This useful site tells us that Lady Thatcher is not yet dead. However, in one important but under-appreciated sense, Thatcherism certainly is dead.
I mean its macroeconomic strategy.
By this I mean not monetarism but rather the idea that if the power of the working class could be broken, then corporate profitability would be restored.
Alan Budd, a Treasury official in the early 80s, has described this as the “nightmare” interpretation.
It’s not. It’s the generous one. I say so for two reasons. One is that if Thatcherism equals monetarism then it must be judged a failure. The thinking behind monetarism was that the announcement of monetary targets would lead to a costless disinflation as inflation expectations fell. But in fact, inflation only fell in 1982 because of mass unemployment. And monetary growth overshot its targets.
Secondly, the restoration of corporate profitability was not (just) an end in itself. The thinking was that higher profits would lead to higher investment and thus faster growth and higher employment, either by providing the funds for capital spending or by improving confidence.
And for a while, this worked. In the late 80s higher profits were associated with an investment - and indeed employment - boom.
Thatcher’s class war was, then, a success.
But only for a short while. My chart shows that over the last 15 years or so, investment has fallen as a share of GDP even though profit rates have increased.
Thatcherism - understood as the idea that a quiescent working class and high profit rates would lead to good investment and high economic growth - is therefore dead.
Viewed in this context, calls from Duncan Weldon and Brendan Barber for wage-led growth make some sense. After all, if bashing the working class hasn’t raised capital spending and economic growth, maybe enriching it will.
The logic here dates back at least to E.F.Schmacher’s 1944 paper, “Public finance - its relation to full employment”. He argued that redistribution towards workers would raise aggregate demand - because workers have a higher propensity to consume than capitalists. Although capitalists would suffer low profit margins, high aggregate demand would ensure a high output-capital ratio and thus high profit rates.
Such a strategy is, under some circumstances, feasible. But is it feasible here and now? I’m not sure, for three reasons:
1. What policy levers - other than bog-standard fiscal expansion - are there that could transfer incomes to the low-paid?
2. Even if such policies are implemented, would aggregate demand rise? If workers use their higher incomes to save more or pay off debt, aggregate demand will not rise.
3. It’s possible that the squeeze on profit margins will reduce capitalists’ confidence and willingness to invest. The experience of the last few years tells us that high profit margins are not sufficient for high investment - but they might be necessary for it.