Talk about a swift reversal in fortune. Consider how quickly British Prime Minister Winston Churchill went from winning a war to losing the peace. On V-E Day -- May 8, 1945, the day after the surrender of Nazi Germany -- Churchill stood on a balcony overlooking London's Parliament Square and addressed a great, cheering sea of humanity. When he told the people, "This is your victory," they roared back: "No, it's yours!" A little less than two months later, the British people went to the polls...and voted him out of office.
Just like that, the British prime minister went from basking in the glow of public adulation to staring at election results that showed an overwhelming lack of support for his continued leadership.
For the record: Clement Attlee and the Labour Party won 48 percent of the popular vote, compared to 40 percent for Churchill and the Conservatives and 9 percent for the Liberals. That gave the Labour Party an almost two to one advantage over the Conservatives in the House of Commons (393 seats to 213). This was, and still is, the biggest onetime swing ever in a British general election, with Labour adding a grand total of 239 seats to the 154 that it held in the previous election. Many lifelong Tories voted Labour. So too did most of Britain's returning soldiers.
Almost all the pundits expected Churchill to coast to victory. So did Harry Truman, Joseph Stalin, and other world leaders. Stalin suspended all activities at the Potsdam Conference in July in the wake of the news and V. M. Molotov, his foreign secretary, was seen wandering around, muttering, "How could this be? How did we not know in advance?"
With characteristic humor, Churchill described what transpired in the 1945 election with these words:
On the night of 10 May 1940, at the outset of the mighty Battle of Britain, I acquired the chief power in the State, which henceforth I wielded in ever-growing measure for five years and three months of world war, at the end of which time, all our enemies having surrendered unconditionally or being about to do so, I was immediately dismissed by the British electorate from all further conduct in their affairs.
More than a stunning defeat for Churchill, however, this was an extraordinary victory for the Labour Party -- and then current progressive notions of change.
Labour had two key messages in the 1945 election. First, it promised to build an all-embracing, cradle-to-grave welfare state. And second, it campaigned on the idea that it would do a better job than the Conservatives not just in spreading wealth, but in raising it up out of the ashes of war...and putting the country on a path of uninterrupted growth.
Labour called for the outright nationalization of roughly 20 percent of British industry, including coal, steel, gas, and electric utilities, and all airline, rail, and bus services. It called for a high degree of central planning and control over the remaining 80 percent of industry under private ownership. And it promised to organize production more efficiently, to override "market failure," and to guarantee high wages and full employment.
But where was the evidence that a centrally planned socialist state could pull off such miracles?
Short answer: There was none.
To the contrary, if what had happened in communist Russia was any guide, socialism in its most extreme form -- with the total abolition of private property -- had been a complete disaster. Through the forced collectivization of agriculture, Stalin had caused millions of peasants to starve to death.
Even so, progressives in Britain and the United States refused to think ill of the murderous Stalin and hailed communist Russia as the coming of "a New Civilization." "All I know," the British socialist Beatrice Webb confided in her diary in 1932 as she and her husband, Sidney, were writing a voluminous and what purported to be a comprehensive study of conditions in Soviet Russia, "is that I wish Russian Communism to succeed." The playwright George Bernard Shaw, a close friend of the Webbs, flatly stated after a visit to Russia, "There was not, and could not be, a food shortage in the USSR." Walter Duranty, the New York Times's Pulitzer Prize-winning Moscow bureau chief, took that falsehood and raised it to a still more preposterous height, telling his American readers that Russian granaries "were overflowing with grain" and that the cows were "plump and contented."
CLOSER TO HOME, progressives on both sides of the Atlantic missed, or chose to ignore, another obvious discrepancy between their rhetoric and economic reality: while all the pump-priming and interventionist policies pursued by Herbert Hoover and Franklin Roosevelt in the United States had done nothing to arrest, let alone reverse, the deepest and most prolonged economic downturn in the nation's history, British governments that kept a tight lid on government spending, over these same years, quietly achieved far better results than the free-spending American presidents. Britain had an average annual growth rate of 4.5 percent from 1933 to 1936, and it easily exceeded pre-Depression levels of prosperity by the end of that period. Through the thirties Britain sustained much lower rates of unemployment than the U.S.
When I spoke with him recently, the eminent English historian Richard Overy discussed how the "failure of capitalism" became an article of faith among the intellectual elite in both Britain and the United States during the interwar years. He observed, "Intellectuals in the 1930s assumed that capitalism was economically inefficient and morally repulsive."
But Britain differed from the United States in one important regard during the thirties. While the U.S. swung to the left politically, Britain remained solidly conservative. Most middle-class people, and many working-class people as well, continued to regard socialism, and hence the Labour Party, with considerable suspicion.
This lent a definite piquancy to the 1945 election. With one brief exception (a Labour-led coalition government from 1929 to 1931), Labour's role had always been to agitate for change, and to critique power, not to wield it. It was like the barking dog that is forever chasing the bus. Then, to almost everyone's amazement, the Labour Party, after all those years of trying, did the impossible: It wound up catching the bus. Attlee, his colleagues, and their allies among the intellectual elite moved into the driver's seat -- with a big majority in Parliament and a clear mandate for change.
News of what had happened famously caused a lady diner at the Savoy to exclaim, "But this is terrible -- they've elected a Labour Government, and the country will never stand for that!" But this was a very real if unexpected change. The 1945 election cut a new channel for British politics and government-moving it far to the left for a generation to come.
The next change of comparable magnitude in British politics happened 34 years later, in 1979, when Margaret Thatcher came to power at the end of Britain's "winter of discontent." In mounting a counter-revolution against socialism, she rechanneled British politics and government a second time. She went well beyond any previous British prime minister, including Churchill, in affirming the principles of free enterprise and limited government.
"You must first win the argument before you win the vote," Thatcher said. Certainly that was one of the biggest keys to her success. In her crusade against socialism, she stood the old progressive critique of capitalism on its head. With great force and conviction, she argued that it was socialism, not capitalism, which had proved itself to be both economically destructive and morally repugnant. Not only had socialism failed in its promise to deliver greater prosperity, but, in giving short shrift to individual initiative and personal responsibility, it had undermined the spirit and character of the British people.
This is the story of how Maggie succeeded where Winston failed in rolling back the socialist tide. It is a story that illustrates the power of ideas -- and the importance of debate. Even though socialism triumphed in 1945, it did so in an absence of real debate. Like a London fog, it tiptoed in on cat's feet.
Anatomy of the 1945 Election
WITH HINDSIGHT, it is easy to pinpoint the first of several factors that led to Churchill's defeat and, with that, Britain's departure from a long-standing, if often compromised, allegiance to free enterprise.
V-E Day was a liberating experience from a political as well as a military perspective. It severed the primary linkage between the great war leader and those who followed him through the thick of an existential conflict: they were no longer bound together by the single overriding objective of winning the war.
From public opinion polls taken during the war and reading the historical record, it is possible to make few general statements about what people were thinking when they went to the polls in Britain in the July 5, 1945, election.
After living two world wars in the space of 30 years, the British people felt that they had earned the right to live in peace and prosperity. They hoped to block out the cares and troubles of the larger world and desired nothing so much as a comfortable domesticity. In a story that appeared shortly after the war, a Fortune magazine reporter acutely observed: "Returning British soldiers, comparatively well fed and clothed, are invariably surprised and often disconcerted at the lot of civilians, who for six years plodded along, eating shabby food, wearing shabby clothes, living in shabby houses."
Britons called World War II "the people's war" because this war hit home in a way that World War I had not. The heavy bombing of British cities during World War II resulted in more than 80,000 civilian casualties and the destruction of more than 2 million homes. A number of historians have argued that the war brought people closer together and contributed to a more egalitarian spirit -- a sense that the widespread sharing of burdens during the war should lead to a more equal sharing of material benefits and the creation of a less class-conscious society after the war.
Without question, British public opinion moved to the left during the war years. This may be seen in the hugely favorable public response to the so-called Beveridge Report, an urgently worded call to arms for comprehensive social reforms, including free doctors' care and hospital services for all. The American press referred to the Beveridge Report as a "blueprint for a postwar New Deal" in Britain. Printed in book form in 1943, just as the war was beginning to turn in the Allies' favor, the report became a runaway best-seller. Sir William Beveridge, its author, became an instant celebrity and media star.
A poll by the British Institute for Public Opinion found that 88 percent of Britons favored immediate adoption of free universal health care, and that included 81 percent of people at top income levels, who felt that they had little or nothing to gain personally. Other recommendations in the report included government guarantees of full employment and a minimum income for all citizens. According to the poll, 86 percent approved of the report, and only 8 percent were opposed.
Most people did not bother to think about the underlying costs of such new entitlements. As the British historian Correlli Barnett has written, "The war liberated public opinion not only from the dismal prewar sense of financial limits, but also from any sense of limits on material resources." People were drawn in by "the seductive analogy" that a nation that could exert itself to win a great war should be equally able to attack "the great social evils"-- as Sir William called them -- "of Want, Disease, Ignorance and Squalor" during the ensuing peace. In vain did Churchill's chancellor of the exchequer Kingsley Wood try to inject a note of reality into all the talk of building a "New Jerusalem," pointing to Britain's mounting indebtedness and asking, "Is this the time to assume that the general taxpayer has a bottomless purse?"
While the Conservatives waffled in their response to the public sensation caused by the Beveridge Report, Labour seized upon the report as holy writ and promised to implement all of its recommendations within three years of coming to power.
War was good to the Labour Party in other important ways as well. Government spending in Britain swelled from a steady state of about 25 percent of GDP in the 1920s and '30s to more than 60 percent during the war, and Labour Party stalwarts had a large say in how that money was spent. As the minister of labour in the wartime government, Ernest Bevin, formerly the head of Britain's largest union, oversaw the conversion of most production from civilian to military uses. In a rough division of responsibilities within the government, Labourites concentrated on economic and domestic affairs, including postwar reconstruction planning, while Churchill and the Conservatives focused on the war and matters of postwar diplomacy and ongoing military strategy.
In short, the war made people comfortable with the idea of big, purposeful, and almost all-powerful government, and it also took the edge off the idea that the Labour Party could not be trusted with the task of government.
The campaign commenced on May 23, two weeks after V-E Day, and lasted six weeks.
Labour's campaign manifesto, Let Us Face the Future, was domestically oriented, forward-looking, and optimistic. It appealed to people who were in a hurry to forget the war and get on with a speedy transition to a snug, peaceful, and more prosperous future.
HOWEVER, IF THERE WAS one person in all of Britain who was most fearful of premature victory celebrations, given the geopolitical situation at the time, it was Winston Churchill. His frame of mind may be glimpsed from the following dispatch, penned just three days after V-E Day, to his foreign secretary Anthony Eden, who was attending a United Nations conference in San Francisco:
Today there are announcements in the newspapers of large withdrawals of American forces to begin month by month. What are we to do? Great pressure will soon be put on us at home to demobilize partially. In a very short time our armies will have melted, but the Russians may remain with hundreds of divisions in possession of Europe from Luebeck to Trieste, and to the Greek Frontier on the Adriatic. All these things are far more vital than the amendments to a World Constitution which may well never come into being till it is superseded after a period of appeasement by a third World War.
Were Churchill's fears of a Soviet strike against Western Europe misplaced or exaggerated? Who can say? Later in the summer, the United States dropped the first atomic bomb on Hiroshima and the second on Nagasaki. More than bringing about Japan's surrender, the atomic bomb changed the strategic balance in Western Europe. It placed our closest allies under the cheap but effective shelter of the American nuclear umbrella, with United States in sole possession of a weapon that could obliterate whole cities or armies.
The point here is that there was a good reason why Churchill-speaking on the eve of an election and before the appearance of this deus ex machina -- did not strive to offer a more reassuring and appealing vision of Britain's future. Knowing Stalin as well as he did, how could he not be worried?
Churchill's lack of eloquence when it came to speaking about domestic and economic issues caused the Economist to fret: "When has the Prime Minister made one of his great and compelling speeches on the theme, not of world strategy, but of the hopes and fears of the British people....So long as he is silent, Conservatism is silent, and the belief grows that maybe the Conservatives are out to do nothing but conserve."
His close friend Vita Sackville-West was even harsher in her assessment of his performance. "You know I have an admiration for Winston amounting to idolatry," she wrote to her husband, Harold Nicolson, "so I am dreadfully distressed by the badness of his broadcast election speeches. What has gone wrong with him? They are confused, woolly, unconstructive and so wordy that it is impossible to pick up any concrete impression from them."
Churchill, then 70, sensed the same failing. "He is very low," his wife, Clementine, wrote to their daughter Mary on June 20. "He thinks he has lost his touch & he grieves about it."
Churchill had not lost his oratorical skills, as later speeches would prove. But on substantive matters -- in trying to explain his economic and domestic policies -- he was tied up in all kinds of contradictory knots.
In presiding over a coalition government, he had worked hand in glove with his Labour Party colleagues, counting on their support for the massive buildup in productive capacity needed to support the war effort. Thanks to Labour's role in the government, for instance, the multiplicity of unions involved in shipbuilding agreed to suspend all restrictive practices for the duration of the war. For his part, Churchill promised to support social reforms that his Labour Party colleagues held most dear -- if they agreed to wait until the end of the war to get them.
Churchill gave his support to universal health care and agreed with Labour that the state should take responsibility after the war for maintaining full employment. He endorsed the idea of keeping the economy on a wartime command-and-control footing for up to four full years after the war. He even embraced "a broadening field for State ownership and enterprise."
In the interest of wartime solidarity, Churchill -- the longtime champion of free enterprise -- unenthusiastically committed himself to a diluted version of the Labour Party agenda.
Churchill was disappointed that the Labour Party leaders insisted on precipitating an election before the war in the Pacific was won. Nevertheless, on May 28, he gave an emotional farewell party at Number 10 for the departing Labour ministers and under-secretaries. "With tears running down his cheeks," as one Labour party minister recalled, Churchill thanked them for their service. "The light of history will shine on all your helmets," he told them.
THE ELECTION TURNED INTO a battle of radio addresses, with each party allotted time on BBC to address the nation in a series of nightly speeches. Families clustered around their radios to listen to this verbal duel. The only real drama came at the outset. In the first of Churchill's speeches, on June 4, he broke out of his self-imposed conformity to the old coalition government's economic consensus...and he accused the Labour Party of Nazi-like leanings or inclinations. In doing so, as just about everyone agreed at the time (including his wife, who begged him to delete these words from his address), he laid the most awful egg. In the midst of victory celebrations, he filled the sweetened air with the acrimonious odor of partisanship. This is what he said:
No Socialist government conducting the entire life and industry of the country could afford to allow free, sharp or violently worded expressions of public discontent. They would have to fall back on some sort of Gestapo, no doubt very humanely directed in the first instance. And this would nip opinion in the bud; it would stop criticism as it reared its head, and it would gather all the power to the supreme party leaders....My friends, I must tell you that a Socialist policy is abhorrent to the British ideas of freedom.
The next night, Attlee delivered a graceful yet devastating rejoinder:
When I listened to the Prime Minister's speech last night in which he gave such a travesty of the policy of the Labour party, I realized at once what was his object. He wanted the electors to understand how great was the difference between Winston Churchill, the great leader in war of a united nation, and Mr. Churchill, the party Leader of the Conservatives. He feared that those who had accepted his leadership in war might be tempted out of gratitude to follow him further. I thank him for having disillusioned them so thoroughly.
This was one instance (out of a fair number) in which the great man misspoke. But really, there was no need to bring the Gestapo into the argument in decrying the adverse effects of socialist government. In fact, there is an unassailable connection between socialism and coercion in a wide variety of forms. The state cannot plan or direct economic activity without a number of negative consequences. It cannot do so without stifling individual freedom and initiative; it cannot do so without politicizing economic decision-making and unfairly favoring some groups at the expense of other groups; it cannot do so without forcing businesspeople to think less about satisfying their customers and more about complying with arbitrary rules and trying to avoid the censure or wrath of government; and, finally, it cannot do so without narrowing the scope of human creativity in responding to people's wants and needs.
All of those forms of government coercion -- and more -- became quickly apparent after Labour's ascension to power.
In retrospect, what seems most significant about the 1945 election is the absence of any serious debate over the future direction of the economy. Fearing that World War II might quickly turn into World War III, Churchill thought it was too soon to demobilize the wartime productive machinery, and he was, in any case, highly compromised -- having promised to go along with much of the Labour Party's social and economic agenda once the war ended in order to secure its support during the war. Churchill did not go into the 1945 election waving the banner of free enterprise against that of socialism. Socialism triumphed over minimal political opposition from the proponents of free enterprise.
So what happened was that a command-and-control wartime economy transitioned into a command-and-control peacetime economy. And it stayed that way for another 30-plus years.
Many of the most idealist socialists regarded the war effort almost as a warm-up exercise for the large-scale social engineering that ought to take place after the war. Consider this revealing item in the journalist J. L. Hodson's wartime diary from September 1944:
A young Radical friend said yesterday: "We've shown in this war that we British don't always muddle through: we've shown we can organize superbly -- look at these invasions of the Continent which have gone like clockwork; look at the harbours we've built on those beaches. No excuse any more for unemployment and slums and underfeeding. Using even half the vision and energy and invention and pulling together we've done in this war, and what is there we cannot do? We've virtually exploded the arguments of old fogies and Better-Notters who said we can't afford this and mustn't do that."
Within weeks of the end of the war, the British people woke up to a much different reality.
Shrink-Wrapping the British Economy
A FORTUNE MAGAZINE COVER STORY ("Britain in Winter") that appeared in February 1946 paints a vivid picture of Britain after six months of peace -- and socialist government. The Britain we see in this time capsule is a place where long lines of people wait to buy clothes, furniture, and other goods deliberately made (under government direction) to the cheapest specifications. Fortune's Gilbert Burck wrote:
The next worst thing to losing a war, the British are becoming aware, is winning it. Victorious and at peace, Great Britain functions almost as if she had won neither peace nor victory. Shop windows, still partly boarded up against a bomb blast, helplessly display their austere "utility" clothing, but a third of a person's yearly ration points must be sacrificed for a dress and about two-thirds of a year's points for a suit. Except for the cinema, there is no night life worth mentioning. Theatres and concerts start at 6:30 p.m. and the streets are deserted long before midnight. And everywhere, from Land's End to John O'Groats, there are queues. Housewives queue for 25 cents worth of meat, the weekly ration. Office workers queue for newspapers that talk of better times. Everybody queues for buses, and sometimes it seems that if a barrel of sovereigns were overturned in the street, people would queue for them.
No less onerous and dispiriting were the restrictions on anyone trying to run a business. To quote again from Gilbert Burck:
If an industrialist wants to spend $150 or more on factory repairs, he must wait for a Board of Trade license. If he wants to add to his plant, he had better devote a big part of it to export goods; and though the government does not actually force him to do its will, its control over his labor, material, and plant leave him no other course.
Under the command-and-control economy of wartime years, it seemed that the government, at the flip of a switch, had been able to convert most of nation's auto-making facilities into the production of much-needed fighters, bombers, and other munitions. And so it had. But consider the problem of flipping the switch back the other way -- returning at war's end to motor vehicle production.
What appeared to be a measure of wartime prosperity -- with factories humming with activity in the Midlands -- was, in fact, supported by loans from the United States. The British government had been buying Spitfires, Blenheim bombers, and other such products with borrowed money. The loans it had taken out would have to be repaid, or rolled over. So, with no more money from the U.S., who would, or could, pay for the output of these factories once they returned to making cars?
There was little demand from British consumers, who remained almost as poor as they had been during the war as a result of the government keeping taxation at near-wartime levels in order to support its spending programs. At the same time, there was small hope for selling a great many cars abroad, due to the high cost of labor, and hence the high cost of manufacture, in Britain.
The crushing burden of war debts offset or canceled out what had been the great patrimony of empire: with income from overseas investments, plus invisible earnings from insurance, banking, and shipping, Britain, prior to the war, had been able to take in almost $2 worth of imported goods for every $1 she sent out through exports. That fortunate state of affairs ended with the war. Because Britain had to import food and other goods in order to live, her standard of living depended upon her relative efficiency.
Starting with Attlee, successive Labour and Tory governments ignored the basic problem, which was a lack of productivity and flexibility. In a never-ending attempt to prop up wages, prices, and employment, they worked with the trade unions and industry to try to limit imports and control or eliminate "wasteful competition" in key sectors, such as autos, steel, textiles, and ship-building.
The sad history of the British car industry epitomizes the futility of this approach. Through consolidation, the number of British car makers fell from a couple dozen companies at the end of the war to a handful in the sixties, and then to one supersized, but still money-losing company: British Leyland, which went bankrupt in 1975 and was then reorganized with the government as the shareholder of the last resort.
EDWARD HEATH, the last Conservative prime minister before Thatcher, followed the pattern set by Harold Wilson, his Labourite predecessor, in retreating from confrontation with the unions while lavishing public funds on flagging industries. This only emboldened trade union leaders to ask for more and be all the more ready to go out on strike to get what they wanted.
Thus, one of the original ideas behind nationalization proved to be a cruel hoax: the idea that the replacement of private ownership with public ownership in the coal fields and steel plants would create a more highly motivated and less strike-prone work force. Labor strife did not diminish under nationalization. It intensified.
In 1947, R. A. Butler, who would become chancellor of the exchequer in the second Churchill government (1951-55), wrote an influential document, the Industrial Charter, which redefined "modern Conservatism" in a way that made it scarcely distinguishable from socialism. He wrote: "In the interests of efficiency, full employment and social security, modern Conservatism would maintain strong central guidance over the operation of the economy."
On his return to power, Churchill did a "me, too" to almost all of Attlee's changes -- feeling he had no mandate to reverse the Labour Party's nationalizations, to curtail union privileges or dismantle the national health service. He was even slow to end rationing, which was quickly abolished in the U.S. following the war but lingered on for years in the UK. "The clock has not been put back one single second," Evelyn Waugh lamented in his Diaries.
That pretty well defines the postwar consensus that lasted from 1945 until 1979. Regardless of which party was in power, it was the received wisdom that government should guarantee full employment while somehow trying to accommodate union demands for higher wages. The customer, or consumer, became the forgotten man. No one worried about producing things that someone might want to buy.
What all this meant in practice was that government was endlessly ensnared in acting as a go-between in mediating disputes and seeking to improve relations between industry and organized labor. During the 1960s and '70s, it became standard practice for the sitting prime minister to summon union leaders and captains of industry for "beer and sandwiches at Number Ten." In late-night sessions at the prime minister's residence, they would thrash out incomes and industrial policies, or try to resolve major work stoppages.
There could hardly have been a better prescription for failure. Once the richest nation in Europe, Britain fell to just 70 percent of the continental average in GDP per capita by the mid-'70s. In Parliamentary debate, Labour's Jim Callaghan, prime minister from 1976 to 1979, made the despairing statement: "Let me say that of course there has been a fall in peoples' standard of life. It has fallen this year and it will fall again next year."
In the three decades following the end of the war, the ratio of government expenditure to GDP climbed to nearly 50 percent -- double what it had been in the interwar period -- and Britain slowly turned from what Napoleon had somewhat enviously called "a nation of shopkeepers" into a nation of zombie industries, zero job creation, negligible new business formation, and ever-worsening living standards.
Enter Margaret Thatcher in Britain's Winter of Discontent
CHURCHILL DESCRIBED SOCIALISM as "the morbid doctrine that nothing matters but the equal sharing of miseries." He spoke of the "inexhaustible" follies of socialism. But while Churchill often mocked socialism, he did not dedicate his political career to its destruction. That is where he differed from Margaret Thatcher...that, and the fact that she came along at a time when the British people, to a great degree, had already soured on socialism and the whole idea of "strong central control over the operation of the economy."
As one of the givens of political life, every other Conservative Party leader, going back to Churchill, had accepted the huge lurch to the left that occurred in the 1945 general election. Mrs. Thatcher did not. In successfully challenging Ted Heath for leadership of the party in 1975, she spoke with the same insurrectionary passion and conviction one hears today from those who say they want their country back. As independent businesspeople, many in the American Tea Party movement feel personally affronted at the thought of living under a government where unseen and supposedly all-knowing bureaucrats rule by discretion. Thatcher was deeply riled by the same thought.
By her own description, she was "inoculated against the conventional economic wisdom of post-war Britain" as a result of "growing up over the shop" and being part of the family grocery business during her childhood in the working-class city of Grantham in Lincolnshire. She was able to respond to abstract criticism of capitalism through the vivid and deeply felt reality of her own experience. As she put it in her 1995 memoir, The Path to Power:
For them [the critics] 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 coffee, sugar and spice to those who frequented our shop. And, more than that, I experienced that business, as can be seen in any marketplace anywhere, was lively, human, social and sociable: in fact, though serious, it was also fun.
The Thatcherite counter-revolution began during Britain's "winter of discontent."
In the winter of 1978-79, Britain was paralyzed by a series of strikes -- causing trains to stop running, refuse to pile up on the streets, the seriously ill to go untreated, and the dead to go unburied. This "green and pleasant land," as William Blake called it, was plunged into a state of near anarchy.
The seeds of the crisis were sown in 1976, when the Labour Party government under the leadership of Jim Callaghan sought an emergency loan from the International Monetary Fund to keep the pound from collapsing. The IMF credit came with several strings attached. Like a number of Third World countries, Britain was put in the humiliating position of having to accept IMF-imposed reforms aimed at taming inflation and curbing government expenditures.
This caused a furious debate within the Labour Party. Rather than try to save the pound, Tony Benn and other prominent radicals wanted to spurn the IMF and move to a "siege economy" built on higher tariffs and further nationalizations extending to banks and other financial institutions.
In the 1976 Labour Party conference, Denis Healey, the beetle-browed and often caustic chancellor of the exchequer, mocked his radical critics, saying: "I have never heard of a siege economy in which we stop imports coming in and demand total freedom for exports to go out."
Under the watchful eye of the IMF, Callaghan and Healey enlisted the support of the omnibus Trades Union Congress (TUC) for a voluntary incomes policy that limited wage increases for most workers to less than 5 percent. Two years later, without acknowledging the IMF's role in instigating financial disciplines, Healey claimed credit for "one of the few periods in postwar British history in which unemployment and inflation were both falling at the same time." That prompted a scathing riposte from Mrs. Thatcher: "Someone ought to tell Mr. Healey that you do not give the man who sets fire to your house a medal just because he phones for the fire brigade."
The improvement in the economy was short-lived. At the first sign of renewed growth, the government's allies in the trade unions blew the top off its incomes policy. In September 1978, more than 60,000 auto workers walked off their jobs, shutting down 23 Ford plants around the country. They demanded a 25 percent pay increase and a 35-hour work week. Next to take action were BP and Esso tanker drivers supplying thousands of filling stations around Britain. They demanded a 40 percent pay increase.
When the Labour Party held its annual conference in Blackpool in late September, an overwhelming majority of delegates voted to reject the 5 percent limit on pay increases and "any wage restraint by whatever method." In doing so, they repudiated the economic policies of their own leaders -- Prime Minister Callaghan and Chancellor Healey.
WHEN THE CONSERVATIVE PARTY held its conference in Brighton weeks later, former prime minister Heath urged the Tories to play the part of the loyal opposition-joining the Labour Party leaders in a bipartisan show of support for restoration of an incomes policy. He warned that the consequences of not doing so would be "ruinous inflation" and "another free-for-all" in the collective bargaining cycle. "There is nothing here for gloating, nothing for joy," Heath intoned. "We should grieve for our country."
In spurning this advice, Thatcher, as the Tory Party leader, struck a blow that shattered the brittle remains of the postwar consensus into a million pieces. Rather than agree to a bipartisan confab on yet another round of wage restraints, she endorsed free collective bargaining. Let the chips fall where they may. If the unions chose to make outrageous demands, that was their decision.
Her government would not intervene to stop them through the use of wage and price controls. But neither would it bail the unions out at a later stage of the game -- sending good money after bad to prop up money-losing companies with bloated payrolls and overpaid workers. If she were elected, there would be no more beer and sandwiches at Number Ten.
No one who listened to Thatcher's speech to the 1978 Conservative Party Conference could doubt that a new day had dawned in British politics. She began her speech by calling for an early election. "There is only one service they [Callaghan and Healey] can do the nation now," she said. "It is to stand not upon the order of their going, but go."
In one part of the speech, she then addressed herself directly to Britain's trade union bosses:
Now, you, the trade union leaders, have great power....But look at the position of your members today and compare it with the position of workers in other free countries. Can you really say, can anyone really say, you have used your powers well?
You want higher wages, better pensions, shorter hours, more government spending, more investment, more-more-more-more. But where is this "more" to come from? There is no more. There can be, but there will not be, unless we all produce it. You can no more separate pay from output than you can separate the two blades of a pair of scissors and still have a sharp cutting edge. And here, let me say to trade union leaders, you are often your own worst enemies. Why isn't there more? Because too often restrictive practices rob you of the one thing you have to sell -- your productivity.
In another portion of the speech, she addressed the nation's political mandarins, of both parties -- all those who did not believe a clean break from the past was desirable, or even possible. Here she spoke of how Britain had been undone, not by "unusually wicked people," but those with "enough good intentions to pave the well-worn path twice over":
The root of the matter is this: we have been ruled by men who live by illusions: the illusion that you can spend money you haven't earned without eventually going bankrupt or falling into the hands of your creditors; the illusion that real jobs can be conjured into existence by Government decree, like rabbits out of a hat; the illusion that there is some other way of creating wealth than hard work and satisfying your customers; the illusion that you can have freedom and enterprise without believing in free enterprise; the illusion that you can have an effective foreign policy without a strong defense force, and a peaceful and orderly society without absolute respect for the law.
Following the party conferences, there were further disruptions and more violence. Trade unions representing local authorities, the Royal College of Nursing, ambulance drivers, and the National Health Service workers went on strike in December and January, demanding huge pay increases. Mass demonstrations in many cities brought commerce to a standstill and closed schools and airports. With government compliance, union shop stewards were empowered to act as police officers in deciding whether truck drivers should be allowed to move "essential" goods across picket lines at hospitals and other locations.
All this put paid to the idea that "only the Labour Party could control labour." It caused many disgruntled union members to cross over for the first time -- voting for the first Conservative leader who dared to call out the strike-happy bosses of their own unions.
When the general election was held in May 1979, Thatcher swept to power with a majority of 43 seats and a 7 percent lead over Labour in the popular vote (nearly equaling the 8 percent lead over the Tories that Labour achieved back in 1945). Four years later, in the 1983 general election, Thatcher and the Conservatives lengthened their lead to a majority of 144 seats and a 15 percent margin over Labour in the popular vote.
The Thatcher Legacy
BELIEVING THAT JOBS (in a free society) depend not on government but on the spontaneous mechanism of businesses competing with one another to earn a profit and satisfy their customers, Thatcher did not attempt to set targets for "full" employment. Instead, she aimed to create nothing more (or less) than "the right framework" for growth to occur -- a framework of low taxes, sound money, light regulation, and flexible markets (including labor markets). In somewhat greater detail, that meant:
• Steep cuts in income tax, particularly at higher levels of income-recognizing that the top rates of taxation (then 83 percent on earned income and 98 percent on investment income) had become a serious deterrent to work and new business creation and an incentive to migrate.
• A sustained policy to reduce public borrowing and monetary growth, eliminate inflation, stabilize the currency, and reduce public spending as a share of GDP.
• The abolition of exchange controls and controls on prices, incomes, and dividends, along with special measures to promote greater competition and choice in financial services, and a program of trade union reforms that outlawed the closed shop, ended secondary picketing, and mandated secret ballots before strikes and ballots in the election of trade union leaders.
• The privatizations (mostly accomplished in Thatcher's second and third terms) of most of many state-owned companies, including British Telecom, the bus companies, British Gas, British Airways, Rolls Royce, and parts of British Leyland, British Steel, and the airports. In this way, she returned what Lenin had called "the commanding heights of industry" to private ownership.
In the steadfast pursuit of these policies, Thatcher accomplished something that few of today's economists have even begun to consider. She achieved agenuine productivity-led recovery that turned Britain from the perennial "sick man" of Europe into its most improved and vibrant economy.
What this summary does not capture is the huge change in peoples' attitudes and outlook that occurred both during Thatcher's 12 years in office and since -- as John Major (Conservative prime minister 1990-1997) and Tony Blair (Labour prime minister 1997-2008) continued to follow her lead in looking to the private sector as the real engine of growth and prosperity. In running for office in 1997, Blair went so far as to pronounce the creation of a "new Labour Party," after taking the unprecedented step of repealing Clause IV of his party's 1918 constitution, which called for state ownership and control of "the means of production, distribution and exchange."
Patrick Minford, an economist at the business school of Cardiff University in Wales and the author of The Supply Side Revolution in Britain and other books, marvels at how many of the sons and daughters of his friends had gone into business for themselves upon graduating from college -- including several who set up their own software companies and one who established an Internet-based company for selling insurance in Australia. "This is completely different than it was when I graduated from university in 1964," he notes. "Back then, there were really only three choices: You went into one of the professions, you joined the Civil Service, or you found a job at one of the really big corporations like Shell or ICI. Small and entrepreneurial business as you know it in America did not exist in the Britain of the 1960s and '70s. Maggie used to talk about turning Britain into a country of entrepreneurs, and the funny thing is, she did."
In the updated edition of his book Testimony, published soon after his election in 2007, French president Nicolas Sarkozy observed that Britain had caught up with France and surpassed it in standard measures of prosperity. He called the Thatcher story "one of exceptional leadership that thoroughly transformed the United Kingdom and laid the groundwork for its prosperity for decades to come." Moreover, he was openly and frankly envious of the seeming abundance of opportunities to succeed that had caused thousands of young French people -- including his own daughter -- to migrate to Britain:
Britain, it will be remembered, seemed to be completely left behind in the late 1970s, with a GDP 25 percent less than that of France. [Now] the British are buying our houses in the Dordogne, Périgord, the Luberon, Savoie, and many other regions. Why? It's simply because Britain's GDP is now 10 percent greater than France's and the British standard of living is higher. I have nothing against the English...but it is not my ambition to see France's most beautiful villages set aside exclusively for British vacationers!
What's worse, London has now become the seventh-largest French city. It has attracted, practically to the point of saturation, thousands of young French people who go to live there, including my daughter. It apparently seems easier to succeed there than in France. Or worse, it seems that success has become so shameful in France that a young person who wants to succeed must leave.
Déjà Vu All Over Again -- Only Backward
I was one of 38 million americans who tuned in to watch the speech that Barack Obama gave on August 28, 2008, when he accepted the Democratic Party's nomination to run for president of the United States. It was an astounding performance, with the president-to-be making a God-like appearance on a stage set up to resemble a Greek temple, but I suspect that few people reacted to it in quite the same way that I did. As a former foreign correspondent and BusinessWeek UK bureau chief who spent four and a half years covering the Thatcher administration, I was struck again and again at how Mr. Obama seemed to pick up on each and every aspect of Thatcherism -- and take it in the exact opposite direction: a recrudescence of free enterprise into socialism, or statism.
To cite a few examples: while she would regulate less, he would regulate more; while she sought to guarantee secret ballots in union elections, he would give free rein to union bullies to organize without ballots; and while she scorned the idea that government should intervene in the marketplace to "pick winners" and guarantee jobs, he positively exalted in it, saying: "I'll help our auto companies retool, so that the fuel-efficient cars of the future are built right here in America. I'll make it easier for the American people to afford these new cars. And I'll invest $150 billion over the next decade in affordable, renewable sources of energy-wind power and solar power and the next generation of biofuels; an investment that will lead to new industries and five million new jobs that pay well and can't ever be outsourced."
In the same month (May 1979) that Margaret Thatcher entered 10 Downing Street as prime minister, Barack Obama graduated from the prestigious Punahou private college preparatory school in Hawaii. That fall, he entered Occidental College in Los Angeles where, as he wrote in his memoir -- "I chose my friends carefully. The more politically active black students. The foreign students. The Chicanos. The Marxist professors and structural feminists and punk-rock performance poets."
Was it Obama's famous charisma or his left-wing policies and political leanings that propelled him into the presidency?
All too clearly, it was his personal magnetism. According to Election Day exit polls, only 22 percent of American voters identified themselves as liberal, compared with 34 percent of self-described conservatives and a whopping 44 percent of self-described moderates. While hard-core liberals formed the "base," Obama won the election on the strength of his appeal to moderates and independents as a self-styled "post-partisan" politician.
In the months and years leading up to the 2008 election, public opinion in the United States did not swing one way or the other. Unlike Attlee in 1945, and unlike Thatcher in 1979, Obama did not come to power with any real mandate for change along ideological grounds.
Beginning last summer, Obama and the Democrats made sweeping health care legislation their top priority. This is when the tide in public opinion began to change. The more Obama talked about the need for health care "reform," the less people liked it and the more they voted against it every time they were given a chance -- culminating in the election earlier this year of Scott Brown, a little-known Republican, to the U.S. Senate seat vacated by the death of Ted Kennedy. Brown turned his campaign into a crusade against Obamacare -- promising to use his vote as the 41st Republican senator to deny the Democrats the supermajority needed to overcome a GOP filibuster.
Then something remarkable happened. Though public opinion had clearly moved to the right, Obama and the Democrats decided to move left-hard left-in rejigging congressional rules to jam their health care bill through Congress via a simple majority vote. Revved up by this "victory" in securing the passage of a manifestly unpopular piece of legislation, the Democratic leadership now aims to replicate this success in passing other bills that have the enthusiastic support of the party's liberal base and are roundly opposed by most other Americans. This includes cap and trade and legislation granting new powers and privileges to the unions.
Under this first-things-last approach, Obama and the Democrats -- cheered on by the intellectual class that is dominant in the universities and within the news media -- are persuaded that they should seize the moment, while they are still in control of both houses of Congress, to pass "enlightened" if unpopular legislation, and then sell the virtues of such legislation to the people once it is already law. They are equally persuaded that good intentions trump any need for good economics -- or careful and honest analysis of weighing the supposed benefits against the likely costs. As a friend of mine put it, "The economic consequences be damned when one's sense of moral superiority is all that matters."
All of which makes November's congressional elections the most important since 1946. That was when Republicans swept aside Democratic majorities in both houses and began to dismantle the New Deal piece by piece. In doing so, they set the stage for the long postwar boom in this country (at the same time, ironically, that the socialist victory in Britain ushered in a long period of decline for that country).
It will be left for future historians to ponder the question posed by Prof. Minford: "Why on earth would Americans, with the most successful economy of all time, want to kill off the engine of their prosperity? It's funny that [former President Bill] Clinton sort of got this point and swung early; Obama has this fantasy world that may well make it impossible for him to grasp what Clinton did."
Share this Article
Like this Article
Print this ArticlePrint Article