rest and wage bargaining was far less ‘collective’. The proportion of the labour force in trade unions had fallen from 50 per cent to 35 per cent, an important cause (and indicator) of greater labour market flexibility.
But, of course, our reforms to make markets work better were not confined to the labour market: they touched every market. We abolished exchange controls, and controls on prices, incomes and dividends. We promoted greater competition in financial services. We reduced controls over private rented housing to encourage supply, and gave public-sector tenants the right to buy their homes at large discounts. Further measures to promote competition — and so improve value for money and widen choice — in the public sector were made in education, the NHS and local government.[107]
Our objectives — bringing down inflation, controlling the public finances with its concomitant of tax cuts, privatization and supply side reforms — were in varying degrees achieved. Moreover, each was valuable in its own right, not least as part of reducing the role of the state and giving people more control over their own lives. But how far can it be said that the economic programme I pursued in the 1980s fundamentally improved the performance of the British economy? There is a large body of persuasive evidence, which is still accumulating, to suggest that it did.[108]
Productivity is the key. Countries with sustainably improving living standards are countries whose labour and capital are productively employed. Countries which fail to achieve high rates of productivity, although they may — and should — take some of the strain on their exchange rates, cannot in the long term enjoy high living standards. This is borne out by Britain’s experience. Before the Second World War there emerged a major productivity gap between us and the United States. Europe also rapidly overtook us in the 1950s and 1960s. And our performance in the 1970s was by far the worst of any leading industrial nation.
But the 1980s marked a major change. US Bureau of Labor Statistics figures for output per hour in manufacturing show UK productivity growth since 1979 to be faster than that of any other major industrial country, and particularly so since 1985. There is good reason to think that the long-term prospect for productivity growth has been permanently improved and that we have not just seen a one-off, ‘catch-up’ effect. Although the productivity growth was particularly dramatic in manufacturing, it occurred in services too. Output per worker in the UK non-oil economy as a whole grew by 1.7 per cent a year between 1979 and 1989 (that is over the economic cycle), compared with 0.6 per cent a year between 1973 and 1979.
A range of other evidence also suggests that the policies of the 1980s have resulted in structural changes in the British economy which, as long as they are not reversed by wrong policies, will put us in good shape in the year 2000.[109] One measure of an economy’s success — and of course the most politically sensitive one as well — is its capacity to create new businesses and new jobs. Although the immediate effect of an increase in productivity may be to shed jobs, productivity growth is essential to enabling businesses to compete and so to providing secure, well-paid employment. So it is no surprise that the number of people in jobs rose by 1.5 million in the 1980s. It is also significant that the peak in long-term unemployment reached at the end of 1992 was more than a quarter of a million lower than its peak in the last economic cycle.
In Britain, as a result of our long-standing commitment to deregulation, we are also less badly affected than our neighbours by the European disease of controls, high taxes and corporatism which has aborted jobs that would otherwise have occurred. It would, though, be highly damaging if a future government were to sign up to the Maastricht Social Chapter, let alone move back towards minimum-wage regulations which would condemn us to Euro-sclerosis when what we need is American-style flexibility.
Along with inflation, industrial efficiency and job creation, the final significant criterion of economic performance is, of course, economic growth. That too confirms the overall picture of improvement. To reach a fair judgement one has, naturally, to try to allow for the effects of the economic cycle. When we do this, we can see that whereas Britain’s non-oil GDP grew at less than 1 per cent a year between 1973 and 1979 (compared with an EEC average of 2.5 per cent), it grew at 2.25 per cent a year in the 1980s. This was contrary to the international trend: the OECD area as a whole experienced no improvement in performance in the 1980s.
It is important to restate such facts about the 1980s — and not just to get the record straight. Undervaluing what occurred then may well lead governments to turn to alternative approaches which are in fact reruns of the disastrous prescriptions of the 1970s.
There is a parallel with the United States. There the attempt by leading Republicans to distance themselves from the Reagan years gave the opportunity to the Democrats in 1992 to claim the centre ground and successfully fight an election on the theme that it was ‘time for a change’. Only now has the Republican Party perceived that it is by developing rather than detracting from ‘Reaganism’ that success will be achieved. The economic record of the 1980s in both our countries — low inflation, more growth, more job creation, rising living standards, lower marginal tax rates — shows what works; and the 1970s show equally conclusively what does not.[110]
WHY THE WEST?
But of course the prescriptions of free-enterprise economics cannot be properly understood, let alone effectively applied, in a vacuum. They depend heavily for their success upon political and — as I have described elsewhere — social conditions.[111] Precisely why modern Western civilization uniquely gave rise to the sustained growth of prosperity which has transformed lives and prospects over the last quarter of a millennium is fertile ground for debate. The Marxist explanation is now clearly discredited: economic growth is not simply a mechanical result of combining capital and labour. Nor can economic progress simply be ascribed to advances in science or technology, which are not just engines of growth but are also themselves stimulated by cultural and other conditions. Just as significant, in fact, is the way in which science and technology are valued and exploited — and this is something which does indeed mark out modern Western civilization. The Chinese, for example, invented gunpowder and the mariner’s compass, but unlike the West they did not use them to build a maritime empire. The Tibetans discovered turbine movement, but were happy to use it for their prayer wheels. The Byzantines invented clockwork, but employed it as part of court ceremony to raise the emperor above visiting ambassadors.[112] But cultural/religious conditions do not offer a total explanation. The moral significance attached by Christianity to the responsible individual was undoubtedly an important element in the distinctive Western growth of liberal political and economic institutions, but its impact has clearly been very different in the Orthodox East. The Protestant Reformation and the values of Nonconformity also probably played a part — but this does not explain the growth of medieval banking and commerce or the rise of Venice. And, of course, any ‘explanation’ which overlooks the role of the Jews in the growth of capitalism would be no explanation at all.
But two special factors do stand out as of crucial importance — and not just as parts of a wider historical explanation, but also as pointers to future policy. The first is the growth over the centuries of a rule of law, which provided the confidence necessary for entrepreneurship, banking and trade to develop. This clearly has important implications for the strategies being pursued now to establish free-enterprise systems in the former communist states. The second vital condition was the fact that in the crucial period ‘Europe comprised a system of divided and, hence, competing powers and jurisdictions’.[113] As a result, no single government was in a position to pursue policies which frustrated the impulses of economic (or indeed political and religious) freedom without fear of loss of resources. Although the difficulties and cost might be considerable, talented individuals could ultimately take their skills and their money to some other more welcoming state. Today also competition between governments and their differing legal, fiscal and regulatory systems remains a check on the scope for abusing power and thus for impoverishing societies. There is an obvious lesson for those who now wish to submerge European nation states in a United States of Europe where a centralized bureaucracy, by
