By Michael Baxter, Economics Writer
Different times call for different remedies. Depending on your own interpretation of Mrs Thatcher, she either saved or destroyed Britain. She may have put the ‘great’ back in Britain, or put the ‘greed’ back in Britain. But whatever your conclusion, it does not mean the UK needs Thatcherism today and here is why.
The period 1868 to 1914, was a golden age for the UK economy. See: The Age of Symmetry.. It was a golden age because it saw more innovation than any other period in history. It was not that golden for economic growth, however.
That’s the thing about innovation. It can sometimes have the effect of destroying jobs. An economy that has seen a burst of innovation has to learn how to ensure demand is there to meet all the potential supply. After World War I the global economy struggled to learn how to adjust. In the US a boom followed, but this was built on leverage to a large extent. World War II changed things. After the war, the UK became a more equal society partly because those who had fought for King and country demanded something in return. In part it was because of ideas of Keynes had become widely adopted. In a more equal Britain, and an economy dominated by Keynesian demand creation, the UK finally learnt how to make use of that legacy of innovation, and the UK boomed as it caught up with potential. The UK was not alone; the post war period lasting around 25 years saw the highest levels of growth ever recorded. Germany learnt a different lesson from Britain, however. To a large extent it found a way to catch up with potential by selling its products overseas. Germany still relied on growing demand but the growth in demand came from outside its borders.
By the mid-1970s, all the potential growth coming from previous innovations had pretty much been used up. The UK went from high growth to playing with recession and stagnation.
Something had to change, and change came in the shape of Mrs Thatcher. In many ways Thatcherism seemed to sound the death knell of Keynesian economics. Under her the UK learned to see the economy in much the same way that a savvy housewife managed the finances of her household. The UK switched from being a country dominated by economic policies designed to increase demand, to one that emphasised supply-side. As part of this adjustment, taxes were cut, and especially for those on higher salaries. The UK became less equal. But this may have been what the UK needed for that era.
It is not like that today. Innovation is all around us. Jobs are being lost to automation. Corporate profits to GDP are at a new record. See: US corporate profits to GDP at all-time high
Many of the larger companies do not know what to do with their mountains of cash. Money being generated by the corporate world is not being spent. The UK has become a far more unequal place, and that lack of equality has meant lack of demand to buy the products that business is capable of producing.
Keynesian economics may have lost its relevance in the 1980s, but that does not mean it is not relevant today.
And things are different in another way. The UK is now more reliant on the rest of the world than ever before. Globalisation has changed the shape of the global economy. The UK is virtually impotent. The UK government can implement measure to stimulate demand, but needs other countries to adopt similar policies or the result will be a rise in imports and the UK government may run up even bigger debts.
Mrs Thatcher became Prime Minister at a time when the global economy was changing in quite a profound way. She was more than the UK’s leader; she influenced world opinion. Thatcherism and Reaganomics were adopted internationally. Maybe Thatcherism and Reaganomics were responsible for ending the Cold War.
In one sense we need another Mrs Thatcher. We need a Prime Minister who can galvanise world leaders. It is just that we need our new Mrs Thatcher to hold quite different views from the first version. We need someone who supports measures to stimulate global demand, more equality, but as a global mantra, and indeed someone who supports minimum international taxes, such as a minimum corporation tax, so that governments can tax company profits without running the risk that companies will set-up shop elsewhere. We need a system for addressing global imbalances as was proposed by Keynes in 1944 at Bretton Woods. And we need charismatic leaders who can light the way. Yes we need another Mrs T, but just not her ideas.