Britain Today - a Post-industrial Economy

Content

Introduction

1. British economy under M. Thatcher 1979-1990
1.1. From Keynesian demand management to Thatcherism
1.2. Thatcherism in operation: 1979-1983
1.3. Britain’s economic miracle 1983-1990

2. Britain’s economic development under Conservative rule 1990-1997
2.1. Economic recession of the early 1990s
2.2. Economic policy and performance of the British economy during the last years of Tory governing

3. Economic policy under Labour 1997-2004
3.1. New Labour: the “third way”
3.2. Economic policy and performance of the Blair government
3.3. Current state and structure of the British economy
3.4. Britain and the euro

Conclusion

Introduction

After the World War II Britain, although still a world power, was no longer a major one, and its position dwindled still further as it shed its Empire and attempted to negotiate entry into the EEC.

Britain’s economic policies after the end of the World War II can be divided in to 3 main periods. The period 1945-1979 is characterised through Keynesian short-run demand-management policies. The British economist J. M. Keynes (1883-1946) advocated expanding the welfare state. In concrete terms this meant the development of a state-financed system of social security accessible to all citizens and state responsibility for the economy. According to this theory, the state should be more active in introducing regulations and controls aimed at influencing prices and wages, rather than just implementing economic policy in an attempt to prevent recession. Within Keynesianism, full or high employment was made a primary objective. State intervention in a “mixed” economy was also accepted.

Since 1979, the traditional Keynesian approach to macroeconomic policy had fallen from political favour. Monetarism was made an alternative to the post-war Keynesian orthodoxy. The Conservative government, which came to power under the leadership of Mrs Thatcher, was determined to make a complete break with the past in its management of the British economy. In contrast to Keynesian short-run demand policy, emphasis was placed on improving the long-run, supply-side performance of the economy.

Like the economists of the 1920s and 1930s who were criticised by Keynes for putting too much faith in the market system, the new priorities (which actually were not new but just taken from the 1920s and 1930s) were for “sound money”, “balanced budgets”, “more competition”, and an overall reduction in public ownership and expenditure.^[1] Also, the abandonment of control over prices, incomes and capital movements, the return of state-owned industries to private ownership and management as well as the reduction in the power of trade unions combined with the reform of labour laws, were all seen to be necessary. This policy is known as Thatcherism. The term came into use in the early 1980s, pejoratively introduced by the journal Marxism Today, but given favourable connotations by N. Lawson, a high-powered financial journalist and later the Chancellor of the Exchequer in the second Thatcher administration.

In 1997, when Labour came to power, the economic policy has been changed. However, the policy conducted by Labour differs from the traditional Keynesian policy. The new economic policy is known as the “third way”, labelled so by T. Blair, the leader of the Labour Party and the current Prime Minister.

In the run-up to the 1997 election, G. Brown, the Labour Chancellor of the Exchequer, committed the party to the traditional economic virtues of low inflation, a balanced budget, reducing the national debt – and not taxing and spending like Labour governments are supposed to. Labour, if elected, its leaders promised, would help set an economic framework – of low inflation, low taxes, flexible labour markets and modest public spending – to create the kind of incentives and stable expectations that are meant to encourage investment, entrepreneurialism and new business formation.

G. Brown, like N. Lawson, the Conservative Chancellor before him, is a supply-sider. This means that the focus of the government attention shifts from the total amount of demand on the economy – spending and investment – to the capacity of the economy to supply that demand without causing inflation. The government supply-side strategy is aimed at drawing those out of work into the labour market, thereby raising tax revenues and putting downward pressure on wages.

1. British economy 1979-1990

1.1 From Keynesian demand management to Thatcherism

I have long been convinced that the only successful basis for the conduct of economic policy is to seek the greatest practicable degree of market freedom within an over-arching framework of financial discipline to bear down on inflation.

Nigel Lawson, 1989 (Chancellor of the Exchequer in Thatcher’s administration after his resignation in 1989).^[2]

Post-war governments in Britain concentrated on improving living standards of the population and on re-establishing international economic competitiveness of the country. One of the main features in economic policy of this period was nationalisation. Pursuing this policy, the Labour Party nationalised many key areas of the economy including public utilities, airlines, public transport and the steel industry.

At the beginning of the 1970s, the British population were enjoying a marked improvement in living standards. Successive governments, however, had failed to strengthen the British economy in the face of international competition. This lack of competitiveness had led to a situation in which even key British exports to fading colonies were in decline. During the 1970s Great Britain was known as the “sick man of Europe” and was suffering from the “British disease”.^[3] The symptoms of this “disease” included high inflation, a permanent trade deficit, wage levels that were too high (set against economic productivity), regular strikes caused by all-powerful trade unions and a general hostility toward social and economic change.

The years following the 1973 in the world economy were marked by downward tendencies. On the one hand, in 1973 ended the great post-war expansion, caused by the intensive exploitation of the new investment opportunities, which eventually led to their exhaustion. On the other hand, economic slowdown was prompted by the OPEC oil price hikes in 1973-1974. Although all the advanced countries had suffered from these events, the extend of the economic slide in Britain had been particularly remarkable. The striking fact was not that the British economy showed no growth, but that its rate of growth was less than that of the most technologically advanced economy, the United States. Whereas Germany, Japan and France all significantly closed the technological gap between themselves and the United States, Britain failed to do so. In terms of GDP per head Britain slipped from 9th in 1961 to 18th in 1976, having fallen behind not just the United States, Canada and Sweden, but Iceland, France, Finland, Austria and Japan as well.^[4]

Erosion of the UK’s position in world manufacturing had also been noticeable. Whereas the manufacturing sector grew at a 3.6% in the 1960s, it failed to grow at all in the 1970s.^[5] The Britain’s share in world manufacturing output fell from 9.6% in 1960 to 5.8% in 1975. Britain consistently failed to match the levels of productivity growth achieved in other countries. While GDP per head in Germany in 1900 was 36% below that in Britain, in 1973 it was 29% higher. As far as labour productivity was concerned, a study comparing labour productivity differences within international companies found that productivity levels in the United States and Canada were 50% above those in Britain; West Germany was 27% above, Italy 16% above and France 15% above. A major factor contributing to this had been the persistently low levels of investment in Britain, generally about half the levels of investment in manufacturing of Britain’s major competitors.^[6]

It was Keynesianism that was blamed by the Conservatives for the failure of governments to control inflation and the pursuit of targets for employment and growth by manipulating demand which had led periodically to unsustainable booms and accelerating inflation. As a counterbalance to the Keynesian agenda, the Conservatives re-developed a concept of monetarism, emphasising stabilisation policy. It rejected Keynesianism as a framework for policy, particularly the idea that policy-makers should try to manipulate the total level of demand in the economy or to try to strike a balance between inflation and unemployment, or the balance of payments and growth. Among the most prominent developers of monetarism was American economist M. Fridmann who had done much to influence M. Thatcher after she came to power.

Monetarism is first a specific doctrine about the causes of inflation – it argues that there is a link between the growth of the stock of money and the rate of increase in prices in the medium term. Only when sound money has been restored can full employment and sustainable economic growth be achieved again.

While the Labour Party continued to hold on to out-dated ideals about a welfare state, the Conservative Party moved away from it. In contrast to the Labour-controlled governments of the 1970s, Margaret Thatcher did not believe it was the state’s responsibility to get involved with wages and trade-cycle policy.

After the Conservative Government had been elected in 1979, it adopted the Medium-Term Financial Strategy (MTFS) which became the foundation of the Government’s economic policy. It sought to apply a monetarist approach to the problem of managing the economy, making the control of inflation the primer target. Once inflation was under control, it was argued, employment would look after itself, aided by reforms on the supply side of the economy that would liberate private enterprise from a dead weight of state intervention and onerous taxation. The secret of success lay in teaching the markets, not least the labour market, that financial discipline would be maintained, come what may. If only a set amount of money was available, inflation would thereby be contained, and inflationary wage settlements would simply lead to particular groups of workers pricing themselves out of jobs, or particular employers pricing themselves out of business. Some fall in output, or rise in unemployment, had to be envisaged as part of a learning process; but a couple of years after the money supply had been cut back, inflation would duly fall.

1.2. Thatcherism in operation: 1979-1983

It is worth dividing the Thatcher decade into 3 phases, as far as macroeconomic policy and performance are concerned. Phase I, which lasted from 1979 to 1983, was presided over by Sir G. Howe as Chancellor of the Exchequer. During this period, the defeat of inflation was elevated to becoming the overriding objective of economic policy – to which all other goals, in particular the achievement of a reasonably high level of employment and a satisfactory rate of output growth, were completely subordinated.

The strategy of the Government remained that of squeezing inflation out of the economy by monetary means. Targets were announced to restricting the growth of the money supply (£M3) to progressively lower levels. Base rate went up as high as 17% in 1979 but £M3 still overshot its range; much the same happened in the next year. If the targets were to be reached, interest rates would presumably have to go higher still. Yet they had already cut a swathe through British industry and, on the back of the oil boom, had at one point pushed up the parity of sterling to US $2.50 and 5 DM – further reinforcing the difficulties of exporters.^[7] As a result, this target was abandoned, and the cards were put on the policy of a fiscal squeeze, which was consistent with the Government’s own emphasis on rolling back the public sector and cutting the Budget deficit.

According to this policy, immediate cuts in income tax were pushed through in the 1979 Budget as an earnest of the Government’s commitment to fostering supply-side incentives. Basic rate come down from 33 to 30%; the top rate from 83 to 60%. But in fact, the tax burden for the average family increased by about 7% in the 4 years from 1979. The income tax reduction of 1979, combined with a big increase in VAT - from 8% to a full rate of 15% - favoured a rich minority of the population only.^[8]

Conservative policy was to control and reduce public spending by imposing cash limits, rather than planning the volume of services; thus if inflation proved higher than expected this would reduce services rather than create expenditure. In 1981, not only the spending side was cut deeper but also a whole range of taxes (except income tax) was put up, in a determined way to reduce the deficit by 2% of GDP, which was done. Monetarism had thus become a mask for deflationary policies which abandoned the priority given to employment in post-war economic management. As a consequence, inflation fell from 18% in 1980 to 4.5% in 1983.^[9]

The real reason was the impact of the slump itself. By the autumn of 1981 unemployment was 2.8 million, double the level in may 1979; and in the winter of 1982-83 it reached 3.3 million.^[10] Most of the jobs lost were in manufacturing industry. But the Thatcher Government was hell-bent on its monetarist experiment, despite record unemployment.

Measured from peak to peak of the economic cycle, growth was only 0.6% in 1980-83, barely a quarter of what had been normally since the World War II.^[11] The recession had bottomed out in 1981; growth was resumed in 1982 and approached 4% by 1983. Between 1979 and 1981, unemployment reached 20% of the labour force, manufacturing output shrank to the levels of the mid-1960s and the public finances were under severe strain.^[12]

The Government’s record in reducing inflation was crucial – this was what it had promised, this was what it had delivered. As for interest rates, they peaked in 1980-81, but by 1983 mortgage rates had fallen by 4%, mainly in the months before the election. For owner-occupiers who had kept their jobs, there was some comfort by 1983. Unemployment had stabilised at 12-13% in 1983. It was the rise in unemployment; but the unemployed themselves were, as in the 1930s, a minority interest, concentrated in parts of the country which voted Labour anyway.^[13] On the other hand, the disarray of the Opposition was a bonus for the Conservatives.

Productivity in the UK since 1979

In terms of productivity, the initial results of the slump was a marked decline. This ended, for both the whole economy and the manufacturing sector, in the last quarter of 1980. For the first 18 months of the Thatcher government, output was contracting even more rapidly than employment, thus explaining the fall in productivity. For the next 2 years the decline in employment was greater than the fall in output, hence productivity per worker and per hour worked began to rise.^[14]

Thatcher and the unions

Thatcherism should not only be characterised simply as an enthusiasm for monetarism and market-based solutions to problems of low productivity. It also marks a break from the tripartite consensus – based on a degree of cooperation between big business, trade unions and the state. The government’s reasons for its hostile attitude to trade unionism are various. The main thrust of its ideological attack is based on the New Right doctrine that trade unions are an unwarranted and damaging interference with the workings of the “free” market. In particular, they are said to create unemployment by “pricing workers out of the labour market”. They restrict the “freedom” of individuals to negotiate the wage rate of their choice. Consequently, the government brought restrictive legislation against trade unions: the 1980 Act restricted the right to picket and outlawed most sympathetic action in support of workers in dispute. The 1982 legislation made “political” strikes illegal.^[15]

1.3. Britain’s economic miracle 1983-1990

Thatcherism is not for a decade. It is for centuries.

M. Thatcher, 1990

Phase I of Thatcherism gradually gave way, particularly following the General Elections of 1983, to Phase II, which lasted until 1988. This period, presided over by N. Lawson as Chancellor, saw much more expansionary policies being followed. In fact, Phase II was characterised by an almost complete “U-turn”, as regards some of the principal aspects of macroeconomic policy.

[...]

^[1] Hodgson, G., Thatcherism: the Miracle that Never Happened, London 1984, p. 184

^[2] Smith, D., From Boom to Bust, 1993, p. 21

^[3] Sturm, R., “Development in Great Britain since 1945”, 1999 http://www.dadalos.org/int/parteien/Grundkurs4/GB/gb.htm

^[4] Gamble, A., p. 15

^[5] Robert, M., “How Healthy is the British Economy?”, 28 March 2004

^[6] Gamble, A., p. 16

^[7] Healey N. M., (editor), Britain’s Economic Miracle. Myth or Reality? 1993, p. 135

^[8] Clarke, P., Hope and glory. Britain 1900-1990, London 1997, p. 371

^[9] Healey N. M., p. 136

^[10] Clarke, P., p. 372

^[11] Clarke, P., p. 372

^[12] Gamble, A., Britain in Decline. Economic Policy, Political Strategy and the British State, 1985, p. 13

^[13] Clarke, P., p. 376

^[14] Hodson, G., p. 193

^[15] Clarke, P., p. 369