There is No Alternative (23 page)

Fair enough, I was, but I am still not persuaded that British Telecom would have been put on its toes by the growth of the mobile phone industry. Other nationalized industries, in the face of technological change and overseas competition, had simply grown more and more unprofitable. Coal, as we shall see, was a key example.

If some of the privatized industries, such as rail, were not noticeably better than their nationalized predecessors, nor were they noticeably worse. And most were noticeably better.

The withdrawal of state support to nationalized industries accelerated the restructuring of the British economy, hastening its transformation from one based primarily on manufactured goods to one based on services. Thatcher's critics often charge that this transformation was undesirable. This criticism, because so often made, requires a response.

When we talk about manufacturing, we are talking about making things, either manually or with machines. When we talk about services—very crudely—we are talking about everything else, save for the direct sale of natural commodities. Doctors, accountants, lawyers, software designers, hoteliers, theoretical physicists, massage therapists, veterinarians, and journalists, for example, all provide
services,
not manufactured goods. Is an economy based on the supply of services really based on anything? Many people instinctively say no. There's no
there
there, they say. You're not making anything; it's all a chimera.

But there is no special reason to believe this. As economies mature, they experience a predictable transformation in specialization: First they are agricultural, then industrial, then based upon services. This is a pattern that has been seen throughout the world, and there is nothing wrong with it—or if there is, most of the First World is now in worse economic condition than most of the Third World, which is an apagogical argument. Services are real economic goods, and civilization depends upon them. If you possess a comparative advantage in service provision, you are clearly better off providing services. The money I make writing books is no more
or less real to me than money I might make by building toasters in my basement. However, given my particular set of competitive advantages, it would be ridiculous for me to try to make a living by building toasters.

Britain led the world in its transformation from an agricultural to a manufacturing economy. It then led the world in the next phase of development. Thatcher never publicly proposed to reduce Britain's manufacturing sector and replace it with a service-based economy. But by forcing uncompetitive industries out of business, her policies dramatically accelerated this transition, and because of this, Britain is now far ahead of its rivals.

Recall Sir Nicholas Henderson, the British ambassador to Paris, who sent a telegram to the foreign office in 1979 remarking that “today we are not only no longer a world power, but we are not in the first rank even as a European one.” He included in this missive a table: It showed that Britain's per capita income was 46 percent below West Germany's and 41 percent below France's.

As of today, British per capita income is 6 percent higher than united Germany's and 8 percent higher than France's.
¹¹⁰
Britain is Europe's fastest-growing economy now, and the world's fifth largest. (It was not long ago the fourth, but China is now ahead.) If these trends continue, it will soon overtake Germany, becoming Europe's largest economy for the first time since 1959. This would have been unimaginable in the 1970s.

Britain's economic performance since the Thatcher era has been unusual—strikingly unusual. Given that unemployment has fallen, what you would expect to see, at least if you still relied upon the Phillips Curve to make your predictions, is higher inflation. For
the past decade, Britain has experienced declining unemployment with stable or falling inflation. The NAIRU has fallen, in other words. It has fallen—there is no other reasonable explanation—because Thatcher's supply-side policies have worked their way through.
¹¹¹

How do we know that Thatcher's policies are responsible for this, rather than the policies of her successors? The answer is simple: Her successors continued her policies
.
The changes Thatcher put in place were not reversed. They have now been embraced by every major political party in Britain. The Labour Party has reinvented itself as champions of free enterprise. “Government,” Tony Blair told the World Economic Forum at Davos, in 2000, “should have a role that is enabling . . . above all, promoting competition and removing the barriers to business growth . . . I call it a Third Way . . . Supporting wealth creation. Tackling vested interests. Using market mechanisms.”

You can call it a Third Way all you like, but the fact of the matter is, it is Thatcher's way.

The remaining controversy about Thatcher's economic policy, then, is not whether she strengthened Britain's global economic position. She did. It is whether she did it at an unacceptable cost, and whether those costs were the inevitable price of transformation. Those costs—two painful recessions, a massive growth in inequality, and the creation of what seems to be a permanent British underclass—do indeed seem to have been high.

The top income tax rate dropped from 83 percent when Thatcher came to power (and 98 percent for those with “unearned income”) to 40 percent when she left. Indirect taxation, however, in the form of Value Added Tax, rose from 7 percent to 17.5 percent. This predictably led to a growth in income inequality. This was a design feature, not a bug. Thatcher aimed to reward those who created wealth and to punish those who did not. Inequality, in her view, was natural and inevitable. “The pursuit of equality itself is a mirage,” she said in 1975, in a speech delivered to American conservatives in New York:

Thatcher's tax policies, coupled with the radical shift in the economy from manufacturing to services under her tenure, caused some poppies to grow to gigantesque heights. Other fields were simply mown down. Educated professionals in the financial sector
flourished; factory employees went under. Some of those who had lost their jobs in the manufacturing sector found new jobs in the service sector, but often at lower salaries. Many did not find new jobs at all.

The average real income of British families rose 37 percent from 1979 to 1992. The income of the richest tenth rose 61 percent; the income of the poorest tenth
decreased
by 18 percent. Rates of welfare dependency and child poverty, in particular, soared—as did the crime rate. Although Britain as a whole obviously became more affluent, the poorest fifth profited not one bit from Thatcherism.

This is quite striking. An increase in income inequality is not a priori a bad thing, if the rich become much, much richer and the poor become only somewhat richer. But no economic policy can be reckoned a wholesale success if the poor become
poorer
during a time of massive economic expansion. Certainly, by all means let some children grow taller than others. But under Thatcher, a substantial number grew shorter. That was not the plan.

Margaret Thatcher went beyond the economic claim that free markets are an efficient vehicle for allocating scarce goods and resources. She argued that free markets were morally ennobling. Although Britain is on average a far more prosperous society now, it is not clear to me that it is a more moral one—in fact, the ubiquitous British underclass is a degraded, disgusting spectacle. Anyone who reads the British tabloid press, or walks through the streets of a British city on a Saturday night, knows this full well.

In this sense, Thatcher's critics are right.

In 1986, Thatcher's government opened the stock market to foreign and domestic traders, an event known as the Big Bang. British investors were now free to seek the best rates of return abroad, just as foreign investors were now free to invest in Britain. Thus did London become, again, the world's center of finance. In 2002,
the United States passed the Sarbanes-Oxley Act, regulating corporate accounting practices. Bankers in the City of London smirk that they would like to erect a solid gold statue in honor of the legislators who sponsored the act, for their efforts may well have diminished the likelihood of another Enron scandal in America—it is hard to say—but also, certainly, resulted in shifting a massive proportion of the mergers and acquisition boom to Britain.

While I was in London recently, I stayed with one of these bankers, an old friend of mine. He asked me to withhold his name—his company allows him to say nothing about these things on the record—so I'll call him Harry. I'll call his flat mate, a London restaurateur, William. They are typical children of the Thatcher Revolution, both prospering in sectors that are thriving now because of her policies.

Harry and William share a spacious flat in a newly gentrified neighborhood of London. It is conspicuously expensive and in the manner of all bachelor pads conspicuously uncivilized: Inelim-inable red wine stains subtly impregnate the luxuriant meringue of the wall-to-wall carpet; the cupboards are fully stocked with drink-mixers involving Rwandan fever-tree quinine, but the kitchen is empty of anything edible. That weekend, Harry was nursing not a broken heart, precisely, but a mildly indignant one. The woman he had been dating had just dumped him, telling him that she wanted someone who made still
more
money: “That's what all women want, deep down,” she had apparently said to him.