Thatcher, Hayek & Friedman

One of the precursors of Thatcherism was a revival of interest in Britain and worldwide in the work of the Austrian economist and political philosopher, Friedrich Hayek, who won the Nobel Prize for economics in 1974. Alongside Milton Friedman, who won his Nobel Prize in 1976, Hayek lent great prestige to the cause of economic liberalism, helping to create the sense of a rightward shift in the intellectual climate, valuable in all sorts of ways to MT and others arguing the cause, such as Ronald Reagan.

Hayek spent the 1930s and 1940s in Britain. He became enduringly anglophile and a British subject, retaining a deep interest and affection for the country fully reflected in his personal files, which are now open for research at the Hoover Institution in Stanford University. has made the trip there and filmed those papers detailing his involvement with British politics in the 1970s and 80s, much of it through the agency of the Institute of Economic Affairs. The IEA played a vital part in Hayek's public life and its archives are also at Hoover, not coincidentally. We now put the best material online, most of it previously unpublished.

introduction: the road to serfdom & AFTER

Hayek dedicates The Road to Serfdom (1944), a rebuke to Conservatives, and Liberals, not lost on MT

MT's first encounter with Hayek came when he published The Road to Serfdom in 1944. She read it as an undergraduate at Oxford, where it became part of her enduring outlook. In fact one can argue that few books influenced her more deeply at any point in her life. Partly, perhaps, that is the luck of timing: it was published when she was 18, so that at a formative period she found herself exposed to one of the most effective and courageous political works ever written, a head-on assault against socialism, the fashionable cause of the day, an armed doctrine at the height of its power. This was the time when Stalin, grotesquely, was known as "Uncle Joe", Soviet heroism against the Nazis a thing of legend and the case for 'planning' and government action of all kinds unanswerable, or at least unanswered. Such a state of affairs naturally left Conservatives demoralised and defensive, deeply in need of powerful intellectual support and all the more delighted to find it.

While The Road to Serfdom was very much the product of evil times, it achieved lasting appeal. Many Conservatives from later generations had a similar reaction to the book as MT, even those who read it when they were much older, and the times more peaceful - such as Norman Tebbit, who first came across The Road to Serfdom in 1970. For Tebbit, as for MT, reading it felt like a kind of intellectual homecoming. This was part of the genius of the book: to carry many readers to a position of complete identification with its complex argument by skilfully fostering a sense that they were discovering the roots of their own convictions, stated with a force they could not match. In that sense, among others, it bears comparison with Burke's Reflections on the Revolution in France.

Two related elements of the book's argument held a powerful place in MT's long-term thinking. She absorbed deeply Hayek's idea that you cannot compromise with socialism, even in mild social democratic forms, because by degrees socialism tends always to totalitarian outcomes, regardless of the intentions, professed or real, of its proponents. And she saw that her own party had done just that, putting her deeply at odds with its collective leadership. She took to heart the book's ironic dedication, pictured on this page.

There is an obvious complication or contradiction here. It was really not possible in any practical sense to be a Hayekian in British politics during the first decades of the postwar period. A rising hope of her party, MT had a career to make. She gave few public signs of being at odds with the fundamentals of the party's direction and made some compromises with socialism herself, notably as Education Secretary 1970-74, when she loyally served a Prime Minister whose whole way of thinking was antithetical to Hayek. Heath, as it turned out, was the last of succession of Conservative leaders back to Baldwin, who had worked to accommodate Labour and the trade unions within the British parliamentary system, recognising the electoral appeal of socialism and aiming to undercut it by compromise, an approach sometimes hard to distinguish from outright agreement. In the postwar period this strategy became known as the politics of consensus.

Hayek's influence on her in those years was under the surface, and well down. Of course her steady and profound rejection of socialism as a doctrine was clear enough. Signs of unease on her part at the whole tendency of Conservative policy in that respect were rarer and only ever privately expressed, but they did exist - for example, her distance from 'Butskellism' in the early 1950s and her discomfort during the last years of Heath. And consensus itself was always a concept that disturbed her and attracted her criticism. But by Hayekian standards she did not stand out: very probably if she had, she would never have become leader of the Conservative Party. And Hayek himself largely fell out of discussion in Britain, remembered for The Road to Serfdom but little more, greatly to his distress. Like many others who had been influenced by the earlier book, it is very doubtful MT read his great work, The Constitution of Liberty, when it appeared in 1960. Indeed even Keith Joseph, a hard-reading fellow of All Souls, passed it over.

1974-79: Hayek's return

For Hayek the period between The Constitution of Liberty and the award of the Nobel Prize was a dark age, professionally and personally. The award transformed his political standing and morale. In British terms the timing was particularly apt because 1974 saw the beginning of the break-up of consensus politics and unprecedented fluidity in thinking among the political elite. It was the year post-war inflation peaked at 25 per cent and the Conservatives found themselves expelled from office after mishandling a confrontation with the miners. The formation of 'Thatcherism' began.

Keith Joseph kicked off that process by establishing a new think tank, naming it with impeccable blandness, "the Centre for Policy Studies". Originally it was to be called "the Erhard Foundation", the ostensible purpose of the organisation being to study the evidently superior West German economic model, but the "Hayek Foundation" featured on his long list of possible names. And it was precisely at this moment that Joseph put right his long omission to tackle The Constitution of Liberty, lugging it north to Fife as holiday reading in the recess, midway in his great sequence of speeches from Upmister to Preston. "I am steeping myself in Hayek", he wrote to Ralph Harris of the Institute of Economic Affairs (IEA), the very day he spoke at Leith (8 Aug 1974) explaining and defending the role of profit. The final and most important speech in the sequence, at Preston on 5 September 1974 was titled "Inflation is Caused by Governments" and earned him a letter of praise from Hayek in Salzburg, a devoted reader of The Times , which published the speech word for word. Joseph replied warmly, thanking him "for your blessing on what I said at Preston", a little as if the pope had moved to Austria.

In The Constitution of Liberty Hayek had added a famous appendix explaining "why I am not a conservative". His objection was that "by its very nature it cannot offer an alternative to the direction in which we are moving". Joseph shocked and angered many by developing the insight in 1975, suggesting that the problem was that Conservatives hadn't been conservative: "it was only in April 1974 that I was converted to Conservatism. (I had thought that I was a Conservative but I now see that I was not really one at all.)" One might easily see this as the moment the Thatcherites caught up with Hayek and began consciously to offer a new kind of Conservatism, redefining the party creed as radical in purpose. There is a story to similar effect, beloved of biographers and documentary makers and perhaps a little too perfect to be actually true, that as Leader of the Opposition MT once cut short a presentation by a leftish member of the Conservative Research Department by fetching out a copy of The Constitution of Liberty from her bag and slamming it down on the table, declaring "this is what we believe".

There are indeed echoes of The Constitution of Liberty in MT's thinking. The book gave centrality to the rule of law, the exclusion of the arbitrary and the personal in favour of the open and equal application of rules. But Hayek had no copyright over that idea. The Oxford jurist A.V. Dicey gave the concept currency in Britain generations before - and MT knew her Dicey far better than her Hayek. Whether she ever really slammed his book on the table, MT was not in plain fact a Hayekian, and certainly never a slavish follower of any thinker.

How then does one assess his role? While there is no reason to doubt Hayek's emblematic significance to the Thatcherites in their search for new roots, it was as a political and economic philosopher that he mattered, not as an economist. And The Road to Serfdom counted for more than The Constitution of Liberty, the critique of socialism more than the vision of a pared-down liberal state. A sobering indication of this can be found in an early prospectus for the CPS circulated by Keith Joseph to possible donors in June 1975. Reassuring them that the "purpose of the Centre will be practicable [sic]", it went on: "There will be no attempt to propose policies such as denationalisation that are not politically feasible". Only when Ralph Harris protested at the "blinkered vision" of the passage was this colossal hostage to fortune dropped.

The private files bring out the nature of Hayek's influence and its limitations very well. The IEA had been for many years Hayek's chief support in the UK, patient advocates and allies of the man and the economic liberal cause. We publish here a selection from its correspondence with Joseph and Hayek, tracing particularly its role in the formation of the CPS as well as bringing Hayek into contact with Conservative leaders. Documents from Hayek's own papers complement the series.

The files show Hayek in one vital respect at odds with the new Conservatism: he was not a monetarist in the manner, say, of Milton Friedman. Indeed Hayek's distance from Friedman and from modern economics as a whole is one of the most striking features of the correspondence, set out for example in a letter he wrote to Arthur Seldon in May 1985:

I do indeed regard the abandonment of the whole macroeconomics nonsense as very important, but it is for me a very delicate matter and I have for some time avoided stating my views too bluntly and would not have time to state them adequately. The source of the difficulty is the constant danger that the Mont Pelerin society might split into a Friedmanite and a Hayekian wing. [The Mont Pelerin Society was an association of classical liberal scholars of great distinction, formed by Hayek in 1947] I have long regretted my failure to take time to criticise Friedman's Positive Economics almost as much as my failure to return to the critique of Keynes General Theory after I had dealt with his Treatiese. [sic] It still seems to me paradoxical that Keynes, who was rather contemptuous of econometrics, should have become the main source of the revival of macroeconomics - which incidentally was also the reason why Milton was for a time a Keynesian.

Sometimes described as a kind of godfather to the new monetary policy, in fact Hayek's contribution to contemporary economic thinking was slight. His response to this experience of marginalisation is fascinating. While not exactly seeking to hide the plain fact of the thing, he consciously underplayed it and even provided public support for key features of the new economic policy despite his fundamental scepticism. When Nigel Lawson first put forward the notion of an MTFS in September 1978 he received a letter of congratulation from Hayek, who endorsed the notion that policy should be based on rules rather than discretion, a position MT herself never wholeheartedly occupied. Hayek also focussed on areas where there was common ground, particularly trade union reform. For example he strongly backed and perhaps originated the idea floated by MT in a tv interview of September 1977 that if the unions resisted reform a future Conservative Government should call a referendum on the topic. Letters to The Times played a large part in his modus operandi, partly through frustrated affection for the paper in the age of print union hegemony - his letters of complaint to the subscription department are heartrending - but also because he sought to influence debate as a private citizen, modestly writing from home, rather than as a supposed economic adviser with privileged knowledge whose words would be taken as evidence of Conservative intentions. Such circumspection and good manners only increased the high regard in which he was held by MT, who quickly and comfortably fell into the habit of meeting him one-to-one, trusting to his discretion.

1979-81: early years in office & the role of friedman

After the 1979 general election the figure of Milton Friedman bulks larger in the story, as monetarism came to define the political battleground and its professional advocates and opponents argued the toss in terms largely impenetrable to the public.

If by this stage Hayek was the benign philosopher king, Friedman was the frenetic man of business, jetting from lecture theatre to presidential suite, all but omnipresent on the op-ed pages and the tv screen. His ten part television series making the case for capitalism, Free To Choose, was broadcast in Britain in early 1980 and the government approached his arrival pre-screening almost as a state visit. Where MT met Hayek one-to-one for quiet chats, a deputation of ministers was arranged for Friedman and his wife Rose, among them Ian Gilmour whose disbelief in all Friedman stood for was absolute but who could hardly complain that he had not been offered the chance to make his case.

Someone in Whitehall decided that Friedman's visit was a party matter, so the official machine stood aloof and Nigel Lawson was deputed to write MT's briefing rather than a private secretary. The occasion had its complications. Friedman was a critic of the monetary regime the new government had established, publicly questioned the choice of £M3 as target and had attacked its raising of VAT to finance income tax cuts in the June 1979 budget (urging deeper spending cuts instead). The argument over £M3 was particularly difficult, going to the core of the government's policy. Friedman's critical approach to MT's policy was not lost on Republicans close to Reagan, who did their best to distance him from MT as soon as he was elected in November 1980. Indeed, divisions between British and US economic policy remained throughout his presidency, MT proving far more averse to government deficits than her ally and friend for whom the reduction of taxes took priority. Only when the fruits of Thatcherite economic policy began to show in economic recovery did people like Don Regan acknowledge MT as an economic ally.

Private documents reinforce the sense that Friedman had his doubts about MT. Meeting her for the first time in 1978 over dinner at the Ralph Harris's, he wrote afterwards to his host describing her as "a very attractive and interesting lady", before going on: "Whether she really has the capacities that Britain so badly needs at this time, I must confess, seems to me still a very open question but we shall I hope have some proof of that in the not too distant future". Keith Joseph inspired doubts too following a meeting in San Francisco in 1981. Admitting that he was "finding what happens in Britain very hard to interpret", Friedman admitted to Ralph Harris ("for your eyes only") that he had been "rendered somewhat uneasy by his [KJ's] attitudes as well. He recognized of course the inconsistency between the policies that the Industry Ministry had been following and Mrs Thatcher's professed philosophy, but he seemed to treat it as somewhat of a joke rather than as a matter for very deep and serious concern". Hayek privately echoed some of this concern, writing to MT in April 1980 decrying the government's policy of 'gradualism' in checking inflation, as he saw it.

Such things were not said in public, of course. Hayek and Friedman alike fastened instead on the undoubted fact that the Thatcherites faced internal resistance to their programme and argued that the slowness of reform was owing to that. Appearing on BBC TV's Panorama the night before the 1981 budget, both men heaped blame on the wets, Hayek fastening on Prior for blocking faster movement on union law, Friedman attacking their resistance to spending cuts. And the year 1981 saw large steps in the right direction from their perspective. Although the tax increases of the 1981 budget were not to his taste, Friedman approved the dethroning of £M3 which the budget inaugurated. Economic recovery established itself in the first quarter of the year and the wets were purged in the September reshuffle, clearing the way for a faster pace on union reform when Norman Tebbit replaced Prior as Employment Secretary. The rest is merely history.

Read Hayek & Friedman documents on

CPS website