Download Privatization in the United Kingdom

Privatization in the United Kingdom
Under the Thatcher Government
Political and Economic Conditions Preceding the Thatcher Government
Although there were specific events in the 1970's that led to Margaret Thatcher's
emergence as the leader of the Conservative Party and its victory in the elections of
1979, the long term economic problems of the British economy stem from a history
of policy errors that go back at least to the 1920's. In the nineteenth century, Britain
was the dominant political, military and economic power. Britain was the first
country in the world to go through the Industrial Revolution. Starting in the late
eighteenth century and continuing into the early part of the nineteenth, the British
developed the coal and iron industries and mechanized the textile manufacturing
processes. James Watt's steam engine revolutionized industry.
The dynamic industrial economy enabled Britain to capture a dominant share of
world trade. Although Britain lost thirteen of her North American colonies, she
went on to build an even more extensive empire. Although she had an empire and
might easily have continued the economic policy of mercantilism, she adopted the
policy of free trade and promoted it around the world.
In the latter part of the nineteenth century Britain was instrumental in getting
major countries around the world to accept the gold standard in which each
country’s currency represented a specified quantity of gold. The gold standard
served to stabilize exchange rates and facilitated international trade.
Britain's dominance in world production and trade was lost as emerging powers
such as the United States and Germany surpassed her. But Britain's economic
downfall came only with the catastrophe of World War I. World War I left Britain a
net creditor nation and her economy crippled, especially relative to that of the
United States. During the war the gold standard was abandoned.
After the war British politicians were determined to reinstitute the gold standard.
The problem was what should be the relative values of the different currencies after
the economic devastations of the war. British politicians, including Winston
Churchill, opted for a valuation of the pound at pre-war levels. This meant that the
pound would have a value of four to five U.S. dollars, which was quite unrealistic.
Nevertheless the British government did try to establish that exchange rate.
The overvaluing of the pound meant that British products were extremely high
priced compared to American products for buyers outside of Britain. This
drastically hurt British exports which in turn produced a severe economic recession
in the mid-1920's.
There were efforts to compensate for the effect of the overvalued pound by
holding down or decreasing British wage rates. This led to a general strike of British
labor in 1926 which damaged the British economy even more. The Great General
Strike was not successful in reversing the economic policies of the Government, but
it contributed to further economic problems and put a scare into politicians of what
could happen.
Instead of abandoning the overvaluation of the pound, the British government
continued to try to support it. One way that the monetary authorities of a country
can attempt to support an exchange valuation of the currency is to raise interest
rates relative to that of other countries. In the situation Britain found herself, it was
considered unwise to raise interest rates because it would discourage investment,
further worsening the recession. The British authorities came up with an
alternative. If they could not raise British interest rates, perhaps they could get
other countries to lower their interest rates. There were authorities in the Federal
Reserve System in the United States who were willing to do what they could to help
the British.
The way the Federal Reserve lowered interest rates in the U.S. was to promote
the growth of the money supply. The lower interest rates and the easier credit
stimulated a boom in the U.S. stock market. The speculative bubble burst in
October of 1929. The subsequent mismanagement of monetary policy produced a
banking crisis and deflation. The deflation resulted in high real interest rates even
though the nominal interest rates were low. The high real interest rates in the
United States resulted in a catastrophic collapse in the investment purchases of
equipment and the building of structures. In real terms the level of such investment
purchases decreased ninety percent between 1929 and 1933. This was the immediate
cause of the Great Depression.
Although the Great Depression started in the U.S. it spread around the world.
Unemployment was high and resources were lying idle even though there was an
obvious need for production. The conventional economists of the time did not have a
satisfactory explanation for depressions. It was the British economist John Maynard
Keynes who developed a coherent explanation for depressions and the theory of
macroeconomics. Keynes prescription for ending the Depression was to increase
aggregate demand for the output of a country even if that involved deficit financing.
In fact, according to Keynesian analysis, any effective method of increasing
aggregate demand necessarily involves the government borrowing the consumer
savings that businesses are not borrowing to finance investment purchases.
Keynesian theory supplanted neoclassical economic theory first in the academic
world, and later in policy making in governments.
In Britain, coalitions of the Conservative and Labour Parties governed during
the Depression years. During World War II, Britons accepted central planning as
necessary to cope with the needs of the war effort. Winston Churchill was prime
minister during World War II and he expected a victory for his Conservative Party
after the war in the election of 1946. He was disappointed, Labour won instead.
The Labour Party of Britain was originally Marxist, but in the early part of the
twentieth century it dropped its Marxist orientation and rhetoric, while remaining
ideologically committed to a socialist program of control of production by the State.
This was still the orientation of the Labour Party when it came to power in 1946.
Furthermore, the Labour leaders and some large component of the general public
thought that the planned operation of the British economy during World War II
demonstrated that planning and socialism worked.
During the period of 1946 to 1950 the Labour Government did quite a bit. It
brought about one fifth of the means of production into State ownership. It created
the British version of the welfare state. It began the liquidation of the Empire. It
participated in the creation of the North Atlantic Treaty Organization (NATO). It
instituted the National Health Program of socialized medicine. It nationalized coal,
iron and steel, electricity, gas, railways, canals, road transport and civil aviation. It
continued price controls and rationing. One example of a fiasco the Labour
government was responsible for was what was known as the Tanganyikan
Groundnut Scheme. But the State budget was becoming more and more difficult to
finance.
The experience of 1946 to 1951 convinced the enough of the voting public that
classical socialism was not working and in the election of 1951 the Conservative
Party under the leadership of Winston Churchill was returned to power. The fear of
another depression led the Conservatives to accept the Keynesian concept of
demand management for economic policy. The Labour Party had not given up hope
of implementing a full version of classical socialism but accepted Keynesian
management of the economy as a useful tool. Some felt that a type of ratchet effect
was operating in British economic policy. A Labour government would gain some
measure of their program and the next Conservative government would accept that
measure as a fait accompli and not attempt to reverse it. By the 1960's Britain had a
welfare state combined with a program of labor union rights that gave labor union
leaders an unprecedented power in the economy.
The Conservative Government of 1970 to 1974 under Edward Heath was done in
by labor strikes and turmoil. This government passed the Industrial Relations Act
of 1973 that pre-strike balloting of union membership and mandated cooling off
periods similar what was required under the U.S.'s Taft-Hartley Act. Labor leaders
resented and opposed this legislation. In 1972 there was a six-week strike of coal
miners which was ended only by a 22 percent wage increase. In 1973-74 the coal
miners union instituted a ban on overtime work which hurt production and finally
there was a shutdown of production. The short supplies of coal led to the declaration
of a three-day workweek by the Government. The Conservative Government
engaged in a good deal of intervention in the economy even the labor trouble. In
1971 they nationalized Rolls-Royce and heavily subsidized Upper Clyde
Shipbuilders to keep them in production.
In the February 1974 general elections the Conservative Party lost seats to
Labour but Labour did not achieve an absolute majority and another general
election was called in October of 1974. Labour managed to settle the miners strike
and the electorate gave them a slight majority in Parliament.
Conservative leaders saw labor unions as being out of control and responsible for
bringing down the Heath government. The curbing of labor union power remained
high on the agenda of Conservative leaders.
Margaret Thatcher, Prime Minister of the United Kingdom
In 1975 Margaret Thatcher challenged Edward Heath for the leadership of the
Conservative Party and won. She did not have the opportunity to take on the
Labour Party in a national election until 1979.
The winter of 1978-79, known as the winter of discontent was a difficult time for
the Labour government. There had been wide spread strikes over many issues,
including a proposed government limit of wage increases to five percent. Garbage
was not collected and with grave diggers on strike the dead were not buried.
Margaret Thatcher's party called for labor union reforms, less government
intervention in the economy, less government spending and lower taxes. The election
brought a resounding victory for the Conservative Party. Although she was harshly
criticized it seems clear that the judgment of History is that her accomplishments
were of heroic proportions. She was a Heroine of the the Ages. Notable among her
accomplishments were:

The promotion of the neoliberal philosophy of government which has to a
large extent replaced the social democratic orientation of government.
One could say she created neoliberalism but she clearly relied on the work
of Friedrich von Hayek for her inspiration and propagandizing of Keith
Joseph to prepare the way.

The restriction of trade union leaders' de jure powers and the breaking of
those trade union leaders' de facto power.

The privatization of nationalized enterprises in coal, iron and steel, gas,
electricity, water supply, railways, trucking, airlines and
telecommunications.

The privatization of public housing.

The reduction of income tax rates.

The institution of monetarist monetary policy with a strong emphasis on
controlling inflation.

The restriction of local government spending and the reform of local
government finance

The closer integration of the British economy with those of the European
Community