Thatcherism, by Kim, Changhyun, Oct 2005

Britain in the 70s

In order to fully understand the historical context of Thatcherism, it is necessary to examine the economic problems Britain faced during the 1970s. Margaret Thatcher was elected in 1979 on a platform promising to make changes, to fix the problems that Britain had.

1) The British Disease
"British Disease" refers to the low industrial productivity and frequent labor strifes that plagued Britain in the 1960s and 1970s.
In the late 1970s, labor productivity of the United States was 50% higher than that of Britain, and that of West Germany was 25% higher. Although Britain had once ranked nineth in the world in terms of GDP per capita, it had fallen to fifteenth by 1971 and eighteenth by 1976. The following were the reasons for Britain's inefficiency.
First, government subsidized or nationalized inefficient industries. In 1971, Rolls Royce, a long time symbol of British manufacturing excellence, went bankrupt. The British government chose to save Rolls Royce at the cost of creating a nationalized company that consumed huge amounts of tax payer's money to pay for its losses.
In 1975, the National Enterprise Board was established to invest in promising new industries such as electronics and biotechnology. Instead, the National Enterprise Board dissipated its resources trying to keep failing private companies afloat. Britain's largest automobile manufacturer, British Leyland, was nationalized, as were British Aerospace (defense contractor).
The Labour Party dominated British politics from 1964 to 1979. Prime Minister Sir Edward Heath, who served between 1970 and 1974, was the only Conservative prime minister to be in office during this period. The trade unions controlled the Labour Party, and no Labour Prime Minister could effectively oppose union activity. Militant trade unionism was another problem Britain had during the 1970s.
Unlike many other countries, Britain did not have a strong, centralized labor organization that could negotiate a deal and make workers abide by it. Irresponsible union power on the shop floor was a major cause of Britain's poor economic performance. Union leaders would often contend with the management, and if their demands were not met, they would call an unofficial strike (wildcat strike).
In 1973, the National Union of Coal Miners took advantage of the oil shock and struck. The miners demanded pay increases far beyond normal. They were supported by the rail and electrical unions. Edward Heath (Conservative) fought the unions by limiting coal consumption, but was voted out of office in 1974. The coal miners got the raises they demanded.
The Labour governments of Wilson and Callaghan that succeeded the Heath government attempted to control wage increases, but with little success. In 1975, the wages rose 30%, despite the social contract to limit wage increases negotiated between the government and the unions. Steep wage increases fueled inflation, which fueled even greater demands for pay raises.

2) Oil Shock and Stagflation
In 1973, the Arab-Israeli war started. Many of the Arab nations involved exported oil. They placed an embargo on oil exports, which dramatically increased world oil prices.
This increase in oil prices had two effects. The first was inflation, caused by high energy costs. The second was exacerbation of the state of the economy. Stagflation arose - the economy stagnated while prices inflated.
1973 marks the end of the period called Keynesian Consensus. The Keynesian school of economists believes that there is a trade off between inflation and unemployment. According to them, high inflation rate is correlated with low unemployment rate, and low inflation rate is correlated with high unemployment rate. They believe that governments could reduce unemployment by printing more money. The Keynesian theory seemed to be correct during the 1950s and 1960s.
Keynesian economics began to fall out of favor when stagflation started. Stagflation directly contradicted Keynesian theory, which suggested that the inflation rate and the unemployment rate should not rise together. Monetarism, enthusiastically espoused by Milton Friedman and other economists at the University of Chicago, gained more acceptance. Monetarists recommended keeping the rate of growth of the money supply pegged to growth rate of the economy, keeping inflation low and constant. They also supported pure market economy.

3) The Winter of Discontent (1978-1979)
Callaghan was prime minister of the United Kingdom from 1976 to 1979. He attempted to control the inflation rate, which was 15% in 1978, by limiting wage increases to 5% per year. This plan was strongly opposed by trade unions and precipitated the Winter of Discontent (1978-1979), during which there were widespread strikes by trade unions demanding pay raises for their members.
On November 22, 1978, the Ford Motor Company ended a nine week strike by granting its workers a 17% pay raise. Truck drivers and rail workers struck and demanded similar wage increases. Violent mass picketing occurred all over the nation. The ultimate disaster was the strike of more than 1 million public employees.
A general anti-union sentiment developed, goaded on by the majority of the press. Tabloids ran titles such as "Pickets Rule," "No Mercy." The British public watched in horror as garbage piled in the streets and sick patients were turned away from hospitals. Many Britons were dissatisfied at the government's inability to contain the strikes.

4) Margaret Thatcher's Rise (Election of 1979)
Callaghan lost the a vote of no confidence by one vote on March 28th. 1979. A general elections was scheduled on May 3rd. During the campaigning process, the Conservative Party depicted the Labour Party as the party of strikes, inflation, and wage controls. The Conservative Party won 339 seats, a gain of 62 seats, while Labour won 269 seats, a loss of 50 seats. The Conservatives won 43.9% of the vote, and Labour won 36.9% of the vote. The Labour Party remained strong in industrial centers of the north, but still suffered a major defeat. Margaret Thatcher, the leader of the Conservative Party, became the prime minister of the United Kingdom.

Kim, Changhyun
October 2005

Winter of Discontent, from Wikipedia
Thatcherism, from Wikipedia
National Enterprise Board, from Wikipedia
Margaret Thatcher, from Wikipedia
United Kingdom General Election 1979, from Wikipedia
Thatcherism 1979-91, from BBC England Timeline
Thatcherism 1979-90, from BBC British Timeline
The "British Disease", from BBC British Timeline
Thatcherism, from Economy Professor
Margaret Thatcher, from PBS
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