The Path to Power

he is. John Maynard Keynes famously remarked that: ‘Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.’

But extant economists are no less the slaves of outside influences. That was true of Keynes himself — a member of the ‘Bloomsbury’ set whose rejection of the Victorian virtues in their own behaviour was subtly but surely echoed in the abandonment of the classical liberal rules and restraints in economics with which ‘Keynesianism’ became synonymous.

So too my own views on economics flowed from personal experience of the world in which I grew up. My ‘Bloomsbury’ was Grantham — Methodism, the grocer’s shop, Rotary and all the serious, sober virtues cultivated and esteemed in that environment. Doubtless, there are a hundred ways of coming to convictions about economics, as there are to convictions about politics or religion. But for me, experience of life in the Roberts household was the decisive influence.

For the truth is that families and governments have a great deal more in common than most politicians and economists like to accept. Although the consequences of flouting fundamental rules are somewhat different for states than for households, they are still ruinous — indeed, more ruinous in the case of states because they have the power to bring whole nations down with them.

Nor was it only an understanding of what government could not do that my upbringing and early experience left with me. I also gained a sympathetic insight into what I would later come to think of as ‘capitalism’ or the ‘free-enterprise system’. Whereas for my (usually somewhat older) political contemporaries it was the alleged failure of that system in the Great Depression that convinced them that something better had to be found, for me the reality of business in our shop and in the bustling centre of Grantham demonstrated the opposite. For them capitalism was alien and harsh: for me it was familiar and creative. I was able to see that it was satisfying customers that allowed my father to increase the number of people he employed. I knew that it was international trade which brought tea, coffee, sugar and spices to those who frequented our shop. And, more than that, I experienced that business, as can be seen in any marketplace anywhere, was a lively, human, social and sociable reality: in fact, though serious it was also fun. There is no better course for understanding free-market economics than life in a corner shop. What I learned in Grantham ensured that abstract criticisms I would hear of capitalism came up against the reality of my own experience: I was thus inoculated against the conventional economic wisdom of post-war Britain.

Primarily under the influence of Keynes, but also of socialism, the emphasis during these years was on the ability of government to improve economic conditions by direct and constant intervention. It was held that the state, if its huge powers were directed in an enlightened manner, could break free of the constraints and limits which applied to the lives of individuals, families or businesses. In particular, whereas a household which spent beyond its income was on the road to ruin, this was (according to the new economics) for states the path to prosperity and full employment. Of course, matters were never expressed quite so crudely. Government deficits, for example, were intended to be ‘counter-cyclical’ — that is to compensate for the effects of recession — rather than open-ended. Lip-service was paid to the need to avoid setting welfare benefits at levels which discouraged work. But behind all this was an almost universally held view that government spending was both morally and practically preferable to private spending, because it was directed to higher and more rationally established objectives. Before I ever read a page of Milton Friedman or Alan Walters, I just knew that these assertions could not be true. Thrift was a virtue and profligacy a vice; and the world would not make sense if the laws of human behaviour could be suspended by political fiat. Perhaps the single greatest change which occurred over the years in which I was Leader of the Opposition and then Prime Minister was that the great majority of policy-makers (and even economists) came round to the view which I held.

There is now a general understanding that the effect of increasing government borrowing is to raise interest rates higher than they would otherwise be. This is particularly so if it is expected that the larger deficit will raise future money supply growth and so inflation. In this way, allowing budget deficits to swell arrests rather than accelerates economic growth. The 1981 Budget, which I have described elsewhere, was based on understanding of that truth.[103] The 364 economists who published a statement attacking the strategy we adopted had no doubt that it represented a direct challenge to the prevailing orthodoxy. The challenge succeeded. Economic recovery was heralded by figures in the summer of 1981 and confirmed by others in the following quarter; by 1983 economic conditions were so buoyant that, along with reaction to the successful outcome of the Falklands War, they ensured me my smoothest general election victory.

As with government borrowing, so with inflation. After decades during which governments fine-tuned the economy on the assumption that there was a ‘trade-off’ between inflation and unemployment — the so-called Phillips Curve — it is now widely agreed that in the long run it is micro-economic changes, affecting the structure of the economy — for example, deregulation — rather than macro-economic manipulation, which determines the number of jobs. And hardly anyone now professes to believe that ‘some’ inflation is economically desirable. For whereas in the past governments thought they were sufficiently clever and wage bargainers sufficiently stupid for the former to reduce the latter’s real remuneration by inflation, we now know that the boot has for years been on the other foot. Not only was future inflation discounted by wage bargainers — they frequently overestimated it and increased their demands accordingly. As a result, competitiveness was worsened, not assisted, by the so-called ‘money illusion’. Worse still, those inflationary expectations are immensely difficult to remove from the system, which is why the benefits of low inflation take many years fully to come through.

The great advantage I had over many of my contemporaries in politics was that whereas they had first to be persuaded of the theoretical advantages of monetarism, free trade and deregulation, the technical arguments and insights were so completely in harmony with my fundamental instincts and early experience that I was much more easily convinced — and my convictions helped me to convince others.

BRITAIN IN THE 1980s

As Prime Minister between 1979 and 1990 I had the opportunity to put these convictions into effect in economic policy — and I was fortunate to have three extremely able Chancellors of the Exchequer, Geoffrey Howe, Nigel Lawson and John Major, to assist me. We intended policy in the 1980s to be directed towards fundamentally different goals from those of most of the post-war era. We believed that since jobs (in a free society) did not depend on government but upon satisfying customers, there was no point in setting targets for ‘full’ employment. Instead, government should create the right framework of sound money, low taxes, light regulation and flexible markets (including labour markets) to allow prosperity and employment to grow.

As for government finances, there was, it is true, some limited continuity with the period before 1979. The Labour Chancellor Denis Healey’s ?6 billion real cut in public spending between 1976/77 and 1977/78 the terms of the agreement with the IMF in December 1976 which marked the first overt use of monetary targets to guide policy, were significant steps towards the kind of approach in which I believed. But they were implemented from necessity rather than conviction and would have been jettisoned at the first available opportunity. Indeed, that jettisoning had already begun, as public spending was allowed to rise again in Labour’s final year. Moreover, the sound elements of policy pursued under IMF tutelage were not combined with the other crucial, complementary aspects — substantial cuts in marginal income tax rates, reform of trade union law, privatization and deregulation. They were, therefore, only half the remedy, for the vital ingredient of promoting enterprise was missing.

I came into 10 Downing Street with an overall conception of how to put Britain’s economy right, rather than a detailed plan: progress in different areas would depend on circumstances, both economic and political. For example, the priority in our first Budget was cuts in income tax — both because marginal rates, particularly on those with higher incomes, had become a deterrent to work and an incentive to migrate, and because we had made such a firm pledge in our manifesto. But when political and economic imperatives pointed in opposing directions it was the economic requirements which came first — as when we put up personal taxes in order to control the deficit and beat inflation in that unpopular but crucial 1981 Budget.

The economic strategy had four complementary elements. First, in time and in importance, was the fight against inflation. Inflation had become deeply rooted in the British political and economic system and in British psychology. It had risen to successively higher peaks in the post-war years and had, as I have described, come perilously close to hyper-inflation in 1975. As a result, it was all the more difficult to eliminate. Only a sustained