John Quiggin on the Failure of Thatcher’s New Classical Economics

Very many Libertarians describe themselves as ‘classical liberals’, meaning they support the theories of the classical economists of the late eighteenth and nineteenth centuries. This rejects state intervention and the welfare state in favour of free markets and privatization. This theory was the basis of Thatcher’s economic policy before the Falklands War, as well as those of other countries like Australia and New Zealand. In all of these countries where it was adopted it was a massive failure, like trickle-down economics and austerity.

Quiggin describes how Thatcher’s New Classical Economic policy was a failure, but she was saved from electoral defeat, partly by the Falkland War on page 113. He writes

The only requirement for the New Classical prescription to work was the credibility of the government’s commitment. Thatcher had credible commitment in bucketloads: indeed, even more than an ideological commitment to free-market ideas, credible commitment was the defining feature of her approach to politics. Aphorisms like “the lady’s not for turning” and “there is no alternative” (which produced the acronymic nickname TINA) were characteristics of Thatcher’s “conviction” politics. The slogan “No U-turns” could be regarded as independent of the particular direction in which she was driving. In a real sense, Thatcher’s ultimate political commitment was to commitment itself.

So, if New Classical economics was ever going to work it should have done so in Thatcher’s Britain. In fact, however, unemployment rose sharply, reaching 3 million and remained high for years, just as both Keynesians and monetarists expected. New Classical economics, having failed its first big policy test, dropped out of sight, reviving only in opposition to the stimulus proposals of the Obama administration.

However, Thatcher did not pay a political price for this policy failure, either at the time of (the Falklands war diverted attention from the economy) or, so far in retrospective assessments. The only alternative to the “short sharp Shock” was a long, grinding process of reducing inflation rates slowly through years of restrictive fiscal and monetary policy. While it can be argued that the resulting social and economic costs would have been significantly lower, political perceptions were very different. The mass unemployment of Thatcher’s early years was either blamed directly on her predecessors or seen as the necessary price of reversing chronic decline.

New Classical Economics was a colossal failure. In fact Thatcherism, whether implemented by the Tories or New Labour, has been a failure, though New Labour was better at managing the economy than the Tories. The only reason it has not been abandoned is because of the charisma surrounding Thatcher herself and the fact that it gives even more wealth and power to the upper classes and the business elite while keeping working people poor and unable to resist the exploitative demands of their employers. And its given a spurious credibility to ordinary people through its promotion by the media.

Beveridge’s Outline Scheme for Social Security in the Report

I found this piece, the Heads of a Scheme for Social Security, of 11th December 1941, in Derek Fraser’s The Evolution of the British Welfare State: A History of Social Policy Since the Industrial Revolution (London: MacMillan Press Ltd 1973). In it, Beveridge lays out the various welfare benefits, which came to form the basis of the post-War Welfare State. The document runs as follows:

1. Assumptions: No satisfactory scheme of social security can be devised [except on the] following assumptions:

A. A national health service for prevention and comprehensive treatment available to all members of the community.

B. Universal children’s allowances for all children up to 14 or if in full-time education up to 16.

C. Full use of powers of the state to maintain employment and to reduce unemployment to seasonal, cyclical and interval unemployment, that is to say to unemployment suitable to treatment by cash allowances.

2. Unified Social Security: On these three assumptions, a scheme for social security is outlined below, providing for each member of the community basic provision appropriate to all his needs, in return for a single compulsory contribution.

3.Principle of Scheme: The principle of the Social Security Scheme is to ensure for every one income up to subsistence level, in return for compulsory contributions, expecting him to make voluntary provision to ensure income that he desired beyond this. One consequence of this principle is that no means test of any kind can be applied to the benefits of the Scheme. Another is that the Scheme does not guarantee a standard of life beyond subsistence level; men whose powers of earning diminish must adjust themselves to that change.

3. Needs: The needs to be covered are of seven kinds, including as one the composite needs of a married woman.

C. Childhood, provided for by allowances till 14 of it in full-time education, till 16.
O. Old Age, including premature old age, met by pension beginning from 65 for man and 60 for woman normally, but beginning earlier for proved permanent invalidity.
D. Disability, that is to say inability through illness or accident to pursue a gainful occupation, met by disability and invalidity benefits.
U. Unemployment, that is to say, inability to obtain paid employment by a person dependent on it and physically fit for it, met by unemployment benefits.
F. Funeral Expenses of self or any person for whom responsible, met by funeral grant.
L. Loss in Gainful Occupation other than Employment, e.g. bankruptcy, fire, theft., met by loss grant.
M. Marriage Needs of a Woman, including provision for:
1. Setting up of a home, met by furnishing grant.
2. Maternity met by maternity grant in all cases, and in the case of a period before and after confinement.
3. Interruption of husband’s earning, by his disability or unemployment, met by dependent benefit.
4. Widowhood, met by pension at various rates corresponding to nees and by credit of contributions for unemployment and disability.
5. Separation, i.e. end of husband’s maintenance by desertion or legal separation, met by adaptation of widowhood pensions.
6. Old Age, met by pension at 60, with provision for antedating if husbands earning capacity is stopped by old age.
7. Incapacity for household duties, met by grant to meet expenses of paid help in illness.
8. Funeral grant for self or any person for whom responsible after separation from husband. (pp. 265-7).

I realise that its assumption about gender roles now seem dated and sexist, with the assumption that the husband goes out to work while the mother stays at home to raise the family. However, regardless of its flaws and the continuation of poverty after the foundation of Welfare State, the system of payments laid out here by Beveridge did have immense success in tackling poverty.

And since the 1980s they’ve been under attack by the Tories. Under Thatcher and Major, the system of welfare grants that previously operated were replaced by loans. Welfare payments have also been increasingly cut, and conditions deliberately imposed so that increasingly fewer people are considered eligible for them. This has also been extended to disability payments, with the result that 590 people have died of starvation, poverty, neglect or suicide thanks to the cuts made by the Tories and their Lib-Dem enablers at the last parliament. And over a quarter of a million more psychologically vulnerable people have seen their condition made worse.

And thanks to these attacks on the welfare state and the abandoning of the Keynsian goal of full employment, 4.7 million people in our immensely rich country are now in ‘food poverty’.

Please remember this when you go to vote on Thursday. And don’t vote for the Tories or Liberal Democrats.