Larry Elliott Sorta Misses What Thatcherism Was – A Radical Reboot Of The UK Economy

That you might not like what Thatcherism was is one thing – perhaps you’d have preferred a continued gradual decline both relatively and in real terms. That you applaud it equally, matter of opinion. But it really does help if you understand what Thatcherism was. An incomplete but radical attempt at rebooting the British economy. Which is where this from Larry Elliott fails:

His cabinet is stuffed with Thatcherite true believers who will hardly be inclined to undertake a vital reboot of the economy

We’ve had two attempts at reboots post WWII. Attlee and the central planning miasma, Thatcher and the Hayekian free market. Neither were complete, both were tendencies more than completed revolutions. So, the UK economy currently needs a reboot does it? So, who is it that should be doing this? Which particular path should we be taking?

Socialism, that central planning type, hasn’t worked anywhere, ever. We’ve most certainly no post WWII success. Continental social democracy – the German, French, Italian etc versions – haven’t worked. We can point to the Nordics as being places that thoroughly work even if we might not share Hygge, Lagom or whichever one is being used to sell sofas these days. But if we do note those places then we’ve also got to grasp that they’re very much more Hayekian free market than we or the US are. There are also other places out there – Hong Kong, Singapore etc – that have sailed past us Europeans in economic terms and they’re Hayek again, without that dragging anchor of a complete and caring welfare state.

Economic success, empirically, comes from that Hayek and free market stuff. So, we want to reboot the UK economy we’ll have to follow that path, won’t we? Who better to do that than Thatcherites?

Little has changed since 1963. Then, as now, Britain was strong in science and rich in new ideas. Then, as now, it was less good than other countries at exploiting them. Wilson’s optimism drained away after he arrived in office, as Johnson’s may well also, and for the same reason: a sterling crisis.

That is, sadly, a woeful error. Because you can’t have a sterling crisis if you’re not trying to maintain a fixed exchange rate for sterling. If you’ve a floating currency then the same things which would cause a crisis just cause a change in the exchange rate. And thus is the crisis averted by allowing prices, in a market, to change.

The truth is somewhat different. Project Fear was a failure not just because all the lurid predictions were well over the top, although they were. It was also a failure because it followed years of voters being hoodwinked by governments of both left and right that the economy was stronger than it actually was. Among the many myths peddled were that making things no longer mattered,

Adding value matters, as adding value has always mattered. What you add value to doesn’t matter in the slightest. What that really is is a conservative hankering after the days of large manufacturing plants. Where real men dropped things on feet. These are activities which don’t add value these days. When there’re 160 million Bangladeshis, 1.3 billion Chinee, soon to be 3 billion Africans, desperate to bash tin for us then rich world tin bashing just isn’t a value added activity.

Further, with the exception of Germany and Switzerland, the UK manufacturing share of the economy is about the same as that in other rich countries. 10 to 12% of GDP, that’s about what a rich nation has these days. To argue otherwise is simply to be lost in some cloud of memories of whippets and flat caps.

A more honest appraisal would go as follows. For decades Britain has consumed more than it has produced, with the result that the UK has the biggest deficit on its current account of any member of the G7. In the past, deficits this big have led to sterling crises. A breakdown of the current account shortfall shows that since the early 1980s a colossal deficit in manufactured trade has been partly offset by a surplus generated by services and by the investment income from trade in financial assets. Put simply, the UK has hollowed out its industrial base and developed the City into a global centre of finance.

We no longer have fixed exchange rates so we can’t have a sterling crisis. It also misses how we’ve financed all of this, selling houses to foreigners – or a surplus on the capital account. But the real point is that we’ve changed what we add value to. That we add value is important, what to is not. Except, obviously, it’s better if we add value to that unique human attribute, brains, than to that we share with the animals, brawn.

Selling services to the world is a more advanced – better – economy than selling flanges to it.

The causes of Brexit lie not in leftwing economic policies but in Thatcher’s scorched-earth wipeout of manufacturing in the 1980s

Tsk, I mean tsk. Manufacturing output was higher – considerably so – when Maggie left office than when she arrived into it.

Being tough on the causes of Brexit means changing the culture of business so that it boosts investment. It means rethinking the role of the state so that Britain leads rather than follows in the fourth industrial revolution. It means spending more on infrastructure, especially in the north. It means a mass housebuilding programme. Put simply, it means doing stuff not normally associated with politicians who think the free market is always right.

Well, actually, the largest British economic problem is slow productivity growth – where we have any at all. And the solution to that, as every fule kno, is free trade. The competition from Johnny Foreigner being what forces firms to increase productivity. That is, the solution is more Hayek and free market. Thatcherites being just the people to give it to us too…..

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Quentin Vole
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Quentin Vole

As with so much in economics, technical terms like ‘manufacturing’ don’t mean what the average person thinks it means. We have large and thriving ‘manufacturing’ sectors – aerospace (largest producer of satellites after the US, with very few others in the game – one of the largest jet engine manufacturers), pharma. But, as Tim points out, they don’t employ tens of thousands of horny-handed sons of toil any longer. Which is great, because no-one except for a few tankie obesessives really longs to be a horny-handed son of toil.

Davidsb
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Davidsb

My first thought as I started reading was “This guy is a blithering idiot – how on Earth did he ever create Oracle Corporation?”

;¬)

Q46
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Q46

‘For decades Britain has consumed more than it has produced…’

Me too.

Nigel Sedgwick
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Tim makes several excellent points in this article. I would just like to add two additional points. Early on, Tim writes: “There are also other places out there – Hong Kong, Singapore etc – that have sailed past us Europeans in economic terms and they’re Hayek again, without that dragging anchor of a complete and caring welfare state.” There are free-market benefits demonstrated by those two great city states. However, I have always thought that it is their status as city states was, is and will continue to have a dominant effect on both their GDP per capita and GDP… Read more »

Q46
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Q46

‘Then, as now, Britain was strong in science and rich in new ideas. Then, as now, it was less good than other countries at exploiting them.‘ As I was alive at the time, an insight. First. Since the State owned most sectors where science and new ideas existed, they were starved of investment as the various State-owned disaster centres and public services competed with each other for money… the ones with the biggest most agressive unions getting most. And not forgetting that if new ideas cost jobs, union boss says forget it. Second. Taxation. Tax was so high even for… Read more »

BarksintheCountry
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BarksintheCountry

The ‘brain drain’ was real in the sixties and seventies. There are a lot of nationalized Americans who made significant contributions and who today are retired and living happily in the US. They left the UK for economic reasons.

Phoenix44
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Phoenix44

Try manufacturing stuff without all that “pointless ” financial sector providing capital, insurance, FX, hedging, pensions, shupping and all the rest.