Margaret Thatcher & Capitalism
The Adam Smith Lecture, 2012
Pembroke College, Cambridge
6 February 2012
Master [Sir Richard Dearlove], Ladies and gentlemen,
As our son is currently studying at St Andrews, I might have hoped - assuming that anyone wanted me to give a lecture about anything - to be asked to give a lecture in memory of Adam Smith there. Smith is probably the most distinguished child of the Kingdom of Fife and should not be a prophet without honour in his own country. Besides, it would have reallocated the cost of the huge train fare which we pay when we go to see our son and made me feel a bit better about the unique fees the English have to pay at Scottish universities. As a member of this great university, however, I am delighted that Pembroke has stolen a march by commemorating Smith itself, and I am honoured to be asked to speak, following Nigel Lawson's outstanding lecture last year.
I particularly want to thank that distinguished PhD from St Andrews and M Phil from this college, Madsen Pirie, who has so generously endowed this lecture. When I first came to London as a journalist in the politically momentous year of 1979, I wanted to try to understand all those perplexing questions of political economy about which I knew so very little. It was to Madsen's Adam Smith Institute, along with the Institute of Economic Affairs, to which I turned. Anything that may be right in what I say will be largely attributable to their influence. Anything that I get wrong will be all my own work.
It says something for Smith's importance, and for the enduring power of the Union between Scotland and England, that the Bank of England's current £20 note features that great Scot's face on it, with his words 'The division of labour in pin manufacturing (and the great increase in the quantity of work that results)'. I don't suppose that one in a thousand people using the note stop to look at the man depicted, but that, surely, would not worry Smith. The inventor of the invisible hand would be well satisfied that his influence is so widely disseminated without many people noticing it. It would amuse him that his name takes flight on what he once called 'the Daedalian wings of paper money', and he would not be at all surprised that, in the 21st century, so many people playing with that money have, like Icarus, come unstuck.
* * *
The main reason for the renewed political and public importance of Adam Smith in our time is that my biographical subject believed in him. In the more than 15 years in which she led the Conservative Party, including her 11 and a half years as Prime Minister, Margaret Thatcher did as much as any practical politician can ever be expected to do to act upon her beliefs.
It is about her, not Smith, that I wish to speak. But there is much in Smith's work that provides a key to her own attitudes. I shall note only two aspects. The first is his faith in the capacity of human beings to make their own living honestly and well, if only governments will let them. 'What is prudence in the conduct of every private family,' wrote Smith, 'can scarce be folly in that of a great kingdom'. You can almost hear the grocer's daughter saying those words herself. 'The only encouragement which [industry] requires,' says Smith, '[is] some tolerable security that it shall enjoy the fruits of its own labour.' Government can and should provide that security, and it only makes things worse when it tries to provide much more than that.
It was upon this principle of unlocking the natural desire for self-betterment that Mrs Thatcher based so many of her policies. It governed her approach to tax, regulation, privatisation, property and the power of trade union leaders over their members and the public. In her mind, this unlocking was not chiefly a mechanical economic exercise, but a moral one. 'My economic policy was also intended to be a social policy,' she wrote in her memoirs [The Downing Street Years, p.698] . She saw self-interest as being a positively good thing because, as she put it, 'man is a social creature.brought up in mutual dependence.' His own efforts, far from being opposed to his social responsibility, were intrinsic to it. In her view, the Biblical teaching ' "Love your neighbour as yourself " expresses this.' [Iain Macleod Lecture, 1977]. When she made her often quoted and ill-expressed remark that 'There is no such thing as society' [Woman's Own, 1987], what she was actually saying - speaking to an interviewer and therefore not ordering her words as she would have done in a formal speech - was almost precisely the opposite of what people thought she meant. When she spoke of society, she would, if she were a generation younger, have used that gesture which we employ to indicate quotation marks. Her precise words were that too many people
'have been given to understand "I have a problem, it is the government's job to cope with it".and so they are casting their problems upon society, and who is society? There is no such thing! There are individual men and women and there are families and no government can do anything except through people and people look to themselves first. It is our duty to look after ourselves first and then also to help look after our neighbour and life is a reciprocal business and people have got the entitlements too much in mind without the obligations'.
Far from dismissing the idea of social obligation, she was trying to bring it, pretty much literally, home. This was the ethical content of the personal economic freedom which she, following Smith, advocated.
The second Smithian inspiration for Mrs Thatcher lay in his powerful perception that commerce is too valuable a thing for it to be ultimately controlled by businessmen. Famously, in words too well-known to need repeating, Smith said that people in the same trade naturally conspire against the public. Commerce, he said, was 'a bond of union and friendship', but it could easily be spoilt by what he called the 'mean rapacity' of monopoly. Dealers, he explained, always want to 'widen the market and narrow the competition'. The latter is never good for the public.
You, Master, are the greatest living expert on secrets, so you will recognise the justice of Smith's remark that a monopoly has the same effect as a secret, giving huge power to the person who keeps the secret, the monopolist. In free trade, on the other hand, secrets are rarely kept; and that, in economic matters, is all to the public good. Any monopoly of the rich, said Smith, is established by the oppression of the poor. His idea of a free-market economy was the opposite of what people stigmatise as capitalism. In his eyes, and hers, it was, to coin a phrase, the instrument of 'the many, not the few'. Government's role was to make sure that markets were not shanghaied by those who operated them at the expense of the many.
It was in this light that Margaret Thatcher regarded so many pressing questions of her period - like the power of building societies to impose a uniform mortgage rate, or the rule of the closed shop which insisted that everyone in a particular trade had to join a particular union, or the state provision of telephone services which meant you had to pay the high monopoly price demanded and wait six months for the privilege of having a phone installed, or the fact that almost no one in a council house was allowed to graduate from renting it to owning it, or the law that you could buy spectacles only from an optician, which made them roughly ten times as expensive as they are today, or that you could by law sell pornography on a Sunday but not Bibles - and so on and so on. In all these examples, there was a vested interest of the providers or bureaucrats involved to be confronted. These interested parties alleged that, without their monopoly, there would be dangers to health and safety, or national security (a favourite claim in relation to telephones) or the threat of 'cowboys', or 'scab' labour, or foreigners, and suchlike bogeys. Mrs Thatcher's general inclination was to ignore those protests and place her faith in letting people choose.
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I emphasise this second aspect of Smith's influence on Mrs Thatcher particularly, because it brings me to the debate now raging in Britain and the Western world since we were hit by the credit crunch in 2008.
The credit crunch has certainly not been good for parties of the Left. It has exposed all those governments - including our own previous one - which increased their spending and borrowing too much. Their policies have inflicted on their citizens the most severe financial punishment the West has endured since the Second World War. When she first came into office in 1979, Mrs Thatcher was horrified to be dealing with a Public Sector Borrowing Requirement which was rising fast and hit 5 per cent of GDP the following year. This was considered frighteningly large, but it was nothing beside what has happened recently. In 2009, the current budget deficit, the modern equivalent of the PSBR, was 10.3 per cent of GDP. Even now, after all these supposed austerities, it is projected to be 7 per cent in 2012. All this is bad news for political parties that love high public spending. These parties tend to be on the Left. In recession, voters tend not to vote for them.
But, for parties of the free-market Right, the effect of the credit crunch is no less painful. Indeed, it may, psychologically, be even more disturbing. This is because the triumph of markets, which was seen as part of the wider triumph of the Western way of life following the end of the Cold War in 1989, is now widely believed to have brought about the credit crunch. It can plausibly be claimed that capitalists, speaking in the name of markets, did what Marxists say they always do. They fooled people and governments into thinking that their activities were essential to the growth of prosperity and opportunity. By doing so, they created not a level playing field, but a sort of adventure playground for themselves in which the authorities provided, at taxpayers' expense, the soft landing. In the good times, the capitalists took the gains, often sums beyond the comprehension of the rest of us. In the bad times, we take the losses, sums which turn out to be much, much larger still. Not only we, but our children and our grandchildren, will be paying for their mistakes.
And when we survey the course of the disaster, we can see that what Marxists disparage as the superstructure of society - the central banks and the regulators, the national parliaments and the governments, the law courts and, let me admit the inattention of my own trade to what was happening, the media - failed. They either surrendered their authority to the brute power of organised money or were simply blind or powerless in the face of it.
So believers in free-market societies must ask themselves: did we bring about this collective impoverishment? Have our beliefs been proved wrong? Did Adam Smith's invisible hand, far from making the public rich and free, simply pick their pockets? And if this is so, where does that leave the greatest political advocate of free markets in our time, Margaret Thatcher?
In trying to answer this question, defenders of the Iron Lady would be most unwise to argue that she has nothing to do with the circumstances in which the West now finds itself. There are many specific decisions by Mrs Thatcher, such as the abolition of exchange controls in 1979, or the reduction of the top rate of income tax from 83 per cent to 40 per cent, or Big Bang in the City in 1986, which made possible movements of international money undreamt of in previous eras. They are certainly part of the context, if not the cause, of the credit crunch.
Even more important than any specific measure was the enormous change in atmosphere everywhere in the developed world which was brought about by the Thatcher example. This was a change which she, in alliance with Ronald Reagan, very consciously willed. Britain moved from having the largest and most loss-making nationalised industries to inventing privatisation and making it the most commercially valuable policy export in history. Her reform of labour markets and labour laws reduced the number of working days lost to strikes in Britain from 29.5 million in 1979 to 1.9 million by 1986. Once-proud trade unions like the National Union of Mineworkers, led from the extreme Left and claiming to be the vanguard of the organised working class, were defeated and reduced to a bitter, tiny rump. Trade unions forged by their opposition to Communism, on the other hand, most notably Solidarity in Poland, looked to her as their heroine in the West. During the miners' strike, its leader, Lech Walesa, publicly declared that she was in the right and the miners' leader, Arthur Scargill was in the wrong. The word 'solidarity' is an essential idea in trade unionism. The fact that Polish workers of Solidarity felt solidarity for her, rather than for their supposed brothers, showed how much things were changing.
In Mrs Thatcher's mind, none of this was accident, or even pragmatism. It was the result of the power of ideas. In her first speech to her party's annual conference as leader, in 1975, Mrs Thatcher rejected the essential premise of socialism. She explicitly attacked the idea of equality: 'We are all unequal,' she said, 'No one, thank heavens, is like anyone else, however much the socialists may pretend otherwise. We believe that everyone has the right to be unequal but to us every human being is equally important.' She maintained and strenuously advocated this position throughout her time. She expressed it, indeed, with characteristic force in her very last speech as Prime Minister in the House of Commons [Link played in original lecture to MT's exchange with Jim Sillars]
Her rejection of the idea that the gap between rich and poor was automatically a bad thing was central to her economic doctrines. She believed that if only people were free to create wealth, its wider distribution would tend to follow. She loved to pull out of her handbag a scrap of paper with a quotation on it which she attributed, falsely, to Abraham Lincoln: 'You do not strengthen the weak by weakening the strong'. So long as the general prosperity was increasing, the size of the gap was not crucial. In her mind, this was part of a political and moral doctrine as well. You cannot have a concept of success without having a concept of failure. You cannot advocate reward for effort and talent without also believing that idleness and incompetence should not be rewarded. You cannot believe in freedom without recognising that some people will not rise to its challenges, and will suffer accordingly.
These ideas, not in themselves new, but expressed and acted upon with missionary zeal, undoubtedly helped bring about huge change in the world. It is a tribute to their power that almost no one, however fierce a critic of Margaret Thatcher, advocates anything like a return to the economic system which obtained in this country before May 1979, let alone the one which governed the Soviet bloc. But it is also fair to ask a hard question about the effects. Did the actions and ideology of Mrs Thatcher dress up as high ideals what were really only the dreams of avarice?
* * *
I think it is true to say that the Thatcher governments did not pay sufficient attention to the problems of market failure. This is not nearly so true in terms of social policy where, contrary to popular belief, welfare spending remained high and the so-called 'safety net' became even more expensively and tightly reticulated. But it applies in part to privatisation. If you look, for example, at public utilities like electricity generation today, you will find that competition is much less great than it appears. Its tariff structures are deliberately so intricate that customers cannot work out what they mean and so high that the advantages of the reforms have been slight. Again, the Government fought the miners' strike ostensibly in order to ensure the future of a substantial, profitable coal industry, instead of one that was costing the taxpayers £1.3 billion a year in 1983. Whatever the other benefits of the victory over Arthur Scargill, such a result was not one of them. Our coal mining today is negligibly small. It was certainly a different, better story in telecoms, airlines, buses and many more, and the Thatcher governments did try hard to establish systems of regulation for privatised industry. But getting so much money from selling off previously troublesome industries gave the Treasury greater joy than working out the details of what might happen next. Mrs Thatcher herself was keener than most of her ministers that nationalised industries should not become private sector monopolies; but on this subject, most notably in the privatisation of gas, she was not always successful. Contrary to her own myth, she was not invariably mistress in her own house.
Again, the abolition of the privileges of stockbrokers and merchant banks in the City was a necessary break-up of an old-fashioned, class-based cartel. But it also created new dangers. The virtue of making London global once again, and attracting much more capital, was vitiated by the vice that the end of the partnership system meant that people tended to get silly about risk. Nigel Lawson himself admits today that no one foresaw that commercial banks, then so stolid and dull, would want to buy up the racy, exciting merchant banks - what we now call investment banks. No one imagined the amazing reverse alchemy practised by the knighted, benighted and now, in one case, deknighted executives of our high-street banks, by which gold is turned into dross. Ministers at that time gave too little thought to the fact that the services offered to the public which are most open to abuse are those which the public find hardest to understand. Thus banking, insurance and sales of private pensions are much more subject to producer capture than are Sainsburys, Tesco and Asda. It is easy for us to spot if the sausages on display have past their sell-by date, but very hard to know if the same is true of our investments. This problem has caught up with the generation now retiring.
It is also true that Mrs Thatcher did not fully recognise, let alone reconcile, the tension between her belief in the importance of global free markets and her equally strong belief in the independence of the nation state. Since she fought her early political battles against the danger of socialist siege economies, it is not surprising that she did not focus on this problem. Many advantages flowed from the line she took. For example, the supposed danger of foreign ownership of British industry was, on the whole, outweighed by the advantage of making Britain, after so long a period of decline, a place where the world wished to invest. But there were unresolved contradictions. In her support for the European Single Market in the mid-1980s, Mrs Thatcher ignored the problem that this was part of a political project which was intended to smooth down competition rather than promote it, and to take power away from elected governments and transfer it to fonctionnaires in Brussels. And it was she, against all her own best instincts, who finally gave in to her ministers and took Britain into the Exchange Rate Mechanism of the European Monetary System on the fleeting promise of lower interest rates. As we soon discovered, and as she had, when in a stronger political position, predicted, we found ourselves chained to and then broken by the needs of a newly reunited Germany.
Nor did she foresee the problem, graphically expressed by the present Governor of the Bank of England, Sir Mervyn King, that these great global financial companies of which we now hear all too much, are 'global in life, but national in death'. Like cancer patients for whom nothing more can be done, they come home to die, and their citizens have to pay for them. The globalisation with which we now live has created enormous opportunities for the creation of wealth, especially in previously poor countries, but it has also created new vulnerabilities. It makes shifts in world power more volatile. It exposes our indigenous population, especially our more unskilled workers, to much greater uncertainty. Finally, as we have seen in the aftermath of the credit crunch, it creates powerful elites about whom the phrase 'non-dom' is very expressive. They don't really live anywhere. You cannot pin down their loyalty or their money, and when there is trouble, they have the plane ticket out. Neither national nor international institutions can police them, and so they can create a world order which suits them, but not the rest of us. Even Mrs Thatcher's worst enemies would have to admit that what she stood for was grounded in what she considered to be ethical foundations, but some of the beneficiaries of what she did are people who take the view that ethics are for little people. The unkind, unfair, but striking way to put this was one chosen by Sir Peregrine Worsthorne: Mrs Thatcher set out to create a country in the image of her father, he said, and ended up creating one in the image of her son.
In any event, no one who currently holds a position of power in the world has worked out how to establish a right relationship between the democratic answerability of independent nations and the free movement of people, money, goods and services in a world where the exchange of that money and those services is often transacted not in weeks or months or years but in seconds.
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If we are properly to understand where we are now, however, we must look not only at what Margaret Thatcher did in the 1980s, but also at what other people did afterwards, and how they treated her legacy. Here we come to the interesting phenomenon of New Labour. It is now fashionable to decry the era of Tony Blair - and it is not hard to see why - but he and even, to some extent, Gordon Brown, deserve credit for having tried to rethink. I find it very striking, in my biographical researches, how little serious thought Mrs Thatcher's opponents gave to studying the Thatcher phenomenon, and how, as a result, they failed. Blair and Brown - plus an honourable mention also for earlier work done by Dr David Owen - were the first anti-Tories to make that study. They learnt many lessons from the Thatcher years, and it was for that reason that Labour, under Blair, won three general elections in a row after having lost four in a row before that. They recognised that the economic model espoused by Labour under Michael Foot and Neil Kinnock had been out of date, and that they must identify with the upward mobility of the upper working and lower middle classes rather than simply expressing the bitterness of defeated trade unionists, welfare claimants and local government leftists. They imitated Mrs Thatcher in much of her rhetoric and some of her ideas.
The trouble was that they learnt only half the lesson. They confused the creation of wealth, of which she was a passionate advocate, with the wisdom of the wealthy, about which she was sceptical. Precisely because they had no business background by work or culture, they were naïve about business people, especially people in the world of finance. When Peter Mandelson famously said that Labour was 'intensely relaxed about people getting filthy rich so long as they pay their taxes', he was exhibiting an unhealthy excitement about personal wealth. It is an irony of history more apparent than real that hardly any mainstream bankers were personally close to Mrs Thatcher. Bankers and other financiers were far less important contributors to the Conservative Party in her era than they were to New Labour in the 1990s and afterwards, or, indeed, than they are to the Conservative Party in the era of David Cameron. By background and temperament, Mrs Thatcher preferred the small businessman, the self-employed, the entrepreneur and the industrialist.
Her attitude to banks was that they tended to combine against the interests of the customer. Just as she was suspicious of the Foreign Office because she thought it was for foreigners, so she was suspicious of the Bank of England because she thought it was for bankers, and therefore trying to frustrate her efforts to control the money supply. She was on the side of the sole trader trying to get a loan on reasonable terms, not of the more comfortable fellow on the other side of the desk. In 1981, much against her wider ideology, she even imposed a windfall tax upon the non-interest-bearing deposits of the banks. With New Labour, by contrast, a sort of Devil's bargain was struck in which bankers were allowed a huge amount of regulatory leeway in return for conferring commercial respectability (not to mention donations) upon the party. Taxes on their huge but evanescent profits helped fund Labour's even huger public spending. Bankers were invited to chair all sorts of government commissions and task forces. They patronised government-approved arts, if 'arts' is the right word for projects like the Millennium Dome. They were, famously, knighted or ennobled.
If this was Thatcherism, it was vulgar Thatcherism. It did not balance her exuberant support for the creation of wealth with her more minatory attitudes about debt, whether personal or public. In October 1987, shortly after what was known as 'Black Monday' on the London Stock Exchange, she wrote privately to her great ally Ronald Reagan requesting that he increase taxes in the United States in order to bring down his country's huge budget deficit. I shall be surprised if the records show Mr Blair being equally tough on George W Bush. Above all, the New Labour version of free markets let go of the basic point that what goes up may come down. The desire to end 'Tory boom and bust' sounded like a sensible ambition, but in practice it was an attempt - Daedalian, Adam Smith might have said - to abolish the business cycle. No true believers in markets would want to do such a thing, although of course they would wish to mitigate the extremes. The doctrine of 'too big to fail' is entirely anti-market, and only came about because some enterprises grew so bloated that they became too big to succeed. It was the suppression of the warning signals that markets naturally give - a suppression concerted between bankers, central bankers, politicians and finance ministry and eurozone officials - which finally did for Western prosperity. Such a suppression could not have happened for long under Margaret Thatcher.
* * *
I should like to conclude by looking at two aspects of her legacy which, sadly, have been conspicuous by their absence from the considerations of public policy-makers in the present crisis.
The first is her persistent, tenacious attention to where money comes from. In the same party conference speech of 1975 - here first as leader - in which she attacked equality, she also deployed one of her most famous phrases - 'other people's money'. She was talking in that context about the ravages of Labour taxation. The phrase expressed, too, her mortal hatred of inflation. She always wanted to remind people that all money government spends is taken ultimately from the people and is therefore transferred only on trust. It does not belong to the government. The same principle applies - but was ignored - in the credit crunch. The fact that the money banks lend what is, ultimately, other people's money, was magicked away by the prestidigitators of the so-called Great Moderation. Wealth, it was claimed, could be conjured into existence. But when, from 2008 on, rabbits could no longer be pulled out of the capitalists' top hat, creditors and shareholders lost money. Depositors would have lost it too, on a catastrophic scale, if those losses had not then been borne by an even larger group of people - all taxpaying citizens. While this disaster was building up, no prominent politician asked the necessary Thatcherite, or rather, Thatcherish question, 'What's happening to people's money?' They had forgotten, or didn't care, whose money it was. This is a particularly acute problem in the eurozone, where the management of the single currency is so far removed from democratic accountability that it pays no attention to the actual effects on actual people. Mrs Thatcher, in her time, warned against this.
The second aspect is related to the first. It is to do with ownership. Who possesses wealth, and why? Adam Smith wrote - in words that could be made to sound Marxist, but are not - 'The property which every man has in his own labour, as it is the original foundation of all other property, so it is the most sacred and inviolable.' Mrs Thatcher agreed with this, which is why she favoured low income tax, and why, despite the Conservative clamour against so-called inflationary pay increases in the 1970s, she thought wage controls were iniquitous. She was strongly in favour of high pay, so long as it was earned.
For her, the next question was how people, when they started to earn enough, could take their property on to a higher plane. 'Every earner an owner!' was one of her slogans. It governed her belief in the spread of home ownership and her consequent, fiscally illogical support for mortgage interest tax relief. It inspired her to push council house sales, in which she was successful, and to liberalise planning, in which her reforms did not last. It also led her to try to get people to buy shares and to save. There were PEPs and TESSAs to shelter modest shareholdings against tax, and tax relief for private pensions. Most of her big privatisations were constructed so that only small parcels of shares could be bought and the ownership would therefore be spread. The famous 'Tell Sid' advertising campaign for the privatisation of British Gas was the best-known effort to make millions of people understand that shares were something they could buy. They responded enthusiastically, though, for the most part, they soon took the profit on what they had bought, rather than becoming serious long-term investors.
When Mrs Thatcher visited Mikhail Gorbachev in Moscow in 1987, the two had epic arguments, in sessions which ran hours over schedule. They got on well because each spoke frankly in favour of his or her own political system and was prepared to debate the case. At one point, Gorbachev accused the Conservative Party of being concerned only for the Haves and neglecting the Have-nots. Mrs Thatcher rounded on him. 'I am not trying to create a class of Haves,' she said, 'but a society of Haves.' There were many defects in the way she did this, but she was telling the truth about her purpose. She did bring about a society in which the owner-occupation of housing reached 70 per cent and personal shareholding attained a record high. Since she left office, both these percentages have fallen. She got nearer to realising the dream of a property-owning democracy than any other leader before or - which is more sobering - since.
Behind Gorbachev's accusation lay his claim that what he called 'bourgeois democracy' was a system 'designed to fool people about who really controlled the levers of power' [The Downing Street Years, p.482]. It is depressing to reflect that his criticism is more apposite today than it was when he made it a quarter of a century ago. In the past 15 years, politicians of all parties have expressed remarkably little interest in ownership, or, if they have done so, the word tends to have become metaphorical rather than real. We speak of people 'having ownership' of their neighbourhood, say, or of a particular issue. Blairites invented the word 'stakeholders' to describe the clouds of people who have an interest, in some sense, in public policy decisions. It is not a meaningless concept, but it is a pale shadow of actual ownership, which has stalled. Somehow, in the post-Thatcher era, we came to see credit as a substitute for ownership, which is another way of saying that we have lived only in the present. We have acted upon Keynes's dictum, whose essential untruth any parent will recognise, that 'in the long-run we are all dead'.
The word 'credit' means belief, of course, and now our credit is very nearly exhausted, and with it, our self-belief. As we disconsolately survey our present situation, we will notice some problems which Margaret Thatcher's legacy made worse. But we should also notice that more problems arose when we forgot her example than when we followed it.
And I think the present, frightened leaders of the Western world could profit from two qualities she exhibited, one of mind, and the other of character. She saw what was wrong in her time - and she was passionately devoted to putting it right.