Thatcherism vs wage-led growth

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.

Comments

[ahmed desai]

Chris, your current objections to wage-led growth can easily be overcome.

1.Legislation could be implemented imposing a living wage on all employers, currently £8.30 per hour for London, less elsewhere.

2. This is not only a permanent rise, but all workers would know that this is their 'safety net' rate rising with infltion in perpetuity, thus encouraging increased demand

3. The capitalists are already unwilling to invest- through the decline in private sector investment they are responsible for two-thirds of the fall in output since the peak of the boom. This is despite sharply rising cash surpluses. Therefore the mesure is both affordable- and takes capital out of the hands of those who are unwilling to spend it and puts it into the hands of those that will.

[Jimmy Hill]

How does this fit in with your story about there being a dearth of investment opportunities and this is why the private sector is not investing?

Could it not be that growth will be sluggish regardless of the distribution between wages and corporate profits?

[Luis Enrique]

if consumption demand is the engine, does the proportion of consumption goods produced in the UK matter?

[Adam Bell]

I'm not at all surprised that you immediately reached for the levers of policy, but the obvious choice is to give people the freedom to fight for higher wages by relaxing union legislation in a targeted fashion: http://www.libdemvoice.org/opinion-the-lib-dems-should-work-with-unions-23977.html

[Cahal]

Perhaps the issue is shareholder value capitalism?

[Cahal]

...and the solution is worker democracy! Sorry for the double post.

[guthrie]

I can't remember the details, but I read from a reputable sourcce (well, ok, an economist) that Thatcherite monetarism was completely dead by 1981 or so, since it was found that it didn't work as they thought.

Also, surely investment has fallen here because there are better investment opportunities in developing countries. So perhaps we should just suck it up and get along for a decade or two of low growth?

[BT]

Let's get our thinking straight.

Aggregate demand will only rise when aggregate borrowing exceeds agreegate repayment.

If the private sector has been through a credit bubble and is now deleveraging, the best measure is to boost incomes to make deleveraging easier and quicker. Encouraging sensible private investment is also important.

How can incomes be raised if the private sector is not creating enough credit? The government must step in a borrow through 'bog standard fiscal expansion'.

In the japan-style lost decade scenario the West now faces, government fiscal expansion is the right way to help the private sector deleverage so that normal economic growth can resume.

The conservative view of a direct conflict between private and public sector borrowing (crowding out!) is profoundly wrong and must be challenged.

[Adam]

As well as a potential short-term rise in aggregate demand, I think redistribution towards workers would bring about a more important long-term rise.

Higher wages could raise aspirations as well as the ability for workers to pay for better education and training both for themselves and their kids. This could potentially up-skill the workforce and increase productivity.

More people with higher disposible incomes could also mean an increase in entrepreneurialism. Ceteris paribus, there will might be a better chance of business survival if 10 different people try to set up a business with £1,000 each than one person with £10,000.

Last but not least (and related to your last post), if most companies started to pay a living wage instead of a minimum wage, there would create a greater incentive for people to move off benefits and into work.

oo, on to policy levers to achieve this. How about corporation tax breaks for companies that pay the living wage? How about total corporatation tax exemption for co-ops?

[Stu]

Note the graqph starts to drop off around 1992.