Margaret Thatcher’s policies of privatisation, light-touch regulation and low income tax failed to boost growth, according to a new study that casts doubt on the merits of free market economies.
Growth, what growth? Thatcherism fails to produce the goods
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| New economic analysis shows growth and productivity was faster before Margaret Thatcher implemented free market policies. Photograph: Neville Marriner/Rex |
Margaret Thatcher’s policies of privatisation, light-touch regulation and low income tax failed to boost growth, according to a new study that casts doubt on the merits of free market economies.
In a wide-ranging analysis of Britain’s performance in the decades before and after 1979, economists at the University of Cambridge say the liberal economic policies pioneered by Thatcher have been accompanied by higher unemployment and inequality. At the same time, contrary to widespread belief, GDP and productivity have grown more slowly since 1979 compared with the previous three decades.
Liberal market policies such as lower tariffs and income taxes, free movement of labour, limited legal immunity for trade unions, privatisation and light-touch business regulation “did not produce the goods” in terms of higher growth in GDP and productivity, according to Ken Coutts and Graham Gudgin at the Centre for Business Research at Cambridge Judge Business School.
“Those who believe in the free market economy must be able to show that economic performance after 1979 was better than it would have been under the ‘corporatist’ economic policies of earlier decades. The starting point in doing this should be to show that the actual performance was better than had been the case during the decades prior to 1979,” said Coutts and Gudgin.
“The report shows that the most important economic indicators, including growth in GDP per head, were in fact no better in the post-1979 decades.”
On the analysis, only one aspect of post-1979 policies actually boosted growth, but that came with grave consequences a few decades on in the shape of the financial crisis.
“Financial liberalisation was the sole aspect of the liberal market reforms introduced into the UK, initially in 1971-73 and more consistently from 1979, which materially increased the rate of economic growth,” the paper said.
“The freeing up of finance led to a huge, and eventually unsustainable, expansion of household borrowing. This temporarily accelerated the growth of consumer spending and hence GDP and of house prices, but in 2008 contributed to a banking crisis and the longest recession for over a century.”
The economists find that average annual growth of per capita GDP fell from 2.6% per year in the three decades prior to 1980 to 2.2% per year in the following decades to 2007, and a decline of 0.2% per year since 2007. Productivity growth slowed even more sharply, from 2.9% per year in the three decades prior to 1980, compared with 1.7% from 1980 to 2007, and a decline of 0.2% per year since 2007.
Although inflation and industrial disruption were reduced after 1980, unemployment and inequality have been higher, the analysis found. Economic growth has also been more volatile, with fluctuations in GDP coming in “large waves in contrast to the ripples of the 1950s and 1960s”.
The authors say that even allowing for factors such as the slowing in growth of world trade, the evidence for an absolute improvement in UK economic performance after 1979 is “at best mixed”. Similarly, they reject arguments in support of liberal market reforms made on the basis of the UK’s relative performance.
“The relative improvement that took place was the result of slower productivity performance by European countries and not of any improvement in UK performance,” they write in the paper
Coutts described the report, called the Macroeconomic Impact of Liberal Economic Policies in the UK, as a “factual background” to a debate that is needed over how the UK improves its lacklustre productivity performance. The paper calls for a broader discussion around the kind of economic model the UK should pursue.
“This is an appropriate time to question whether the UK is following the most appropriate form of capitalism,” write Coutts and Gudgin.
“A wider range of varieties of capitalism are available to policymakers than is commonly assumed.”
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