ECONOMIC DEVELOPMENT IN THE UNITED KINGDOM: FROM THATCHERISM TO THE THIRD WAY

POST WORLD WAR II AND KEYNESIAN ECONOMICS Britain’s economy was in ruins following World War II. Endemic poverty and unemployment contributed to the implementation of Keynesianism (sometimes called the Welfare State) as an economic development model. Keynesianism, a form of statism, is based on free market principles but the state plays an important role in economics. The state, in Keynesianism, usually owns strategic industries like natural resources, telephone, and airlines. It employs a significant number of people and empowers unionism. The state also provides health care to its citizens (national health care) In the UK, national health care is known as the National Health Service (NHS).

The Keynesian State (1950s-1970s) Keynesianism played a critical role in stoking economic growth and full employment. By raising living standards, the UK rose to one of the largest economies in the world by the early 1970s. However, ballooning government deficits, a slowing economy, and growing unemployment contributed to economic malaise that inspired calls for an economic paradigm shift. The oil shock of the mid-1970s stoked high inflation and intolerable levels of unemployment (together known as stagflation). These economic maladies contributed to a growing belief that a change of economic paradigm was needed.

Thatcherism Shatters the Keynesian Paradigm By the early 1980s, Prime Minister Margaret Thatcher and the Conservative majority in the House of Commons aimed to dismantle the Keynesian state and introduce a larger role for free markets in the economy. Thatcher believed that Keynesianism contributed to a lethargy of the British economic spirit and sought to reintroduce that spirit to the UK. Thatcher’s free market principles had three aims: privatization, deregulation, and (trade) liberalization. The goal was to unleash the animal spirits of capitalism in the UK to re-energize economic growth and employment, while taming inflation.

Privatization Previously state-owned industries would be sold off to private investors (ex. telecom, mining, railroads, steel) Public services, like garbage collection, would be outsourced to private firms to reduce the state’s budgetary burdens. Council housing, public housing for the poor, would be sold to private investors. Encouraging private investment would yield greater economic efficiencies and lead to lower unemployment rates. Reigning in the state would decrease budget deficits.

Deregulation By reducing regulations on industries, the energy of the free market would be unleashed. Income taxes and corporate taxes were cut signficantly. Unions were eschewed by the state in a policy known as “state distancing.” To encourage entrepreneurs, the state gave an allowance to those individuals as an incentive to start their own businesses. Private banks were permitted to give out more loans at their discretion rather than follow the onerous regulations.

Liberalization By allowing for more free trade internationally, the UK could export its manufactured goods and services while importing inexpensive products. Stock exchanges became more connected globally, inviting investors to embrace British industries. Foreign investors were encouraged to directly invest in the British economy.

The Success of Thatcherism? The UK’s gross domestic product grew by 14.5% between 1982 and The investment class benefited from tax breaks and share ownership in the stock market. Skilled workers in electronics and the hi-tech sector saw their incomes increase. Home ownership throughout the country grew. Average earnings rose 22% in a ten year period. Growing consumption fueled the rise of the service sector.

The Success of Thatcherism? Poverty in the UK rose to levels not seen before World War II. The gap between rich and poor rose Scores of workers in the manufacturing sector lost their jobs due to growing global competition. Manufacturing production in 1987 was 3% less than in An increase in economic regional disparities (“North-South Divide”) became apparent by the late 1980s…the North, once considered a manufacturing hub, declined while the hi-tech and entrepreneurial South became wealthier. Weakening trade unions through legislation further hurt unskilled and semi-skilled workers.

Tony Blair, New Labour, and the Third Way Despite the relative success of Thatcherism, Britain became more divided as it grew wealthier. By the mid-1990s, the Conservative Party was viewed as a callous, pro-business entity that looked out for the wealthy. Sensing the popular discontent, Tony Blair sought to change the Labour Party’s image…distancing itself from both Keynesianism and the heartlessness of free markets. Tony Blair’s Third Way propelled his Labour Party to almost two decades of electoral success. Ironically, Blair’s Third Way adopted the ideas of Thatcherism’s emphasis on free markets but used state monies to level the playing field for the less advantageous.

The “Third Way” at Work Thatcher’s privatization policies were continued, but Blair called it “the stakeholder society.” Blair continued Thatcher’s policy of state distancing (from unions) but then used the state’s resources to: - provide hi-tech vocational training for workers displaced in the manufacturing sector (“Bridging the Gap”) - initiate programs to deal with homelessness, truancy, and the renewal of poor neighborhoods (“Social Exclusion Unit”) - raise the minimum wage (“Fairness at Work”) - extend maternity leave for young families.

The United Kingdom Today Today, the UK would be considered a market-based economy. The British populace generally accepts free market principles but they would never tolerate the privatization of their health care system. As social and economic cleavages grow, David Cameron and his Conservative government have emphasized the importance of entrepreneurialism and fiscal constraint. Prime Minister Cameron has positioned himself as the Tony Blair of the Conservative Party.