“Let us glory in our inequality.”

Failed Privatizations – the Thatcher Legacy

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is “The Bubble and Beyond”.

This is from my book on privatization, written some 15 years ago, never published.

As in Chile, privatization in Britain was a victory for Chicago monetarism. This time it was implemented democratically. In fact, voters endorsed Margaret Thatcher’s selloff of public industries so strongly that by 1991, when she was replaced as prime minister by her own party’s John Major, only 35 percent of Britain’s voters supported the Labour Party – half the proportion registered in 1945. The Conservatives sold off public monopolies, used the proceeds to cut taxes, and put the privatized firms on a profit-making basis. Their stock prices rose sharply, making capital gains for investors whose ranks included millions of Britons who had been employees and/or customers of these enterprises.

Yet by 1997 the Conservatives were voted out of office by one of the largest margins in their history. What concerned voters were the results of privatization that Mrs. Thatcher had not warned them about. Prices did not decline proportionally to cost cuts and productivity gains. Many services were cut back, especially on the least utilized transport routes. The largest privatized bus company was charged with cut-throat monopoly practices. The water system broke down, while consumer charges leapt. Electricity prices were shifted against residential consumers in favor of large industrial users. Economic inequality widened as the industrial labor force shrunk by two million from 1979 to 1997, while wages stagnated in the face of soaring profits for the privatized companies. The tax cuts financed by their selloff turned out to benefit mainly the rich.

Opinion polls showed that voters had opposed privatization at the outset (as did the press and many Conservative back benchers), but the Conservatives pointed out that Tony Blair rode to victory in part by abandoning “Clause Four” of the Labour Party’s 1904 constitution, advocating state control over the means of production, distribution and exchange. Most voters wanted tighter regulation in the public interest, but not a return to state ownership. On the other hand, they feared the prospect of selling off the post office, the BBC and the London tube (subway) system.

Nearly everyone agreed that companies were run differently in private hands than was the case under public ownership, even when the same managers remained in charge. Privatization was praised by Mrs. Thatcher and her allies – and blamed by many others – for managing these companies to generate capital gains for stockholders rather than to serve broader social ends.

Many people did not believe that essential public-sector industries should be run as commercial gain-seeking enterprises. Among the norms of public service, making a profit certainly was not one of the yardsticks used by the bureaucracy put in charge of these companies. Public-sector labor unions aimed more at maintaining employment than at producing revenue for the state as owner. The purpose of taxes, after all, was to subsidize basic services to the population.

This attitude had long been shared by many Conservatives, as well as by Labour. When Benjamin Disraeli created the Conservative Party in its modern form in the mid-nineteenth century (replacing the old royalist Tory Party), his major ideological adversary was not socialism but the free-trade liberalism that led Britain to repeal its protectionist agricultural tariffs (the Corn Laws) in 1846. Indeed, as a novelist Disraeli sought to expose the horrors of unbridled laissez faire. In Sybil, or The Two Nations, written in 1845 (three years before the Communist Manifesto), he described the rich and the poor as constituting “two nations between whom there is no intercourse and no sympathy, and . . . who are not governed by the same laws.” His novel assigned the loftiest ideals to Sybil, the daughter of a factory worker, but placed his hopes in a morally regenerate aristocracy. And in due course, Disraeli’s social welfare legislation, especially the public health system introduced from 1874 to 1881 (he said that his motto was Sanitas sanitatum, “Health, all is health”), helped the Conservative Party evolve as a nationalist and sometimes “state socialist” party, especially after World War II under Harold Macmillan in the 1960s and even Edward Heath in the ‘70s.

But it was the Labour Party that pressed for nationalization of the major industries. Fabian socialists such as Sydney and Beatrice Webb, George Bernard Shaw and other wealthy opinion-makers typified the degree to which many of Britain’s leading upper-class intellectuals supported nationalization as a cure for the ills of industrial capitalism. Indeed, the aristocracy underwent a schooling in personal economic values that resembled those of ancient Greece and Rome in their disdain for the idea that one’s life should be devoted to so lowly a purpose as commercial gain-seeking.

Britain’s government was controlled about half of the postwar period by the British Labour Party, which in turn was controlled by the trade unions. This gave the unions more political power than in any other country. Conversely, the Labour Party’s strength was based on the unions. Most workers employed by the public utilities and other government enterprises belonged to the Transport and General Workers’ Union (TGWU). Although the number of individual party members was relatively small, all of the TGWU’s approximately one million members were deemed to belong simply by virtue of their union membership. The union’s general secretary cast their votes as a bloc at the Labour Party’s annual convention.

Trade unions were given broad privileges in 1906, subsequently restricted by the Trade Disputes Act of 1929 passed largely in retaliation against the 1926 general strike. This act made it mandatory for union members to opt in to the payment of the union’s political levy to the Labour Party. After World War II the rule was changed to give unions a right to opt out of paying the political levy. This had the ironic effect of placing the Labour party finances more firmly in the hands of the union leaders. At the Labour Party conferences these leaders voted on behalf of all their members who had paid the levy. The TGWU thus was placed in a position to cast one million of the party’s roughly six million votes.

Labour endorsed the nationalization of industry so as to serve the interests of workers. As noted above, Clause Four of its 1918 constitution (added in 1919 in the aftermath of World War I) called for the state to control the means of production, distribution and exchange. In 1945 the incoming Labour government nationalized the gas and electric utilities, as well as most transport lines that remained municipally or privately owned. Nearly all were run at a loss, which duly was covered by public subsidy.

World War II had been the great catalyst for faith in public ownership and national planning. Some four-fifths of Britain’s gross domestic product (GDP) was commandeered by the government. By the end of the 1940s most utilities and natural monopolies were in public ownership at the national or local level, or (as in the case of water) were held by public companies with restricted returns for the owners of their equity shares. The coal mines, gas and electric utilities, road transport and railways all were nationalized. The foundations and basic cost structure of Britain’s economy thus were shaped by these public utilities, public housing and socialized medicine, not to mention British Petroleum (BP) and, in time, the government’s North Sea oil holdings. And in due course the automotive, steel and aircraft sectors were rescued from collapse by being nationalized, henceforth to be run at heavy losses subsidized by taxpayers.

Clement Atlee’s Labour government of 1945-51 cited five reasons for nationalizing British industry. As Mrs. Thatcher’s Treasury Chancellor Nigel Lawson has summarized, the first reason was to improve industrial relations. In practice, he retorted, this meant caving in to the trade union leaders, especially inasmuch as a second objective of postwar nationalization was to ensure full employment. The effect was to inflate wage rates through make-work programs and featherbedding.

A third reason for nationalization was to maximize productivity gains, by removing absentee rentier owners from the scene. The actual result, pointed out the Thatcherites, was an uneconomic management of the labor force. Nationalization also had focused on regulating natural monopolies in the public-interest – that is, by politicians – by administering prices and providing service on a basis other than profit objectives. The monetarists would argue that straight profit objectives were more efficient.

A fifth argument for nationalization had been the strongest. It was intended to replace short-term profit maximization by wider national and social priorities. But governments tend to live just as much in the short run as do corporate managers. More to the point, politicians seek to win votes by placating labor on the eve of elections. “The nationalized industries,” argued Lawson, “so far from improving industrial relations, proved the source of the biggest threat to industrial peace – doubtless because of the combination of centralized union power and recourse to the bottomless public purse.” At least, this argument was more understandable in 1979 than it had been in 1949.

If it seemed that government enterprise could succeed where private management failed, the reason was to be found largely in its claim on the public purse. The losses run up by these enterprises were financed by income taxes whose rates for business and the upper brackets were among the world’s highest, as were inheritance taxes. Indeed, many considered Britain to have been turned into Europe’s most socialist economy after 1945. Yet the objective seemed not to be the provision of efficient service at world-class levels. Public housing, originally a showpiece, deteriorated into what some called “modernist trash,” while the telephone system remained archaic. Public bureaucracies came to be seen as personal baronies whose administrators made little attempt to apply business methods or cost accounting. Yet their book cost far exceeded the stock-market valuation of private companies.

Most Conservatives acquiesced in the idea of national planning as the government increased its share of the economy from 40 per cent to over 60 per cent by the late 1970s. As Mrs. Thatcher observed, “It was, after all, none other than Harold Macmillan who in 1938 proposed in his influential book The Middle Way to extend state control and planning over a wide range of production and services.” Most social legislation since World War II was bipartisan, including the new National Health Service and the National Insurance legislation of 1946. Running a public enterprise was prestigious for many members of the upper classes. And the government was willing to bail out industries when they went bankrupt, with full compensation to investors – something that the market could not have done.

Margaret Thatcher’s Monetarist World View

Mrs. Thatcher has described how her upbringing living over her father’s grocery store in the small town of Grantham shaped her impressions of how society worked. “There is no better course for understanding free-market economics than life in a corner shop.” It was an experience that inoculated her “against the conventional economic wisdom of post-war Britain,” that is, the faith in government planning and the disdain felt among the literati for entrepreneurial values. Hers was the world of “Methodism, the grocer’s shop, Rotary and all the serious, sober virtues cultivated and esteemed in that environment.”

This Babbitt-like view of the world did not prepare her to think about the economic impact of debt, a serious blind spot for nearly all monetarists. She confessed that her idea of debt management was based on balancing the family checkbook, as if this was a proper analogy for public finance and government control of the printing press and a central bank to create money at will. To Mrs. Thatcher a government deficit simply meant more debt, and hence more taxes to be paid. “Thrift was a virtue and profligacy a vice,” she wrote. Taxes were “a deterrent to work,” not the means by which vital public services were supplied. It was as if such services had no economic value. Income policies were epitomized by the undeserving poor living better on state subsidies in public council housing than hard-working families who struggled to pay their rent or meet their mortgage payments. This was a view reflecting middle class resentment against subsidized services extended to families lower on the economic scale.

One does not learn much about macroeconomics from a store. A shopkeeper buys what already has been produced; how it is made is not of much concern. In fact, Mrs. Thatcher’s world view was naturally akin to that of Chicago School monetarism. The focus was simply on how to undercut the prices of one’s competitors, preferably by cutting taxes and the costly social welfare schemes on which they were spent.

The ideological pedigree for the Chicago School’s narrow-minded economics was provided by Frederick Hayek and Milton Friedman. Hayek’s most famous book, The Road to Serfdom (1944), opposed any and all government planning in principle as leading inevitably to either fascist or Communist authoritarianism. When Keith Joseph gave Mrs. Thatcher a copy of this book she readily responded to his hard line. “Hayek saw that Nazism – national socialism – had its roots in nineteenth-century German social planning. He showed that intervention by the state in one area of the economy or society gave rise to almost irresistible pressures to extend planning further into other sectors. He alerted us to the profound, indeed revolutionary, implications of state planning for Western civilization as it had grown up over the centuries.” This would underlie her opposition to European unification under the Maastricht Treaty.

To most people the government appeared as the benign sponsor of the welfare state that emerged from World War II’s mobilization. But by the late 1970s the sclerosis of public industries threatened to make Britain economically ungovernable. In these circumstances the Chicago School’s anti-statism found an increasingly fertile intellectual ground.

It was natural for self-made people such as Margaret Thatcher to prefer a private-sector market economy to a state bureaucracy. Private enterprise beholden to shareholders hardly can afford patronage and cronyism. Of former Conservative Prime Minister Harold Macmillan’s broad and inclusive politics, she acknowledged disdainfully that “The traditional economic liberalism which constituted so important a part of my political make-up . . . was often alien and uncongenial to Conservatives from a more elevated social background.”

She and her supporters stood more in the tradition of the old Liberal Party, dressing up the ideas of Adam Smith in monetarist Chicago garb, seeing in government planning a road to serfdom at worst, and incompetence at best. She warned against the dangers of inflation spurred by government borrowing, but said little about private debt.

Mrs. Thatcher thus was ideologically harder than her pragmatic Conservative predecessor Edward Heath, and represented a break from her party’s traditions. She admired what the Chicago Boys had done in Chile, and would find kindred monetarist souls among Russian “reformists”. “Let us glory in our inequality,” she preached at one banquet, explaining that more inequality meant that more wealth was being created by “savers” at the top of the economic pyramid, presumably to trickle down via new direct investment. However, she recognized that such policies could be introduced in England only by an elected government. The task she set before herself was to win British voters to support her reforms voluntarily, for imposing them by armed force was out of the question.

It was taken as a matter of faith that financial gains would be invested in upgrading the enterprises once they were privatized, installing new machinery and hiring more labor to provide better service while increasing output at falling prices. Workers were invited to think of themselves as finance-capitalists-in-miniature, earning dividends and capital gains by investing their savings in the shares in these companies. This was the essence of Mrs. Thatcher’s “popular capitalism.” In her pursuit of these objectives the Iron Lady became Britain’s first prime minister to be elected for three consecutive terms, to retain this office for over ten consecutive years, and to have an “ism” named after her.

But first, she had to convince her fellow Conservatives. This became her major initial fight, within her own party.

How British Monetarism Planned the Neo-Conservative Takeover

No economic theory can be promoted successfully today without institutional sponsorship. In America, monetarist ideas were spread by policy institutes such as the Heritage Foundation, the Cato Institute and the American Enterprise Institute. Likewise in England, if the history of privatization is dominated by Margaret Thatcher, her victory was largely a product of British monetarism’s main policy institute, the Centre for Policy Studies (CPS), founded in 1974 by her mentor Keith Joseph (then a Member of Parliament). With Mrs. Thatcher as its President, the CPS used the economic philosophy of Frederick Hayek (the “father of monetarism”) and Milton Friedman to launch the “Thatcher Interlude” that culminated in 1979 with her election as Prime Minister.

Britain could claim the Austrian-born Hayek as one of its own. He had become a British citizen in 1938, and held the Tooke Chair in economics at London from 1931 to 1950. (Ironically, Thomas Tooke was the great anti-monetarist, a century and a half earlier, in the 1830s.) To help spread his political philosophy, he helped create the Institute of Economic Affairs in 1957, the Adam Smith Institute in 1977 (serving as its first chairman), and the Social Affairs Unit in 1980.

Hayek wanted to abandon all public regulatory structures. Followed by Friedman, he argued that all attempts by government to shape markets were doomed to failure. Planning itself was wrongheaded in principle. As Nigel Lawson summarized this philosophy: “Economic planning was both impossible and unnecessary. . . . The price mechanism . . . was a much more efficient means of transmitting consumer wants and needs than the vast bureaucracies of Whitehall and the nationalized industries.”

This view of idealism as serving to strengthen state power enabled the Conservatives to take the moral high ground, Lawson continued, “by elevating private actions above public direction and dismissing ‘social justice’ as both vague and arbitrary.” The only valid idealism was to destroy the state. This could best be done by cutting off the government’s financial taproot, the ability to create the money needed to finance its budget deficits. The alternative to government bureaucracy, Lawson concluded, was to create a new political ideal for capitalism: to turn “profit” and “capitalism” into words of praise; “planning,” “government” and “taxes” became the new terms of invective.

Hayek joined the Chicago economics faculty in 1950, two years after Friedman, who spent 1953-54 in England as a visiting Fulbright Lecturer at Cambridge. At that time, he reminisced (in Capitalism and Freedom), “Those of us who were profoundly worried by the danger to freedom and prosperity posed by the growth of government, the triumph of the welfare state and Keynesian ideas, made up a small minority and we were considered eccentric by the vast majority of our intellectual colleagues.” Monetarism was deemed eccentric because it saw in government only the power to tax and oppress, not to protect and support. (Herman Kahn’s wife, Jane, likes to tell the anecdote of how, Milton Friedman once replied to her when she asked whether social spending on needy children was not a type of public welfare that was well justified: “Mrs. Kahn, why do you want to subsidize the production of orphans.”) To the monetarists, all socially ameliorative spending appeared only as an economic distortion on the expenditure side, and as a burden on industry on the tax side of the tax-and-spend equation.

Mrs. Thatcher’s truculent Joan of Arc personality found a kindred soul in Alfred Sherman, CPS’s Director of Studies, whom she described as an ex-Communist who brought a “convert’s zeal” to the monetarist cause. Like so many former left-wingers, he seems never to have forgiven the working class for not following his early entreaties. And much like a spurned lover, he got his revenge as a Tory. But he retained from Marxism an awareness of economic theory’s political service as apologetics for one class or the other. He found in monetarism not so much an objective analysis of money and credit as a means of blaming inflation on government spending. Cutting off the government’s ability to run into debt would leave the power of private capital (“the market”) to take its place.

If Sherman was the ideological gadfly, Mrs. Thatcher was the master of political tactics. Her genius lay in seeing that public bureaucracies were ripe for the plucking, along with the Keynesian macroeconomic theory that served as their intellectual foundation. Most Britons believed that once a path was embarked upon, it could not be changed, to say nothing of being diametrically reversed. The denationalization of industry appeared politically impossible. Indeed, Labour governments believed they could bring one sector after another into the public domain. To Mrs. Thatcher this was the road to serfdom, and she sought to reverse the trend. She alone had the confidence to go on the offensive rather than passively decrying the trend towards larger public control of the economy. It was largely a result of her initiative that Britain, the nation with Europe’s strongest social democratic tradition and the most highly developed public sector, became the first to reverse what seemed initially to be an inexorable trend toward greater state control.

The Monetarist Attack on Full-Employment “Demand Management”

Mrs. Thatcher, Keith Joseph, Alfred Sherman and Nigel Lawson challenged the idea that economies could be managed by income policies aimed at achieving full employment. This objective, voiced by John Maynard Keynes in the 1930s in his General Theory, had become political orthodoxy throughout most of the world by the 1950s and ‘60s, and was endorsed both by Conservatives and Labour.

In America, the (“Full”) Employment Act of 1946 had replaced what Marx called the chronic “reserve army of the unemployed” by employment policies aimed at absorbing surplus labor through public spending. This policy met its Waterloo at the hands of Gardner Ackley of the Council of Economic Advisors and Robert McNamara, who tried to calculate just how much war America could afford, and indeed how much was needed to create “effective demand.”

In England, Mrs. Thatcher and her allies opposed Keynesian income policy on the ground that it supported wages (and hence, priced British goods out of world markets) simply to create “demand,” without regard for productivity. The achievement of “full-employment stability” was illusory, the monetarists accused, for it entailed monetary instability. Acting as the employer of last resort (or injecting enough “effective demand” to ensure full employment), governments created inflationary pressures by monetizing public debts. The ensuing inflation threatened bondholders and hence deterred their motivation to save, by reducing the purchasing power of their rentier income. The tacit assumption was that their “saving” would have funded new direct investment and employment rather than real estate or stock market speculation in assets already in place.

The major backers of monetarism duly became the rentier interests (banks, insurance companies and other institutional investors, as well as wealthy coupon clippers) who feared seeing the value of their bonds, loans and other claims on the economy’s wealth eroded by inflation. It was not hard for monetarists to show that their self-interest lay in backing an economic doctrine which depicted governments as being inherently inefficient, wasteful and/or corrupt, dominated by vested interests such as the labor unions. The Thatcherites argued that wherever public enterprise played a major role, it suffered from bureaucratic inefficiency and waste. Decision-making by entrenched constituencies (the labor unions in Britain, party members in the USSR and Argentina, and campaign contributors in the United States and Japan) led publicly owned companies to be managed uneconomically.

The way to stop this process was to turn off the monetary spigot which funded public spending. Contrary to Keynesian prescriptions, the monetarists argued, governments should limit their regulatory activity to control over the money supply, increasing it at a constant rate. They could do this only by not running into debt in the pursuit of full employment programs and other social spending. In sum, whereas Keynes had provided a rationale for government planning to sustain full employment, with an inflationary bias that he welcomed as leading to the “euthanasia of the rentier class,” monetarism took the side of creditors in urging fiscal austerity of the type imposed by the IMF on debtor countries.

Inverting Lenin’s view of governments as being the board of directors for the ruling class, the Thatcherites depicted government (at least Labour Governments when in power, which was about half the time under Britain’s two-party system) as the Board of Directors of the labor unions. They argued that industrialists could not manage in the face of unequal competition with the unions. Creditor-oriented monetarism thus merged with free-market economics of a particular kind. A Keynesian “market,” the Thatcherites accused, was very different from what an ideal market should be. The kind of competitive market that union leaders wanted was one of low unemployment conducive to wage-push inflation. For the Thatcherites, creating a “competitive market” and price stability became euphemisms for breaking trade union power.*

Creating a Populist Opposition to Public Spending

Monetarists recognized that in order to reduce taxes (without increasing the public debt), it was necessary to cut back public spending proportionally. This was, conveniently, part of their plan to scale down government in general. The path of least resistance was for politicians to create a backlash against government waste, and to reduce everyone’s taxes somewhat, while “simplifying” the fiscal system by shifting taxes away from wealth (especially in the finance, real estate and insurance sectors) onto consumers via sales taxes, excise taxes and the value-added tax (VAT).

The biggest problem faced by Mrs. Thatcher in pursuing this regressive fiscal policy was that most voters initially viewed the government as subsidizing essential public services, ensuring economic security and helping families in need. But voters also were taxpayers. Mrs.Thatcher played on their resentment against public subsidies to those who were less hard working (i.e., poorer) than themselves, seeking to attract voters to her cause through their perceptions of the existing system’s unfairness and visible inefficiencies. Although most came from wage-earning families and their natural sympathies lay with labor, she was able to denounce trade unions for their featherbedding and extortionate wage demands.

In sum, Mrs. Thatcher made no apology for fighting against tax-and-spend policies, trade unions and public ownership. What she challenged was nothing less than her society’s traditional value system. She appealed to the narrowest and most immediate self-interest of voters, not to their idealistic hopes. Her success is reflected in the fact that the 1980s became a decade in which income and property taxes were rolled back and governments began to be downsized not only in England but throughout the world.

Opposition to public spending – and the taxes to pay for it – was fanned by warnings about the dangers of inflation eroding the purchasing power of wages. What was not stressed was that the main source of global inflation was the United States, whose war in Southeast Asia had created a budget deficit and forced the world off gold. America quadrupled grain prices in 1971-72, and OPEC countries followed suit with oil prices. By the end of the 1970s the U.S. Federal Reserve raised interest rates to 20 percent in order to end the inflation by deterring bank lending. This plunged England and other countries into economic crises of their own. Future historians no doubt will find it remarkable that they sought to cope by curtailing their own budget deficits and money supply.

The monetarists viewed inflation as a domestic phenomenon that could be countered by cuts in public spending and general austerity. But their policies only made things worse, by collapsing employment and output. Falling tax revenues pushed government budgets even further into deficit, and rising interest rates increased rather than lowered prices. (Economists call this the Gibson Paradox.) High interest rates collapsed the stock and bond markets, leading to capital outflows and lower foreign-exchange rates. This increased the price of imports, pushing up prices accordingly. But monetarist politicians single-mindedly blamed the inflation on not following their austerity policies even more stringently and not cutting government spending by even more!

What the Thatcherites feared was not so much government as such, but the degree to which the trade union bureaucracy controlled the Labour Party. Like America, Britain was ruled by what was essentially a two party system. And when one party remained in office so long that its vested interests overplayed their hand, the other party was voted in, and typically tried to reverse what its predecessor had done. Labour was bound to come to power every five to eight years or so. Under Britain’s “pendulum politics,” the prospect was for it to act as the arm of the trade unions that made up the bulk of its constituency, and to re-nationalize companies that the Conservatives had denationalized.

At the Centre for Policy Studies, Keith Joseph stressed in a 1976 pamphlet, Monetarism is not Enough, that monetary deflation by itself could not solve Britain’s problems. Workers had to be laid off. But Labour’s featherbedding practices blocked the needed downsizing. Indeed, union power was strongest in government departments and public enterprises. To be run efficiently, these had to be shifted to non-union labor. This perception helped promote the privatization of key public industries and government operations.

Mrs. Thatcher’s Anti-Union Strategy

After reducing taxes on wealth and fighting inflation by cutting back government, the monetarist objective was nothing less than to destroy British trade union power. Mrs. Thatcher nurtured a popular reaction against the unions, choosing her battles carefully. Biding her time so as not to alienate public opinion, she waited for the unions to misplay – and then acted with tactics planned in advance both from a legal and public relations vantage point.

By the time her tenure as prime minister ended, Mrs. Thatcher had carried through her program, hinted at already in the late 1970s (see Thatcher 1995:424f.). The 1988 Employment Act gave union members the right not to join in strikes their unions called without holding a ballot. The 1990 act, she wrote, “concluded the long process of whittling away at the closed shop,” by forbidding unions from excluding non-union workers from being hired.

Already in the aftermath of the 1974 coal strike, Edward Heath’s government had scaled back union immunities from law suits making it a legal tort – that is, an actionable offense, punishable by fine – for unions to picket or boycott suppliers (or customers) of companies being struck. Monetary judgments henceforth could be levied against the unions.

Mrs. Thatcher also hit upon the strategy of insisting on union democracy as a ploy to counter hard-line union leaders. The traditional British procedure was for workers to vote for shop stewards (typically the most militant union members) to represent them in casting their votes for the union heads who in turn did the voting for strikes and also wielded power at the Labour Party’s annual convention. Mrs. Thatcher knew that it was much more difficult to frighten these activist shop stewards into submission than to intimidate the rank and file. Her idea accordingly was to insist that all major decisions, above all whether to strike, should to put to a full union vote in open secret-ballot elections. Without this reform, she wrote, “the rest of our programme for national recovery would be blocked. . . . Winning the next [1979] election, even by a large majority, would not be enough if the only basis for it was dissatisfaction with Labour’s performance in office since 1974. Therefore, far from avoiding the union issue – as so many of my colleagues wanted – we should seek to open up debate. Moreover, this debate was not something to fear: the unions were an increasing liability to Labour and correspondingly a political asset to us. With intelligence and courage we could turn on its head the inhibiting and often defeatist talk about ‘confrontation.’”

As one Conservative remarked, “What other right winger would ever have had the cleverness to trust the common sense of the ordinary union member so sincerely? The union bosses were put in an impossible position. As the self-proclaimed tribunes of the workers they could not refuse democracy. They tried to use the argument of the expense of ballots to avoid them, so Maggie said, ‘That’s alright; the government will pay.’ Love her or hate her, one has to admire the accuracy of her perception.”

The unions overplayed their hand in the Winter of Discontent, 1978/79, but the time was not yet ripe for a showdown. “From 1980 we pursued a ‘step-by-step’ programme of trade union reform,” Mrs. Thatcher later reminisced. The 1982 “Tebbit Acts” removed the traditional union “immunities from common law tort action for damages, except for ‘primary’ strikes sanctioned by a majority in secret ballot,” observes one of her advisors, Patrick Minford. This legal chess game set the stage for her to checkmate Arthur Scargill’s coal miners in 1983 (her counterpart to Ronald Reagan’s 1981 destruction of the Air Controllers’ Union), by making union funds subject to awards for damages.

In 1981, Mrs. Thatcher gave into the union rather than engage in a fight she felt she could not win in the public’s eye. She knew just how far she could go up against them, and her sense of timing enabled her to succeed. Her defeat of the 1984-85 miners’ strike (described in the next chapter) effectively cemented the new order. “In 1990, my last year as Prime Minister, the number of industrial stoppages was the lowest in any year since 1935.”

The decline in union power enabled the privatized companies and others to downsize their labor force. Between 1979 and 1986, union membership fell by three million persons. Two million industrial workers were put out of work, including over a million miners. “The new service industries, such as computer software and biotechnology,” Mrs. Thatcher wrote in 1995, “are in any case not easily unionized, and so not held back in the application of new techniques.”

A Conservative politician summed up matters: “The original purpose of privatization was to break up Trades Union Monopsony rather than manufacturer/utility Monopoly.” The politicians who joined Mrs. Thatcher’s inner circle focused on labor’s cost-push inflation, to the extent that British wage rates (and hence, product prices) were negotiated between strong-willed union leaders and (so Mrs. Thatcher claimed) weak-willed government bureaucrats.

The Conservatives depicted their warfare against the unions as being waged not against labor, but against adventurist opportunists using their constituencies for their own glory. Even communists such as Leon Trotsky had attacked craft unions such as America’s American Federation of Labor as representing particular layers of the labor force acting in their own narrow self-interest. Mrs. Thatcher subtly froze the union leaders out of the policy picture simply by ending the traditional ritual of beer and sandwiches in Downing Street. The trade union bosses found themselves cut off.

Mrs. Thatcher ended by excluding children and young adults under twenty-one from the minimum wage regulations, and finally abolished the laws outright. These transformations of the labor market, she concluded, “allowed management once more to manage and so ensured that investment was once again regarded as the first call on profits rather than the last.” But a double standard seems to have been at work. The first call on profits seemed to be for higher salaries and stock options for senior managers. She denounced high taxes for deterring their efforts and praised high salaries for motivating them, yet what seemed to motivate manual workers was poverty and the loss of job security. Her rather vindictive world view did not recognize falling real wages as deterring productivity gains; only falling profits and dividends for the well-to-do led to inefficiency in the monetarist world view.

In the process of privatizing the large public enterprises, Mrs. Thatcher seized labor’s pension funds, wiping out company liability for the pensions saved up by their employees. It took several years for the European Community to rule her act illegal. The money belonged to the workers, not to the buyers of these companies.

But just who were these buyers? Where did workers fit into the picture, via their personal shareholdings and those of their pension funds?

“Popular” or “Peoples’ Capitalism”

Mrs. Thatcher recognized that an anti-union policy by itself would not suffice; she had to give workers something in return. What was needed was to cast monetarism’s anti-labor philosophy in a more positive rhetoric. Her solution was “popular capitalism,” an elaboration of what Anthony Eden and other earlier Conservatives had called a property-owning democracy.

The idea of getting workers to think of themselves as property owners had long been voiced by Conservative politicians. It began with the idea of them owning their own homes, bought on mortgage. Mrs. Thatcher started the process with Council house sales. No less than £24 billion were sold off, larger than any single other public industry. But the privatization that really inaugurated “popular capitalism” was the sale of British Telephone in November 1984. The idea was nothing less than to win workers over to the cause of capitalism as an ideal, by turning them into stockholders in the economy’s commanding heights. This, she hoped, would shift their faith away from socialism in the future to capitalism in the present. “Privatization not only widens share ownership (desirable in itself),” claimed Lawson, “but increases employee share ownership, which previous privatizations show leads to further improved performance.” More politically to the point, giving property to citizens would create “a society with an inbuilt resistance to revolutionary change.”

Lawson hoped that workers would value their shareholdings more than they would resent their falling real wages. In any event, he added, “I give away few political secrets when I say that Governments are likely to be more concerned about the prospect of alienating a mass of individual shareholders” than they would be about offending a few dozen Conservative investment managers. Future Labour governments thus would have to hesitate before taking steps that would threaten the value of shares held by large numbers of workers.

Every attempt therefore was made to spread share ownership as widely as possible, for “the more widely the shares were spread, the more people had a personal stake in privatization, and were thus unlikely to support a Labour Party committed to re-nationalization. And if this forced Labour to abandon its commitment to re-nationalization, so much the better. For our objective was, so far as practically possible, to make the transfer of these businesses irreversible.” However, another Conservative politician has assured me that the small private investor “was never more than icing on the political cake.” In the end, it was the large campaign contributors who mattered after all, for their funding enabled the party to buy TV time and media space to attack Labour in the usual ways, which had little to do with the economic self-interest of workers as such.

Mrs. Thatcher’s ideal was for every employee and customer of British Gas, British Telephone and other major utilities to buy into them and thereby to acquire a stake in their efficient management. Workers who were not deemed redundant would find their wages supplemented by dividends (and capital gains) from the stocks they were able to buy with their savings. In good capitalist form they would become owners of the means of production, at least as minority shareholders. This prospect was supposed to gain popular support for breaking the trade unions, dismantling government protection of labor and withdrawing subsidies from public services. Politics became an exercize in the degree to which the perspective of labor’s economic self-interest could be foreshortened and sidetracked.

Lawson had proposed the term “people’s capitalism,” but Mrs. Thatcher felt that this sounded too much like the communist people’s republics, and preferred “popular capitalism.” This still sounded like General Pinochet’s “labor capitalism,” and indeed was a similar program of monetarist austerity, dressed up in populist rhetoric.

The attempt to make privatization irreversible shaped its tactics from the outset. In this respect its history in Britain is as much the story of political expediency as one of economic principles in the abstract. Mrs. Thatcher sought to protect the newly privatized status quo by endowing a coalition of beneficiaries who would form a bulwark against any future attempts by Labour to try to re-nationalize the enterprises being sold off. One constituency of “popular capitalism” was created by giving workers a stake in preserving the value of the shares they held in these enterprises. Another constituency consisted of the buyers (often the former managers) of the enterprises being sold off. Yet another was created by selling shares to foreign investors, so that any attempt to denationalize would have to confront not only British financial institutions and worker-shareholders, but American and other global diplomatic pressure. The strategy was to spread shareholding so widely that it could not be reversed.

This political strategy shaped the early privatizations. It led Lawson to offer shares at a fixed price rather than by auction, on the ground that small subscribers wanted to know just how much they would have to pay in order to be willing to buy. He later ruefully admitted that this political ploy led to an underwriting strategy that resulted in huge losses to the government (and unwarranted gains for the City financiers) as compared to what an open auction of shares would have yielded.

How Britain’s Public Enterprises were Strangled: The Needless Fight over the PSBR

The Thatcherites argued that private ownership would be inherently more efficient than government control, assuming that sound management depended on ownership alone. Lawson insisted that “you can no more make a State industry imitate private enterprise by telling it to follow textbook rules or to stimulate competitive prices, than you can make a mule into a zebra by painting stripes on its back. There is no equivalent in the State sector to the discipline of the share price or the ever-present threat of bankruptcy.” Only the prospect of economic gains would lead enterprises to cut costs, improve service and become more businesslike in general.

One economist (John Kay, 1988) pointed out that, “all State-owned corporations improved their productivity remarkably in the 1980s, whether they were privatized or not.” However, Lawton replied, “it was the process of preparing State enterprises for privatization . . . that initially enabled management to be strengthened and motivated, financial disciplines to be imposed and taken seriously, and costs to be cut as trade union attitudes changed.”

The real problem was that Britain’s Treasury refused to authorize the funds needed for investment as long as the enterprises remained in public hands. To stop the inflation that was distorting nearly all economies in the mid-1970s, monetarists had argued that it was necessary to cut budget deficits. After Britain’s 1976 foreign-exchange crisis, the IMF won Labour adherence to this principle under Dennis Healey. He succumbed to IMF austerity in order to get loans to support the value of sterling. The ensuing impoverishment of Britain contributed to Labour’s 1979 downfall. Rather than leaning against the monetarist wind, Labour itself blocked public industries from financing modernization. Raising the required funds would have increased the Public Sector Borrowing Requirement – the PSBR. Having little idea of how to make public enterprises function efficiently, Labour fatally undercut the viability of these enterprises by letting monetarists control Treasury policy.

Monetarists argued that the way to control inflation was to control the money supply. Friedman explained that this meant in practice the control the public debt. Monetarists accordingly made a bee-line for the Finance and Treasury ministries in every country. In Britain they were able to control the government through the PSBR, placing a stranglehold on public finances. This forced governments to choose between transferring assets to the public sector, or making do without capital investment and modernization.

The problem could have been cured by letting government departments operate as independent public agencies off the balance sheet, like America’s Tennesee Valley Authority (TVA) and other such entities. But the monetarist objective was not to make governments work better. Just the opposite: it was to claim that they could not work efficiently. Finance or Treasury departments in each country subject to IMF monetarist pressures made sure that this would be the case. This was the prelude in the 1970s, setting the stage for privatization in the ‘80s.

A double standard was at work. The private sector was assumed to be able to look after itself and not to run into debt imprudently. The financial sector accordingly was deregulated, and promptly created a crises of irresponsible lending. One pitfall was that the PSBR failed to distinguish between productive and unproductive public debt. The idea of productive borrowing outside of PSBR constraints was rejected as being merely a reformist or even left-wing rationale to increase public borrowing and thereby increase the power of government. The last thing Mrs Thatcher and her advisors really wanted to see was a reform that would enable public enterprises to be run more efficiently. In any event, public borrowing would not have generated revenue for directors, after labour’s wage levels had increased. Nor would it have generated the remarkable underwriting fees that resulted from privatization. The upshot was that British Telephone and its other monopolies needing technological revamping in the world of the 1980s could be modernized only by being privatized.

Privatization’s ultimate beneficiary was the City of London, the square mile of financial institutions that obtained the quickest benefits and turned the program into something rather unanticipated by Mrs. Thatcher and Mr. Lawson. The rentiers for their part seem to have perceived the Thatchers and Friedmans as pawns, an advance infantry of promoters wrapping austerity economics in populist garb – policies that otherwise would have been difficult (if not impossible) to sell to voters.

The irony was that most of Mrs. Thatcher’s friends and heroes were businessmen – manufacturers who made or dealt in products, not financial manipulators. But inevitably, her privatization policy led her to rely on the City financiers. Her autobiography and that of Nigel Lawson reflect their growing annoyance and even fury with the way in which the bank underwriters chosen to advise the government turned privatization into a vehicle to grow rich very fast. Mr. Lawson is scathing as to the the City institutions’ lack of competence, exceeded only by their greed (always pointing out how much more venal their global partners were, to be sure). But once the government had chosen these institutions as its partner, the die was cast. It was unable to find a way to control the underwriters, and feared to disengage.

To the investment bankers placed in charge of underwriting over £65 billion (over $105 billion) of enterprises, at fees of over three billion pounds during 1979-97, and probably at least as much in short-term trading gains, the monetarist politicians appeared out of Britain’s ideological woodwork as well-meaning fools, political front-persons presenting privatization – and hence, City underwriting fortunes – as “popular capitalism.” As far as the City financiers were concerned, their disdain for the City enabled them all the better to act as political spear-carriers for a policy that turned control of the British economy over to themselves. What Margaret Thatcher provided was a populist and even idealistic legitimization for their gains.

The Winter of Discontent, 1978/79

Mrs. Thatcher was lucky. Accident – and indeed, the weather – intervened to play a fateful role. Under normal conditions Britain is warmed by the Gulf Stream bringing tropical water across the Atlantic Ocean from the Caribbean. This creates a warm westerly breeze that keeps British winters free of the ice that normally exists at such northerly latitudes (Britain is as far north as Canada). But occasionally – in the winter of 1947, sixteen years later in 1963, and again sixteen years later in 1979 – the wind blows from the east, bringing cold air from Russia and central Europe. Starting in November 1978, Britain was subjected to sharply below-normal temperatures that persisted right up to election day, May 9, 1979.

This 1978/79 winter descended precisely at the time when British labor unions chose to go on strike to demand pay raises in an attempt keep up with inflation. Like the rest of the world, Britain was suffering from the inflation and high interest rates emanating from the U.S. economy under the hapless Carter presidency. As high prices spread throughout the world, the inflation ate into the purchasing power of wages. The Labour Party had cut its political wrists by subjecting Britain to IMF austerity in the face of this inflation, and stifling new investment and hiring by public enterprises by letting the PSBR put a stranglehold on their financing. The strikes were directed against these public enterprises, for as noted earlier it was here that unionization was strongest.

The British are not equipped to deal with long periods of severe weather even in normal times, given its rarity. As a result of the public-sector strikes, the roads remained unsalted and were not gritted. Few drivers had snow tires for their cars (expecting winters normally to be mild). Traffic along the M6 motorway around Birmingham and other Midlands districts slowed to a crawl, grinding Britain’s industrial heartland to a standstill.

This became known as England’s Winter of Discontent. It turned a majority of voters, who normally had voted for the Labour Party, to resent its alliance with the unions. As Mrs. Thatcher described the political situation, on December 12, 1978, “trade unions representing National Health Service and local authority workers rejected the 5 per cent pay limit and announced that they would strike in the New Year.”

The next three weeks brought heavy snow, gales and floods. Matters came to a head on Wednesday, January 3, when “the TGWU called the lorry drivers out on strike in pursuit of a 25 per cent pay rise. Some two million workers faced being laid off. Hospital patients, including terminally ill cancer patients, were denied treatment. Gravediggers went on strike in Liverpool. Refuse piled up in Leicester Square. . . . In short, Britain ground to a halt. What was more damaging even than this to the Labour Government, however, was that it had handed over the running of the country to local committees of trade unions.”

Mrs. Thatcher emphasized that Labour Prime Minister Callaghan “had based his whole political career on alliance with the trade union leaders. For him, if not for the country, it had been a winning formula. Now that the unions could no longer be appeased, he had no other policy in his locker. . . . The Government could not even decide whether to declare a State of Emergency.” Mrs. Thatcher for her part was not particularly eager to promote a government settlement with the unions; she preferred to mobilize public reaction against them. In fact, she worried that “The Labour Party might just be persuaded to agree to the negotiation of no-strike agreements in essential services, the payment by the taxpayer of the cost of secret ballots in trade unions and even a code of practice to end secondary picketing – though the last was doubtful. Equally, I was clear that if the Government did accept, we were honour-bound to keep our side of the bargain.” However, she made it a condition of support for the government that it should end the closed shop, thereby stripping unions of much of their power – something no Labour government would agreed to do.

On January 16 she opened the debate in the House of Commons by describing how the “transport of goods by road was widely disrupted, in many cases due to secondary picketing of firms and operators not involved in the actual disputes. British Rail had issued a brief statement: ‘There are no trains today.’ . . . many firms were being strangled, due to shortage of materials and inability to move finished goods. There was trouble at the ports, adding to the problems of exporters. At least 125,000 people had been laid off already and the figure was expected to reach a million by the end of the week. The food industry, in particular, was in a shambolic state, with growing shortages of basic supplies like edible oils, yeast, salt and sugar. And all this on top of a winter of strikes – strikes by tanker drivers, bakers, staff at old people’s homes and hospitals; strikes in the press and broadcasting, airports and car plants; a strike of grave diggers.”

She reported that Labour’s George Brown had complained to her that “the unions had been falling more and more under the control of left-wing militancy.” But Prime Minister Callaghan then urged that the government make further concessions to the unions, including “exemptions from the 5 per cent pay limit, tighter price controls and extension of the principle of ‘comparability,’ under which public sector workers could expect more money. All these were intended as inducements to the unions to sign up to a new pay policy. But he signally failed to address what everyone except the far Left considered the main problem, excessive trade union power.”

Recalling language that used to denounce weak-willed opposition to Hitler on the eve of World War II, she heaped scorn on Mr. Callaghan for “appeasing” the unions. Rather than fearing to alienate them, she urged her own party leaders to seize the opportunity to gain public favor by riding on wave of reaction against union over-reaching. British wages no longer were set by fair bargaining between workers and their employers, she claimed, but were negotiated by trade union leaders dictating terms to weak-willed government managers. The alternative, of course, was the kind of austerity dictated by IMF monetarists maintaining an employers’ market by imposing chronic under-employment and shifting enterprise out of the unionized public sector to newly privatized, non-unionized enterprises – precisely the kind of austerity that Keynesian income policies had sought to prevent.

Upon winning the general election, Mrs. Thatcher appointed loyal monetarists, who developed a more subtle alternative to the tight-money programs imposed by the IMF on hapless third world counties. A general monetary stringency would have lowered profits and stifled capital gains as well as wages. Britain’s monetarist strategy was to depress wage levels through “structural reform” or “structural adjustment.” The restructuring was achieved not by macroeconomic policies affecting the overall money supply and incomes, but by changing the legal framework and institutional structures within which markets operated. Union power was broken by changing the legal rules, while government economic power was dismantled by cutting taxes and selling off enterprises. The industries being privatized were subjected to much the same downsizing and asset stripping as private companies taken over by corporate raiders and/or leveraged buyouts in the 1980s.

How Monetarism Laid the Groundwork for Privatization

Ostensibly a theory of money and prices, monetarism became an ideology to attack government spending and organized labor. The theory’s guiding idea was that price levels could be determined by controlling the money supply – by the central bank managing the rate at which government deficits were monetized. Meanwhile, wage-push inflation could be countered by taking legal steps to break the power of unions to strike and to declare boycotts. The effect was to remove economic planning from the hands of government. The vacuum would be filled by global investment bankers. Efficient management was to take the form of maximizing stock-market gains, not the promotion of full employment and other non-market social welfare objectives.

Keynes had been a monetary theorist of a different stripe. He saw that money, in the sense of spending power, comprised effectively the entire credit superstructure. Any income-yielding asset could be collateralized as the basis for credit. Indeed, credit – and in effect, purchasing power – can be created simply by companies not paying their bills. These unpaid bills became assets on the books of their suppliers (“receivables” that could be financed through the banking system). In this respect the volume of credit and near-money is virtually synonymous with the economy’s overall volume of debt. This perception forms the basis for post-Keynesian “creditary” or “balance sheet” economics, a more comprehensive alternative to monetarist doctrine. (Gardiner 1993 provides a technical discussion.)

Monetarism reveals its political bias by singling out only public debt as the source of inflation, ignoring the mushrooming private debt. This one-sidedness has proved to be its Achilles Heel. Yet it was precisely this narrow anti-government focus that attracted Mrs. Thatcher and other libertarian politicians to monetarism in the first place.

Monetarism’s appeal is political and rhetorical, not based on sound economic evidence. (Its correlation of money and prices fail to acknowledge the arrow of causality, especially at the foreign-exchange margin. See Hudson 1992 for a detailed critique.) Controlling the public debt by reining in government can represent only part of a comprehensive system of monetary management, for in practice the money supply – the means of settling obligations – turns out to be nothing less than the overall credit supply. This in turn includes the economy’s “near-money” in the form of all marketable assets and debt instruments. Attempts to manage money, narrowly defined as government debt, are thus in vain.

The real reason why monetarists seek to control the Treasury or Finance Department and the central bank in every country is to achieve their political ends. From their position in these financial control centers, they put the brakes on government operations across the board, or promote other pet policies. Monetarist doctrine provides the ideological wrapping to present this control as a form of idealism and individualism.

Although privatization was not a centerpiece of Mrs. Thatcher’s original program, she placed members of her inner circle in charge of the financial ministries and the public enterprises first in line to be privatized, to set about preparing them for sale. In addition to helping the government budget, privatization would remove enterprises from control by the trade unions. And turning power over to privatized management would enable them to begin economizing by downsizing their labor force.


* Friedman did not join in this anti-labor invective. He blamed British managers for the “British disease” of stagflation (high inflation with slow growth). The nation’s industry had become hidebound rather than undertaking research in product innovation and marketing. In any event, he explained, no inflation could be cured without limiting growth in money supply, and hence government budget deficits, for the monetization of government debt formed the monetary base of “high-powered money.”