occurred with the large increase of means-testing. Rather than stick to universal payment, Thatcherism instead opted for a case-by-case basis for families or individuals to receive payments in welfare. Whilst this was deemed to be a cost-effective approach to distributing benefits, evidence suggests this approach was more costly and required a considerable amount of data on individuals (Hills, 1998).
To understand why such a massive policy shift occurred, we will explore the policy environment the 1970s and early 1980s. We shall consider various policy actors, developing networks, various forms of power and environmental conditions.
Since the end of the second world war, Monetarist and Austrian academics had begun to build resources to start a counter-revolution to create a power bias towards private industry and capital as a whole. Milton Friedman led the discussion with his paper “History of the United State, 1867-1960” which collected the major themes of Monetarism into a single piece of work. This paper lead Friedman to become President of the American Economic Association (AEA) as his work was widely shared within private industry and academic circles. However, it would be his paper “Taxes, Money and Stabilization” in The Banker which would be later be accepted by Keynesian thinkers and central banks across Europe. With a collection of monetarist work now becoming widely circulated, this incentivised neo-conservatives to start building neo-liberal policy communities. This famously began with the Mont Pelerin Society (MPS), which gathered intellectuals from the US, Austria and the UK to formulate their thinking. Thatcher’s main source of macroeconomic modelling came from the Institute of Economic Affairs led by Sir Keith Joseph, whilst her allies in the US formulated the Heritage Foundation. Together, these institutions continuously communicated their ideas to political actors across the globe, including undermining state actors that followed full employment policies. This demonstrates one of the three faces of power in policy theory – agenda setting. The influence of lobbyist groups controlled the wider parameters of macroeconomic policy, even before the election of Thatcher (Cairney, 2020). This united front came with speed and aggression that Keynesians were not prepared for by the end of the 1960s (Birch and Mykhnenko 2010, Mitchell and Fazi 2017).
Policy shifts did not originate under Thatcher, but rather increasing lobbying from Monetarists began to change macroeconomic discourse. The Radcliffe Report, which analysed the monetary base of the UK and wider macro accounts, had continuously adopted Keynesian frameworks between the 1930s to the 1950s. However, as the end of the 1960s saw financial markets promoting Friedman’s ideas, the UK central bank caved into pressure by announcing in their 1968 edition that there was a connection between fiscal deficits and monetary growth. This announcement from the Bank of England then lead Labour Prime Minister Harold Wilson to formally drop controls on credit and the money supply (Mitchell and Fazi 2017, Quiggin 2010, Palley 2004). Monetarists alone did not drive this policy shift, but rather passive acceptance from Keynesian thinks. In his 1973 book, Keynesian economist James O’Connor began adopting neo-Conservative language by placing pressure on his colleagues to consider how “balance” HMRC’s spending and placing greater conditions on how these initiatives were financed. How the language within macroeconomic discourse shall be developed later in the essay, however it is evident that state actors and academics began changing their policy goals and analysis with the growing influence of Monetarist organisation and their power of agenda setting.
What was the policy environment that drove Monetarists and capital to strike back? Pre-WW2 originally saw the state as a policy actor follow the advice of Central Banks, but once full employment policies were established through various war recovery plans, it was evident they were too popular to ditch (COA, 1845). Labour saw increasing shares, with the expansion of public infrastructure and increasing quality of life. These growing shares led to unions to obtain both the power to set agenda and influence decision making outcomes. Capitalists on the other hand faced decreasing shares, whilst government regulation pressured them to offer low private interest rates and less dividend returns. This led to much of the blue collar sector to resent this paradigm shift, yet had little means to persuade legislators to adopt previous models due to wider success. Yet with the rise of the academic right and Monetarist literature, blue collar workers were quick to embrace neo-conservative policies with the necessary resources at hand (Dumenil and Levy, 2005). The counter-revolution of the 1980s was driven to return power back to the hands of private capital.
But is the development of policy communities enough to drive the paradigm shift? Some would argue otherwise, at the debate between the shares of labour and capital was not simply an academic one, but rather one based on the political economy (Clarke, 1988). The policy environment became to show the increasing structural flaws of the Keynesian model, in particular the UK’s failure to tackle inflation and defend its exchange rate – without these factors the push for a Monetarist model would have perhaps taken much longer.
This lends to the policy concept of punctuated equilibrium theory (PET), in which long-term policies that remained in place became vulnerable to sudden shocks and lead to instability (Cairney, 2020). The post-war regime had the specific focus on maintaining long-term high employment, in order to utilise productive resources that would counter any inflationary risk. Whilst the UK was not new to these risks, globalisation had increased the movement of capital and thus its very nature became more liquid. The popularity of full employment policies began to decline once inflation first hit the UKs natural food market, whilst also harming the country’s metal exports. This would have remained a short-term problem, if not for the US to exasperate its government deficit on the Vietnam War. This spike, which saw no multiplier effect in private markets and no increased employment, saw the US increasing inflation rate rampage through European nation’s exchange rates. Whilst this did lead to a boom in European exports due to the decreasing value of the dollar, this also meant nations had fewer physical resources at home to deal with the growing crisis, whilst obtaining US dollar assets did not bring forward an immediate solution. The fall in physical resources deeply harmed UK infrastructure, which resulted in labour demanding extra compensation for these downfalls. This lead to one of the major macroeconomic disaster of the 1970s – the wage-price spiral.
This was predicated by Milton Friedman, who famously remarked “Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around.” (Klein, 2007, pp. 140). Labourers were aware that their purchasing power would decrease due to the inflation rate, which would go on to also be exasperated by the worldwide oil crisis, leading them to demand increasing wages. Whilst Ted Heath and James Callaghan met these demands, markets simply matched increasing wages to increase their returns, increasing the spiral of inflation. This catastrophic failure was a gift to both political conservatives and academic monetarists. Both groups were able to use the negative experiences of the British public to argue that fiscal policy that government spending was out of control.
The Vietnam War was only the start of the inflation crisis. The massive increase in infrastructure and capital also resulted in a massive increase in the use of oil. Yet this would come back to harm labour, as the UK’s involvement in the Yom Kippur War resulted in the Organisation of the Petroleum Exporting Countries to create an oil embargo. Middle Eastern nations increased their oil prices by almost 20% and cut production by almost a quarter once European nations began citing their support for Israel during the war. With demand remaining the same, yet supply dropping drastically, this only added to the UK’s inflation rate, whilst turbocharging the damage done to the UK’s exchange rate (this circumstance is what lead Thatcher to adopt a permanent floating exchange rate, which has since not changed under any UK government). Real GDP and employment dropped dramatically in the UK, leading to the first major UK recession in almost 45 years (Quiggin, 2012).
At the core of Keynesianism’s declining support is one thing – power – and the manner it was wielded between national government and trade unionists. Economist John Kenneth Galbraith argues that due to the tight control over labour held by the trade unions, the scarring effect of the Winter of Discontent saw the public lose faith in how this power was used (Pressman, 2008). However, Economist Bill Mitchell and Thomas Fazi (2017) argue it is in fact the role of trade unions to respond to crisis, and by not responding would be a failure to represent workers. Rather than shift onus to workers, instead it should be up to policy makers to find the root of the problem. Keynesian economist John Cornwell argues that whilst the wider model proposed by Keynes still holds deeply held truths, it failed to consider how to manage demand in times of crisis (ibid) – once again leading us back to the policy theory of PET.
For the final section, we shall consider ideas as to how Thatcherism was able to aggressively implement its proposals within a short period of time. Whilst the Keynesian model took almost 20 years to develop and implement over across Europe, neo-conservative policies under Thatcherism were built within less of a decade. This represents the most obvious example of the first and third face of power in policy theory – decision making and thought control. Examples of decision making are most obvious when considering the intense process from state to private control of pricing, state welfare and liberal cooperation regarding trade agreements. Yet this change required, not only for Thatcher to use her own decision making powers, but to reduce the influence of her own opponents. Thatcher would later reduce the power of unions by using the close organisational link between Employment Minister James Prior and his trade union colleagues, presenting any decision making as legitimate. By reducing the power and voice of the union, this was the start of changing policy discourse and removing barriers to potential policy goals (Dorfman, 1983; Marsh, 1992).
Klein (2007) labels this dramatic change as “shock therapy”, which originally applied to authoritarian regimes across Europe. It was noted that Thatcher had taken an interest in wider themes of authority, but was less hesitant to use it through economic policy. However, an opportunity arose after the 1982 invasion of the Falkland Islands by Argentina, thrusting the UK into another conflict and giving the state the opportunity to show it was still an international powerhouse. Klein describes how Thatcher had “went into Churchillian battle mode” (pp. 137) to present herself as a hero. The aftermath of the war saw her approval ratings threefold, which was soon to be followed by the nickname of “The Iron Lady” to describe her aggressive and authoritative decision making. With public support, support from policy circles and holding full decision-making powers, Thatcher led the largest corporatist revolution the developed world had ever seen. Klein argues this is the first key example of a democracy adopting such authoritarian policy attitudes.
Stiglitz (2007) accepts the premise of Klein’s argument in the manner of which Thatcherism is carried out, but warns that Klein, like Friedman, is also guilty of making assumptions within her arguments. Stiglitz argues that a stronger argument is to be made on the limitation of information feedback on markets and its problems this causes for policies such as privatisation. Whilst more economic focused in his analysis, Stiglitz hints at the policy theory of bounded rationality – in which the lack of information feedback motivated government bodies to sell off assets to instead share responsibility within wider market loops. This would offer a more policy focused motivation for why Thatcher was quick to privatise industries – as noted earlier it was often certain measurements (i.e. relative poverty, market shares) were dismissed.
A final note is to consider Thatcherism’s complete dominance within public policy discourse, to which is still dominant within macroeconomics to this very day. Thatcher and the wider Monetarist bodies decided that in order to sell their economic ideas, they would need to be presented through a relatable analogy. This led to the dominant household analogy – where the state must run its finances similar to that of a household. This statement was particularly driven home with Thatcher’s statement “There is no such thing as public money. There is only taxpayers’ money.”
This statement is, by accounting standards, wrong. It was a point in which the Bank of England had states various times, in particular in 1982 when actually HMRC’s spending initially derives from credit extension with a zero balance at the start of each day (Bank of England, Q1, 1982). Never-the-less, Thatcher portrayed pervious Labour governments of spending recklessly, which was not helped with Harold Wilson voluntarily accepting a loan from the IMF during the inflation crisis. After decades of Keynesian dominance, the lack of organisation allowed Monetarists to define, broadcast and sell alternative and fresh policies. To this day, the household analogy has gripped and dominated the UK’s discussion of government financing, in particular New Labour taking such proposals to the next level by targeting fiscal and debt ratios akin to that of Euro nations in the EU (Kelton, 2020).