Friday, 18 September 2015

Let's Finally End This Myth About Thatcher

When myths are widespread, it's good and necessary to prick the balloon of illusion. Perfect cases in point are these anti-Thatcher memes that used to pervade through the jungle of left wing social commentary. Given that all of the world's most successful economies got the way they did by adopting the things Thatcher espoused*, one would think it should be rare to meet people who are still aboard the anti-Thatcher bandwagon. However, to my surprise I met someone last week who believes Thatcher ruined our economy and made people generally worse off through her industrial policies. When I shared this on Facebook it emerged from the resulting thread that this anti-Thatcher rhetoric is still alive and kicking.

Alas, anyone with even the sketchiest understanding of economics would know why this myth should have long been put to bed. The reality is, the reason Thatcher's economy was a terrific success was largely down to her government’s understanding of the relevance of the works of the likes of Smith, Ricardo, Bastiat, Hayak and Friedman - which, to put in a nutshell, state that global trade, competition, private industry, low taxes, a small State and hard work are the key tenets to a successful economy. It was because of the Conservatives' embracing of these qualities that, despite popular myths to the contrary, Britain actually manufactured more under the Thatcher years than in the decades that bookended her time in office, and increased its public spending in that time period too.

Since the Second World War, and the foundations laid down by the Clement Atlee socialist government, Britain had been awash with economic hardship and putrid nationalisation projects that were being choked by overly-powerful unions. This went on until the 1979 Thatcher years, when she and her party upset a lot of people by transforming an economically impotent Britain into one of the world's economic superpowers again**. It's true that a lot of this comes from, and remains in, London and the South East - but power law distributions make this unsurprising - the whole point is that Britain is an economic powerhouse once again, and it's largely thanks to Thatcher's terms in office in allowing the free market to bear the fruits it couldn't under a stultified socialistic system.

What needs to be grasped is that although the industries most constantly talked about (like coal and steel) declined as a proportion of the aggregate economy, other sectors (like service industries) expanded. To capture the point, next time you’re in London – the country’s economic epicentre – have a walk around and see how many sectors are providing steel, coal and timber compared with service-based goods.

You might also like to note that this isn't a pro-Thatcher bias - the exact same thing happened in all the other prosperous economies too - it's just the way the world was changing. When steel and coal industries declined across Europe and America, that declension was offset by huge expansion in service industries, in every case making the countries in which this was happening richer. The Thatcher government had a strategy to discontinue unprofitable industries - as all governments should with their responsibility to its taxpayers - because despite emotional attachments up north, this unprofitability couldn't carry on under the pretext of it being British unprofitability (replace 'British' with 'white men' and see how it sounds a lot like racism)

The reality is that due to the changing landscape, Britain's coal industry had been declining long before Thatcher. In fact, it's quite famously known that more coal pits were closed under Wilson's Labour governments than under the Tory Thatcher's ones. The reason is obvious - but also widespread across other advanced economies - we saw not only the rise of cheaper coal abroad, but also the rise of first oil and then gas and later nuclear as less ecologically unfriendly sources of power. With that comes a decline in industries that relied on coal, in favour of industries that relied on oil and gas.

A few crazy trade unionists would have preferred to have kept subsidising inefficient and less profitable coal mines (and have the taxpayer pay to prop them up), all in name of Britishness, but as well as sounding a lot like racism to me, it is certainly illogical and economically short-sighted.

I don't dispute that much of what happened to the UK under Thatcher was a hard pill for many to swallow, as jobs were lost, families broken up, communities' clubs shattered, and so forth - but equally what holds us together is going to have to be much more than industrial nationalism. In global economies, climates change all the time - and we humans have to adapt to those changes. Coal mines were shut down because coal could be bought cheaper from abroad. Cheaper coal is better than expensive coal for the one buying it, irrespective of the country from which it happens to come. Trade should have no national preferences, and generally coal mining in the UK is expensive compared to open cast mines in countries such as China, Russia, India, Australia, and Indonesia. It’s the old Adam Smith wisdom again - you can try to produce wine in Scotland, but much better to produce it in vineyards in sunnier countries like France and Italy.

What’s usually the case, as is with Thatcher’s critics, is that they have missed most of the costs and mistaken the benefits for costs, by having too narrow a vision in supporting the parts of the economy that are not healthy (which not-coincidentally, often seem to be the particular industries in which they find themselves). It's no use being emotionally affiliated to an industrial factory that's costing us money just because it happens to be one’s own, or because it happens to be based in one's own country

The argument that supports why enhancing the global connectivity is good for all economies is the same argument that supports why market economics on a global scale is more efficient than the Darwinian natural selection model for economics, and why Thatcher's critics have got it wrong - it is the efficiency of the relationship between prices, supply and demand. It is foolish and impractical to favour bailing out and propping up industries in Britain, when Britain (and the rest of the world) can benefit more greatly (and has benefited more greatly) from the efficiency of the relationship between prices, supply and demand on a global scale. Making good use of the efficiency of the relationship between prices, supply and demand on a global scale is the more or less the same as making good use of the efficiency of finding improved technology. Whenever a government departs from this mandate by trying to artificially improve industries on the basis that they happen to be 'our national industries' (as the Labour Government of the 1970's tried to do) it only succeeds in diminishing the extent to which opportunities to improve everyone's welfare exists.

Competitive markets is what brings about the allocation of resources with maximum efficiency.  Adam Smith showed in his seminal Wealth Of Nations that the different ways to allocate resources is only maximised to the best effect when competitive markets function freely (for further reading, this has also been proven mathematically by Debreu and McKenzie). 

There may be plenty of reasons to criticise Mrs Thatcher – but claiming she ruined our industry is not one of them – because, in fact, the opposite is true; she helped enhance our economy in ways that seemed unlikely in 1979.  To criticise her for that is as foolish as criticising all the people driving safely in China and India because you happen to prefer car crashes in Britain.

There is one simple reason why British manufacturing of consumable goods has gone downhill, and if you don't get this point you're not getting the whole picture; manufactured goods acquired from other countries makes Britain richer as well as making the exporting countries richer too. In the vast majority of cases the price system in the competitive marketplace couldn’t have favoured the companies that are no longer manufacturing in Britain – quite simply because consumers started to buy from cheaper manufacturers abroad.

Let me offer a schoolboy example that shows the logic is correct. Pretend that instead of two countries we have two schools – School A and School B, neither of which is permitted to trade with the other. Johnny at School A has a monopoly on pencil cases. Johnny can sell Billy a pencil case for £5. Now because of a new policy which enables School A to trade with School B, Billy can now buy a pencil case from Charlie in School B for £3. Johnny has two choices, he can match Charlie’s £3 selling price or he can find something else to trade in. If he chooses the latter he will ensure he is no worse off than a £2 loss, otherwise he might as well choose to match Charlie’s £3. So the worst case scenario is that Johnny carries on trading, losing £2 per unit. Billy’s £2 gain matches Johnny’s £2 loss, so there is no net gain or loss. But now consider Freddy at School A.  Freddy, who was never willing to pay £5 for a pencil case, buys one for £3 from Charlie in School B, and goes home happy (as does Charlie with another sale). 

Billy’s gain and Johnny’s loss cancel each other out, but Charlie’s gain amounts to a net gain.  The logic is compelling and simple – in net terms both School A and School B benefit from being able to trade with each other. Instead of two schools, relate that model to every country in the world, multiply that simple pencil case model by factors of billions to allow for an open and competitive market, and different countries’ resources, strengths and geographical positions, and it is obvious that each country benefits from unconstrained trade potential. 

But that’s not the whole story; I have only said why free international trade is good for economies. There is another important factor in this picture – impeding the process of free international trade actually harms the people the government wants to protect – its own industry (and thus, its own citizens). Here’s how it happens. Let’s use a simple and extreme illustration to explain what is a more complex but no less valid truth about why government interference is bad.

Let’s suppose there is a car factory in Newcastle that isn’t doing as well as the Executives or the Government would like, due to consumers’ preference for cars in Japan. The Government introduces a policy that favours car production in Newcastle over car imports from Japan.  How on Earth could that not be good for the British economy – Britain’s gain is Japan’s loss, right? Wrong. Quite simply, what you put into the pockets of the car factory in Newcastle you take out of someone else’s pockets elsewhere in Britain (as well as having people probably paying more for their cars). Consider Slough’s boiler factory; what you don’t see is an almost invisible chain of events; the boilers made in Slough are shipped off to Japan and sold to a company that makes its money producing nuclear reactors, the buyers of which are companies who trade in mineral oils, and those companies deal with companies who make cars in Japan and ship them to Britain. 

In other words, there is a complex economic process that is going on outside of your peripheral vision, whereby both the car factory in Newcastle and the boiler factory in Slough are both bringing cars into Britain. That is to say, if you protect the car factory in Newcastle from competition you must damage Slough’s boiler factory because somewhere down the line they are the competition. So the next time you hear a politician announcing how much he or she wants to do to protect British producers in one industry from foreign competition, be aware that he or she is unknowingly proposing an action that hurts other industries in Britain, and amounts to a net loss in economic efficiency. 

Finally, I'll leave you with a passage I wrote in this blog about the benefits of global trade and how it is similar to the innovations of new technology:

"Finding someone who will do the job for less is a good thing for the economy in a similar way to how improving technology is good for the economy (and in most cases it’s a good thing for the person doing the work too – because having accepted the lower wage job, one presumes he did so because the terms offered were an improvement on his situation prior to accepting it).  In fact, not only is finding someone who will do the job for less a good thing for the economy in a similar way to how improving technology is a good thing for the economy - they are more or less the same thing.  Here’s why. 

Suppose you have a car factory in Manchester, and on the staff team you have 3 innovative engineers; Tom, who designs a machine that assembles the engine valves 25% quicker than the current machine; Dick, who synthesises two compounds that vastly improves the engine oil’s ability to clean the engine; and Harry, whose newly constructed equipment can make seatbelt holders at £2.60 per item cheaper than the current equipment.  I think you’ll agree that those three advances have improved the car factory in Manchester.  And having agreed, it stands to reason that if you want to be consistent you are compelled to agree that finding cheaper ways to employ people is also good for the economy, because it’s the same thing.

When we outsource the work attached to call centres, medical data analysis, computer software design, electrical engineering, and so forth, we are doing something very similar to Tom, Dick and Harry’s improvements in the car factory in Manchester.  That’s the wisdom that it seems too many people miss; new business and trading links across the world are good for the world as a whole, just as new technological innovations are good for the world as a whole.  Hopefully in our lifetime we will get to live in a world in which we see the end of discrimination against total strangers because they happen to live in another humanly constructed geographical border.  Economics favours it, and so does human kindness and decency."

* This is about the empirical nature of economics and the results seen globally when governments learn how to engender freer trade, less state interference, lower tax thresholds, fewer barriers to trade, removal of cronyism and other vested interests and the encouragement of competition. Off the top of my head the two countries that are not embroiled in major instability or civil war but that have departed furthest from those qualities are countries like Cuba and Venezuela - and one can see clearly how undesirable it would be to live in either of those places (you might add North Korea to that too).

** Then Labour, particularly under the Brown era, tried to repeat the mistakes of the 1970s, with irresponsible spending and unmindful borrowing concealed by stealth taxes and misjudged accounting, injecting copious amounts of credit into the system which gave false signals about the cheapness of money and prudent borrowing.