By Anatole Kaletsky
April 16 Among all the obituaries and encomiums
about Margaret Thatcher, very few have drawn the lesson from her
legacy that is most relevant for the world today.
Lady Thatcher is remembered as the quintessential conviction
politician. But judged by her actions rather than her rhetoric,
she was actually much more compromising and pragmatic than the
politicians who now dominate Europe. And it was Thatcher's
tactical flexibility, as much as her deep convictions, that
accounted for her successes in the economic field.
Governments in Europe and Britain today are obsessed with
hitting preordained and unconditional targets. Inflation must be
kept below 2.0 percent; deficits must be reduced to 3.0 percent
of gross domestic product; government debt must be set on a
declining path; banks must be recapitalized to arbitrary ratios
laid down by some committee in Basel.
In sacrificing their citizens' well-being and their own
political careers to these numerical totems, modern leaders
often claim inspiration from Thatcher. And when voters turn
against them, Europe's leaders keep repeating Thatcher's most
famous slogans, "There is no alternative" and "No U-turn". But
are these the right lessons to draw from Thatcher's political
life? A closer look at her economic achievements suggests
In the 20 years she spent in parliament before becoming
prime minister, Thatcher first saw Harold Wilson's Labour
government wrecked by currency crises and trade union militancy.
Then Ted Heath ousted by a miners' strike and finally James
Callaghan humiliated by the 1976 sterling crisis and driven out
of office by the wave of public-sector strikes that came to be
called the "winter of discontent." After these searing
experiences, her immediate priority on becoming prime minister
was to turn British monetary management and labor relations
upside down. Yet her actions were much more cautious and
pragmatic than her rhetoric.
In fact, the Thatcher revolution started with a huge
tactical surrender. Within two months of taking office, she gave
the public-sector unions that had brought the country to a
standstill pay raises averaging 21 percent. This huge award
resulted in the biggest increase in inflation in British history
- from 10 percent when Thatcher took over to 22 percent a year
later (as measured by the retail price index). Controlling this
inflationary upsurge required stratospheric interest rates and
an overvalued currency. These, in turn, led to a trebling of
unemployment and the collapse of many British manufacturing
businesses. In response to this economic disaster, Thatcher
quickly abandoned the monetary targets she had initially claimed
as the lodestar of her economic policies. While Thatcher's
recession seemed to go on forever to Britons who lived through
it in the early 1980s, her U-turn against austerity came
dizzyingly fast by the standards of today's obstinate
politicians, especially those in Europe.
After just 18 months in office, Thatcher effectively
abandoned the monetarist policies that are still often regarded
as the bedrock of her economic philosophy. In the two years from
the autumn of 1980, she slashed interest rates from 16 percent
to 9 percent and presided over the biggest currency devaluation
in British history, with the pound falling from $2.40 to $1.45.
Ironically, this U-turn on macroeconomic policy began within
weeks of her most famous rhetorical commitment to unyielding
monetarist austerity, when she challenged the October 1980
Conservative Party conference: "You turn if you want to; the
Lady's not for turning."
After the monetary U-turn of 1981-82, the British economy
started reviving, and by late 1982, Thatcher's popularity had
rebounded, with help from the Falklands war. But Thatcher
remained cautious. She waited almost a further two years before
starting seriously to implement the labor market, privatization
and competition reforms for which she is now remembered and
justifiably revered. By 1984, when these structural reforms were
launched in earnest, the British economy was enjoying a
The pivotal event was the 1984-85 miners' strike - and even
this famous victory exemplified Thatcher's pragmatism and
tactical caution. Two years earlier she had faced a similar
demand for higher pay from the miners but judged the economy too
weak and public support too fragile for a long strike. Thatcher
quickly surrendered and even sacked the tough-minded boss who
had refused to bargain with the union. It was only after the
economic recovery that followed the 1981 U-turn on monetary
policy that Thatcher felt ready for the all-out battle with the
miners by which her place in history has been defined.
Similar patience and tactical calculation marked the other
great structural reform that defined Thatcherism: privatization.
"Privatization" was a word that Thatcher's government brought to
many people's attention for the first time, as I can attest,
having written the first detailed article on this subject in the
Financial Times, whose editors insisted on quotation marks
around every appearance of this new word.
The first such "privatization," of British Telecom, happened
only in late 1984, five years after Thatcher's election. Like
all of Thatcher's big privatizations, this was carefully
structured to guarantee political popularity by offering
virtually guaranteed profits to voters. The sale of public
housing at knockdown prices did even more to enrich
working-class voters when combined with the house-price boom
that began in 1982 after the monetary policy U-turn.
Thus, Thatcher's invention of "popular capitalism," just
like her taming of the unions, became possible only after
Britain's economic and financial cycle moved from bust to boom.
The key lesson of Thatcherism, therefore, was that
market-oriented structural reforms such as labor flexibility,
privatization and supply-side tax cuts were symbiotically linked
to the abandonment of monetarism and macroeconomic austerity.
Expansionary macroeconomic policies and competitive structural
reforms were both needed to reverse Britain's decline.
Without Thatcher's anti-union legislation, privatization and
deregulation, expansionary demand management would have produced
inflation. But without expansionary demand management, labor
reforms and restructuring of inefficient state-owned industries
would have deepened recession and aggravated unemployment, as in
In short, austerity is the enemy of competitiveness, and
without economic growth structural reform is doomed to failure.
If only today's European leaders could understand this as
clearly as Margaret Thatcher.