Economic history · Thatcher's Economic Policy

Did Thatcher's Economics Work?

←Thatcher's Economic Policymodule 12 of 13

Six steps, about nine minutes, a question at each. You need no economics and no preparation, only a willingness to guess before you are told.

The 1970s brought power cuts and a loan from the International Monetary Fund, which lends to governments that cannot borrow elsewhere. The decade grew at 2.7 per cent a year, and the 1980s are remembered as the recovery.

Eleven modules of this series have followed the policies one at a time. This one asks whether the decade as a whole worked.

The arguments that Thatcher's policies worked include the surge in factory productivity and the end of decades of losing ground to France and Germany. The arguments against include the level unemployment kept returning to, which rose and stayed higher through the decade, and income inequality, which rose further than in any modern decade and never came back down.

Six steps cover the growth shock, two arguments for, two arguments against, and a verdict step that is not scored, because the economists and institutes it draws on do not agree with each other. After you rule, the module shows how the economist Nicholas Crafts and the Resolution Foundation, an institute that studies living standards, split on the same figures.

What this module covers

  • Growth: the two decades, side by side
  • For: the productivity surge, and why it is argued over
  • For: Britain stopped falling behind France and Germany
  • Against: unemployment settling higher
  • Against: the inequality reset that never reversed
  • Your verdict, and the sources' split

Written for every level. Tap any underlined word for what it means, and open the boxes below for the economics behind each decision. If you already know the theory, skip both and the history reads straight through.

Step 1 of 6

Step 1 · the two decades, compared

What the growth figures show

People argue about that decade the way they argue about a match they watched from opposite ends of the ground. The figures are the one thing both sides have to share.

The 1980s are remembered as the decade when the economy grew faster than it had in the 1970s, and is where that memory can be tested.

The 1970s brought power cuts, strikes, prices rising over 20 per cent a year, and a government loan from the in 1976. Growth is averaged over each decade, so the two decades can be compared directly.

The 1970s average was 2.7 per cent a year, and the 1980s average can be set against it.

economic growth
The increase in what a country produces from one year to the next. It is what makes average incomes rise over time, and it is the thing a recession interrupts.
International Monetary Fund
A body funded by its member governments that lends to countries which cannot borrow enough elsewhere. It attaches conditions to what it lends, usually about what the borrowing government may spend.

Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.

The 1970s averaged 2.7 per cent growth a year. Was the 1980s average higher or lower?

vs

A tie counts as correct either way.

For scale. The shape inside the average: the economy shrank 2.0 per cent in 1980, then grew 5.5 per cent in 1987.

Step 2 · exhibit one, for

The factories worked faster

The strongest number for the argument that the policies worked is , and in the factories it surged.

Factory output per hour rose nearly 8.5 per cent during 1981. The jump came in the middle of a deep , while factories were closing across the country.

Economists still argue over what the 1981 jump was. The economist Nicholas Crafts reads it as real change inside the surviving factories. The Resolution Foundation reads part of it as the effect of the closures.

Factories that make more for every hour worked need fewer hours, so the same years can show output rising and jobs going.

productivity
How much is produced for each hour worked. It is what allows pay to rise over time without prices rising to match, which is why economists watch it more closely than almost anything else.
recession
A period in which the economy shrinks rather than grows, usually counted as two or more three-month periods of falling output in a row. Firms sell less, so they employ fewer people, so households spend less again.

When the weakest factories close, what happens to the average output per hour of the factories that remain?

For scale. Across the whole economy, output per hour rose about 27 per cent between 1979 and 1990 on the official measure.

Step 3 · exhibit two, for

The gap stopped growing

Britain's oldest economic complaint was the gap with France and Germany: for decades they had produced more for each hour worked, and the gap had grown.

The gap is measured in for each hour worked, with Britain set at 100. In 1979 France stood at 112 and Germany at 157: a French hour of work produced 12 per cent more than a British one.

Economists have run the same comparison again for the decades since 1979.

output
How much an economy actually produces, in goods and in services. It is the thing growth measures the change in, and the thing a recession is a fall in.

What happened to the gap with France and Germany after 1979?

For scale. The narrowing took decades: France was still ahead in 2007, but by 9 per cent instead of 12.

Step 4 · exhibit one, against

The level that would not fall

The government of Prime Minister Margaret Thatcher changed unions, taxes and state-owned industry, but the changes did not cure . In 1990, eleven years on, being out of work was more common than in 1979.

Economists measure the level unemployment in Britain keeps returning to once good years and bad years average out. If the changes made the job market work better, that level should fall.

That level stood at 7.5 per cent in 1974 to 1981, the years before the changes had taken effect.

unemployment
The number of people who want paid work and cannot find it, usually given as a share of all those working or looking for work. People who are not looking are not counted, so the figure understates how many are out of work.

The level unemployment kept returning to stood at 7.5 per cent in 1974 to 1981. How high was it in 1986 to 1990, after the changes?

For scale. The level did fall eventually: to 5.7 per cent by 1997-2000, on the same measure.

Step 5 · exhibit two, against

The gap that opened

The gap between rich and poor grew more in the 1980s than in any other modern decade.

The gap opened from the top. Nearly half of the money the decade's tax cuts and benefit changes handed out went to the richest tenth of households.

Incomes at the top and at the bottom took different paths from 1979 to 1990. Near the top, incomes rose 56.1 per cent.

Incomes near the top rose 56.1 per cent between 1979 and 1990. How much did incomes near the bottom rise?

For scale. Both figures count what households had left after housing costs were paid.

Step 6 · your verdict

Your verdict

The gap between rich and poor never narrowed back, on the Gini, the standard measure of the gap: 0.26 in 1980, 0.33 by 1994.

The Gini runs from 0, where every household has the same, to 1, where one household has everything. The gap largely stayed at that higher level through the decades that followed.

The arguments that the decade's policies worked include the factories working faster and Britain no longer falling behind France and Germany. The arguments against include growth that was no faster, unemployment settling higher, and a gap between rich and poor that never narrowed back.

The gap between rich and poor stayed where the decade left it, and it has not gone back to where it started.

inflation
The rate at which prices in general are rising, measured over a year. It is not the level of prices but the speed they are climbing, so falling inflation still means things are getting dearer, only more slowly.
Economic growth2.6% a year, against 2.7% in the 1970sThe decade averages, side by side. Thatcher's policies did not bring faster growth overall; the argument is about what they changed instead.
Manufacturing productivityfactory output per hour up nearly 8.5% in 1981 aloneThe strongest number for the argument that the policies worked. Economists still argue how much of it was real change inside surviving factories and how much was the effect of the closures.

You have seen the evidence on both sides. What is your verdict?

What happened next Next module → Next: How Britain Compared1979 to 1990. Inflation fell across the rich world in these years. France tried the opposite policy and reversed it. What was actually Britain's to claim.

Module 12 of 13 in Thatcher's Economic Policy

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What this module covered

, decade against decade

2.6% a year in the 1980s, 2.7% in the 1970s

The 1981 jump

factory output per hour up nearly 8.5%, part real change, part closures

Closing the gap, Britain = 100

France 112 in 1979 to 109 in 2007; Germany 157 to 119

Where settled

7.5% in 1974-81, 9.6% in 1986-90

Top against bottom, 1979 to 1990

+56.1% near the top, +3.1% near the bottom

The gap after, and your verdict

0.26 in 1980 to 0.33 by 1994, and it stayed; the verdict has no score, and it is yours

You met six terms in this module

, , , , ,

economic growth
The increase in what a country produces from one year to the next. It is what makes average incomes rise over time, and it is the thing a recession interrupts.
International Monetary Fund
A body funded by its member governments that lends to countries which cannot borrow enough elsewhere. It attaches conditions to what it lends, usually about what the borrowing government may spend.
productivity
How much is produced for each hour worked. It is what allows pay to rise over time without prices rising to match, which is why economists watch it more closely than almost anything else.
recession
A period in which the economy shrinks rather than grows, usually counted as two or more three-month periods of falling output in a row. Firms sell less, so they employ fewer people, so households spend less again.
output
How much an economy actually produces, in goods and in services. It is the thing growth measures the change in, and the thing a recession is a fall in.
unemployment
The number of people who want paid work and cannot find it, usually given as a share of all those working or looking for work. People who are not looking are not counted, so the figure understates how many are out of work.

Growth was no faster, but the factories worked faster and the gap with France and Germany narrowed. The rise in inequality never reversed.

Take it further

🌍Next: what the whole world was doing while Britain fought its war→ 🇬🇧United Kingdom: the numbers today→ 🎯Guess the Value, which trains you to estimate numbers like the ones these questions asked for→

Where every figure came from

[1] The decade in outline: House of Lords Library, The UK economy in the 1980s. Section 4: average GDP growth was 2.6% a year in the 1980s against 2.7% in the 1970s; real disposable income per head rose 28.9% against 29.7%; the 90:10 income ratio rose sharply to 4.1 by 1989; inflation fell from 18.0% in 1980 to 4.6% in 1983.
[2] Growth, year by year: ONS, GDP year-on-year growth, series IHYP. The shape inside the averages: 1980 = -2.0, 1981 = -0.6, 1987 = 5.5, 1988 = 5.4.
[3] The 1981 productivity jump: Bank of England Quarterly Bulletin, March 1982, Economic commentary. The new index of output per man-hour in manufacturing rose by nearly 8.5% during 1981, after a fall of 2.5% in 1980.
[4] Productivity, the long series: ONS, whole-economy output per hour, series LZVB. 1971 = 42.3, 1979 = 50.1, 1990 = 63.7, which is a rise of about 27% between 1979 and 1990.
[5] The case for, and the price, measured: Nicholas Crafts, The economic legacy of Mrs Thatcher, CEPR. Tables 1 and 2: GDP per hour worked, UK = 100, France 112 in 1979 to 109 in 2007, Germany 157 to 119; a marked improvement in relative performance. Table 3: the sustainable unemployment rate by period, 7.5% in 1974-81, 9.5% in 1981-86, 9.6% in 1986-90, 5.7% by 1997-2000. The 1980s' rapid rise in inequality 'has turned out to be largely permanent'.
[6] The case against, measured: Resolution Foundation, The Thatcher legacy. Section 4.2: part of the 1981 productivity surge reads as the scrapping of the worst plants, against a distinctly higher trend from 1981 to 1990, and a marked improvement in relative performance. Section 4.4: income at the 90th percentile rose 56.1% to 1990, at the 10th percentile 3.1%; almost all of the modern rise in inequality occurred in this period.
[7] Inequality, the long series: Institute for Fiscal Studies, Inequality in the UK 1968-2021. The Gini coefficient, the standard measure of income inequality, rose from 0.26 in 1980 to 0.33 in 1994. Reused as the content model's opened locator.
[8] What happened to inequality after: House of Commons Library, CBP-7484, Income inequality in the UK. 'Income inequality rose sharply during the 1980s, before largely stabilising in the 1990s'; from 1990 it 'has remained more stable'.

Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
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