Everything you know about the ‘Thatcherite consensus’ is wrong

Stewart Lansley is the author of “The Cost of Inequality: Three Decades of the Super-Rich and the Economy”, out today

A new report shows that on all counts bar inflation, ‘managed capitalism’ had a better economic record than the post-1980 ‘market capitalism’ that replaced it.

The last time free markets ended in catastrophic meltdown with the 1929 crash and the great depression, the laissez-faire economic model that triggered it was eventually put out to grass. Finance and the rich paid a heavy price as a new era of ‘managed capitalism’ brought much tougher regulation, much more equal societies and imposed a lid on top fortunes.

Following the crisis of the 1970s, this was replaced by a new thirty-year long market experiment in ‘market capitalism’, in many ways similar to the model of the 1920s. It came with big promises. Freeing up markets, it was claimed, would improve Britain’s competitiveness, make the nation more productive and boost growth rate.

So has it delivered on these promises? According to a new audit of these two alternative post-war economic models, the answer is no. The study shows that on only one goal - curbing inflation - can the post-1980 era be judged a clear success. Inflation rates have fallen, but on all other counts, the economic record of market capitalism has been poorer.

The main outcome of the post-1980 experiment - one based on a return to blind-eye regulation of the City, fewer controls over business and a weakening of collective bargaining - has been an economy that is both more unequal and more fragile:

The UK’s growth rate has fallen from an average of 3 per cent in the post-war era to an average of 2.2 per cent since 1980.

Unemployment levels have jumped from an average of 1.6 per cent in the immediate post-war era (from 1950 to 1973), to an average of 7.8 per cent since 1980, a near five-fold rise (Figure 1, right).

This is despite a steady fall in the share of national output accruing to wage-earners, from around 60 per cent at the end of the 1970s to 53 per cent by 2008, a trend that was designed to unleash a new era of job creation.

Despite greater market freedom, productivity growth (the rate of increase of productive capacity) has deteriorated sharply since 1980, averaging 1.9 per cent a year to 2008 compared with an annual average rise of 2.95 per cent from 1961-1973 (Figure 2, right).

The UK continues to have a noticeably weaker record on productivity compared with more regulated economies such as Germany and France.

The record on economic turbulence is also much poorer (Figure 3, right).

In the two decades from 1950, the UK economy experienced only three shallow and short-lived recessions: one in 1956 when output fell by 1.4 per cent over three quarters, one in 1957, when output fell by 0.9 per cent over two quarters, and then in 1961 when it fell by 0.7 per cent over two quarters.

In contrast, the period since 1980 has seen much more prolonged and severe economic shocks: in 1980-1981 when output fell by 4.7 per cent (over five quarters); 1990-1991, when it fell by 2.5 per cent (over five quarters); and 2008-2009 when it fell by 6.4 per cent (over six quarters).

The architects of the market experiment have always accepted that one of its outcomes would be a rising income and wealth gap as rewards rose at the top. This, it was claimed, would be justified by an improved economic record which would spread and increase prosperity for all. In the event, the gap has soared with the proceeds of growth becoming much more unequally shared, but without the promised pay-off.

The thirty year experiment has failed to live up to its promises, delivering a much poorer economic record than the ‘managed capitalism’ which it replaced.

See also:

• Mitt Romney praises Keynes – by accident – Alex Hern, September 30th 2011

• Vindicated Balls gives absent Osborne an economics lesson – Shamik Das, September 15th 2011

• Labour suffers from economic “Stockholm Syndrome” – Ann Pettifor, June 4th 2011

• An economics lesson for Matt Hancock – Will Straw, September 23rd 2010

• Clegg completes Thatcherite conversion with Maggie metaphor – Will Straw, September 20th 2010