Conservative Party economic policy: from heath in opposition to Cameron in coalition [1. publ ed.] 9781137295231, 9781349451791, 9781137295248, 1137295236

Table of contents :
Half-Title......Page 2
Title......Page 3
Copyright......Page 4
Contents......Page 6
Acknowledgements......Page 7
Introduction......Page 9
1 Conservatism, the Conservative Party, and Its Political Economy......Page 14
2 The Conservative Party and Its Microeconomic Policies, 1964–97......Page 40
3 The Conservative Party and the Labour Market, 1964–97......Page 77
4 The Conservative Party and Its Macroeconomic Policies, 1964–97......Page 112
5 The Conservative Party and the Economy since 1997......Page 157
6 Conclusions......Page 186
List of Sources......Page 197
Index......Page 208

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Conservative Party Economic Policy Richard Wade

From Heath in Opposition to Cameron in Coalition

Conservative Party Economic Policy

Conservative Party Economic Policy From Heath in Opposition to Cameron in Coalition Richard Wade

© Richard Wade 2013 Softcover reprint of the hardcover 1st edition 2013 978-1-137-29523-1 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2013 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978-1-349-45179-1

ISBN 978-1-137-29524-8 (eBook)

DOI 10.1057/9781137295248 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress.

To my family and to the memory of Jonathan Burroughs

Contents viii

Acknowledgements Introduction

1

1 Conservatism, the Conservative Party, and Its Political Economy

6

2 The Conservative Party and Its Microeconomic Policies, 1964–97

32

3 The Conservative Party and the Labour Market, 1964–97

69

4 The Conservative Party and Its Macroeconomic Policies, 1964–97

104

5 The Conservative Party and the Economy since 1997

149

6 Conclusions

178

List of Sources

189

Index

201

vii

Acknowledgements This book developed out of a research project which was carried out at the University of Essex. It is therefore appropriate that I first thank those who supported me throughout my work there. I owe the greatest debt to Professor Paul Whiteley, who not only aided my research, but was also kind enough to read the full draft of this book and offer his valuable opinions on it. Professor Anthony King helped me during the first year of my research and also assisted me in subsequent years; his support during the difficult early stages of the research was invaluable. Dr John Bartle was there throughout my period of research; he frequently offered interesting lines of thought to pursue and commented on various drafts. Dr Tom Quinn and Professor Mark Wickham-Jones provided excellent advice on how to approach the manuscript and make it suitable for publication. Thanks also go to numerous members of staff in the Department of Government, who helped to support my work in some way during my time there. When I was carrying out my research, the following individuals agreed to be interviewed, and their thoughts have naturally informed the analysis presented in this book: Charlie Bean, Sir Samuel Brittan, Lord Burns, Tim Congdon CBE, Peter Cropper CBE, Charles Goodhart CBE, Lord Griffiths of Fforestfach, Sir John Hoskyns, Lord Howe of Aberavon, Peter Jay, William Keegan CBE, Lord Lamont of Lerwick, Lord Lawson of Blaby, Rachel Lomax, Sir Peter Middleton, Patrick Minford CBE, Lord Rees-Mogg, Gordon Pepper CBE, Sir Adam Ridley, Peter Sedgwick, Lord Skidelsky, Lord Tebbit, Sir Douglas Wass. All were generous with their time and generally willing to provide answers to follow up questions when asked. Special thanks must go to Tim Congdon who, in addition to being interviewed, also read the manuscript for this book and provided feedback. Responsibility for the book’s contents, including any mistakes, nevertheless remains mine and mine alone. This book makes extensive use of research carried out at the Conservative Party Archive at the Bodleian Library in Oxford and the National Archives in Kew, London. Staff members at both institutions

viii

Acknowledgements   ix

were generous and helpful, and special thanks must go to Sheridan Westlake, Stephen Parkinson, and Adrian Harris of the Conservative Party for allowing me to view documents in the party’s archive, and to Jeremy McIlwaine, the party’s archivist. The final thanks must go to my family. Without their support, this book could not have been written, and it is only right that they should share the dedication.

Introduction

In 2010, the British Conservative Party returned to government after thirteen years in opposition as by far the larger party in a governing Parliamentary majority made up of themselves and the Liberal Democrats. As they had long regarded themselves as the natural party of government, the Conservatives’ extended period in the political wilderness following their crushing defeat in the 1997 general election was a traumatic experience. But the unusually inexperienced group of ministers (by Tory standards) who took office in 2010 could at least comfort themselves with the knowledge that the government was likely to be judged on the issue that many Conservatives have traditionally regarded as the party’s main area of expertise: the economy. Following a prolonged period of economic expansion in Britain between 1992 and 2007, a financial markets liquidity crisis that began in August 2007 had, by the autumn of 2008, morphed into a full-blown systemic crisis, which came close to bringing down the global financial system. Although this fate did not come to pass, the damage was sufficient to plunge Britain and most other developed economies into the worst recession since the interwar period. Although the recession technically ended in 2009, it was sufficiently damaging to leave the UK’s gross domestic product (GDP) several percentage points below its previous peak by the time of the May 2010 general election. The country’s public finances, which had been weak even prior to the recession, ran out of control; large public sector deficits were accumulated, resulting in a significant increase in the level of national 1

2   Conservative Party Economic Policy

debt. The issue of how to restore fiscal credibility to the government’s books therefore became a major theme of the 2010 election campaign. The Conservatives positioned themselves as the most fiscally hawkish of the three main parties. This was in stark contrast to the protestations of the Labour Party in particular that too fast a rate of deficit reduction would lead to a stillborn economic recovery. The outcome of the 2010 general election was the first hung Parliament returned to Westminster since February 1974. Although unable to secure a parliamentary majority, the Conservatives became the largest party in the House of Commons and attracted the greatest share of the popular vote of all political parties. Rather than form a minority government, the Tory leadership entered into negotiations with the Liberal Democrats, from which a formal agreement emerged for the two parties to govern in coalition. The centrepiece of this agreement was a resolution to tackle Britain’s budget deficit (HM Government, 2010: 15–16). In the subsequent budget, it was announced that the structural current deficit would be balanced by 2015–16 and debt would be falling as a percentage of GDP by the end of the Parliament (Hansard, 2010: 167). It should be noted that a new law on fixed-term Parliaments has been passed to ensure that Parliaments run for a full five-year period, subject to certain caveats. In light of this, the present Parliament is expected to sit until 2015. At the time of writing in early 2013, almost three years have passed since the formation of the coalition, and the economic outlook remains uncertain. During the second quarter of 2012, the economy was initially believed to have shrunk by 0.7 per cent (later revised to 0.4 per cent), meaning a third consecutive quarter of negative growth. This was more than sufficient for the downturn to qualify as the second recession to hit Britain within five years, despite the economy returning to growth in the third quarter of 2012. Although the structural deficit has been reduced, its progress has been slower than expected and the onset of recession has meant that the deficit when unadjusted for cyclical factors remains stubbornly high. As of January 2013, borrowing figures suggest that the government is set to borrow even more in 2012/13 than it did in 2011/12. Although at face value these events appear to have verified the Labour Party’s pre- and post-election warnings that rapid fiscal contraction would lead to a choking off of the economic recovery, such a conclusion remains premature at this stage. Numerous influences,

Introduction   3

such as poor weather and extra bank holidays, have been cited as potential factors in various weak quarterly growth figures since 2010. A more important mitigating factor has been the weakness of overseas economies on which the United Kingdom is heavily reliant in terms of export markets. Most notably, eurozone countries have seen growth falter badly due to seemingly intractable financial and sovereign debt crises. As of early 2013, the political situation remains highly fluid and the economy is likely to prove the dominant issue in a way it was not for most of the thirteen years of Labour government between 1997 and 2010. In light of this, there is surely a case for considering how the Conservative Party has chosen to construct and implement economic policies in recent times, to thereby put today’s developments into some sort of historical context. There is also a need to assess where the political economy of the Conservatives is likely to be headed in the near future, in light of the considerable economic and political challenges the party faces at present. This book seeks to cover these two issues by analysing the history of Conservative Party economic policy making over the period 1964–97 before putting post-1997 events into the context of what came before. The years 1964 and 1997 mark natural watersheds for the Conservative Party, in which prolonged periods in office came to an end following general election defeats. Although the 1997 defeat was more decisive and heralded an extended stay in the political wilderness, the 1964 general election defeat was in some ways more significant. First, it directly led to major changes in the rules for electing the party leader, which helped to transform the Conservative Party into a recognisably meritocratic institution. Second, there was a noticeable changing of the guard as many of the party’s most senior figures from the immediate post-war years stepped back from front-line politics and their places were taken by individuals who had mostly been elected to Parliament after 1945. Third, by the mid-1960s, the key political issue of Britain’s relative economic decline that was to dominate politics well into the Thatcher era was becoming increasingly prominent. The year 1964 therefore constitutes a convenient starting point for an analysis of the modern political economy of the Conservative Party.

4   Conservative Party Economic Policy

The structure of the book The book is broken down into five main chapters, with a sixth providing some final conclusions. The core of the book’s analysis is contained in Chapters 2, 3 and 4. These chapters cover the Conservative Party’s making of economic policy during the period 1964–97 in microeconomic policy, labour market policy, and macroeconomic policy. However, for the reader to get some feel for the sorts of ideas that have influenced the Conservative Party’s making of economic policy, there is a need to consider the underlying nature of conservatism and its relationship with both the Conservative Party and the party’s political economy. This task is undertaken in Chapter 1, which provides intellectual background to subsequent analysis. Chapter 5 brings events up to the present day by covering developments in the Conservative Party’s political economy since 1997. Much of the chapter is devoted to putting the events of 1997 onwards into the context of what came before, and the ideas and policies endorsed by the party’s leadership at present are considered in light of how the Conservative Party has chosen to run the economy during previous spells in government. Chapter 6 concludes the book by seeking to summarise the key findings of the analysis undertaken in previous chapters and then considers the challenges that lie ahead for the Conservative Party in terms of its political economy.

Some comments on sources The origin of this book is a doctoral thesis that was researched and written up mainly during 2010 and the first half of 2011. A series of 23 interviews were conducted with individuals who were in some way involved in the events covered in Chapters 2, 3 and 4. Those interviewed are listed in the Acknowledgements and include Conservative Party policy makers, both elected and unelected; advisers to the party; civil servants and other public officials; and economists and journalists. Although these interviews have not been formally quoted or cited in this book, they have naturally informed the arguments presented. Primary sources have been relied upon extensively in Chapters 2, 3 and 4. When I was considering the Conservative Party’s making of economic policy in opposition during 1964–70 and 1974–79,

Introduction   5

the party’s official archive at the Bodleian Library, Oxford, proved particularly useful. Papers covering the 1970–74 Heath government have been accessible for some years at the National Archives in Kew, although papers covering the Thatcher ministry are currently available only for 1979–81 (with the 1982 papers opened in January 2013). The release of the earliest papers covering John Major’s time as prime minister remains almost a decade away. In light of the above, Chapters 2, 3 and 4 cover the period 1964–81 far more extensively than they do events after 1981. This Rankean approach does have the virtue of focusing on the period during which debates over whether the Conservatives should pursue a primarily interventionist or a market liberal approach to the economy were at their most fierce and were ultimately resolved. The crucial events of 1979–81 broadly determined the basis of economic policies throughout 1979–97, and the comparatively brief coverage of 1982–97 that I have given is therefore justified – not just on the basis of a lack of primary source material, but also because of its relative lack of importance to the story told here, compared with the period 1964–81. Although the release of papers for 1982–97 may refine parts of the book’s analysis, it is unlikely to alter it dramatically, given the large quantity of secondary material already available for the post-1981 period. Judicious use of such secondary material is naturally a feature of the post-1981 analysis contained in this book.

1

Conservatism, the Conservative Party, and Its Political Economy

Any study of the Conservative Party’s making of economic policy this past half century needs to be placed in the context of the nature of conservatism and the implications for political economy that stem from such a body of political thought. Indeed, such is the importance of these issues that they require some exploration prior to the undertaking of a substantial empirical analysis. To navigate an area of public administration as complex and demanding as economic management, it is unsurprising that political parties of all hues have tended to rely on some sort of basic economic world view. The main thesis of this chapter is that the Conservative Party has, throughout its history, tended to rely on one of two general economic outlooks when making and implementing its economic policies. It should be noted that throughout the chapter conservative in the intellectual sense of the word is given a lower-case c so as to distinguish it from the by no means perennially synonymous Conservative Party. The chapter first outlines some of the key insights which have tended to underpin all forms of recognisably conservative thought. The focus then moves to how most conservative economic thought can be categorised into one of two major strands: libertarianism and paternalism. I then explore the implications of these two outlooks for both microeconomic and macroeconomic policy making.

The fundamentals of British conservatism An obvious problem with trying to set out the fundamentals of British conservatism (referred to simply as ‘conservatism’ from this point 6

Conservatism, the Conservative Party, and Its Political Economy   7

on) is the difficulty of espousing a set of firm principles to which conservatives at all times hold. Although thinkers of a conservative disposition can be traced back at least as far as Richard Hooker and the Elizabethan era (Quinton, 1978: 9–10), the intellectual origins of much post-Enlightenment conservative thought, with some justification, have been credited to Edmund Burke and in particular his epic denunciation of the French Revolution (Burke, 2009). But people looking for a distinct political programme in Burke’s writings will find themselves disappointed; indeed, the central message of his work was that distinct political programmes should be met with considerable scepticism. Even contemporary conservatives who revere his legacy would certainly not seek to advocate for many of the causes championed by Burke. But he himself observed that a state without the means of change was without the means of its preservation, when he defended himself against charges of hypocrisy from those who noted his admiration for the 1688 Glorious Revolution and the American Revolution of 1775–83 (Burke, 2009: 21). Conservatives and conservatism have therefore tended to adapt themselves to changed circumstances, and it should not be taken as a sign of intellectual weakness or political opportunism that they frequently reassess their position as society evolves. To the present-day conservative, the value of Burke’s work lies less in the specific causes he espoused (which are often archaic by today’s standards), than in the mind-set from which he considered the political problems of his day. As Michael Oakeshott (another luminary in the conservative canon) observed, conservatism is better considered as a disposition as opposed to a formal creed or doctrine (Oakeshott, 1991: 407). Rather than attempt to draw out a list of principles or policies that should be pursued under all circumstances, the conservative generally prefers to adapt his principles and proposals to circumstances. Conservatives also tend to claim that abstract ideas with metaphysical appeal may prove to have unexpected and often disastrous results if developed by reason alone into a political programme for implementation. Oakeshott condemned those who sought to impose ideological blueprints on society with no consideration of how they might come unstuck in practice, pejoratively regarding such an undertaking as ‘rationalism in politics’ (Oakeshott, 1991). But this

8   Conservative Party Economic Policy

essentially pragmatic disposition does not, in isolation, get us far when considering the main tenets of conservatism. One can argue, however, that the unifying theme running through the works of Burke, Oakeshott, and numerous other conservative thinkers is a distinct conception of human nature. Frequently regarded as a pessimistic or realistic outlook depending on taste, the idea that human nature is both flawed and imperfectible is a near constant in conservative thought, whether religious or, as is now almost universally the case, secular. A number of devout Christians have led the Conservative Party, including Lord Salisbury, Bonar Law, and Stanley Baldwin, and in the eighteenth century, the Anglican Church was described by one anonymous wit as ‘the Tory Party at prayer’. Christian thought has also played a role in conservative thinking and, as noted above, Hooker has been cited as an early conservative thinker. The Christian doctrine of original sin and the biblical tale of the fall of man have provided a religious foundation for many conservative thinkers to view mankind as flawed by its very nature, and this has no doubt influenced the conservative outlook. Conservatives, however, have tended to avoid using religious arguments to justify their economic views, with only occasional exceptions to this, such as the arguments contained in Hugh Cecil’s Conservatism (1912). The religious strand of conservatism is therefore of limited interest in the context of this chapter, and it is the secular tradition of conservative thought that is henceforth its focus. In part reflecting the decline of religion in British society, most contemporary conservative thought is secular in any case. It has nevertheless maintained a pessimistic outlook on human nature without invoking Christian theology. The introduction of a conservative thinker who focuses specifically on the intellectual dimension of human imperfectability is helpful at this point. Anthony Quinton (1978: 16) highlights the proposition of intellectual imperfection as a foundation on which much conservative thought is erected. The basic insight is that the complexity of social relations are such that the rational faculties of the human mind are too weak to fully comprehend them, and that abstract reasoning should therefore not be relied on in the sphere of political activity. Quinton therefore shares a common position with Oakeshott (1991: 5–42) and his critique of political rationalism.

Conservatism, the Conservative Party, and Its Political Economy   9

Quinton is also of some interest as he is one of the few political philosophers to have attempted to define specific conservative principles. The first of these, political scepticism, asserts that political wisdom is to be found in the accumulated experiences of the community as a whole rather than in the abstract speculations of isolated thinkers. The second, traditionalism, ensures that the conservative is hostile to sudden change and sympathetic to established customs and institutions. The third, organicism, leads conservatives to view society as an organic whole, defined by inherited customs and institutions, rather than as a mere amalgamation of individuals that only constitute the sum of their parts (Quinton, 1978: 16–17). It can be argued that Quinton’s attempt to expound a set of conservative principles is inherently misguided, since by its very nature conservatism cannot be reduced in such a manner. But it can also be seen as a valiant attempt, whether flawed or otherwise, to abstract the essence from the conservative ‘disposition,’ as defined by Oakeshott. It does not seek to prescribe any specific political agenda and it is probable that any individual who regarded himself or herself as a ‘Quintonian’ conservative would come to radically different policy positions when considering societies that differ substantially. As befits a political disposition that values the wisdom of knowledge accumulated across time, the conservative canon is extensive and the number of important contributors is large. This section has barely scratched at the surface of conservative thought, a subject that could easily fill a multivolume work. But it has nevertheless laid down some of the key foundations that usually underlie the thought processes of conservatives and it has made some important points that will prove significant as this chapter progresses. These include Oakeshott’s claim that conservatism in its British form can generally be regarded as a disposition rather than a fixed programme or doctrine. Its epistemology can be regarded as a form of scepticism, and this helps to explain why conservatives have tended to regard David Hume as a philosopher worthy of admiration (Gilmour, 1978: 53–8). This scepticism is usually derived from a pessimistic view of man’s capacity for reasoning and, needless to say, conservatives tend to be hostile towards attempts to apply schemes to society based on abstract reasoning alone. This also makes conservatives sceptical of excessive change, although some willingness to

10   Conservative Party Economic Policy

accept and adapt to gradual change distinguishes the conservative from the pure reactionary. The ongoing debate as to whether conservatism should be regarded as an ideology need not concern us here. What is certainly true, however, is that, partly due to the adaptive nature of conservatism, the policies advocated by conservatives (and, indeed, Conservatives) have varied hugely across time. This chapter is focused principally on the political economy of the Conservative Party; with this in mind, the next section considers a vitally important question concerning conservative thought and political economy.

Are there two conservatisms? If one takes as given the claim that conservatism is better described as a disposition than a prescriptive political programme, is it possible that two individuals, both of a conservative outlook, can arrive at two radically different policy positions on a single issue? Furthermore, can two conservatives come to radically different policy programmes? These are difficult propositions to test empirically, given the problems of satisfactorily measuring an innate conservative disposition, but the issue is certainly worth exploring. The point relating to how conservatives can come to separate conclusions on an individual matter due to differences in their past experiences has particular resonance to the Conservative Party and to the evolution of the thinking of its members on economic policy. Green (2002: 237) highlights this when considering why those Conservatives who entered Parliament in 1950 tended to be reluctant to challenge the political economy established by the Attlee government, whereas those first elected in 1959 were, generally speaking, more enthusiastic about revising the post-war settlement. Whereas those first elected in 1950 had vivid recollections of the 1945 electoral defeat and the alleged explanation for this in the ‘hungry thirties’ period of Conservative Party–dominated government, those who entered Parliament in 1959 did so in a climate that questioned the achievements of post-war British governments and in which grass-roots Conservatives were increasingly frustrated with the post-war settlement. Given this, we should be unsurprised that two distinct traditions of political economy have tended to coexist in the Conservative Party.

Conservatism, the Conservative Party, and Its Political Economy   11

The classic exposition of this ‘dual inheritance’ was provided by W. H. Greenleaf (1983: 187–346). His distinction between libertarian and paternalist conservatives is useful, although its limitations must be acknowledged given the tendency of the two positions to overlap, with most Tories simultaneously holding libertarian views on some matters and paternalist ones on others. Greenleaf’s (1983: 196–262) outlining of paternalist conservatism highlights how those who subscribe to it have tended to find inspiration in the politics of Benjamin Disraeli and the association of his name with reforming measures designed to ensure that Britain did not fracture irreversibly into the ‘two nations’ of rich and poor. Disraelian ‘one nation conservatism’ was best expressed intellectually and emotionally through Disraeli’s novels, most notably Sybil (Disraeli, 1927) and Coningsby (Disraeli, 1901). Its practical expression came through the reforming measures of the 1874–80 Conservative government in which Disraeli was prime minister. These measures included the Sale of Food and Drugs Act, the Public Health Act, the Artisans’ Dwellings Act, the Rivers’ Pollution Act, and a series of Factory Acts (O’Hara, 2005: 75). It should be noted that the practical realisation of Disraeli’s commitment to social reform has sometimes been exaggerated by his paternalist admirers and that the political economy pursued by his governments did not differ markedly from that established by earlier ministries, most notably the 1841–46 Peel government and Liberal administration under Gladstone that held office between 1868 and 1874 (Smith, 1967). In any case, it was Disraeli’s Home Secretary, R. A. Cross, who was principally responsible for much of this legislation, rather than Disraeli himself (Blake, 1966: 555–6). By contrast, those conservatives in the libertarian tradition have tended to be far less sceptical of the consequences of a market-based economy and more reluctant to interfere in its basic mechanisms. Just as the paternalist strand of conservatism enjoys a distinct ‘hall of fame’ of twentieth-century thinkers and practitioners, including Joseph Chamberlain, F. E. Smith, Arthur Steel-Maitland, Neville Chamberlain, Quintion Hogg, and Harold Macmillan, so the libertarian strand of thought has been represented by luminaries including Hugh Cecil, Ernest Benn, Enoch Powell, Angus Maude, and Keith Joseph. Indeed, with his effusive praise of Adam Smith’s economic theories, it can be argued that the libertarian strand of

12   Conservative Party Economic Policy

conservatism dates back at least as far as Edmund Burke (Greenleaf, 1983: 266). Green (2002: 241) claims that Greenleaf’s distinction between libertarian and paternalist conservatism focuses excessively on conservative attitudes to the state and goes on to offer an alternative model in which the primary emphasis is on conservative attitudes towards the effectiveness or otherwise of the basic agencies of civil society. These non-state agencies, whether sports clubs, charities, churches, trade unions, or otherwise, play the role of Burke’s famous ‘little platoons’ and, through their activities and interactions, allow civil society as a whole to properly function. From this perspective, the determining factor as to whether a conservative will take a libertarian or paternalist stance on a particular matter is his or her perception of how effectively the existing agencies of civil society are performing their social roles. Although this framework can be applied to any part of civil society, it is the economic dimension that most concerns us, given the focus of this book; we nevertheless accept that the economic dimension overlaps considerably with other aspects of civil society. The basic civil society agents in a market economy are synonymous with the basic economic agents defined in standard microeconomic theory. The first of these is the individual, whether as a consumer, capital owner, or wage earner. Alongside individuals are various collectives, most notably firms and trade unions. The extent to which a conservative is sympathetic to state intervention in market activity is likely to depend on how he or she views these agents in relation to their intended role of securing the economic and social good. The value of Green’s model is that it can potentially explain how conservatives come to radically different conclusions as to the scope for state intervention within civil society as a whole and in the market economy in particular. It also largely renders redundant allegations by libertarian conservatives that paternalists are in some way quasi-socialists, as well as rendering redundant the counter-accusation that libertarian conservatives are little more than nineteenth-century liberals. If a conservative’s attitude to state intervention is based on his or her perception of the social effectiveness of civil society’s institutions, then neither strongly libertarian nor strongly paternalist views on the role of the state can necessarily be dismissed as unconservative.

Conservatism, the Conservative Party, and Its Political Economy   13

The trade unions provide an illuminating example (Green, 2002: 270–2). Free societies usually allow labour collectivisation to at least some extent, and the outright banning of trade unions tends to be a feature of authoritarian or totalitarian states such as Nazi Germany and the Soviet Union. A well-functioning labour movement is therefore a common feature of a healthy civil society, and it would be difficult to identify a genuine conservative who advocated the outright banning of collectivised labour. In the early post-war period, the Conservative Party’s policy makers argued that the greater prominence of the trade union movement should be respected (Conservative Central Office, 1947: 9); the legal framework in which the unions operated remained largely unchanged under the 1951–64 Tory governments. But as industrial relations became increasingly fraught from the 1950s onwards, many conservatives began to advocate reform of trade union law. Such advocates were not, however, limited to those in the party who could be regarded as strongly libertarian and therefore likely to be hostile to trade union activity, as was indicated by the support of the usually paternalistic Edward Heath for trade union reform (Heath, 1998: 279–81). By the 1970s, even those who were regarded as ultra-paternalist Tories had spoken damningly of trade union conduct (Gilmour, 1978: 236–8). Conservative disapproval of trade union activity from the 1950s onwards can be interpreted as being based on a view that the trade unions had ceased to play their appropriate role within civil society and had instead become an active threat to it. Reform of industrial relations therefore became a Conservative Party priority. The issues surrounding Tory policy towards the trade unions are dealt with more extensively in Chapter 3, but this example indicates the value of Green’s framework. The main drawback of the Green model is that it hinges on the definition of the ‘social good’ that civil society’s agencies are supposed to facilitate. Such a concept is inherently subjective. Just what constitutes a conservative definition of the social good is never made clear by Green, and it is difficult to confront this issue without reverting to the sort of abstract reasoning that conservatives instinctively distrust. The issue becomes even more complicated when one considers the fact that within the context of a market economy, the economic good and the social good may conflict for those of an outlook that might be conservative. An obvious example of this is worker migration,

14   Conservative Party Economic Policy

where the economic good may demand the free movement of labour, but the social good may demand a limit to it so as to preserve the continuity, stability, and the traditions of the community. There is another way to consider how conservatives come to conclusions about the economic and social good along the lines suggested by Greenleaf’s distinction between paternalist and libertarian conservatism. This comes through consideration of the conservative attitude to inequality. Both libertarian conservatives such as Keith Joseph (Joseph and Sumption, 1979) and paternalist ones such as Ian Gilmour (1978: 150) have rejected the socialist pursuit of equality. Indeed, all recognisable conservatives have defended the presence of socioeconomic inequalities, and Dorey (2011) provides a thorough analysis of the importance of inequality to British conservative philosophy and Conservative Party politics. He also makes a distinction between one-nation conservatives, who support ‘bounded inequality’, and neoliberal conservatives, who are untroubled by there being no limits to inequality. The term ‘neoliberal’ shall be jettisoned in the following discussion, as it has become such a loaded term as to almost constitute an insult. The terms economic liberal and market liberal shall instead be used interchangeably. Dorey insists that whilst both one-nation conservatives and market liberal conservatives defend inequality on various grounds, the former view the organic nature of society as necessitating that the gap between rich and poor be kept within some ill-defined limit so as to avoid social fractures (Dorey, 2011: 49). This constitutes a view of conservative political economy in keeping with the Disraelian notion of ‘two nations’ and the need to avoid such a state of affairs from becoming too extreme. It also exhibits considerable overlap with Greenleaf’s definition of paternalist conservatism. The notion of economically liberal conservatives approximates Greenleaf’s libertarian conservatives. Conservatives who support a more robust market liberal approach tend to be less exercised by the potentially disruptive effects of unrestricted markets and the marked inequalities which they can bring, and instead focus on the potentially malign results of excessive paternalism. These include the possibility of rewards moving out of line with effort and merit, leading to moral hazard among those who benefit from paternalism and disillusion for those who lose out. The impact is likely to prove disastrous

Conservatism, the Conservative Party, and Its Political Economy   15

both in terms of peoples’ sense of personal responsibility and the performance of the economy. Whether dressed up in the form of Greenleaf’s paternalism and libertarianism, Green’s model of attitudes to the agents of civil society, or Dorey’s one-nation and market liberal conservatives, it is clear that the notion of twin traditions in conservative political economy is a legitimate one and that the distinction between the two does exist in practice. It is also highly significant and underlies the different ways in which Conservative Party has approached microeconomic policy issues and, perhaps less obviously, macroeconomic policy making. These will be explored in the next two sections.

Conservatism and microeconomics Microeconomics took on much of its present theoretical form in the late eighteenth-century writings of, among others, Adam Smith and David Ricardo. Attacking (not to mention parodying) the mercantilist position that the creation of wealth is derived from the ability of nations to generate trade surpluses, Smith posited that it was the division of labour and consequent specialisation that underpinned the extraordinary development then being seen in England and other leading European economies. From this it followed that a market economy operating under a comprehensive legal framework of property rights and enjoying both internal and external security would optimise its allocation of resources and maximise wealth creation (Smith, 1986). Ricardo later buttressed this position with his analytical demonstration that free trade between two countries would lead to each country specialising in the goods in which it enjoyed a comparative advantage in production, resulting in trade gains for both countries (Ricardo, 1971: 147–67). There are some obvious reasons why conservatives are likely to be attracted to classical political economy. Markets are spontaneous organising mechanisms for allocating scarce resources that do not owe their existence to the imposition of policies based on abstract reasoning. The development of markets is also bound up inextricably with the growth of the community as a whole, and therefore approximates Quinton’s themes of traditionalism and organicism. Indeed, the market itself fosters a number of important institutions, including commercial law, business associations, trade unions, banks,

16   Conservative Party Economic Policy

and credit associations, which can be considered among Burke’s ‘little platoons’ and important agents of any well-functioning civil society. For conservatives, another attractive feature of Smith’s Wealth of Nations is that it is not a work of abstract economic theory, but an empirical consideration of the development of economies and, indeed, of societies over time. To contemporary readers, the claim concerning the success of the mechanisms of the market therefore appeared to have empirical validity, and this was always likely to count for more in the minds of most conservatives than was theoretical elegance. The conservative preference for empiricism is partly based on an extreme distrust of rationalist thought. But alongside this is a willingness to trust in customs and institutions that have stood the test of time. The markets of Smith’s time certainly passed this test. Trying to map such developments in economic theory to the policies pursued by Conservative governments during the nineteenth century is fraught with hazard. Aside from the problem of establishing causation between ideas and policy, there is the issue of defining just when the Conservative Party emerged in its present form. Many historians highlight the collapse of Tory support in the general election following the 1832 Great Reform Act and Sir Robert Peel’s 1834 Tamworth Manifesto as marking the beginning of the modern Conservative Party (Stewart, 1978: 92–8). This judgement would appear to rule out consideration of Lord Liverpool’s 1812–27 ministry which, by and large, implemented commercial policies along lines consistent with classical political economy (Harris, 2011: 28–32). Peel’s 1841–46 ministry arguably provides a more illuminating example. As the first majority Conservative Party government, it enacted a number of economic and financial policies which approximated those recommended by classical political economy (Harris, 2011: 66–7). One such measure was the proposal by Peel to repeal the Corn Laws and thereby remove the protection that had hitherto sheltered Britain’s agricultural producers. Such a policy of free trade clearly had exemplary economic liberal credentials. But it proved to be political dynamite, and the Conservative Party soon split into two factions, with a Peelite rump that was reconciled with free trade separating from a protectionist majority that retained the Conservative Party label.

Conservatism, the Conservative Party, and Its Political Economy   17

The Peelites were eventually subsumed into the amalgamation of nonconservative factions that became the Liberal Party, whilst the protectionists continued to enjoy an independent existence under the long-time leadership of Edward Stanley, the Fourteenth Earl of Derby. Much of the opposition to repealing the Corn Laws had resulted from the makeup of the Conservatives as the party of landowners and agriculture. Nevertheless, as Blake (1966: 243) notes, the protectionists did have a genuine intellectual case, and Peel’s less-than-adroit handling of the situation did much to ensure his own dramatic political demise. Electoral necessity eventually saw the Tories jettison protectionism; once in government, they experienced little obvious difficulty in adapting their position to, broadly speaking, Gladstonian political economy in the 1870s (Letwin, 1992: 52). Following a number of short-lived minority administrations under Derby and Disraeli, it was not until 1874 that the Conservatives were again returned to office with a parliamentary majority. The influence of the social reforms of the 1874–80 Disraeli government on many conservative thinkers has already been remarked upon, although it should again be stated that Disraeli’s bark with regard to social reform was always more evident than his bite. As Smith (1967: 130) has noted, Conservatives during Disraeli’s time did snipe at classical political economy, but most were either reconciled to its fundamentals or had no coherent alternative to offer. Disraeli’s rhetoric and the partial realisation of his ideas through legislation should not be underestimated in terms of its influence on subsequent conservative thinkers and their consequent willingness to return to Disraeli’s ideal of elevating the condition of the people through government action (Gilmour, 1978: 74–86). But Disraeli’s government did not fundamentally break with the established political economy of late nineteenth-century Britain which was, in itself, largely consistent with the framework prescribed by classical economic theory. Disraeli was succeeded as party leader and later as prime minister by Robert Cecil, the Third Marquess of Salisbury. The formidable Salisbury saw some role for the state in the provision of working-class housing, but was generally inclined towards leaving the market to operate freely (Roberts, 1999: 282–7). Despite the 1886 Liberal Party schism over the issue of Irish Home Rule and the resulting assimilation

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of Liberal Unionists (including radicals such as Joseph Chamberlain) into Salisbury’s 1886–92 and 1895–1902 governments, there was no seminal change to the way in which Britain’s economy was managed during the later years of the nineteenth century. There were, however, issues outside of politics that posed questions about the nature of the existing economic order. The social inequalities of the Victorian period provided a spur to social reformers, and this coincided with the gradual extension of the franchise brought about by the electoral reform measures of 1867 and 1884. Although microeconomic theory had much to say about the efficiency of the free market, it could say relatively little about its distributional aspects, and these were fast becoming a major issue of public conscience. In terms of economic theory, the late Victorian era also coincided with the rise of marginalism as the key mathematical tool of analysis that unified existing economic theory. Developed initially and independently by economists W. S. Jevons and Leon Walras, it arguably saw its most famous exposition in Alfred Marshall’s Principles of Economics (Marshall, 1890). This mathematical revolution in economic theory marked the transition from classical to neoclassical economics and remains at the core of microeconomics to this day. The subsequent application of such theory to a theoretical economy made up of numerous markets would in the twentieth century yield the First Fundamental Theorem of Welfare Economics. This theorem states that undisturbed markets provide efficient economic outcomes, thus amounting to an analytical confirmation of Smith’s earlier argument that ‘the invisible hand’ of the free market would allocate scarce resources in an optimal manner. The theorem is subject to two conditions, however. The first of these is that economic agents (whether producers or consumers) do not enjoy market power whilst the second is that markets exist for all commodities. The first of these conditions implies that a concentration of market power, to the extent that either firms or individuals can act as price makers, will lead to suboptimal outcomes. The second condition, amongst other things, implies that public goods will tend to be underconsumed. These insights supplement the fact that neoclassical economics offers no guarantee that even economically efficient allocations will be ethically acceptable from the perspective of wealth and income distribution.

Conservatism, the Conservative Party, and Its Political Economy   19

It can reasonably be asked to what extent conservative thought was influenced by such abstract theory, developed mainly through the mathematical analysis of highly simplified models of the economy. Conservative scepticism of abstract thought would have been perfectly justified, had such theory been unrelated to the empirical evidence. But unlike the small cottage industries considered by Adam Smith, the Industrial Revolution had in some cases resulted in industrial behemoths which dominated markets and were therefore able to set prices well above production costs and to the detriment of the consumer. This was an even more egregious phenomenon in Germany and the United States (Backhouse, 2002: 165). In addition, public goods such as education and basic health care could be thought to be ‘underconsumed’, with the poorest in society having easy access to neither. Such ‘poverty amid plenty’ was documented by the research of those such as Seebohm Rowntree (1901). The interrelated issues of income and wealth inequalities, a lack of provision of basic public goods, and industrial monopolies and cartelisation posed a problem for conservatism and the Conservative Party. There was no prospect of the party adopting a position that advocated equality through punitive taxation and vast transfers of wealth and property. But with the expansion of the franchise, the political difficulties associated with sustaining the existing order were likely to become insurmountable, and some compromise in the party’s position would therefore be required. Indeed, Salisbury had foreseen this and always feared the consequences for the propertied classes of expanding the electorate to those without property (Roberts, 1999: 57–8). Unsurprisingly, during the first half of the twentieth century numerous conservative intellectuals and policy makers devoted their time and effort to developing ideas for social reform that provided a distinct conservative alternative to both the new liberalism of Asquith’s Liberal Party and socialism. Perhaps the most significant result of such activity was Joseph Chamberlain’s call for ‘tariff reform’. Chamberlain’s political programme combined a system of tariffs known as ‘Imperial Preference’ with social reforms such as the provision of old-age pensions. Although the tariff reform-advocating Conservatives were crushed in the 1906 general election and Chamberlain himself was incapacitated by a stroke soon afterwards, the Tory focus on social reform was to be enduring. Indeed, a significant portion of the welfare

20   Conservative Party Economic Policy

state edifice was to be established by Chamberlain’s son, Neville, during a prolonged period of Conservative Party political ascendency in the 1920s and 1930s (Greenleaf, 1983: 232–8). It was during the interwar period that Harold Macmillan developed his ideas on establishing a ‘middle way’ between free market capitalism and state control of industry (Macmillan, 1938). Macmillan was also involved in the reorientation of the Conservative Party’s economic policies during the post-war period, which was best expressed through The Industrial Charter (Conservative Central Office, 1947). Although Rab Butler was the prime mover, the Tories’ acceptance of the mixed economy, full employment, and an expanded welfare state bore some resemblance to the arguments put forward by Macmillan and his associates during the interwar period (Garnett and Hickson, 2009: 13). Macmillan’s premiership of 1957–63 would see the development of a more proactive role for the state in industry with the formalisation of economic ‘planning’ through the setting up of the National Economic Development Council (NEDC). There was, however, an alternative approach to political economy being advocated by some Conservatives from 1945 onwards. Far from reconciling themselves with the reforms of the Attlee government, its supporters expressed deep dissatisfaction both with the post-war settlement as established during 1945–51 and with the subsequent Tory acceptance of it. The core of this position was a rejection of nationalisation and the all-encompassing nature of the comprehensive welfare state. Its foremost early advocate was Sir Ernest Benn, although his critique of collectivism took its main inspiration from individualist creeds (Greenleaf, 1983: 299–308). During the 1930s and 1940s, a number of classical liberals had reacted against what they perceived to be the intellectual and practical threats to the market economy, with Friedrich Hayek foremost among the European defenders of market liberalism (Cockett, 1994: 78–89). One of Hayek’s main contentions was that the price mechanism is unique in making full use of society’s widely dispersed knowledge in a way that a central planner of the economy cannot (Hayek, 1945). Hayek also put forward a number of hugely influential anti-collectivist arguments in his seminal 1944 tract The Road to Serfdom (Hayek, 1944). Hayek’s relationship with conservatism was not a simple one. When considering The Road to Serfdom, Oakeshott (1991: 26) acerbically

Conservatism, the Conservative Party, and Its Political Economy   21

noted that plans to prevent planning were derived from a mistaken political outlook shared by those who had advocated planning in the first place. Hayek’s brand of individualism sometimes sat uneasily with the conservative view of society as an organic whole, and the man himself openly declared himself a nonconservative (Hayek, 1960: 395–411). But his writings contain a number of elements that continue to attract conservatives, and Gray (1988: 249–59) has argued that Hayek’s classical liberalism is based on epistemological scepticism rather than on the distinctly unconservative rationalism sometimes associated with classical liberals and libertarians. In any case, Hayek proved to be a valuable intellectual ally to many conservatives in the battle against socialist ideas, if only on the basis of the principle that ‘my enemy’s enemy is my friend’. Hayek’s writings would go on to influence many politicians on the right, both in Britain and beyond (King, 1987: 14–16). But by the 1950s and 1960s, the leading advocate of market liberalism within the Conservative Party itself was Enoch Powell. Powell entered Parliament in 1950 with impressive scholarly and military credentials and was strongly associated with the One Nation Group of Conservatives. Despite its Disraelian moniker, it was home to a diverse range of thinkers, and during the 1950s it put forward a number of ideas that attempted to define a distinctly conservative approach to, amongst other things, the social services (Green, 2006: 41–3). Powell also became involved with the Institute of Economic Affairs (IEA), a think tank set up by Antony Fisher in 1955, following advice from Hayek on how best to make the argument for economic liberalism in Britain. Although politically neutral, the IEA became close to a number of Conservatives, with Powell foremost among them. But the economic aspects of ‘Powellism’ would be overshadowed from the late 1960s onwards by his controversial views on immigration and, to a lesser extent, on the union with Northern Ireland and British membership of the European Economic Community (EEC). Powell would resign the Conservative whip in 1974 in protest at the Heath government’s policies; he later re-emerged as an Ulster Unionist MP. His impact as a spokesman for economic liberalism was thereafter more limited and was often upstaged by some of his more contentious political enthusiasms. As will become obvious in subsequent chapters, the political economy of the Conservative Party since 1975 has been defined to a

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great extent by the economic liberalism articulated by Benn, Hayek, the IEA, Powell, and others prior to that date. But the paternalist approach to economic policy was particularly influential with senior Tories prior to 1975, and both strands of thought therefore played an important role in how the Conservative Party chose to conduct its microeconomic policy making after 1964. This distinction between paternalist and market liberal approaches to political economy is an important one to establish; it will underpin much of the analysis contained in Chapter 2, in particular.

Conservatism and macroeconomics To many readers, the fact that Conservative politicians can be classified as either paternalist or libertarian and that this leads them to advocate different microeconomic policies may appear intuitively straightforward. What is less obvious, however, is how such a distinction can result in different approaches to the seemingly technocratic activities of macroeconomic policy making. This section of the chapter will explore this issue and will argue that paternalist and market liberal conservatives are likely to take different views on how the economy should be managed from a macroeconomic perspective. In order to do this, the historical background needs some consideration. The centrepiece of British financial policy during the second half of the nineteenth century was the gold standard. Its full form was brought about by the 1844 Bank Charter Act, which established fully gold-backed Bank of England notes as the legal standard. Such a monetary system ensured that the purchasing power of the currency was pegged to the price of gold and would thereby remain relatively constant against all other goods across time. As would later become significant, the purchasing power of the currency therefore depended to a great extent on the demand and supply conditions in the gold market and less on the activities taking place in the ‘real’ economy. Although the British economy enjoyed an unprecedented period of economic development following the Industrial Revolution, it was not immune from prolonged experiences of economic depression. The Conservative Party’s loss of the 1880 general election, for example, has been attributed to the depressed economic conditions then being experienced by the country and their consequent impact

Conservatism, the Conservative Party, and Its Political Economy   23

on voting (Blake, 1966: 719). But it was the post–World War I slump of the 1920s and the perceived role of the return to the gold standard that brought into sharp perspective the weaknesses associated with a gold-based monetary system. One of the most formidable economists to express their discontent with monetary arrangements was John Maynard Keynes. He regarded the gold standard as a ‘barbarous relic’ (Keynes, 1923: 172) and was strongly critical of the Baldwin government and its Chancellor of the Exchequer, Winston Churchill, for re-establishing sterling’s parity with gold in 1925 (Moggridge and Johnson, 1972: 207–30). With the onset of the Great Depression in the 1930s, Keynes began to work on his revolutionary macroeconomic theories. It was through his extensive knowledge of monetary economics that Keynes developed his reinterpretation of the rate of interest, which formed the centrepiece of his seminal challenge to existing theories of the business cycle (Keynes, 1936: 135–85). Within the framework of existing theory the interest rate had acted as a variable that adjusted so as to bring about equilibrium between savings and investment. By contrast, Keynes argued that the rate of interest was a measure of ‘liquidity preference’ (Keynes, 1936: 166–8). Keynes posited that people could hold two types of financial asset: money and interest-bearing bonds. Since money is a more liquid asset than bonds, the interest payments enjoyed by bond holders constituted a premium required to convince people to forgo the liquidity benefits of holding money. The interest rate therefore represented people’s preference for ‘liquidity’, that is to say money, over illiquid financial assets. Keynes subscribed to the quantity theory of money viewpoint that money is held for transactions purposes and as a buffer against unforeseen circumstances. But he added the third motivation of speculation. Keynes claimed that when bond interest rates are very low and the price of bonds consequently is high, individuals anticipate a future rise in the interest rate and a fall in bond prices. They would therefore forgo bonds and increase their money holdings (Keynes, 1936: 172–4). It followed that any attempt to expand the money supply would lead only to greater money holdings, as people would not be induced to rebalance their financial asset portfolios in favour of bonds. Keynes regarded this scenario as a ‘liquidity trap’ in which the demand for money would be infinitely elastic.

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The demand for money function was therefore heavily influenced by the variability of the interest rate and was consequently highly unstable. Advocates of the quantity theory had tended to assume that increases in the quantity of money in circulation would lead to corresponding increases in nominal output and therefore the price level. This assumed that the impact of money on real economic activity would be neutral in the long run. But this interpretation depended on the demand for money being relatively stable so that excess money balances were quickly run down by greater spending. The implication of Keynes’s theory was that excess balances would not be spent and private-sector investment and aggregate demand would therefore be too weak to ensure the full use of available economic resources. This had been considered impossible in mainstream economic theory, with Say’s Law explicitly stating that supply would always create its own demand (Say, 1821). Due to the presence of liquidity preference, it followed that monetary polices designed to increase the money supply would be impotent under the special circumstances of a ‘liquidity trap’. Expansionary fiscal policy to support investment and aggregate demand would therefore be required, with the excess of spending over taxation used to finance public works. The legacy of Keynes remains hotly disputed, but a consensus of sorts did emerge during the 1940s and 1950s. John Hicks (1937) formalised Keynes’s work into the widely used and taught Investment-Saving– Liquidity preference-Money supply (IS–LM) framework, and this period also marked the emergence of the ‘neoclassical synthesis’ within which the macroeconomic insights of Keynes were synthesised with neoclassical microeconomics (Samuelson, 1948). In Britain, the dominant economic school of thought that emerged strongly advocated the use of activist fiscal policy to manage demand; it put little or no emphasis on the role of money and monetary policy in economic activity (Congdon, 2007: 31–45). The role of money in the inflationary process was thought to be minimal and, so far as nominal income did move with the money stock, the causation was thought by many to run from the former to the latter (Kaldor, 1970). For simplicity, this school of thought is referred to throughout the remainder of the book as neo-Keynesian so as to distinguish it from Keynes, since it is only possible to speculate on his views on such an approach.

Conservatism, the Conservative Party, and Its Political Economy   25

If fiscal policy was to be used to manage demand and monetary policy was largely impotent, then the question of how to construct an anti-inflationary policy remained unanswered. A number of neo-Keynesians highlighted Keynes’s reference to ‘wage units’ in The General Theory and from it developed the idea that wage pressures were important in determining inflation (Congdon, 2007: 36–7). Alban Phillips (1958) strengthened the neo-Keynesian position considerably (though not necessarily intentionally) with his publication of research that demonstrated a strong negative correlation between unemployment and the growth in money wages in the United Kingdom for the period 1861–1957. Samuelson and Solow (1960) published research on the US economy that generated similar findings. The negative correlation between unemployment and inflation that could be derived from this became known as the Phillips curve. The intuition used to explain this correlation was relatively simple. If unemployment was high, then employers would have a large pool of workers from which to choose and would not have to offer high wages in order to attract them. By contrast, if unemployment was low, then firms would have to attract workers already employed by offering them higher wages than they were already receiving. The neo-Keynesian transmission mechanism for inflation could therefore be outlined as follows: increases in wage rates would result in firms increasing the prices of their goods in order to maintain profitability, and this would lead to a wage/price spiral as workers in turn demanded higher wages to compensate for the greater cost of living. Inflation was therefore a cost-push phenomenon and a system of price and income controls was required to contain it. The extent to which neo-Keynesian policy prescriptions directly influenced British macroeconomic policy making during the post-war settlement era remains highly debatable. But there is no doubt that they had an impact on the thinking of a number of senior Conservative politicians. As noted earlier in the chapter, many Conservatives had been scarred by the impact of high unemployment during the interwar period; for obvious reasons, it was paternalist Tories who tended to fall most frequently into this camp. One of them, Harold Macmillan, had corresponded frequently with Keynes between the wars and would later become one of the most prominent of those

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Conservatives who were keen to adopt discretionary macroeconomic policies and enact price and income controls in an attempt to contain inflation (Green, 2002: 157–91). But if many Conservatives disliked unemployment and its consequences, neither did they ignore the insidious problem of inflation. Conservatives are always likely to be dissatisfied by a state of affairs in which the currency rapidly declines in terms of its purchasing power. Not only would it lead to property redistribution by the back door, but it would disproportionately damage the interests of the middle classes that have provided the backbone of Conservative Party support and activism since the late nineteenth century. This was exemplified by the so-called middle class revolt of the late 1950s onwards, during which Conservative voters switched their allegiance to the Liberal Party at by-elections in protest at the accelerating rate of inflation (Green, 2002: 194). Indeed, Tories tended to view rapid inflation as a threat to social stability itself (Waldegrave, 1978: 109–14). The virtual annihilation of the middle classes in much of mainland Europe due to the hyperinflations of the immediate post–World War I period and the subsequent rise of highly unpleasant regimes provided a salutary lesson of what can occur if monetary stability collapses for even relatively short periods. Developing a strategy for countering the problem of inflation was therefore a primary concern for many Conservatives, particularly among those on the market liberal wing of the party who had little time for a policy of interfering in basic market mechanisms through a prices and incomes policy. Developments in academia would play a key role in determining the form such counterinflationary strategies would eventually take. The quantity theory of money had been ignored in many universities following the experiences of the Depression and the publication of The General Theory. One place where it continued to be taken seriously was the University of Chicago, and Milton Friedman became the foremost advocate of the so-called Chicago School of economic thought. Friedman was an enormously influential economist whose academic achievements included a seminal contribution to the theory of consumption (Friedman, 1957). His support for economic liberalism made him, with Hayek, one of the major influences on Conservatives who sought to make an unapologetic case for a market-based economy (Thatcher, 1993: 618).

Conservatism, the Conservative Party, and Its Political Economy   27

Friedman’s support for free markets was derived from a strident individualism and support of freedom (Friedman, 1962), which is difficult to reconcile with the conservative tradition, at least in its British form. But this did not stop him from having a major impact on the economic policies developed by the Tories from the mid-1970s onwards. In 1956, he produced an influential theoretical restatement of the quantity theory of money (Friedman, 1956). As already outlined, the attack of Keynes on the traditional quantity theory was based on the idea that individuals hold speculative money balances for the purposes of investing in bonds. The demand for money would therefore be highly dependent on the rate of interest and thus inherently unstable. By contrast, in the traditional quantity theory, the demand for money was assumed to be stable. Friedman conceded that the interest rate could play a role in the demand for money, but also insisted that by claiming that people could hold only two types of asset, Keynes had oversimplified. There existed a wide variety of assets in addition to bonds and money, which included corporate equity, real estate, commodities, and consumer goods such as cars and dishwashers. When deciding on the makeup of their asset portfolio, individuals would only take the interest rate into account when deciding how many bonds to hold as against other assets. Given that the decision to hold bonds was only one of many decisions made by individuals concerning how to hold their wealth, variations in the rate of interest would have a much smaller impact on the overall makeup of the portfolio, compared with what Keynes had claimed. Changes in the rate of interest would therefore lead people to adjust their portfolios not just between money and bonds, but between bonds and a range of other assets. The influence of interest rate changes on the holding of money would therefore be much weaker than Keynes had hypothesised, and the demand for money would be relatively stable. Significant amounts of money would not be held for speculative purposes and idle balances would not be accumulated. If people did acquire excessive money balances as a result of monetary growth, the excess would be spent and national income would increase. The link between the money stock and nominal output was therefore restored in Friedman’s theory. Friedman claimed to have provided empirical support for the importance of money in determining economic activity in his history

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of monetary developments in the United States, which he co-wrote with Anna Schwartz (Friedman and Schwartz, 1963). The work also offered a radical reinterpretation of the Great Depression. Far from it being the result of inadequate fiscal policy, the central cause of the Great Depression in America from the perspective of Friedman and Schwartz was gross negligence on the part of the United States Federal Reserve Board in the conduct of monetary policy (Friedman and Schwartz, 1963: 299–419). The Federal Reserve had attempted to check the stock market boom of the 1920s through monetary restraint, and from 1928 it gradually reduced the stock of money in the US economy. The reduction in the money stock continued unabated during 1929–33, as numerous banks failed, and Friedman and Schwartz argued that it was this collapse in the quantity of money that was responsible for the deflation and catastrophic falls in output experienced by the United States during the period. But Friedman’s most decisive intervention in terms of impact on economic policy making arguably came in the late 1960s. The idea, derived from the original Phillips curve, of a long term trade-off between inflation and unemployment had provided strong justification for neo-Keynesian demand management. The aim of discretionary demand management was to achieve the most desirable trade-off between inflation and unemployment. If there was no trade-off to be had, then the idea that an economy should be demand-managed in such a way would be seriously flawed. Friedman (1968) and Edmund Phelps (1968) independently came to the conclusion that only in the short run was there a trade-off, and that in the long run the result of expansionary policies was perpetually increasing inflation. Friedman explained these ideas in his Presidential Address to the American Economic Association in 1967. He argued that there was a level of output and unemployment at which the economy would settle with a stable rate of inflation. He referred to this as the natural rate of unemployment. This concept was later to be renamed by economists as the non-accelerating inflation rate of unemployment (NAIRU). Should a government attempt to push the level of unemployment below the natural rate by increasing the money supply, output would initially expand. This would happen because people would enjoy higher cash balances than they wished to hold and would spend the excess, leading to increased spending and greater output.

Conservatism, the Conservative Party, and Its Political Economy   29

But short-term gains in output would result in firms increasing prices, due to higher demand for their goods. Increased prices would mean a fall in real wages, and workers would thereafter resolve not to be caught out again in a similar manner. They would therefore adapt their inflation expectations and assume rising rather than stable prices in future nominal wage negotiations. This would in turn lead to greater unemployment, as firms shed workers because of higher real wage costs. If the government wished to keep unemployment below the natural rate, it would then need to increase the money supply by an amount greater than that anticipated by workers, and the process would repeat itself. The conclusion Friedman and Phelps drew was that, far from leading to a temporarily higher level of inflation as the Phillips curve suggested, holding unemployment below its natural rate would lead to an ever-increasing rate of inflation. If one plotted a graph with inflation on the vertical axis and unemployment on the horizontal axis, the Phillips curve would appear to be vertical in the long run, whilst cutting the horizontal axis at the natural rate of unemployment. Friedman’s claim that the Phillips curve trade-off did not exist in the long run appeared prescient as there was an onset of stagflation in many Western economies during the 1970s. This led to a major debate among macroeconomists as to whether policy making should be governed by rules or by discretion. Monetarists believed that a government could not, in the long run, influence real variables such as employment and output through discretionary manipulation of nominal variables such as the money stock. It should therefore operate a policy ‘rule’ of constant growth in the money stock at a rate consistent with the long-term growth potential of the economy plus the desired (presumably low) rate of inflation (Friedman, 1968). At first glance, the debate over whether to apply economic policies consistent with monetarism would appear to be one that should be settled through recourse to the empirical evidence. In its simplest terms, does the evidence support the claim that the demand for money function exhibits stability or not? But as Congdon (2011: 260) has noted, monetarism is not a politically neutral economic theory. There were elements to the political economy of monetarism that were always likely to attract libertarian conservatives. Congdon highlights the role of money as an instrument for choice and the way in which it facilitates the Smithian division of labour and the

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Hayekian division of knowledge that underlie the development of modern market economies (Congdon, 2011: 261–2). Additionally, it can be argued that it strengthens the institution of private property (Congdon, 2011: 265–70). In light of this, a government that values such things is likely to put a premium on preserving the value of the currency whilst leaving markets to set individual prices and wages. Although such a position may appeal to conservatives of a market liberal disposition, it can be argued that it better approximates classical liberal principles than it approximates conservatism. But there is a third aspect to the political economy of monetarism that indisputably sits within the conservative tradition of thought and which Congdon (2011: 271) explicitly links to Oakeshott’s scepticism of rationalism in politics. This partially rests on the fact that Friedman’s original support for a money supply ‘rule’ was derived from a profound scepticism of just what could be achieved through discretionary macroeconomic policies, given how little is known about the functioning of economies (Friedman, 1960: 86–9). A conservative is always likely to be sympathetic towards such epistemological scepticism. Monetarism was therefore always likely to prove attractive to conservatives and especially to those of a market liberal persuasion. This was particularly so, given that an implication of the monetarist position is that the retention of a liberalised economy is a precondition of economic development and the maintenance of a low rate of unemployment. Paternalist conservatives, on the other hand, always distrusted such reasoning and the idea that only the liberation of the market could bring down unemployment. This disquiet partly stemmed from their view that the monetarist ‘cure’ had the potential to be even worse than the disease. There was therefore much in neo-Keynesianism that attracted paternalist conservatives. If demand management could bring about full employment and strong growth, then social reform which ‘humanised’ the market could be possible without inordinate sacrifices in output. Additionally, the imposition of a prices and incomes policy was unlikely to trouble them in the way that it did libertarian conservatives, who believed that the market should be left to price goods, services, and incomes. Indeed, a prices and incomes policy offered the possibility of directly acting to limit the extent of inequal-

Conservatism, the Conservative Party, and Its Political Economy   31

ities, even if paternalist Tories were naturally reluctant to pursue this approach as vigorously as their contemporaries on the political left.

Conclusion We highlighted at the outset to this chapter that our job would be to relate political economy to conservatism as a mode of thought. In doing so, we have identified two very different approaches to political economy, both of which sit comfortably within the conservative tradition. The paternalist strand has tended to more easily reconcile itself with intervention in the economy and unorthodox approaches to macroeconomic policy, such as deficit spending and prices and incomes policies. By contrast, the libertarian strand of conservatism has much more in common with classical liberalism in its advocacy of a relatively undisturbed market economy and macroeconomic policies designed to ensure controlled growth in the quantity of money. To a great extent, the next three chapters consider the ways in which these two strands of conservatism competed for influence in the party’s making of economic policies between 1964 and 1997.

2

The Conservative Party and Its Microeconomic Policies, 1964–97

This chapter analyses the microeconomic policies pursued by the Conservative Party during 1964–97 from a perspective that puts particular emphasis on the respective influences of paternalist and market liberal conservatism. The period 1964–81 is covered much more extensively than the post-1981 period for two reasons, alluded to in the introduction. First, the availability of official papers for 1982 onwards is limited at present, so a full analysis of the period of 1982 onwards comparable to that provided here for 1964–81 is not yet possible. But second, and perhaps more important, is the fact that post-1981 events were determined to a great extent by the competition between market liberal and paternalist forms of conservatism, which was broadly decided in favour of the former by 1982. The microeconomic policies pursued by the Tories from 1982 to 1997 therefore owed much of their form to the policy direction that was established during the first two years of the 1979–83 Thatcher government. To put the analysis in its appropriate context, however, the chapter first considers the extent to which the Conservative Party reconciled itself to the reforms of the 1945–51 Attlee government following its crushing 1945 election defeat and the six subsequent years it spent in opposition. We highlight the distinction between the party’s leadership, which broadly accepted Labour’s reforms, and other parts of the party, which were much more sceptical. We then briefly explore the clash between paternalist and libertarian conservatism in the context of the decision by the Conservative government in 1964 to abolish resale price maintenance (RPM). The subsequent analysis then focuses on post-1964 Conservative policies towards regional economic 32

The Conservative Party and Its Microeconomic Policies, 1964–97   33

development, the nationalised industries, financial markets, and the tax system.

The road to 1964 The traditional account of the politics of the immediate post-war period owes much to Addison (1975) and emphasises the existence of a ‘consensus’, which was accepted by both major political parties. Advocates of this interpretation claim that the reforms of the Attlee government were largely accepted by the Tories, resulting in a prolonged period during which both Labour and Conservative governments managed the British economy in a broadly similar manner. This viewpoint has been challenged by some, including Jones and Kandiah (1996). But it is nevertheless reasonable to state that the Conservative Party leadership did respond to electoral defeat in 1945 by publicly committing itself to the economic policies that would tend to be used by both parties as a first resort for managing the British economy up until the 1970s. In their Industrial Charter publication (Conservative Central Office, 1947: 16), the Conservatives committed themselves to jobs for all those who were willing to work. This commitment was effectively an acknowledgement by the party’s leadership that the state had a significant role to play in managing aggregate demand along Keynesian lines to ensure that a repeat of the high unemployment rates experienced during the interwar years never occurred again. According to the traditionalist account, the Tories also came to accept the principles of the mixed economy and the comprehensive welfare state, with the starring role in this reorientation of conservatism played by ‘Rab’ Butler (Morgan, 1990: 31–2). The increasing influence of other ‘progressive’ Tories, including Quintin Hogg and Harold Macmillan, has also been highlighted (Green, 2002: 218). But it should be noted that it was the leadership of the Conservative Party that reconciled itself to an expanded welfare state, the mixed economy, and Keynesian demand management rather than the party at large. In the Conservative Party’s middle and lower ranks, this reorientation of the party’s policy platform was met with a notable degree of hostility (Green, 2002: 219). As early as 1944–45, Conservative Members of Parliament (MPs) such as Richard Law were becoming exasperated at the inability and the unwillingness

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of senior Tories to make a case for individual liberty at a time when collectivist ideas were dominating the political agenda (Cockett, 1994: 91–8). A gulf opened up between those Conservatives who contented themselves with a more interventionist approach to political economy and those who advocated a greater role for the market and a corresponding retreat of the state. Although this book is primarily focused on the period after the 1964 general election, the abolition of resale price maintenance (RPM), a measure carried out by the 1963–64 Douglas-Home government, does merit consideration. The reasons for this are twofold. First, it was a classic case of a split between those Tories who were sympathetic to the free market and those who regarded it with scepticism. Second the minister at the centre of the debate was Edward Heath. As party leader, Heath would go on to dominate Conservative Party policy making for the subsequent decade. RPM allowed British producers to set the prices at which their goods could be sold in retail outlets. A result of this practice was that many small shops that would otherwise have been swallowed up by competition from the supermarkets were able to remain commercially viable. For many Conservatives, such interference in the workings of the market was justified, as small shops were a central part of many small communities and their disappearance would negatively impact social cohesion and continuity. But for the economic liberal, RPM exploited the consumer and prevented the growth of the more efficient supermarket industry. Conservatives supportive of the free market, such as Enoch Powell, were therefore sympathetic to a policy of RPM abolition (Heffer, 1998: 356). The incorrigibly pro-market Board of Trade had long sought to abolish RPM, and in Edward Heath they had a president of the board with the political muscle to make it possible (Bruce-Gardyne and Lawson, 1976: 112). Whether Heath was motivated by principle, electoral considerations, or a need to steal a march on other contenders for the post-Douglas-Home Conservative leadership is impossible to determine with any certainty. Regardless, the proposal split the Conservative Party in Cabinet, Parliament, and in the country (Bruce-Gardyne and Lawson, 1976: 99–103). An aggravating factor was the fact that a general election was due in 1964, and small shopkeepers were a traditional bulwark of Conservative support. As a

The Conservative Party and Its Microeconomic Policies, 1964–97   35

result, some Tories who supported abolition in principle were highly sceptical of the timing. Heath was ultimately able to carry the legislation through Parliament, and RPM was abolished prior to the 1964 general election (Bruce-Gardyne and Lawson, 1976: 108–12). Whether this contributed to the Tories narrowly losing the election remains open to debate (Findlay, 2001). RPM abolition is mainly of interest here because it illuminates the difficulties involved in reconciling the views of paternalist Tories with those Conservatives who are less sceptical of the free market. It was this contrast in views between market sceptics with considerable sympathy for state intervention and the economic liberals who favoured a relatively unfettered market that dominated Conservative interparty debates over microeconomic policies during the years following 1964. In the next three sections of the chapter, these debates are considered in relation to three policy areas in which the market had been allowed to play only a limited role during 1945–64: regional policy, the nationalised industries, and financial markets.

Regional policies under Heath and Thatcher In July 1965, Sir Alec Douglas-Home resigned the leadership of the Conservative Party and the Tories held their first ever formal leadership ballot amongst MPs. The two main contenders were Edward Heath and former Chancellor of the Exchequer Reginald Maudling. Enoch Powell also ran, but received just 15 votes. Unlike the vehemently pro-market Powell, Maudling and Heath were not then strongly associated with any economic doctrine, and the contest hinged on who was perceived to be better suited to taking the fight to the Wilson government. Heath was generally thought to be the better choice and he was duly elected leader by 150 votes to 133 (Campbell, 1993: 180–3). In the months leading up to the leadership election, Heath had already emerged as the party’s dominant figure in policy making. He had been made Shadow Chancellor by Douglas-Home and excelled himself in the House of Commons when opposing Labour’s 1965 Finance Bill (Campbell, 1993: 173–4). With Rab Butler’s retirement from politics, Heath also took over as chairman of the Advisory Committee on Policy (ACP) (Ramsden, 1980: 236). As party leader,

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he would later take effective control of the Conservative Research Department (CRD). By the time he became leader, Heath had therefore established considerable authority over the entirety of the Conservative Party’s policy-making machinery. The general direction of the comprehensive review of policy undertaken by the Tories in opposition during 1965–70 was therefore determined to a great extent by the newly installed leader. Heath had little or no interest in fundamentally rethinking the underlying philosophy of the party in order to form an intellectual basis for policies, and Powell claimed that Heath had little interest in ideas and would turn red in the face if you showed him one (Campbell, 1993: 212–39). This was a little unfair, as Heath was anything but closed-minded when it came to searching for ideas to solve individual problems. But it is reasonable to say that he was not at all interested in seeking a unifying philosophy for the party’s policy platform. Policy was therefore formulated in a way that subjected individual problems to analysis from which a solution would be derived, as opposed to establishing an underlying philosophy from which to develop a coherent set of policies. This was very much in keeping with Heath’s way of approaching problems. Indeed, it was said that he believed any problem to be solvable if subjected to sufficient rational analysis (Campbell, 1993: 239). Heath therefore rejected Powell’s attempts to open a debate on underlying philosophy and Angus Maude, the Conservative shadow aviation spokesman, was later sacked for writing an article in The Spectator which argued that policy making needed to be less technocratic (Garnett and Hickson, 2009: 73–4). In Douglas-Home’s short-lived government, Heath had been responsible for regional policy, amongst other things,. The policies pursued by Heath in this area had been interventionist and were designed to encourage economic development in the least prosperous parts of the country (Campbell, 1993: 157–9). From the Tory paternalist perspective, this was a noble use of resources in the one-nation tradition, and it was very much in keeping with the policies pursued by both Labour and Conservative governments after 1945. But to market liberal conservatives, such measures were at best ineffective and at worst highly damaging. There were always likely to be discrepancies in economic performance between regions for reasons that went beyond both the understanding and the control of policy makers. An activist regional policy wasted precious resources

The Conservative Party and Its Microeconomic Policies, 1964–97   37

by subsidising firms to operate in areas where they did not produce goods and services most efficiently. The correct policy response was to stop subsidising underperforming regions and instead free up the labour market so that firms and workers could migrate to the locations most appropriate for business activity. Heath set up a Regional Development Policy Group to consider economic policy towards the regions. Given its membership, there was no reason to suppose it would be unsympathetic to economic liberalism. It included William Deedes, who, though no doctrinaire free-market enthusiast, would nevertheless play a key role in the marketing of Thatcherism to a wider audience after 1974 as editor of The Daily Telegraph (Cockett, 1994: 183–4). The known Powellite John Biffen was also a member, as was Sir John Eden, who, as we shall see, combined with Nicholas Ridley to generate ambitious proposals for denationalisation during this period. The group was chaired by Frederick Corfield, who would go on to become Vice President of the pro-market Selsdon Group, which was formed in 1973 in opposition to the interventionist policies then being pursued by the Heath government (CRD, 1967a). In June 1966, the group prepared a discussion document for an upcoming meeting of the Shadow Cabinet. It noted that different macroeconomic policies were suitable for different regions and that there was therefore a continuing need for an activist regional policy (CRD, 1973). Additionally, the group believed the most effective forms of regional policy to be those that developed a depressed region’s infrastructure and attractiveness (CRD, 1973). This was some way from the economically liberal prescription of scaling down regional subsidies in favour of reforms to make the labour market freer and more flexible. A subgroup was set up in November 1966 to look into labour mobility and associated issues (CRD, 1967a); its activities are considered in more detail in Chapter 3. But it is necessary to note here that its recommendations were interventionist and far from radical, despite it having been chaired by the already strongly pro-market Nicholas Ridley (CRD, 1967b). A meeting held by the Regional Development Policy Group in August 1968 indicates the extent to which interventionist thinking on regional policy continued to dominate discussions. Dr Malcolm Fisher, a Cambridge academic associated with the Institute of Economic Affairs (IEA), submitted a paper which was highly sceptical

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of the merits of regional policy and called for an approach that focused on increasing the mobility of the labour force. In light of this, Fisher wrote that he could not accept the interventionist nature of the group’s interim report (CRD, 1973). The responses to Fisher’s paper from Corfield and Eden are worth noting. Corfield insisted that although there were costs associated with regional policy, costs would also arise from doing nothing and market forces did not always work effectively enough to make the latter a viable option. Meanwhile, Eden insisted that the Tories were trying to find a middle way between the free-market economy and central direction (CRD, 1973). Given that Eden was then deeply involved in Nicholas Ridley’s plans to denationalise much of British industry and would go on to become a vehement critic of the Heath government’s interventionist policies, it is astonishing that he should have defended an interventionist interim report in such Macmillanite terms. If even supposed economic liberals were unwilling to retreat from an interventionist regional policy, it is unsurprising that the Tories had no plans to move away from such an approach if elected. To be sure, the 1970 manifesto did pledge to abolish much of the machinery associated with Labour’s regional policies. But it also firmly stated that the Conservatives regarded an effective regional development policy as a core part of its future plans for the British economy and the country’s society (Dale, 2000a: 186). The manifesto pledge thus amounted to little more than a commitment to conduct regional policy with greater competence than Labour had demonstrated. With the above in mind, the refusal of the Tories once in office to move away from activist regional policies is unsurprising. Although the Heath government honoured its manifesto commitment on regional matters to do away with many of Labour’s regional policy-making bodies, 1970–74 was to be notable for the proliferation of activist regional policy. The reasons for this are related to the government’s decision to pursue a highly expansionary macroeconomic policy, although a full discussion of the macroeconomic policies pursued during this period is deferred to Chapter 4. It should be noted, however, that the origins of the expansion of regional policy were discussions held in a 5 May 1971 meeting of the Ministerial Committee on Economic Strategy (MCES).

The Conservative Party and Its Microeconomic Policies, 1964–97   39

The MCES was chaired by Heath and attended by his most senior lieutenants including Chancellor Tony Barber, Foreign Secretary Sir Alec Douglas-Home, Home Secretary Reginald Maudling, Trade and Industry Secretary John Davies, and Lord President of the Council William Whitelaw. It was set up at the formation of the government to consider the main strategic issues relating to the government’s management of the economy (CAB, 1970) and therefore constituted the most important ministerial committee in terms of decision-making on economic policies. By the time of the aforementioned 5 May 1971 meeting, concerns about unemployment were so grave that Barber warned that the official figure could hit the then unthinkable figure of one million by the autumn. In response, Employment Secretary Robert Carr argued that the government should develop a series of programmes for accelerated expenditure that focused on improving the basic infrastructure of the regions with high unemployment (CAB, 1971b). The infrastructure programme was fully approved in a 21 September 1971 meeting, and by this stage an even more extensive regional policy was already being considered (CAB, 1971b). Working alongside the MCES was the Ministerial Committee on Economic Policy (MCEP), which wrestled with many of the governments’ most intractable microeconomic problems and was chaired by Barber. In 1971 its attention was mainly focused on the Scottish ship manufacturer Upper Clyde Shipbuilders (UCS). On 4 August, Davies suggested the setting up of a Regional Development Agency since Local Employment Acts were of limited use if major employers located in vulnerable regions such as UCS closed down (CAB, 1971a). Such ideas had worked their way into the more important MCES committee by the autumn, and on 29 September, members were already discussing whether an agency should be set up with a mandate to promote regional development (CAB, 1971b). The decisive shift towards a highly interventionist regional policy came during the winter of 1971–72. On 22 November 1971, Heath told the MCES that in order to return to full employment and ensure economic prosperity, the government had to take a major new initiative (CAB, 1971b). He duly assigned the Head of the Civil Service Sir William Armstrong the task of producing a report designed to outline the measures and executive machinery required to bring about necessary changes in the country’s national and regional

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economic structures, modernise and redevelop British industry, and also re-establish full employment and put the economy on a path to sustained growth (CAB, 1971b). Armstrong’s proposals were presented in a paper dated 14 January 1972 and entitled The Modernisation and Expansion of Industry. Running to 51 pages, with its measures projected to cost £1.9 billion, its highly interventionist proposals included the setting up of a National Development Agency, the modernisation of ports and roads, new construction and social infrastructure plans, and investment grants for the developing areas (CAB, 1972a). Discussions in the MCES during the early months of 1972 were dominated by the document’s proposals and involved most of the government’s ‘biggest beasts’, including Heath, Barber, Maudling, Davies, Douglas-Home, Whitelaw, Carr, and Maurice Macmillan (CAB, 1972a). Although it can be argued that this group was dominated by paternalists, it is also reasonable to say that the party’s leaders at this point in time came overwhelmingly from that wing of the party. In a 19 January 1972 meeting, the committee endorsed the report’s general approach and over a series of subsequent meetings in February the details of individual measures such as free depreciation incentives and regional development grants were agreed upon (CAB, 1972a). The proposal for a National Development Agency was abandoned in favour of an executive based in the Department of Trade and Industry, since it was agreed that the legislation that would be required to establish a National Development Agency would almost certainly antagonise the government’s supporters (CAB, 1972a). Sir William Armstrong was again put to work to develop detailed proposals for such an executive; he presented these in a meeting of the MCES held on 23 February (CAB, 1972a). Armstrong’s executive proposals would also grant the Trade and Industry Secretary powers to give selective financial assistance to industry, and Heath stated in the summing up of the discussion that such regional measures should not be included in the upcoming finance bill, but in a separate piece of legislation (CAB, 1972a). The resulting bill was to become the 1972 Industry Act and was passed in March, to the dismay of market liberal Conservatives (Norton, 1978: 90–8). The Industry Act established an Industrial Development Executive answerable to the Trade and Industry Secretary, in accordance with Armstrong’s proposals. The government would continue

The Conservative Party and Its Microeconomic Policies, 1964–97   41

to adopt a highly interventionist approach to regional policy for the remainder of its lifetime. After they lost office in March 1974, there was little time for the Tories to extensively rethink policy before a second election was held in October of the same year. In a section entitled ‘Help for the Regions’, the Conservatives restated their commitment to an interventionist regional policy (Dale, 2000a: 236–7). With the ousting of Heath as party leader by the pro-market Margaret Thatcher in 1975 and her appointment of the like-minded Keith Joseph as the party’s policy coordinator, a shift away from interventionist measures appeared likely. But as the following analysis shows, the move was limited. After Thatcher became party leader, there were genuine attempts to refashion regional policy along market-based lines. Where traditional regional policies had usually consisted of a combination of grants, subsidies, and state-led activities, Nicholas Ridley suggested that certain areas should be exempt from various regulations in order to encourage enterprise. Shadow Chancellor Sir Geoffrey Howe viewed Ridley’s idea enthusiastically, and details were developed in opposition, although Howe claims that it was difficult to sell the policy to Margaret Thatcher as she viewed it as regional policy by another name (Howe, 1994: 109–10). The problem of backward regions was later to be exacerbated by the recession of 1980–81, which disproportionately affected the large industrial cities in the north of England during Thatcher’s first term as Prime Minister. In government, Howe proved to be a doughty campaigner for Ridley’s idea, and his efforts would eventually result in the introduction of so-called Enterprise Zones. As Chancellor, Howe presented the initial proposals for Enterprise Zones in a meeting of the Thatcher-chaired MCES on 23 October 1979 and stated that he envisaged them as a way of removing existing concentrations of severe ‘physical or economic decay’ and of promoting economic revival through the removal of state intervention and regulation wherever possible (CAB, 1979b). A subsequent 19 December MCES meeting agreed on the following range of measures for Enterprise Zones: exemption from industrial development certificate controls; exemption from the industrial training levy; exemption for employers from all but the bare minimum of government statistical surveys; partial de-rating of all industrial and commercial premises in Enterprise

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Zones for a period of seven years; capital allowances of at least 75 per cent of both industrial and commercial building; exemption from Development Land Tax, a measure to ensure the speedy processing of planning applications (CAB, 1979b). Decisions regarding the location of Enterprise Zones were left mainly to Environment Secretary Michael Heseltine. In a 22 July 1980 meeting of the MCES, he suggested the following six sites: Salford and Trafford Park in Greater Manchester; Bilston in the West Midlands; London on the Isle of Dogs; the Newcastle and Gateshead area; Speke in Liverpool; and Wandsworth. All but Wandsworth were agreed to by the MCES (CAB, 1980). Ministerial activity relating to the issue of Enterprise Zones did not cease with this initial tranche; by early 1981, Welsh Secretary Nicholas Edwards was, without success, proposing a further Enterprise Zone in Deeside, whilst Heseltine received approval for a number of smaller Enterprise Zones (CAB, 1981a). Although Enterprise Zones represented a genuinely novel approach to the problem of backward regions, a more orthodox regional policy was taking form under Michael Heseltine, who was by no means uncritically signed up to the Prime Minister’s and Chancellor’s uncompromising brand of economic liberalism. Although he was responsible for a vast expansion of the scheme to sell council houses to tenants and he later wrote positively of the Thatcher government’s privatisation policies, there were also closely related paternalist and interventionist strands to Heseltine’s political and economic thinking (Heseltine, 1987: 58–81). He was a strong advocate of intervention in industry to encourage stronger industrial performance, and when he was Defence Secretary from 1983–86, he allegedly used the procurement budget to operate an industrial policy by stealth (Lawson, 1992: 673–4). He also advocated the use of government intervention to combat problems in deprived areas such as the inner cities (Heseltine, 1987: 130–76). On becoming Environment Secretary in 1979, Heseltine immediately asked his Permanent Secretary at the Department for Environment to establish the legislative means to create Urban Development Councils (UDCs) (Heseltine, 1987: 134–5). The ensuing proposals for setting up UDCs in economically run-down Liverpool and the London Docklands were put to a subcommittee of the MCES

The Conservative Party and Its Microeconomic Policies, 1964–97   43

chaired by Keith Joseph on 25 July 1979. These UDCs were designed to take on many of the responsibilities of local authorities and to draw in private finance, as both areas suffered from widespread dereliction. Strong support for the principles behind Heseltine’s proposals was expressed, though he was asked to do further background work (CAB, 1979c). This was completed in time for a 6 September meeting that same year, at which time the group approved of the proposals but the Financial Secretary to the Secretary, Nigel Lawson, initially withheld the Treasury’s position due to the implications for government expenditure and the public sector borrowing requirement (PSBR) (CAB, 1979b). Heseltine was eventually able to overcome Treasury scepticism and UDCs were introduced. Following a visit to Merseyside in July 1981, in the aftermath of the inner city riots of that year, Heseltine produced an official minute (entitled ‘It Took a Riot’) that advocated the setting up of a more ambitious interventionist scheme designed to reinvigorate areas of economic decay throughout Britain. An ad hoc Cabinet committee was set up by the Prime Minister in September of that year with the membership stacked against Heseltine. Although extra money was provided, it stopped well short of the resources he had hoped for (Hennessy, 1986: 102). There are two important points that emerge from the discussion above in relation to the Conservative Party’s approach to regional policy during 1964–81. First, even the more market-friendly individuals involved in the party’s policy making during 1964–70 were reluctant to move away from interventionist regional policies. It was therefore unsurprising that the Heath government continued and even intensified this approach during 1970–74, particularly given the economic and social problems then being experienced in locations where the heavy industries were in decline. The second point is that even during Margaret Thatcher’s time as Conservative leader, an activist regional policy in the deprived areas continued, despite the introduction of Enterprise Zones. Indeed, the most distinctive feature of regional policy during the period covered is its continuity. Despite the greater influence of economic liberalism in the Conservative Party from 1975 onwards, the interventionist approach to the problem of economically backward regions was only partially displaced.

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The nationalised industries under Heath and Thatcher As was noted earlier in the chapter, a key feature of the alleged post-war consensus was the Conservative Party’s apparent acceptance of a mixed economy. The Tories broadly accepted the nationalisations carried out by Labour during 1945–51 and did not substantially reverse this process. This is not to say that the Conservatives accepted these reforms in their entirety. The nationalisation of iron and steel was fiercely opposed by the Tories in Parliament and, on being returned to office in 1951, the Churchill government went about denationalising both the steel industry and the nationalised road haulage firms (Burk, 1988). However, there was to be greater questioning by Tories of the size of the nationalised industry sector after 1964. In February 1967, Tony Barber wrote to Edward Heath, recommending the inclusion of Nicholas Ridley in any group set up to discuss the nationalised industries (CRD, 1969a). Heath had no objection to this, and wrote to Ridley the following month, offering him the chairmanship of a policy group that was to look at the nationalised industries and consider the scope for denationalisation, as well as what sort of regimes should apply to those industries that remained within the scope of public ownership (CRD, 1969a). Edward Boyle, to whom Heath had delegated responsibility for the setting up of policy committees, received advice from Sir Keith Joseph that Sir John Eden, John Peyton, Michael Alison, and John Nott would all be good additions to Ridley’s policy group (CRD, 1969a). All bar Alison were firm market liberals, and both Eden and Peyton eventually joined the committee. Boyle and Ridley agreed to terms of reference for the committee such that it would consider policy towards the existing nationalised industries, the scope for denationalising them, and the environment within which industries remaining in the state sector should operate in the context of a competitive market economy (CRD, 1969a). Ridley clearly saw this as a licence to push for denationalisation, and almost immediately started referring to his committee as ‘the denationalisation policy group’ (CRD, 1969a). He also made contact with Ralph Harris of the IEA, who recommended a number of economists with free-market credentials as potential committee members (CRD,

The Conservative Party and Its Microeconomic Policies, 1964–97   45

1969a). One of Harris’s recommendations, Professor Jack Wiseman of the University of York, duly joined the group. During the group’s first meeting in June 1967, Peyton and two other members, Charles Fletcher-Cooke and Stephen Hastings, felt that the principal objective of the group should be to reduce the size of the nationalised industry sector by as much as possible. It was agreed that the group would assess the nationalised industries to see what could be denationalised and where there was scope for more competition (CRD, 1968b). By the second meeting, it had been agreed that competition should be introduced to allow price controls to be removed, except for in the natural monopolies, where some method of fixing prices or the return on capital would be required (CRD, 1968b). The group’s final report was completed in July 1968. It is worth noting that Margaret Thatcher was credited with having played a significant role in the discussions that led to the report, despite her not having been an official member of the committee. The report did not advocate an unthinking ‘dash to denationalisation’, and it conceded that a large part of the nationalised sector was likely to remain publicly owned, and that ways of improving efficiency in these industries would therefore have to be found. The report noted that such improvements to efficiency were a prerequisite for denationalisation in any case, and that nationalised industries were not to be treated as private firms and should therefore continue to be funded by the Treasury, as opposed to being funded by the capital markets (CRD, 1968c). But the report also stated that denationalisation would be preferable whenever possible. It recommended the denationalisation of British Steel (which had been renationalised by Labour in 1967) as well as state-owned road haulage and the air corporations British Overseas Airways Corporation (BOAC) and British European Airways (BEA). In addition, if the industries could be put on a sounder footing and suitable regulatory machinery developed, then coal, the buses, the railways, electricity, gas, telephones, the docks, and the airports would all become candidates for denationalisation. There were also a large number of smaller concerns that could be sold off immediately, with only the Post Office and most waterways necessitating perpetual public ownership. Ending the Post Office’s monopoly was also seen as a viable possibility (CRD, 1968c).

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The report therefore proposed a radical shift in Conservative Party policy regarding the nationalised industries. But those who controlled policy at the top level of the party soon acted to ensure that such ideas were squeezed out. John Ramsden (1980: 260–1) notes the lukewarm reception which the report received from the Reginald Maudling-chaired Advisory Committee on Policy and the fact that the secretary to Ridley’s group, Tony Newton, was distinctly cool on the proposals. When a subcommittee produced a report with detailed proposals on how to denationalise BOAC and BEA, another CRD staffer, John Wilkinson, criticised the report as being written from a fixed ideological position (CRD, 1970a). Nicholas Ridley and Sir John Eden were the prime movers in the original group and had, according to Ramsden (1980: 260–1), carried the remainder of the group with them. Ridley continued to amend the proposals in 1969, and in October of that year he and Eden asked the ACP for permission to discuss their proposals with individuals serving at board level in the nationalised industries. Maudling, presumably with Heath’s blessing, was happy to provide clearance, but attached the caveat that they should not commit the party to anything. Despite Brendon Sewill of the CRD arranging a meeting attended by Ridley, Eden, an executive at BOAC, and the director of legal affairs at the Confederation of British Industry (CBI), their attempts to get widespread denationalisation adopted as party policy were beginning to falter (CRD, 1970a). Ridley had discussed the possibility of producing a pamphlet on denationalisation with James Douglas of the CRD. But in April 1970 this changed, with Maudling insisting that he now wanted only a speech rather than a formal pamphlet. By the following month, a general election had been called and Ridley was complaining to Douglas that the issue of denationalisation did not feature prominently in the draft manifesto (CRD, 1970a). Douglas responded by saying that the form of words in the existing draft were, in his view, sufficiently flexible to provide a prospective Conservative government with a mandate for going as far as it wished on the issue of denationalisation (CRD, 1970a). Ridley therefore failed to get a commitment to denationalisation on the scale he had hoped for. The Conservatives formally committed themselves to hiving off only a limited number of small concerns such as the travel agent Thomas Cook (Ramsden, 1980: 262). This was an

The Conservative Party and Its Microeconomic Policies, 1964–97   47

indication of the scepticism of the party leadership towards the idea of denationalising vast swathes of Britain’s nationalised industries. Given this, the Heath government’s policies towards the nationalised industries after 1970 are not difficult to explain. Those looking for early signs of the alleged U-turn by which the Heath government retreated from disengagement from industry in favour of intervention have highlighted the issue of nationalised industry prices (Holmes, 1997: 39–40). The early meetings of the MCES during the summer of 1970 were devoted mainly to this issue, and committee members were highly reluctant from the start to allow increases in nationalised industry prices (CAB, 1970). The willingness to subsidise nationalised industry output such as electricity and gas to the extent that prices were significantly below production costs indicated how the sort of market-based thinking that had influenced Ridley and Eden was not so prevalent among the party’s most senior economic policy makers. The Heath government denationalised only Thomas Cook and the public houses in Carlisle, the latter having been state-owned since the First World War (Bruce-Gardyne, 1974: 38–9). But it was the government’s nationalisation of so-called ‘lame ducks’ that most distinguished its approach to the nationalised industries. The story of the move towards more extensive interventionism has been told elsewhere and will not be outlined extensively here (Holmes, 1997: 37–54). It included the government rescues of Rolls-Royce and UCS and the introduction of the highly interventionist Industry Act in May 1972, as detailed in the previous section. The nationalisation of Rolls-Royce was defended on national interest grounds, given the firm’s crucial role in the UK defence industry (Holmes, 1997: 41). Equally, given the reliance of the Clydeside area of Scotland on the shipyards for employment, the nationalisation of UCS tied in with the government’s interventionist regional policies. But these nationalisations nevertheless sat easily within a narrative reinforced by the introduction of an Industry Act. Alongside this were the attempts by Heath to pursue a policy of ‘corporatism’ in which government, trade unions, and business leaders were to coordinate the country’s economic activities (Campbell, 1993: 447–8). This policy failed principally because of trade union scepticism. But the fact that it was even seriously considered indicates the lack of sympathy Heath had for the sort of government disengagement from

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industry that Eden and Ridley had proposed in opposition (Campbell, 1993: 446–7). Heath’s replacement as party leader was to prove far more sympathetic to denationalisation. Privatisation, as it later became known, was to be the Conservative Party’s flagship policy for much of Margaret Thatcher’s time as Prime Minister. Yet the 1979 manifesto was remarkably reticent on the subject. The Tories did commit themselves to privatising the National Freight Corporation in their 1979 manifesto (Dale, 2000a: 272), but the proliferation of the privatisation programme was very much a post-1979 phenomenon. Some background work was carried out in opposition, with Nicholas Ridley carrying on where he left off in 1970, but this time in the knowledge that he had backing for his ideas at the most senior levels of the party. Michael Heseltine had initially taken on the role of shadowing the Department of Industry in 1975. But Thatcher found his interventionist enthusiasms distasteful, and she used the incident during which he brandished the House of Commons ceremonial mace at the Labour benches the following year as an excuse to move him on (Campbell, 2000: 320–1). In any case, by March 1976, Ridley was once again chairing a party policy group on the nationalised industries. The terms of reference gave him a large amount of discretion by asking him simply to consider what the relationship should be between a Conservative government and the nationalised industries and to make recommendations accordingly (CRD, 1978). The membership was diverse and included Heseltine himself. But it also included Ridley’s erstwhile partner in crime Sir John Eden, as well as John Wood, a free market–inclined economist with close links to the IEA. The group produced its interim report in July 1976. It was, unsurprisingly, pessimistic about the prospects for the nationalised industries and concluded that only by returning such industries to the private sector could industrial performance be improved dramatically. The ending of statutory monopolies was proposed where possible, and in the case of natural monopolies such as gas, electricity, post, and telephone, the main trunk road would have to remain a monopoly but should nevertheless ‘end at the subscriber’s front door’ (CRD, 1978). This presaged the later privatisation of the electricity industry where generation and supply became competitive markets and transmission

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and distribution were turned into regulated monopolies (Lawson, 1992: 234–7). In terms of which parts of the nationalised industry sector should be sold off, the conclusions were very similar to those drawn up in the 1968 report. As noted earlier in the chapter, it was in the field of nationalised industry pricing that the reluctance of the Heath government to embrace industrial disengagement could be best seen from an early stage. The contrast with the Thatcher government was notable, with gas providing an indicative case. Gas had long been supplied by the then publicly owned British Gas at a substantial loss, with the difference made good by a state subsidy. The new Energy Secretary, David Howell, took the decision to increase gas prices at ten percentage points above the rate of inflation for the three years to 1982, thus bringing the price of gas much nearer to its cost of production (Lawson, 1992: 172). Such a decision was always likely to be a necessary prelude to a successful privatisation of the gas industry. Howell’s successor as Energy Secretary, Nigel Lawson, was no less committed to the increase in gas prices and defended them throughout his 1981–83 tenure at the Department of Energy (Lawson, 1992: 171–80). It was during Lawson’s time at Energy that the largest of the early privatisations took place, with more than half of the government’s shares in Britoil sold off in November 1982. The privatisation programme gathered increasing momentum during the 1980s as the idea proved practically successful and politically popular. Its economically liberal credentials were exemplary, and it proved to be the flagship policy of the government’s for much of the decade; it continued into the 1990s under John Major’s leadership. This is not to say that economic liberalism was a completely dominant influence in the privatisation programme. Peter Walker was one of the few paternalist market sceptics to survive Thatcher’s Cabinet reshuffles of the early 1980s and was Energy Secretary for the whole of the 1983–87 Parliament. In discussions relating to the privatisation of the gas industry, Walker expressed a preference for British Gas to be privatised en bloc, whereas Lawson, by then Chancellor, wished to break up the company first in order to encourage competition. Walker (1991: 190) hoped that British Gas would thereby remain a powerful company which could compete on the world stage. Lawson eventually relented and Ofgas had to take on an extensive regulatory role (Lawson, 1992: 215–16) as the industry watch dog. British Gas would eventually

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demerge into two separate companies during the last months of the Major government. Indeed, it could be argued that during the earliest years of the Thatcher Ministry, the need to reduce the PSBR was at least as important a factor in driving the privatisation programme forward as any intention to liberalise the British economy. A meeting of the Cabinet on 31 May 1979 had paved the way for the privatisation programme, although at this time it was being referred to as the disposal of public sector assets (CAB, 1979a). The importance of reducing the PSBR was highlighted, and it was stated that large sales that could be taken into account in 1979–80 and thus help with the immediate budgetary problems were required. Nonfinancial objectives such as a wider spread of ownership were also mentioned, but at this stage this appeared to constitute a secondary objective (CAB, 1979a). In her summing up, the Prime Minister took responsibility for the setting up of an MCES subcommittee under the Chancellor’s chairmanship, which would consider the issue of disposing public sector assets and also would review the operation on a regular basis (CAB, 1979a). The MCES ‘Sub-Committee on Disposal of Public Sector Assets’ was first convened under Howe’s chairmanship on 5 June 1979. Sir Keith Joseph, Peter Walker, Michael Heseltine, John Nott, David Howell, and John Biffen were all regular attendees during 1979, as was Nigel Lawson who, as Financial Secretary to the Treasury, was given responsibility for the privatisation programme and proved to be the subcommittee’s most energetic member. The target for asset disposals in 1979–80 was £1.2 billion, which was to be achieved by £600 million of British Petroleum (BP) share sales, £100 million of National Enterprise Board shareholdings, £200 million from the sale of the British Gas Corporation’s oil interests, and £300 million from selected British National Oil Corporation (BNOC) oil interests (CAB, 1979d). During Lawson’s time as Financial Secretary, the onus was on pushing ahead with asset disposals, but proposals frequently ran into difficulty. The sale of the government’s interest in British Aerospace, despite being proposed as early 19 July 1979 (CAB, 1979d), was sufficiently problematic for it to be delayed until early 1981, and the government’s final holdings were only disposed of in 1985. A published target of £500 million was set for asset disposals in 1980– 81, but a Lawson memo for the subcommittee, dated 19 December 1979, noted that there remained a gap of approximately £200 million

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between the reasonably firm plans that existed for asset disposals at that time and the published target (CAB, 1979d). Prospects for the disposal of public sector assets in 1981–82 were discussed in a subcommittee meeting on 18 February 1981, where Lawson stated that 1981–82 would be an important year for the Government’s privatisation programme, especially as the published target for 1980–81 had been undershot by a significant amount (CAB, 1981c). A published target of £500 million was agreed though in private the government was hoping to realise £600 million or more. By 10 June 1981, the subcommittee agreed that the ambitious target of £600 million in cash proceeds for 1981–82 asset disposals was unlikely to be met (CAB, 1981c). The situation had improved by the autumn of 1981, with the sale of Cable and Wireless equity worth £183 million in October constituting the largest privatisation so far undertaken. In his concluding remarks to a meeting of the subcommittee on 27 November 1981, Howe stated that the momentum of the disposals programme needed to be maintained and that Ministers should look to identify further candidates for privatisation (CAB, 1981c). His instructions were not ignored, and the privatisation programme would continue to gain momentum. Unlike regional policy, Tory policy towards the nationalised industries constitutes a clear case of the gap in thought opening up during 1964–74 between those with direct control over Conservative Party economic policy and a significant number of individuals in the middle ranks of the party. Heath and those around him were initially able to ensure that economically liberal ideas such as the denationalisation proposals of Ridley and Eden were kept out of official party policy. But this would change significantly and irreversibly with Heath’s replacement by Margaret Thatcher in 1975. The eventual outcome by 1997 was a major change in the landscape of British political economy; most of the nationalised industry sector was transferred into private ownership and there was no realistic prospect of the process being reversed.

Policies towards the financial markets under Heath and Thatcher One of the less remarked upon outcomes of the outbreak of the Second World War in 1939 was that the capital account of Britain’s

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balance of payments became subject to stringent exchange controls, which limited the amount of sterling that could be exchanged for any foreign currency. These restrictions remained in place until 1979. The financial sector itself was subject to only limited competitive pressures after 1945, with high market concentration and cartelisation among its most distinctive features (Moran, 1984: 12–14). Additionally, governments during the post-war period tended to give ‘quantitative guidance’ so as to control the growth of credit, with formal ceilings adopted in 1965 (Moran, 1984: 30). This was the situation that faced the Heath government on taking office in 1970. There is no evidence that reform of the financial markets was even discussed in opposition during 1964–70, yet the introduction of Competition and Credit Control (CCC) in September 1971 under Conservative stewardship of the economy was a radical measure. CCC constituted an abandonment of quantitative limits on credit, and competition between clearing banks on the price of credit was encouraged. The price mechanism – that is to say, interest rates – was henceforth intended to govern the market for credit (Moran, 1984: 30–1). The impetus for this far-reaching reform came not from the Tories, but from the Bank of England. In the 1960s, a view had developed in the Bank that direct controls over credit were not working well and that greater competition in the banking sector would be a good thing. Additionally, the increasing amount of work the Bank was doing on the study of money suggested that the demand for money function was stable and that interest rates could therefore be used more extensively so as to control monetary growth (Capie, 2010: 427). John Fforde, a senior Bank official who was one of the architects of CCC, drew up a possible outline for such a scheme in April 1970, two months before that year’s general election, which returned the Conservatives to office. It included rules for liquidity ratios and advocated the presence of a special deposits scheme (Capie, 2010: 485–6). These could be used to control credit, alongside the greater role to be played by interest rates. The Bank had hoped that the new government would be open to the proposals, but found the Treasury hostile (Capie, 2010: 487). Another prominent Bank official of the period, Charles Goodhart (2003), later explained that the argument that direct controls over bank lending were inadequate and that interest

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rates could instead be used to control credit growth was used to bring the Treasury around to the Bank’s proposal. In the autumn of 1971, the Conservatives therefore introduced measures to reform the banking system that were substantially developed by the officialdom of the Bank of England and had little to do with any alleged enthusiasm among the party’s policy makers for free markets. The actions of the party’s leadership during the operation of CCC give a strong indication of the extent to which Heath and his senior ministers were not reconciled to the idea of a free market for credit with interest rates acting as the main tool of monetary control. Despite very strong credit and money growth during the early 1970s, the Prime Minister and Chancellor were both extremely reluctant to raise interest rates (Capie, 2010: 509–10). A still clearer indication of the Heath government’s attitude towards the financial markets and the role of the free market came in 1973, by which time the credit and monetary booms seen under CCC were clearly having inflationary consequences. The government was left with no option but to take measures to slow monetary growth. Under these circumstances, a government committed to liberalised financial markets would have increased the Minimum Lending Rate (MLR, as the Bank’s interest rate became known in 1972) to what was required in order slow the growth of credit and thereby bring both increases in the money supply and the rate of inflation back under control. But financial market liberalisation was not a government priority, and there were other issues then being faced by Heath and Barber which they regarded as far more pressing. Mortgage rates were a politically sensitive issue that militated against any decision to increase interest rates. Additionally, the Heath government had introduced a statutory prices and incomes policy in November 1972, which meant that industry could not raise prices in response to an increase in their input costs. Given that an interest rate rise would significantly increase the price of capital, there was a considerable and largely successful lobbying attempt by industry to persuade the government not to put up interest rates. The government therefore tasked the Bank of England with finding a method for slowing the growth of credit which did not involve increasing MLR to levels which the Prime Minister and Chancellor regarded as unacceptable (Capie, 2010: 520–1). The result was the Supplementary Special Deposits Scheme, colloquially

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known as ‘the Corset’. This required the clearing banks to make special deposits with the Bank of England, should their lending reach a specified maximum level. They had no link with the special deposits already existing under CCC, which applied to banks regardless of their lending activities (Capie, 2010: 521). The Corset effectively constituted a return to direct controls on lending, and was therefore indefensible from the perspective of an economic liberal. The introduction of the scheme in preference to increasing interest rates clearly indicated the Heath government’s indifference to maintaining liberalised financial markets in the face of pressures to increase the cost of borrowing. The Corset remained in place throughout the period of the Labour governments of 1974–79 and provided a government-imposed check on credit growth. The free-market logic of the incoming Thatcher government was applied to the financial markets in a manner which had been alien to the Heath government. Whereas the introduction of CCC had been very much the Bank of England’s baby in 1971, the extensive liberalisation of financial markets that occurred during the first eighteen months of the Thatcher Ministry was actively driven by ministers. In October 1979, the government took the decision to abolish exchange controls and thereby ended forty years of extensive government control on capital movements to and from the United Kingdom. The precise origins of the decision to abolish exchange controls are rather hazy, but the improvement to Britain’s balance of payments prospects as North Sea oil came online was almost certainly a factor. As with 1964–70, there is little evidence that policies towards the financial markets were discussed extensively by the Tories in opposition during 1974–79. To a considerable extent this is unsurprising, as policy towards financial markets is a complex subject and parties outside government have only a fraction of the expertise at their disposal that they do when in government. Nigel Lawson had advocated some relaxation in the control of capital movement as early as November 1977, and in an article written during the general election campaign eighteen months later, he made the case for full abolition (Lawson, 1992: 38). There would be a partial relaxation of exchange controls in the June 1979 budget and, despite some scepticism from Bank of England officials, as Financial

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Secretary to the Treasury, Lawson remained convinced of the case for full abolition rather than a gradual process and eventually won the day (Lawson, 1992: 40). On announcing full abolition in the House of Commons in October 1979, Chancellor Sir Geoffrey Howe was publicly congratulated by Enoch Powell (Howe, 1994: 143). There is scarcely a better indicator of the economically liberal credentials of exchange-control abolition. The abolition of exchange controls effectively neutered the Corset, as its provisions could now easily be circumvented by banks. The abolition of the Corset was therefore announced in the March 1980 budget and was implemented during the summer of that year. The problems this would cause for the government’s overall macroeconomic strategy are considered in Chapter 4. The removal of the Corset effectively brought about the approach to the financial markets which had originally been intended by the CCC reforms, albeit with the additional feature that there were no controls now in place on Britain’s capital account. Banks and other financial institutions competed freely with one another, and short-term interest rates and funding policy were now the two principal tools of monetary control, rather than schemes designed to directly control credit growth. Two points relating to these reforms should be made, both of which provide evidence of the contrast between the economically liberal ideas underpinning policy towards the financial markets under the Thatcher government and the absence of such an approach under the Heath government. First, the abolition of exchange controls and the removal of the Corset were measures strongly advocated by Tory ministers themselves, in spite of scepticism from public officials in the case of the former. By contrast, the Heath government was relatively uninvolved in planning CCC reform, and the ideas behind the scheme were mainly those of the Bank of England. Second, when faced with its own inflationary problems during 1988–90, the Thatcher ministry did not resort to directly controlling credit growth as the Heath government had done during 1973–74, but instead relied on the unpopular policy of increasing short-term interest rates. This was a strong indication of the Thatcher ministry’s commitment to liberalised financial markets, and the approach was to continue during John Major’s premiership.

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The background to policy making during 1964–81 One of the most significant points to emerge from the preceding sections is the lack of penetration of free-market ideas into Conservative Party policy making during 1964–70. The interventionist nature of regional policy went unquestioned, proposals for denationalisation were undermined and ignored, and financial market liberalisation did not feature. This was partly because Heath and his predominantly paternalist colleagues ensured that market liberal ideas such as denationalisation did not become party policy. But if this is the case, then why was the Conservative Party’s 1970 Manifesto regarded by a number of Tories, including Norman Tebbit (1988: 94) and Nicholas Ridley (1991: 3–4), as a call to arms for an assault on the post-war settlement and a reduction of government activity consistent with free-market principles? The first point to make in response to this question is that many Conservatives in the lower ranks of the party had been interested in market liberalism for some time. The most prominent supporter of free-market ideas in the party had for a long time been Enoch Powell, and he continued to make an uncompromising case for the market after Heath became leader in 1965 (Garnett and Hickson, 2009: 60–4). But his role as Shadow Defence spokesman meant that he would shift much of his attention to speaking out in favour of Labour’s policy to reduce the British military presence east of Suez. This position put him at odds with the Conservative leadership. Heath had ensured that Powell was not involved in economic policy making, and in April 1968, the ‘Rivers of Blood’ speech (in which Powell used inflammatory language in a speech opposing the scale of immigration) saw him removed from the Conservative front bench (Campbell, 1993: 241–4). Powell was thereafter as much a liability as an asset to those Tories hoping to promote the free market. But by this time Powell was far from the only Conservative to have become convinced of the case for a competitive market economy, and the denationalisation proposals developed by Nicholas Ridley and Sir John Eden have already been highlighted as a case in point. Sir Keith Joseph was a member of Heath’s Shadow Cabinet and he had made contact with the IEA soon after the 1964 general election (Denham and Garnett, 2001: 137). It was also during this period that he established a strong working relationship with Margaret Thatcher,

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another Tory attracted to free-market thinking and the works of the IEA (Cockett, 1994: 171–3). In April 1967, Joseph made a speech at Reading which supported private enterprise over state activity and criticised previous Tory governments for not pursuing a free-market agenda (Denham and Garnett, 2001: 158–9). This speech prefigured his more decisive interventions in 1974. But Joseph’s ‘first crusade’ did not last long, and Powell’s ‘Rivers of Blood’ speech a year later took much of the wind out of the sails of Conservative market liberals. There were other signs of a shift in the balance of power between economically liberal ideas and interventionist ones among Tories outside of the key economic policy-making roles. One of the rising stars on the Conservative side was Geoffrey Howe. He had lost his seat as an MP in 1966 but re-entered Parliament in 1970 and was immediately appointed Solicitor General in the Heath government. His contact with the IEA went back as far as the early 1960s, and in 1968 he became a member of the IEA’s international near-equivalent, the Mont Pelerin Society (Cockett, 1994: 163). He had a history of advocating a greater role for markets in public policy, and as early as 1956 had co-written a pamphlet that called for the liberalisation of the market for rented property (Howe and Jones, 1956). There is therefore strong evidence that economic liberalism was beginning to influence many middle-ranking Conservatives as early as 1964–70. Additionally, Green (2002: 229–30) and Ramsden (1996: 255) have highlighted grass-roots support for a more market-based set of economic policies during this period. But, as has been demonstrated in this chapter, the impact of free-market ideas on policy making was limited. Nevertheless, this enthusiasm for market liberalism meant that any perceived commitment by the party’s senior politicians to ‘rolling back the frontiers of the state’ was likely to be seized on by many in the party’s middle and lower ranks. It is in this context that the ‘Selsdon Man’ phenomenon must be understood. In addition to the increasing influence of economic liberalism in the party, there is a second reason why the incoming Heath government was felt by many to be challenging the post-war consensus much more aggressively than its policy making during 1964–70 would suggest in hindsight. The rhetoric adopted by Heath and by some of his senior colleagues (most notably the new Trade and Industry Secretary, John Davies) at the time of and in the months immediately following the 1970 general election was much more pro-market than

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the policies then being pursued. This convinced many within the Conservative Party and beyond who had not been privy to pre-1970 policy making that Selsdon Man was aggressively pro-market. But as we have seen, this conclusion was not justified by the policy making that took place during 1964–70. Indeed, detailed analysis suggests that the policies put forward in the 1970 Conservative Party manifesto were actually less ‘right wing’ than those put forward in either 1966 or October 1974, let alone those of 1979 onwards (Klingemann, Budge, and Bara, 2006: 26). The 1970 manifesto nevertheless used a form of rhetoric that was later to be associated with Thatcherism, insisting: ‘We want people to achieve the security and independence of personal ownership, greater freedom of opportunity, greater freedom of choice, greater freedom from government regulation and interference’ (Dale, 2000a: 180). Heath himself resorted to similar rhetoric in his speech at the celebratory Conservative Party conference of October 1970, where he insisted that he wished to create a society ‘free from intervention, free from interference, but responsible. Free to make your own decisions, but responsible also for your mistakes. Free to lead a life of your own, but responsible to the community as a whole’. At the same event, John Davies committed the government to a policy of refusing to rescue ‘lame duck’ businesses which were economically unviable. These ill-advised statements and promises would subsequently be thrown back in the face of the government as first Rolls-Royce and then Upper Clyde Shipbuilders were nationalised. The record of the Heath government remains controversial. Among academics, Martin Holmes (1997) has been particularly critical, and many Conservatives, particularly those of a Thatcherite viewpoint, including Thatcher (1995: 195–6) herself and Norman Tebbit (1988: 114–34), have strongly criticised the government’s performance during 1970–74. Campbell (1993) is much more sympathetic, as are a number of contributors to The Heath Government 1970–74: A Reappraisal (Ball and Seldon, 1996). Heath himself naturally defends the reputation of the government he led (Heath, 1998). Part of the reason for these contrasting interpretations stems from whether one regards the policy planning pursued during 1964–70 or the rhetoric deployed in 1970 as the true intentions of the incoming Heath government.

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The 1974–75 period was to be a tumultuous one for the Conservatives. Having lost the February 1974 general election by a narrow margin, the party had little time to reformulate its policies before the follow-up election of October that year. A further defeat in which Labour turned its plurality of seats into a small majority led to a leadership contest, which was fought in early 1975. The traditional account of the Conservative leadership election, in which Thatcher unexpectedly beat Heath in the first round before seeing off other contenders in the second, is that Thatcher won principally because she was not Heath. Having lost three out of four general elections under his leadership, the party was desperate to rid itself of an electoral liability and chose to replace him with the first challenger who came forward. In this sense, Thatcher’s becoming leader was an accident of history and was dependent on Heath’s ineptitude (Jenkins, 2006: 46). But Wickham-Jones (1997) and Cowley and Bailey (1999) suggest that ideology played a greater role than is acknowledged by the traditional account, and that Thatcher’s victory indicated a move to the right by the Conservative Party. Thatcher was certainly associated with the right economically, and it is difficult to explain her victory in the second ballot in terms of the ‘anyone but Heath’ narrative, since Heath was by that stage out of the running. She was a known associate of Sir Keith Joseph, who had set out a free-market agenda in a highly influential series of speeches between the two elections of 1974 and had only failed to stand for the leadership himself after he made an ill-fated speech at Edgbaston that appeared to imply eugenics (Denham and Garnett, 2001: 240–50). But Thatcher was also a social conservative, and research by Norton suggests that a larger proportion of the Conservative Party was socially conservative than was economically liberal as of 1989 (Norton, 1990: 41–58). It is reasonable to assume that this was also the case in 1975. Therefore, the ideological forces at play in the 1975 leadership election may or may not have involved economics to a significant extent. In any case, Thatcher’s assumption of the leadership was an important development. Having committed his government to interventionist policies during 1970–74, Heath would have had little credibility had he engaged in a Damascene conversion to the Joseph agenda. A move in the party policy towards economic liberalism was therefore unlikely while he remained leader.

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Under Thatcher, economic liberalism was always likely to enjoy a favourable tailwind. To coordinate the policy-making process, Thatcher turned to Joseph, whilst Sir Geoffrey Howe was appointed to the key position of Shadow Chancellor. As highlighted earlier, Joseph’s interest in free-market ideas went back at least as far as the 1964–70 opposition period, yet in office he had not objected to the more interventionist policies pursued by the Heath government. Following the February 1974 general election, Joseph held a series of discussions with the strongly pro-market Alfred Sherman and Alan Walters, which led to him rediscovering his affection for the market economy (Denham and Garnett, 2001: 238). This was followed by the series of speeches mentioned above. Joseph’s intervention came after Heath had refused him the Shadow Chancellorship and instead given the role to Robert Carr. He then gave Joseph much the same response that Enoch Powell had received the previous decade when trying to open a philosophical debate over the fundamental issue of the government’s role in the economy (Cockett, 1994: 235–6). In a seminal speech made at Upminster on 22 June 1974, Joseph not only advocated a free-market approach to the economy and attacked the post-war consensus, but he also apologised for his own role and that of his party in pursuing collectivist policies after 1945 (Cockett, 1994: 241). The speech had been written by Sherman, who would write a number of the pro-market and pro-monetarist speeches delivered by Joseph during the summer and early autumn of 1974. Sherman, Joseph, and Thatcher also established a new think tank, the Centre for Policy Studies (CPS); the highly ideological Sherman became its director and driving force. Heath had given its founding his blessing, having allegedly been told that it was to investigate the causes of West Germany’s post-1945 economic success story (Denham and Garnett, 2001: 238–43). Although the CPS was similar to the IEA in its economically liberal outlook, its role was intended to be slightly different. The IEA had always committed itself to winning the ‘battle of ideas’ in general terms, and it had remained above party politics throughout its existence. By contrast, the CPS was designed to fight the battle within the Tory Party itself, and by doing so ensure that economically liberal ideas impacted on the Conservative Party’s making of economic policy (Cockett, 1994: 237). Ralph Harris and Arthur Seldon, the

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moving spirits of the IEA, saw no drawbacks to this division of labour and gave the new body their blessing (Denham and Garnett, 2001: 238–9). As noted earlier, the role of Heath and other senior Tories of a paternalist disposition had been crucial in ensuring that free-market ideas such as denationalisation did not become party policy prior to 1975. Not only was Heath removed that year, but there was also a generational shift relating to those primarily responsible for the Conservative Party’s making of economic policy. Those largely reconciled to the post-war settlement and those who had been heavily involved in economic policy making during 1964–74 such as Heath, Maudling, Iain Macleod, Edward Boyle, and Terence Higgins were, for various reasons, no longer a part of it. In their place came Joseph as policy-making guru and Howe as Shadow Chancellor. The tilt towards the free market was obvious and was reinforced by more junior roles for market liberal Tories, including John Nott, John Biffen, Nicholas Ridley, David Howell, Nigel Lawson, and Norman Lamont. All were involved to some extent with economic policy making between 1975 and 1979. Although the need for party unity ensured that many who were less hostile to economic intervention were included in Thatcher’s Shadow Cabinet, only Jim Prior as employment spokesman was given a significant role relating to the economy. Set alongside this, the desperate plight of the British economy in 1975 and 1976 appeared to support Joseph’s repudiation of the post-war consensus. Public sentiment also appeared to have moved against interventionist ideas such as nationalisation (Crewe, Särlvik, and Alt, 1977). In such an intellectual economic and political climate and with Heath defenestrated, it is difficult to imagine any alternative leader, whether a paternalist figure such as William Whitelaw or otherwise, preventing economic liberalism from imparting significant influence on Conservative economic policy from 1975 onwards. Under Thatcher it was therefore unsurprising that the party was largely committed to a free-market agenda by the time it was returned to office in 1979. But if one accepts that market liberal ideas exerted far more influence in policy making after Margaret Thatcher became leader in 1975, a further question presents itself. If the 1979–90 ministry was so committed to free markets, why was state spending as a proportion

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of gross domestic product (GDP) not cut substantially? From 1945, state spending fell markedly from its wartime peak, and after the Conservatives were returned to office in 1951 it settled at approximately 35 per cent of GDP. By the late 1960s, spending was consistently running at more than 40 per cent of GDP, and the combined effects of the Heath government’s expenditure increases, Labour’s continuation of these policies, and the 1974–75 recession resulted in a peak of almost 50 per cent during the mid-1970s. Owing to the IMF-imposed spending cuts of 1976 and a return to economic growth during the late 1970s, state spending had fallen to approximately 42 per cent of GDP by the time the Thatcher government took office in 1979. Given their self-professed aim to ‘roll back the frontiers of the state’, the post-1979 Conservative governments experienced mixed results. Spending initially rose as a proportion of GDP, as the 1980–81 recession led to much higher welfare costs. As the economy recovered, spending headed back down towards 40 per cent of GDP, and as the late-1980s boom intensified, it bottomed out at approximately 35 per cent. The recession of 1990–91 saw spending head back towards 40 per cent before it again stabilised at approximately 38 per cent of GDP in the mid-1990s. Despite the disposal of a large number of loss-making nationalised industries, spending as a proportion of GDP was therefore only a few percentage points lower than it had been under Labour during the late 1970s. The most important factor underlying this failure to substantially reduce the size of the state was the cost of nonhousing public services and the inability of the Thatcher government to either reduce their cost or transfer significant parts of them to the private sector. This failure was noted by the Prime Minister’s ideological allies at the Centre for Policy Studies (CPS) (Cockett, 1994: 316). Commitments in other areas meant that far-reaching proposals to reform the welfare state were not developed until the second half of the 1980s. When these proposals did come, they tended to focus on improving efficiency through such innovations as the internal market, and any proceeds from such policies were unlikely to be seen in the short term. Nigel Lawson (1992: 586–624) has outlined the difficulties the then government faced in reforming the public services and reducing their cost, given public sentiment in the United Kingdom.

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The Conservative Party’s approach to taxation policy, 1964–97 As Chancellor during 1983–89, Lawson’s ability to reduce taxation as a proportion of GDP was inextricably linked to reducing the proportion of GDP devoted to public spending, given the government’s stated commitment to fiscal probity. Given the relative failure to substantially reduce the state sector, Lawson’s hands were tied to a considerable degree. His strategy was therefore to shift taxation from income to spending so as to allow individuals to keep more of their own income (Lawson, 1992: 340). Even if the Thatcher government found it difficult to reduce the size of the state, it did enjoy considerable success in shifting the burden of tax from income to spending. The intellectual origins of this approach went back to the mid-1960s. One of the key ideas that influenced those who were planning taxation policy during the Conservative Party’s 1964–70 period of opposition was that incentives through the tax system were important in encouraging economic activity and wealth creation (CRD, 1969b). As early as the 1966 general election, the Conservative manifesto promised to utilise tax incentives as a means of encouraging people to earn and save more (Dale, 2000a: 165). By 1970, such thinking had developed still further; the argument that lower taxes could actually increase revenues made some headway in internal party discussions (CRD, 1970b). This anticipated the arguments of the Lafferite supply-siders who influenced the tax-cutting policies of the Reagan Administration in the United States during the 1980s. This was a crucial intellectual step for the Tories, and it followed that taxation should be levied less on income and more on expenditure if people were to be given greater incentives to earn. This shift from direct to indirect taxation was another feature of the tax package that emerged in 1970. The tax cuts in the package were to be focused principally on direct forms of personal and business taxation. These were to be financed by reduced public spending and the imposition of a new Value-Added Tax (VAT), a form of indirect taxation. Other proposals included the abolition of Purchase Tax and Selective Employment Tax (SET), the latter a Labour measure for taxing service sector employment in order to subsidise manufacturing (CRD, 1970b). These proposals were included in the 1970 manifesto (Dale, 2000a: 182).

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An indication of how seriously those making policy took the idea of incentives was that the profoundly unconservative idea of a ‘wealth tax’ was considered to finance cuts in direct taxation. This proposal was discussed during the early stages of the 1964–70 debates on tax reform, but was dropped due to opposition within the party (Campbell, 1993: 218). It was still being debated, however, by the time of the 1970 Selsdon Park meeting of the Shadow Cabinet. Keith Joseph was the most enthusiastic supporter of a wealth tax to help raise revenues for cuts in direct taxation, but he was in a minority. With Reginald Maudling and Willie Whitelaw leading the opposition, the idea was permanently shelved (CRD, 1970c). The shift in ideas on taxation during the 1964–70 period of opposition should not be understated, particularly as it was one of the areas in which the Heath government undeniably adhered to its pre-election commitments. Direct taxes were cut and SET was abolished, with VAT introduced in April 1973 as the principal revenue raiser on the indirect taxation side, after this was agreed in the MCES (CAB, 1971b). Whether this approach to tax policy would have endured had the government survived beyond February 1974 is a matter of conjecture. The ideas that underpinned these reforms would remain influential during 1974–79 and would go on to underpin the programme of tax reform after 1979 that would reach its apotheosis during Nigel Lawson’s chancellorship. Arthur Cockfield was the long-time moving spirit behind Conservative Party tax policy planning; the reforms prepared during both 1964–70 and 1974–79 owed a considerable amount to his influence. Cockfield’s poor eyesight had precluded military service during the Second World War, so he spent his time working at the Inland Revenue, where he built up considerable expertise on the tax system. He continued to wield significant influence over Conservative taxation policy up until 1984, when he was appointed to Brussels as Britain’s European Commissioner. His role lent continuity to Tory policy making on taxation matters for most of the Heath and Thatcher periods. Unsurprisingly, given Cockfield’s continued role in tax matters and the continuing influence of ideas associated with incentives, the planning of tax policy during 1974–79 focused on providing greater incentives and on the associated aim of shifting the burden of tax from earning to consumption. The Conservatives’ 1979 manifesto

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explicitly declared the need to switch some of the focus of taxation from earnings to spending (Dale, 2000a: 271). But there was a further factor in Tory thinking that infiltrated the party at around this time and helped to shape the Conservative government’s taxation policies after 1979. The tax system had long been used by both main political parties to influence the behaviour of individuals. The SET introduced by Labour to reward employment in manufacturing at the expense of service sector firms was a case in point, and the Tories had been no less inclined to use the tax system to encourage certain behaviours that its members regarded as virtuous. The allowance for married couples was a prime example. Using the tax system to change behaviour was, from the perspective of economic liberals, abhorrent in terms of individual liberty and would inevitably distort incentives. What was required instead was a simple tax system which did not privilege any activity over another. The aim was therefore ‘tax neutrality’. By the time the Tories took office in 1979, the top rate of income tax was 83 pence in the pound, with a special rate of 98 pence for investment or ‘unearned’ income. Howe’s 1979 budget made immediate changes, designed to create incentives by cutting the top rate of income tax to 60 pence in the pound and the basic rate from 33 pence to 30 pence in the pound. To pay for the tax cuts, the VAT rate was all but doubled, to 15 per cent. Howe defended the move by asserting the importance of creating incentives for economic activity (Howe, 1994: 128–32). According to Howe, the increase in the VAT rate did cause some controversy, even amongst the government’s fiercest tax cutters, as it was feared that a large increase in indirect taxation would drive up prices and hence inflation expectations at a time when the government was committed to reducing them. Lawson, who succeeded Howe as Chancellor in 1983, continued the quest to reduce direct taxation. As the economy settled into a prolonged upswing, the additional Treasury receipts were used to cut income tax, with the basic rate progressively reduced from 30 pence to 25 pence in the pound across the period 1986–88. The dramatic tax-cutting budget of 1988 also saw the top rate of tax reduced from 60 pence to 40 pence in the pound. Attempts to shift the burden more towards indirect taxation proved difficult, however, as any rise in VAT or an extension of its coverage to items such as food was fraught with political hazard.

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For much of Lawson’s chancellorship, he was constrained by a lack of revenue arising from the general inability of the Thatcher government to dramatically reduce the proportion of GDP devoted to public sector spending, as was noted in the previous section. Even with tight limits on public spending and a growing economy, the proceeds to devote to tax cuts were therefore limited. As a result, the focus of policy shifted towards neutralising the tax system. The most notable tax-neutralising measure came in Lawson’s first budget, delivered in March 1984. The system of corporate taxation up to that point had included a number of tax reliefs, or ‘bribes’, that privileged various types of business activity over others. This was most notable in the tax preference that industrial investment enjoyed over the services sector. Lawson’s view was that such bribes distorted investment decisions and led to resources being deployed into activities that were not necessarily the most profitable available (Lawson, 1992: 350–1). The solution arrived at was a removal of many of the bribes that featured in the corporate taxation regime, with the proceeds used to finance an overall cut in the rate of corporation tax that was implemented across a series of years to 1986–87. But it was the gradual abolition of the privileged position enjoyed by marriage in the tax system that best illustrates the dominance of the idea of tax neutrality in policy making. Sir Geoffrey Howe, Nigel Lawson, and Norman Lamont all played a role in this process, and it represented the privileging of tax neutrality over the traditional Tory support for the institution of marriage which was stressed by many Conservatives sceptical of economic liberalism (Gilmour, 1978: 148–9). Philip Norton defines all three chancellors mentioned above as Tories who combined economic liberalism with social liberalism, and this may help to explain the policies pursued (Norton, 1990). The tax allowance for married couples would eventually disappear during Kenneth Clarke’s 1993–97 chancellorship. But neutralisation of the tax system was only one key idea that drove the reform of taxation from 1979 onwards. The recognition of the importance of incentives and the related commitment to moving from direct to indirect taxation were also key elements. Unlike neutralisation, these ideas were influential during Heath’s time as leader, as noted earlier. Throughout the period covered, the Tories needed ideas that would underpin a radical approach to taxation policy whilst taking into account the political and economic

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constraint that the share of GDP devoted to public spending could not be significantly reduced. Under Heath, this constraint was derived from the fact that there was no appetite among senior Conservative economic policy makers for a significant reduction in the size of the state. Under Thatcher, it came from the realisation that it would be politically impossible to bring about such a reduction. Under these circumstances, the ideas on tax reform outlined above were very attractive and became highly influential as a result.

Conclusions There are three key conclusions that should be drawn from the analysis undertaken in this chapter. First, the Heath government came to office much less committed to market liberalism than is sometimes claimed. Although a great deal of pro-market rhetoric was deployed by the Tory leadership during 1970, the foundations for a concerted attack on the post-war consensus were, both in intellectual terms and in terms of policy planning, rather shallow. In light of this, the Heath government’s willingness to pursue interventionist microeconomic policies across a wide range of policy areas during 1970–74 becomes easier to explain. Second, the Conservative Party’s microeconomic policies from 1975 onwards were increasingly influenced by market liberalism, and the influence of paternalist forms of conservatism correspondingly declined. This was most evident in policy areas such as the nationalised industries and financial markets. Though regional policy making retained a residual interventionist flavour, the introduction of Enterprise Zones constituted a genuine attempt by the Thatcher government to remodel regional policy along free-market lines. This economically liberal approach to microeconomic policy making would endure throughout the remainder of Thatcher’s premiership and would also remain the case under John Major (Jenkins, 2006: 164–70). The third key conclusion to be drawn is that, despite the particularly strong influence of libertarian conservatism during 1979–90, the size of the state did not shrink significantly, and by 1997 the amount of GDP devoted to government expenditure was only a few percentage points below what it had been in 1979. Being unable to significantly cut the size of the state meant that, rather than substantially cutting

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the tax burden outright, the Tories had to focus on shifting from taxing income to taxing expenditure. This was based mainly on the idea of the importance of incentives, and went back to Heath’s time as Leader of the Opposition. During the Thatcher premiership, this approach was to be buttressed by the objective of neutralising the tax system. This meant that even such Tory shibboleths as support for marriage in the tax system were sacrificed in order to adhere to the classically liberal principle that individual behaviour and decision-making should not be deliberately biased by the government’s levying of taxes.

3

The Conservative Party and the Labour Market, 1964–97

Both the Heath and Thatcher ministries pursued activist approaches towards trade union reform that contrasted sharply with the cautious or hands-off method practiced by the Conservative governments of 1951–64. The Heath government carried out a comprehensive reform of industrial relations with the introduction of the 1971 Industrial Relations Act. The Thatcher government introduced a series of Employment Acts, Trade Union Acts, and a Wages Act that led to a transformation of industrial relations and the labour market in Britain. The subsequent Major ministry largely consolidated and extended the reforms of 1979–90 (Dorey, 1999) and is therefore not considered in any great detail in this chapter. Moran (1977: 20–3) offers a somewhat arbitrary but nevertheless highly useful division of the government’s role in industrial relations in Britain into three distinct historical traditions: liberalism, voluntary collectivism, and compulsory collectivism. The liberal tradition has tended to derive its approach from a belief that the largely unfettered market is the best organising mechanism for economic activities; therefore it views with scepticism trade union power and the potential distortions to markets which it can result in. This approach also incorporates an extreme hostility to violations of individual liberty through coerced collectivism, such as the practice of the closed shop (Moran, 1977: 20–1). Both voluntary and compulsory collectivists tend to profess sympathy for the role of the trade unions in the labour market, but at the same time they differ as to the role that the state should play in industrial relations. Whereas voluntary collectivists tend to see the 69

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state as an institution that exists to legally protect the bargaining rights of unions, compulsory collectivists perceive there to be a greater and more activist role for the state in organising industrial relations, and a greater role for the trade unions in the broader economic governance of the country (Moran, 1977: 21–2). The essential conclusions of this chapter are that whereas the Heath government drew on all three traditions in its Industrial Relations Act, the reforms of the Thatcher government were based almost exclusively on the principles of economic liberalism. In addition to this crucial difference in strategy, the Heath and Thatcher administrations also differed in terms of their tactical approaches to pursuing reform. The Heath government attempted comprehensive reform in an all-encompassing bill, whereas the Thatcher government proceeded in a step-by-step manner across a period of years. The latter approach was undoubtedly informed by the difficulties experienced during 1970–74. Beyond industrial relations reform, there was also a key difference in the thinking of the Conservative Party’s economic policy makers under Heath compared with their thinking under Thatcher. The Heath government was operating in an intellectual framework that took trade union power largely as a given, regarded high wage settlements as the main motor of inflation, and thought deficient demand was the principal cause of unemployment. There was also a belief that the labour market was in many ways unique and required very different policies to other types of market so as to make it function most effectively. By contrast, under Margaret Thatcher’s leadership, the party’s key policy makers had been strongly influenced by pro-market economists such as Friedrich Hayek and Milton Friedman. They believed markets to be efficient in most cases and thought that excessive monetary growth was the underlying cause of inflation. Within this intellectual framework, the main causes of unemployment were seen to be distortions to the labour market. The trade unions were only one of a number of such distortions, but as of 1979 they appeared to be a central one. It is this intellectual shift that best explains not only the change in approach to industrial relations under Thatcher’s leadership, but also the more widespread attempts to reform the labour market pursued by the Thatcher and Major governments throughout 1979–97.

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Post-war industrial relations and demands for reform To understand the approaches to industrial relations reform pursued by the Tories after 1964, some background information regarding the British system of industrial relations must be provided. Of Moran’s three historical traditions, the British system as of 1964 most closely approximated voluntary collectivism. This term is synonymous with voluntarism, and the two terms are used interchangeably throughout the remainder of the chapter. The voluntarist system was founded on the basis that there would be virtually no state interference in the internal affairs of trade unions. Other important elements included the various criminal and civil law immunities enjoyed by the trade unions with reference to their activities during trade disputes and the absence of legal enforcement of agreements made between unions and employers. The system’s legal foundations were a series of Acts of Parliament passed between 1824 and 1946. The repeal of the Combination Acts in 1824 had decriminalised trade unionism, but involvement in strikes remained a criminal activity. Despite its reforming activities, the Gladstone government of 1868–74 remained sceptical of trade unions, due to its adherence to economic liberalism. It did, however, pass the 1871 Trade Union Act, which ensured that the internal rules of trade unions were their own business and not the government’s. A further law, the 1875 Conspiracy and Protection of Property Act, passed by Disraeli’s Conservative government, decriminalised strike activity. But it was the Taff Vale judgement of the law, upheld by the House of Lords in 1901, that led eventually to the long-time settlement that arose from the 1906 Trade Disputes Act. The aforementioned House of Lords ruling had declared that the Amalgamated Society of Railway Servants should pay substantial damages to the Taff Vale Railway Society to cover the financial costs of their industrial action. Making trade unions liable for civil damages arising from strike activity was a serious threat to union activity. In response, the Campbell-Bannerman government legislated in 1906 for trade unions to enjoy immunity from prosecution under common law for most acts in furtherance of a trade dispute. The term ‘trade dispute’ was broadly defined and granted unions considerable scope for industrial action without facing the threat of civil liabilities.

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Although the 1906 Trade Disputes Act largely established the legal framework in which industrial relations were to be conducted up until the 1971 Industrial Relations Act, the General Strike in 1926 led to a rare curtailing of union power in the Baldwin government’s Trade Disputes and Trade Union Act of 1927. Besides tightening the law on strikes, this piece of legislation also outlawed the ‘contracting out’ principle whereby trade union members donated money to the Labour Party unless the individuals concerned made an explicit request not to pay this political levy. Contracting out was replaced by a provision for ‘contracting in’, whereby individual members would have to request that they be included among those paying the political levy. The 1927 Act was repealed by the Attlee government in 1946 and the ‘contracting out’ principle was restored. This legal framework for industrial relations was inherited by the Conservatives on their return to office in 1951. As detailed in Chapter 2, the Conservative Party’s leaders remodelled the party’s policy platform during 1945–51 and largely reconciled it to the post-war consensus of a mixed economy, Keynesian demand management, and an expanded welfare state. This acceptance extended to the industrial relations arena and, besides committing the Tories to full employment, The Industrial Charter of 1947 also expressed sympathy for an enhanced role for trade unions in the economy (Conservative Central Office, 1947: 21). Walter Monkton was appointed as the new Conservative Minister of Labour, and he pursued a policy of accommodation with the trade unions. Monkton attempted to keep out of the industrial relations arena as much as possible, but occasionally acted as a conciliator in some of the more serious disputes. There was little or no prospect of a fundamental reform of the industrial relations system, something that did not change after the departure of Monkton and the rise of a more militant form of trade unionism. This new tendency in industrial relations was typified by the election of Frank Cousins as General Secretary of the Transport and General Workers Union in 1956. At a time when the Conservative government was becoming increasingly alarmed at the tendency for increases in wage settlements to outstrip increases in productivity, Cousins objected to all calls for wage restraint and declared that ‘in a period of freedom for all, we are part of the all’ (Barnes and Reid, 1980: 27). Government concerns over excessive wage settlements and the unwillingness of

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unions to moderate their pay claims was one of the main factors in Selwyn Lloyd’s decision to introduce a ‘pay pause’ in July 1961. This measure was followed by an incomes policy designed to hold down wage increases. Such policies were to be frequently used by both Conservative and Labour governments during the 1960s and 1970s. The introduction of an incomes policy was a clear signal that Conservative policy makers preferred to treat the symptoms of trade union power as opposed to reforming the industrial relations system which legitimised it. But by the late 1950s, some parts of the Conservative Party were beginning to make the case for reforming the industrial relations system. In 1956, a group of Conservative lawyers published A Giant’s Strength, a pamphlet which highlighted the allegedly growing problem of trade union militancy and proposed a substantial extension of the law into the industrial relations arena in order to counter it (Inns of Court Conservative and Unionist Society, 1956). The proposals were publicised through the Bow Group’s Crossbow publication, largely due to the enthusiasm of the publication’s editor, Geoffrey Howe, for trade union reform (Moran, 1977: 56). Whilst writing for the Sunday Telegraph on labour law issues, Howe also became involved in publicising the case of Douglas Rookes (Howe, 1994: 46). Rookes had worked at Heathrow Airport as a draughtsman for the British Overseas Airways Corporation (BOAC) and had left his union, the Association of Engineering and Shipbuilding Draughtsmen (AESD). Since a closed-shop agreement existed between BOAC and the AESD, the latter threatened to strike unless Rookes was dismissed. After some delay, BOAC dismissed Rookes, who subsequently took the AESD to court over the issue. The House of Lords eventually ruled in his favour in its Rookes v Barnard judgement of 1964 (House of Lords, 1964). This had potentially drastic implications for the privileges enjoyed by the unions under the 1906 Trade Disputes Act. In their 1964 manifesto, the Conservatives promised a Royal Commission to look into the issue of industrial relations in light of the increasingly intractable problem of industrial relations in general and the ongoing Rookes v Barnard saga in particular (Dale, 2000: 150). The Labour Party had been largely silent on the issue during the election, but in April 1965, Harold Wilson established a Royal Commission under Lord Donovan to consider trade union law. When the Donovan Commission reported in 1968, Wilson and his

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Secretary of State for Employment and Productivity, Barbara Castle, put forward limited proposals for the reform of industrial relations in the government white paper In Place of Strife. Wilson and Castle were defeated in their attempts to enact reform by a combination of trade union hostility, backbench opposition, and a Cabinet revolt orchestrated by the Home Secretary James Callaghan (Jenkins, 1970). The increasing prominence of industrial relations as a political issue during the 1960s was indicated by the establishment of a Royal Commission on the subject and the subsequent willingness of a Labour Prime Minister to legislate in the face of opposition from the very organisations that largely financed his party. When combined with the problems of excessive pay claims, increasing strike activity, and Britain’s relatively poor economic performance, the issue became particularly pressing. It was against this backdrop that the Conservative Party during 1964–70 drew up its proposals for a wide-ranging reform of industrial relations. The origins of these proposals are covered in depth during the next section of the chapter.

Heath in opposition: planning for industrial relations reform As noted in Chapter 2, one of the most important results of the Conservative Party’s defeat in the 1964 general election was that Edward Heath was able to establish effective personal control over the party’s policy-making machinery. Heath used his new position energetically and established a number of policy groups to produce policies for the next election which, given Wilson’s slim majority, was unlikely to be delayed for long. One group was commissioned to look into the issue of the trade unions. According to his biographer, Heath, who was himself a former Minister of Labour under Harold Macmillan, was by 1965 already convinced of the case for industrial relations reform (Campbell, 1993: 111). Heath confirmed the appointment of the former Chancellor of the Exchequer Lord Amory to chair the committee. The terms of reference required the committee to review the position of the trade unions in British society and consider what changes to the law, if any, should be made in relation to this (CRD, 1966a). The committee was named the Policy Group on Trade Union Law and Practice, and its secretary was Stephen Abbott of the Conservative Research Department (CRD).

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His central role in driving the process of Conservative policy making towards industrial relations during this period has been acknowledged by those involved, including Geoffrey Howe (1994: 47). Abbott had worked for the engineering firm Metal Box; whilst in this role he formed strong views on the need for trade union reform (Moran, 1977: 57). These are indicated by his reaction to a paper produced in 1965 by the Conservative Trade Unionists’ National Advisory Committee. The paper advocated such stringent anti-union measures as the abolition of the closed shop and the contracting out principle, as well as a proposal that unions should be required by law to register with a registrar that would be able to veto those internal union arrangements that did not meet basic criteria (CRD, 1966b). A memorandum from Abbott indicates his support for these proposals (CRD, 1966a). The initial conclusions reached by the group set the direction of Tory policy towards the trade unions up until the collapse of the Industrial Relations Act in 1972. It is therefore important to consider their activities in some detail. Besides Amory and Abbott, those on the committee included former Ministers of Labour Joseph Godber and Iain Macleod as well as MPs Dudley Smith, John Hobson, Ray Mawby, and Peter Walker. Businessmen who joined the group included J. R. Edwards, Edward Grint, and Stephen Brown (Moran, 1977: 57). Heath and his colleagues experienced great difficulty in recruiting academic experts to the group, mainly because those with the necessary expertise, such as Hugh Clegg of the University of Warwick, were not Tory sympathisers (CRD, 1966a). The first meeting of the group in February 1965 made a crucial first decision that would contribute to the fate of the 1971 Industrial Relations Act. It was agreed that the group should consider how to overcome the practical problems of the industrial relations system and that a coherent philosophy would emerge as a result (CRD, 1966b). This was an approach to be expected of a committee composed of relatively nonideological politicians and businessmen, and it meant that the policies which eventually emerged would be influenced by a variety of divergent and sometimes outright contradictory strands of thought. On confronting the practical problems of the trade union issue, it was agreed at the first meeting that the principal problem was unofficial strikes and that the law should be amended to prevent

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unions from breaching collective agreements. The group also agreed that the issues of restrictive labour practices and the rights of individuals within a union needed attention, and that a narrowing of the definition of a trade dispute was desirable (CRD, 1966b). This was a formidable agenda; over the next few meetings, a wide-ranging set of ideas for industrial relations reform emerged from the group’s deliberations. To address the issue of internal union arrangements which threatened the rights of individual members, the idea of a central registrar with whom all trade unions would have to register was developed during the group’s second meeting on 2 March 1965. To provide incentives to register, the drastic policy of refusing legal protection under the 1906 Trade Disputes Act to unregistered unions was considered. It was conceded that this policy could inhibit the rights of individual non-unionised workers to pursue trade disputes. It was also agreed that there was a need to curb the activities of those acting against union authority and, separately, that it would be desirable to remove legal immunities against actions in tort except for those arising directly from a trade dispute (CRD, 1966b). This would mean a dramatic reduction in the legal immunities enjoyed by trade unions. By the fourth meeting of the group on 31 March, the proposal for a central registrar had been developed to the point that it was agreed that the registrar should recommend to trade unions the inclusion of provisions for secret ballots in their constitutions. The issue of the closed shop was also raised, and it was agreed that workers dismissed for leaving a trade union or refusing to join a trade union should be entitled to damages. There was also broad agreement that when a secret ballot showed that more than half of workers wished to be represented by a trade union, the employer should recognise the union in question. Removing the protection of the 1906 Act from disputes arising between workers and workers and the idea of special labour courts were also beginning to be discussed (CRD, 1966b). The fifth and sixth meetings of the policy group, on 7 April and 28 April 1965, also proved to be highly significant. At the 7 April meeting, it was agreed that collective agreements should be made legally enforceable; the 28 April meeting saw members return to the idea of labour courts and consider the powers which they would require. These included the power to award damages to workers wrongly dismissed (but not demand reinstatement for them) and

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the power to interpret and adjudicate on alleged breaches of legally binding collective agreements. The group also saw such courts as the appropriate bodies for dealing with appeals by trade union members against their unions and for adjudicating disputes between the unions and the registrar over union rules. It was also agreed that the proposed registrar for trade unions should outline ‘model rules’ to be included in the constitution of all registered unions, whereas ‘voluntary rules’ could be left for individual unions to decide and would be subject only to approval by the registrar (CRD, 1966b). A progress paper, presumably written by Abbott and dated 10 May 1965, brought together the key ideas discussed during the first six meetings (CRD, 1966b). There were three significant institutional innovations proposed. First, fixed-term collective agreements or those subject to notice of termination were to be made legally binding. Second, a new registrar for trade unions was to be established with powers to enforce model rules for inclusion in the constitutions of all unions and powers to interpret trade union law and report breaches to the labour courts. Incentives for registration were also proposed. Third, special labour courts would be established whose functions included the interpretation and adjudication of collective agreements, adjudication of matters relating to trade unions, adjudication of appeals by employees against alleged unjust dismissal, and adjudication on appeals by individual trade unionists against disciplinary or other action taken against them by their union. Alongside these institutional upheavals, it was also proposed that the definition of a trade dispute be narrowed to exclude disputes between workmen and workmen and those involving workmen in other establishments. This would in effect outlaw so-called ‘secondary action’ whereby workers not directly involved in a given dispute could take industrial action in support of it. These proposals were produced in less than three months by Amory’s committee and, with minor alterations, formed the backbone of the 1971 Industrial Relations Act. Returning to the three main traditions in industrial relations outlined by Moran, it is possible to identify the influence of all three in the proposals put forward by Amory’s policy group. First, despite the substantial nature of the reforms, the unions were to continue to enjoy considerable legal protection under the 1906 Trade Disputes Act in relation to legitimate trade disputes. In this respect, the proposals did not abandon the centrepiece of the voluntarist tradition of British industrial relations.

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There were, however, elements to the proposals which more than hinted at compulsory collectivism. The willingness to make collective agreements legally enforceable and the reluctance to make individuals personally responsible for strike activity implied that unions should be made responsible for the activities of their members. This could only be achieved through granting them increased powers over their members. The introduction of a registrar also implied a government-sanctioned formalisation of the role of trade unions, which had never been a part of the voluntarist system of industrial relations. Both collectivist traditions were therefore represented in the group’s proposals. But then so too was the liberal tradition. Part of the argument for a central registrar for trade unions was that it would allow for the imposition of union rules which would limit the use of the closed shop and protect the individual’s right to association. This line of thought had impeccable liberal credentials. The proposal to narrow the definition of the term ‘trade dispute’ so as to limit the legal protection afforded by the 1906 Trade Disputes Act was also very much in the spirit of economic liberalism. The key point to take from this, however, is that the proposals outlined by the group did not conform to any one of these traditions, but were a mixture of all of them. An indication of just how far the proposals of the group differed from an approach influenced purely by economic liberalism is given by focusing on the tenth meeting of the policy group on 23 June 1965. Enoch Powell was invited to address the committee and he unsurprisingly outlined a set of proposals that constituted a purely economically liberal approach to industrial relations. Powell insisted that fixing the price of labour was as economically damaging as fixing the price of any other good and said that the legal privileges granted to the trade unions since 1906 were indefensible. It followed that collective bargaining was also not to be encouraged and that the 1906 Trade Disputes Act and any other legislation giving legal privileges to the trade unions should be repealed. Powell also argued that contracting out of the political levy should be abolished in favour of the principle of contracting in (CRD, 1966b). Powell’s proposals reflected the economically liberal argument that the unions performed no function other than to distort the workings of the labour market by bidding wages up above the market rate. There is no evidence, however, that he had any impact on the thinking of

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the policy group. The draft report of the committee drawn up by Abbott in July 1965 was largely based on the ideas which had been summarised in the progress paper of two months earlier, and it was finalised over a series of meetings during the summer of 1965 (CRD, 1966b). These proposals made their way into Putting Britain Right Ahead, a Conservative statement of aims published in September 1965, which constituted the party’s first major publication under Edward Heath’s leadership (Conservative Central Office, 1965). Two months later, the chairmanship of the Policy Group on Trade Union Law and Practice passed to Keith Joseph. Heath had made Joseph front bench spokesman on labour matters and it was also at this point in time that Geoffrey Howe joined the group. The businessman Stephen Brown had turned down the offer of the chairmanship before it was offered to Joseph (CRD, 1966a). The committee met twice in December 1965 to discuss the main issue on which Putting Britain Right Ahead had differed in its proposals from those put forward by the Amory-chaired group (CRD, 1966b). Putting Britain Right Ahead had suggested making only certain types of collective agreements legally enforceable, whereas the policy group had insisted that legally binding status should be extended to all collective agreements. The result of the meetings under Joseph was a further document dated 10 February 1966 and entitled ‘Second Report of the Policy Group on Trade Union Law and Practice’ (CRD, 1966b). Most of the proposals were substantially unchanged from how they had appeared in the first report, except that more details were now in place. Specific meaning was given to the term ‘trade dispute’, and legal privileges were to be withdrawn from sympathy strikes in support of workmen in other establishments, strikes aimed at enforcing a closed shop, strikes in breach of a collective agreement or contract of employment, and strikes against action taken in accordance with a court order so as to abolish a restrictive practice. There was also a softening of the line on collective agreements, presumably in light of the more limited proposal put forward in Putting Britain Right Ahead. Whereas the group’s previous report had called for all collective agreements to be made legally binding, the new report proposed that collective agreements be so only if management and trade union agreed to it (CRD, 1966b). The reform of industrial relations was one of the main policy areas on which the Conservatives fought the 1966 general election (Dale, 2000a: 167–8). It did not appear to do them much good, however,

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and Labour significantly increased its parliamentary majority. But the Conservatives were nevertheless convinced that proposals to reform industrial relations and in particular the trade unions were an electoral asset worth persevering with, given the increasing unpopularity of the unions (Howe, 1994: 47). Although the Policy Group on Trade Union Law and Practice had by this time been disbanded, it was soon replaced by a new Policy Group on Trade Unions and Industrial Relations. This group was set up soon after the election in May 1966 and again met under Keith Joseph’s chairmanship. Its remit was not only to build on the proposals of the earlier policy group, but also to consider other areas of industrial relations (CRD, 1966a). Despite the broad terms of reference, the group largely remained focused on the industrial relations reform agenda set out by the Amory-chaired group in 1965. The first six meetings, until February 1967, took place under Joseph’s chairmanship, and much of the time was spent on the technical matter of how far the scope of legal enforceability should apply to collective agreements (CRD, 1967c). Joseph was moved from his position as front bench labour spokesman in March 1967 and was replaced by Robert Carr. Carr therefore took on Joseph’s role of chairing meetings of the policy group until the 1970 general election. The group continued to work within the framework developed in 1965; the immediate task was to produce an updated report on the proposed reforms of the industrial relations system (CRD, 1967c). This was drafted by Abbott over the summer of 1967 and was submitted to the Advisory Committee on Policy (ACP) in November of that year (CRD, 1970d). It was this report that formed the basis of Fair Deal at Work, a publication which outlined the Conservative Party’s proposals for reform of the British system of industrial relations (Conservative Political Centre, 1968). The Tories had been anxious to claim the political high ground on trade union reform, and by publishing Fair Deal at Work in April 1968, they beat the Donovan Commission by one month (Howe, 1994: 46). Fair Deal continued the tradition of the various Conservative Party industrial relations proposals put forward after the 1964 general election by having its origins in the early meetings of the Amory group in 1965. In this sense the proposals continued to represent liberalism as well as both voluntary and enforced collectivism. The perennial problem, that of how to reconcile the need for the unions to have the power to compel their members to hold to

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legally enforceable collective agreements whilst also protecting the rights of the individual against his union, remained unresolved. Further work on the proposals for industrial relations reform continued to take place in Robert Carr’s group after the publication of Fair Deal (CRD, 1970d). By this stage the most important individuals involved in framing the policy measures were Carr himself, Stephen Abbott, and Geoffrey Howe. These three individuals were later to be the main architects of the drafting and passing of the Industrial Relations Act into law, after the Conservatives were elected to office in 1970. There was also a Trade Union subcommittee, which consisted mainly of Conservative Party–aligned lawyers, who did a considerable amount of the work required to turn the proposals of Fair Deal into legal measures which would have effect (CRD, 1969c). Reform of industrial relations was one of the Conservative Party’s main policy proposals in advance of the 1970 general election campaign and was once again given prominence in the party’s manifesto (Dale, 2000: 184). This was unsurprising, given that the issue was thought to have electoral traction at a time when Labour had been unable to enact the changes which had been proposed in In Place of Strife. Indeed, industrial relations reform was, along with tax reform and the remodelling of the machinery of government, one of the three areas to which the Tories had devoted most their efforts in developing policies whilst in Opposition during 1964–70 (Campbell, 1993: 212). These proposals continued to be based on the thinking done in the initial Amory group. Their form was largely a result of the decision taken by that committee to put practical problem solving ahead of philosophical consistency. This meant that the proposals were influenced by a range of approaches to industrial relations, as outlined earlier in this section. One of the most important implications of this was the contradiction between the need to give unions sufficient powers to coerce their members into honouring collective agreements and the need to provide adequate safeguards for individuals against union power (Taylor, 1993: 185–6). There are two other notable points to make with regard to the proposals for industrial relations reform. The first of these is the political importance of inflation and the belief then held by many that excessive wage claims were its underlying cause. This neo-Keynesian view was outlined in Chapter 1. Chapter 4 will highlight the extent to which it dominated thinking among those making Conservative

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macroeconomic policy during the period 1964–74. Within this world view, the problems of inflation and industrial relations became inextricably linked. The policy of industrial relations reform was therefore not just a solution to the industrial relations problem, but also a key component of anti-inflationary policy. Given that the Conservatives to a great extent fought the 1970 general election on the issue of rising prices (Holmes, 1997: 6), managing inflation effectively was always likely to be a prerequisite of success in government. Second, it should be noted that there was little thinking on the broader issues of the labour market and how it functioned, with most thought being devoted to the relatively narrow issue of industrial relations reform. There was a Labour Mobility Policy Group (briefly mentioned in Chapter 2), which was set up under Nicholas Ridley. It met from March through to December 1967, and its members attempted to develop solutions to the problems of moving labour out of declining industries and into emerging ones and of encouraging workers to move from regions with high unemployment to areas where there was a shortage of labour. Given that Ridley was chairing the group, one might have expected some radical market-based solutions. But the group put forward interventionist proposals, including the establishment of a manpower board, financed by a payroll tax, to coordinate activities designed to encourage labour mobility. It also called for reforms to the mobility benefits system to encourage labour mobility, but accepted that this would lead to an increase in the payment of such benefits (CRD, 1967b). The activities of the various policy groups covered in this section are a clear indication of the extent to which thinking on the labour market was dominated by industrial relations and in particular the trade union issue. But the activities of the Ridley group highlight the broader fact that there was little thinking within the Conservative Party about how labour market problems could be solved by free-market solutions, even by those sympathetic to economic liberalism such as Nicholas Ridley.

Heath in government: the Industrial Relations Act and corporatism On forming a government in June 1970, the Conservatives aimed to legislate as soon as possible on the issue of industrial relations.

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As noted in the previous section, Robert Carr, Stephen Abbott, and Sir Geoffrey Howe (as he had become) were to be the three most important individuals in producing what became the 1971 Industrial Relations Act. Carr was appointed Employment Secretary, Abbott was made his special adviser, and Howe became Solicitor General, with the responsibility of drawing up the required legislation. The decision to introduce legislation immediately was partly due to the fact that so much detailed preparation had already been done in Opposition, meaning that little further work was required (Barnes and Reid, 1980: 137). Another significant point that should be noted is that reform was to be an all-in-one affair, with the proposed reforms together constituting a comprehensive package intended to simultaneously address all of the problems exhibited by Britain’s creaking system of industrial relations. In justifying why such an approach was pursued rather than the step-by-step approach to industrial relations reform that would prove so successful during the 1980s, Howe (1994: 59–60) claims that the package was not intended to clobber the unions but to modernise industrial relations. It therefore had to encompass reform of many parts of the industrial relations system if it were to be sellable to all interest groups. A consultative document was published on 5 October 1970; it allowed for just a two-month period of government consultation with employers and trade unions (Taylor, 1996: 169). Carr insisted that significant parts of the proposed reforms were nonnegotiable. The trade union movement took umbrage at this and at the fact that the consultation period was to be so short (Barnes and Reid, 1980: 137–9). The Industrial Relations Bill was published on 3 December 1970 and was bitterly opposed by both the trade union movement and the Labour Party. But the Conservative Party enjoyed a sufficient majority in the House of Commons to ensure that it became law as the Industrial Relations Act in August 1971. Unsurprisingly, the Industrial Relations Act was largely based on the proposals put forward by the Tories in Fair Deal at Work, which were in turn based on the ideas first developed by the Amory-chaired Policy Group on Trade Union Law and Practice in 1965. The extent to which it drew on a number of different strands of thought in industrial relations was noted in the previous section; Denis Barnes (Barnes and Reid, 1980: 141), Permanent Secretary at the Department of

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Employment during the Act’s lifetime, noted its lack of a consistent underlying philosophy. Barnes and Reid (1980: 141–3) identified four main themes. First, by making collective agreements legally enforceable and making trade unions responsible for the actions of their members, trade union officers would be compelled to exercise more authority over their members. It was hoped that this would make industrial relations more orderly and reduce the number of unofficial strikes. But these measures sat uneasily with the second main theme, which was to protect the rights of individual trade union members against their unions. This included the right for individuals not to belong to a union and the prohibition of the closed shop. The legislation also established criteria designed to protect the rights of individual trade unionists, which trade unions had to conform to in order to be able to register with the new central registrar. The third main theme sat easily with liberal tradition, since it removed legal privileges from various categories of strike action, including sympathy strikes. Although this stopped some way short of the Powellite argument for complete removal of the trade union privileges associated with the Trade Disputes Act 1906, those unions that remained unregistered would lose the protection they enjoyed under the Act and would become liable for damages arising from trade disputes. The fourth theme was the granting of certain rights to individual workers against their employers. These were to be enforced through the new system of the National Industrial Relations Court (NIRC). The NIRC was also granted powers to settle a variety of other types of labour dispute and could also grant injunctions to prevent injurious strikes. The second and third of the main themes outlined above closely converged with the principles and practice of economic liberalism. But the centrepiece of the voluntarist tradition, the continued enjoyment of substantial legal privileges by trade unions with regard to trade disputes, remained largely undisturbed, provided unions registered. Meanwhile, the first of the main themes implied an industrial relations system in which unions were to exert more authority over individual members, and it sat most easily in the compulsory collectivist tradition. The Industrial Relations Act therefore drew on all three traditions, just like the various sets of Conservative proposals that had been developed since 1964.

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Tory plans to reform industrial relations did not form part of a more generalised plan to reform the labour market as a whole. The reform of industrial relations instead formed part of the government’s strategy to counter inflation (Heath, 1998: 333–4). The government’s pay policy in the state sector was therefore a crucial adjunct to its industrial relations reform agenda. The Conservatives had ruled out the use of a formal prices and incomes policy in its 1970 manifesto (Dale, 2000a: 183). Yet, as Chapter 4 will make clear, this was not because the government’s key policy makers had in any way been influenced by monetarist arguments. Edward Heath and those closest to him in making the party’s economic policies continued to view excessive wage settlements as the underlying motor of inflation. Whatever its manifesto commitment, the government could not stand aside from pay policy in the public sector. The approach eventually pursued became known as N-1, with the government attempting to limit pay increases in the public sector to one per cent less than the previous pay settlement increase, in the hope that this would set an example for wage bargainers in the private sector (Taylor, 1993: 188). Unfortunately for the government, this policy coincided with and arguably helped to aggravate an increase in union militancy in the public sector, which contributed to a series of demands for pay increases well above the rate which the government had planned to concede. This threatened not only the government’s public sector pay policy, but also its entire anti-inflation strategy. By the autumn of 1971, the government had the machinery of the Industrial Relations Act at its disposal in its attempts to counter union militancy in the state sector. The Trades Union Congress (TUC) had advised its affiliated unions not to register. Although the Act did not require unions to register, its provisions meant that the legal privileges enjoyed by trade unions under the 1906 Trade Disputes Act would not apply to unregistered unions. Unions that refused to register therefore risked incurring substantial civil liabilities for any industrial action pursued. The legislation was therefore designed to heavily penalise trade unions which did not act within its framework. Unfortunately for the government, the operation of the Act’s provisions turned out to be farcical. An NIRC ruling that the Transport and General Workers Union (TGWU) was liable for damages caused by its shop stewards ‘blacking’ (boycotting) container lorries was overturned by the Court of Appeal under Lord Denning. This meant

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that responsibility lay with the shop stewards rather than with the trade union. Employers could in theory seek damages from the shop stewards, but they were unlikely to be able to pay, and as a direct result five shop stewards involved in the blacking episode were sent to prison for contempt of court. This ran directly counter to the aims of the Act, which was intended to make trade unions responsible for the actions of their shop stewards (Taylor, 1996: 175). The imprisoning of the so-called Pentonville Five was a fillip to the trade union movement. Not only did it lead to threats of widespread sympathy strikes, but it also prompted a number of moderate trade unions to deregister from the Act’s provisions. Other aspects of the Industrial Relations Act proved no less troublesome. The provision for opting out of making collective agreements enforceable was taken up by numerous unions and employers and thereby undermined the Act’s attempts to counter unofficial industrial action. Meanwhile, Carr’s successor as Employment Secretary, Maurice Macmillan, used the Act’s provisions to have the NIRC order a two week ‘cooling off’ period between disputing parties in the case of a national rail strike in April 1972. No progress was made in the intervening period and Macmillan subsequently used the NIRC to force a ballot among railway workers. Predictably, the result was a vote in favour of strike action (Taylor, 1996: 175–6). The Industrial Relations Act therefore proved to be an extremely blunt instrument at a time when Britain’s industrial relations were deteriorating alarmingly. The government would suffer a severe blow to its authority in February 1972 with its defeat at the hands of the National Union of Mineworkers (NUM). By that time, the whole of the government’s economic strategy was being reassessed. The biggest threat to the government’s fortunes was the unprecedented combination of rising inflation and rising unemployment, something which existing neo-Keynesian theories implied could not happen. When deciding how to react to the collapse of its industrial relations legislation, the views of the government’s most senior members as to the causes of unemployment and inflation were therefore crucial. As will be seen in Chapter 4, the key economic policy makers in the Heath government continued to operate within a neo-Keynesian intellectual framework. This maintained that unemployment was chiefly the result of deficient demand, whilst inflation was caused by excessive wage increases. The only viable strategy was therefore

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to pursue expansionary demand management macroeconomic policies whilst finding some way to moderate wage inflation. The second part of this strategy had profound implications for the Heath government’s approach to industrial relations. On being elected, the Heath government had hoped that the prospective Industrial Relations Act would contribute to wage claim moderation. The Chancellor and Employment Secretary explicitly stated this in a paper they co-wrote on inflation strategy for the Ministerial Committee on Economic Strategy and which was dated 26 November 1970 (CAB, 1970). But with this strategy in ruins, it had only two options within its own intellectual framework. The first was to come to some sort of arrangement with the trade unions to ensure moderation in wage claims. The second was to impose a statutory incomes policy. Up until November 1972, Heath did everything he could to come to some sort of voluntary arrangement, even going so far as to offer the unions an unprecedented say in the running of the British economy (Taylor, 1996: 176–80). Such a ‘corporatist’ arrangement would have heralded a dramatic shift towards compulsory collectivism. Heath was not able to secure the agreement of the unions, however, and on 6 November 1972 resorted to the statutory prices and incomes policy. Analysis of this policy choice fits more easily into the issues covered in Chapter 4, and detailed discussion of it is therefore deferred until then. It is important to note three things about the Heath government’s approach to industrial relations and the labour market that have emerged from this and the previous section. First, the problem of industrial relations in Britain was not set within the context of broader labour market issues. There was therefore relatively little thinking evident about how to improve the functioning of the labour market as a whole. Labour market policy and attempting to combat the trade union problem were essentially seen as the same thing. Second, policy makers were highly flexible with regard to the ideas they were willing to use in order to solve the industrial relations problem. The Industrial Relations Act included measures derived from three different traditions of industrial relations. Therefore, following the collapse of the new system of industrial relations, Heath was willing to countenance drastic compulsory collectivism in order to guarantee restraint in wage bargaining from the trade unions. It is this

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wage bargaining dimension that leads on to the third point, which is that policies towards industrial relations were seen very much as a part of the government’s counterinflation policy. It had been one of the intentions of those who were responsible for the Industrial Relations Act to ensure a moderation of wage inflation, and this was the principal objective of the various policies pursued towards the trade unions during 1972–74 following the collapse of the Act. As the next two sections will demonstrate, all three of these features would change markedly during Margaret Thatcher’s time as Conservative Party leader.

Thatcher in opposition: seeing the labour market as a market like any other The events surrounding Margaret Thatcher’s ousting of Edward Heath as Conservative Party leader were covered Chapter 2 and will not be recapitulated here. It is important to note at this point, however, the importance that Thatcher and her closest intellectual allies such as Sir Keith Joseph and Sir Geoffrey Howe implicitly attached to Milton Friedman’s idea of a ‘natural rate of unemployment’. This insight proved to be the basis for a considerable rethink at the top of the Conservative Party about how the problem of unemployment should to be confronted. The natural rate of unemployment hypothesis was outlined in Chapter 1, so only a brief restatement is given here. Friedman argued that there was a natural rate of unemployment in any given economy and that if unemployment fell below this level then the result would not merely be a higher rate of inflation but an ever increasing one (Friedman, 1968). This meant that any government which sought to bring unemployment below its natural rate would see inflation rising until unemployment was allowed to return to its natural rate. With stagflation around the globe an established phenomenon by the mid-1970s and existing macroeconomic theory struggling to explain the occurrence, Friedman’s argument provided a possible explanation and soon became highly influential. The significant part of the natural rate hypothesis to would-be labour market reformers was Friedman’s claim concerning just what determined the natural rate of unemployment. In this sense, the labour market was simply a market like any other, and it would clear

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naturally if undisturbed by intrusion into the workings of demand, supply, and their equalisation through the price mechanism. From this perspective, trade union power was a considerable obstacle to a properly functioning labour market, as it tended to push wage rates above their market-clearing level. As in any market, a price above the market-clearing one would lead to excess supply and, in the context of the labour market, unemployment. The natural rate hypothesis therefore rejected deficient demand as the cause of unemployment and focused instead on labour market distortions. This absolved the government of responsibility for unemployment and implicated the trade unions. It also marked a move away from the neo-Keynesian idea that the labour market was in some way unique and in favour of the idea that it was a market like any other. Regardless of the debates over its empirical foundation, the Friedman natural rate argument was a convenient one for a Conservative Party which intended to pursue monetarist policies and abandon the government guarantee of full employment if returned to office. If the government could not bring about full employment, then promising it made no sense. The Friedman argument concerning the damaging role of trade unions was also supported by the works of classical liberals such as Friedrich Hayek (1960: 267–84). These free-market based ideas on unemployment, though largely accepted by many of the Conservative Party’s economic policy makers during 1975–79, were not the only factor behind the movement towards policies designed to limit the power of the trade unions. The growing industrial relations problems of the 1970s meant that the trade union question remained at the top of the political agenda and would have done regardless of the ideas of Friedman and others. The voluntarist system which had prevailed up until the 1960s had long since been abandoned by both parties, and attempts to empower trade union leaders to discipline their members had not succeeded when tried under Heath. The collapse of the Labour government’s Social Contract during the Winter of Discontent in 1978–79 suggested that it would be difficult for either party to operate a system of coerced collectivism in which government and trade unions cooperated on economic policy and worked together to ensure wage restraint. With the increasing influence of economic liberalism in the Conservative Party allied to the discrediting of other ideas that could provide an alternative industrial relations reform agenda, it is

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unsurprising that the Tories gravitated towards industrial relations reform policies that were economically liberal in their inspiration. The main dividing line over industrial relations reform between the hawks (led by Thatcher, Howe, and Joseph) and the doves (led by Jim Prior) was not so much the direction of policy but its extent and its speed. All were convinced that the powers of the trade unions needed to be curtailed to a greater or lesser degree, if not for reasons of market purity then at least because it might return some normality to industrial relations and reassert the right of British governments to govern. The battle between the hawks and doves over industrial relations reform was fought throughout 1975–79 and then into government. The hawks were mainly those who believed in the Hayekian principles of the free market, which had been outlined by Joseph during his series of speeches in 1974. Within this intellectual framework, the unions were little more than market distortions which should be treated exactly like other impediments to the free operation of demand and supply. Within the shadow cabinet the most important individuals with these views were Joseph himself and the shadow chancellor, Sir Geoffrey Howe. Margaret Thatcher was of much the same outlook, but had to moderate her tone publicly, given the assumption made by many after the experiences of 1970–74 that the Tories would need the cooperation of the trade unions in order to govern effectively (Campbell, 2000: 390–2). The hawks in the shadow cabinet were reinforced by a number of backbenchers, most notably Norman Tebbit, who took a particularly uncompromising position in opposing trade union power. Beyond the Conservative Parliamentary Party, there were organisations that not only advocated a tough stance on trade union power but also became actively involved in industrial relations. These included the National Association for Freedom (NAFF), which provided logistical support to the management of the Grunwick Film Processing Laboratories during the long-running Grunwick dispute of 1976–78 (Cockett, 1994: 221–3). The doves were primarily made up of those who did not buy into the new free market agenda. They were led by Jim Prior, who was made front bench spokesman on Employment by Thatcher, but remained a close ally of Edward Heath’s. This appointment was a clear indication that the hawks did not possess an overwhelmingly strong position.

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Prior was supported by a number of like-minded Tories, including Sir Ian Gilmour. Gilmour’s own criticisms of the trade unions put forward at the time indicate the extent to which there was considerable overlap between hawks and doves over how to confront the union problem (Gilmour, 1978: 236–8). It is also notable that the policies pursued by the Thatcher governments towards the trade unions were one of the few areas about which Gilmour wrote positively in his later critique of the Thatcher ministry (Gilmour, 1992: 93–102). This again demonstrates that the main differences between the hawks and the doves on industrial relations reform related to the speed and eventual destination of travel rather than its direction. For most of the period, Prior was able to prevail over his more hawkish opponents. In an important speech made in Manchester in February 1976 on the policies a prospective Conservative government would pursue towards the trade unions, Margaret Thatcher declared that the Tories would not engage in sweeping changes along the lines of the 1971 Industrial Relations Act and would instead focus on constructive, gradualist reform (CRD, 1979a). Prior (1986: 154–6) was in full agreement with such an approach, and it remained the stated policy of the Conservatives right up to the 1979 general election. There were nevertheless a number of skirmishes between Prior and those who advocated a more robust approach on the trade union issue. As Prior (1986: 154–5) notes in his memoirs, interparty conflict over the issue of the closed shop came to a head in 1977 at the height of the Grunwick dispute with a number of prominent Conservative politicians including Norman Tebbit urging him to take a tougher line. A further threat to the Prior position was the entry into the debate of John Hoskyns and Norman Strauss. Both had had successful careers in industry and had hitherto not been associated with the Conservative Party. During 1975–79, they had gravitated towards the Centre for Policy Studies (CPS) and towards those members of the shadow cabinet who supported the free-market agenda, most notably Sir Keith Joseph, Sir Geoffrey Howe, and Margaret Thatcher herself. Both Hoskyns and Strauss shared the view of the hawks that a much tougher approach should be taken towards the trade unions. Their thoughts on the issue were expressed in Stepping Stones, a document which they prepared for the shadow cabinet in 1977. Stepping Stones argued that comprehensive trade union reform was a prerequisite of turning around the British economy and could not

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be long delayed once the Conservatives took office. The central argument of the document was that an incoming Conservative government should forget about the next general election and instead focus on carrying out difficult but vital reforms as quickly as possible (CRD, 1981). The implication of this was that the consensual approach to union reform advocated by Prior was inadequate. Stepping Stones was too radical for the overwhelming majority of the shadow cabinet, and industrial relations policy remained the preserve of Prior. When Sir Geoffrey Howe made a speech in January 1978 calling for a tougher approach to the unions, he was quickly slapped down by his leader and told to leave the issue to Prior (Campbell, 2000: 395). But the behaviour of the trade unions during the Winter of Discontent in 1978–79 meant that those who favoured a tougher approach towards the trade unions were able to ensure a hardening up of the party’s trade union reform proposals in the 1979 manifesto (Dale, 2000a: 268–70). There is strong evidence that the Tories were highly sensitive to public opinion with regard to how far they could go on trade union reform, and the Conservative Research Department (CRD) kept meticulous records on public attitudes to the trade unions during the period (CRD, 1979b). It should be noted that planning by Conservative Party policy makers for industrial relations reform during 1974–79 differed considerably from the detailed process that took place during the 1964–70 period. First, there was very little formal planning of policy towards the trade unions. This was in stark contrast to what had come before in 1964–70. Second, and crucially, the process of policy making had been reversed. As noted earlier, in 1965 the Amory policy committee had decided from an early stage that practical issues should be addressed, with principles emerging as a by-product. After 1974 the opposite was true, and the overarching principle of limiting trade union powers emerged without specific proposals being fully developed until after the Conservatives had taken office in 1979. The reasons for this were simple. Both voluntary collectivism and compulsory collectivism had been discredited during the 1960s and 1970s, and this meant that reform along liberal lines was the only realistic option. The liberal tradition implied restricting trade union power, and all wings of the Conservative Party could unite around this principle. For those who accepted Friedmanite ideas on the natural

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rate of unemployment, a reduction in trade union power would be necessary in order to bring down unemployment in the long term. For those of a neo-Keynesian disposition, a reduction in trade union power would at least contribute to the containment of inflationary wage settlements. If both hawks and doves could unite on the direction of trade union reform and the tactics required in order for it to be accomplished, disagreement nevertheless remained over the speed at which it should be pursued. There was a significant difference of opinion over how far and how fast trade union reforms should be put into effect once the Tories returned to office. With industrial relations remaining the defining issue in labour market policy making, it was this dispute over how fast to move with trade union reform that was to dominate debate over the labour market during the first three years of the Thatcher government.

Thatcher in government: taming the trade unions The Conservative Party took office in 1979, having promised to reduce trade union power, and contemporary research suggests that such policies were popular even among Labour voters (Crewe, Särlvik, and Alt, 1977). Proposals to counteract the most flagrant abuses of trade union power, notably secondary picketing, had been detailed in the Conservative Party’s 1979 manifesto (Dale, 2000a: 269–70). There remained, however, a widespread view that the trade unions were to be treated with caution, and Jim Prior was appointed Employment Secretary for this reason. Margaret Thatcher (1993: 28) admits as much in her memoirs. The split between the hawks and the doves on industrial relations reform continued much as it had in Opposition. Prior remained the leading dove, and his emollient approach was reinforced by the conciliatory tendencies of the Department for Employment. Within the Cabinet, the leading hawks were Howe and Joseph. The decision by Margaret Thatcher to appoint John Hoskyns head of the Number 10 Policy Unit gave the hawks a strong voice in Downing Street. Hoskyns remained in close contact with the CPS and its trade union expert, Sir Leonard Neal, as well as the fervently anti-trade union Alfred Sherman (Cockett, 1994: 297–301). He also invited his Stepping Stones collaborator Norman Strauss to join the Policy Unit.

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The first batch of industrial relations reform proposals under the Thatcher government came with the introduction of an Employment Bill in December 1979. The Ministerial Committee on Economic Strategy (MCES) first discussed the proposals in a 19 June 1979 meeting. Prior emphasised that in 1971 the Tories had overreached themselves with the Industrial Relations Act, and that the government should this time take a step-by-step approach and ensure that the unions could not complain about the lack of consultation (CAB, 1979b). The learning of lessons from the unsuccessful legislative upheaval of the 1971 Industrial Relations Act was apparent here, and Prior’s proposals were to be in keeping with the gradualist approach which was agreed in Opposition. According to Prior (1986: 160) the new legislation had four main elements. First, government money was to be made available for union elections, strike calls, and the amendment of union rules when these were to be conducted by secret ballot. Second, picketing was to be limited to one’s own place of work. Third, compensation rights were to be provided for those dismissed for refusing to join a trade union, alongside a requirement that closed shops be legitimised by a ballot in which at least 80 per cent of employees voted in favour. Finally, various coercive recruitment tactics were to be outlawed. The main provisions of the Employment Bill were therefore impeccably liberal. The outlawing of picketing outside of a person’s place of work constituted an initial attack on the legal immunities enjoyed by the unions, and there was a direct attack on the closed shop with the introduction of a mandatory ballot and promises of compensation for workers dismissed for not belonging to the appropriate union. The decision to outlaw coercive recruitment tactics was also introduced in order to protect the rights of the individual, with these provisions informed to a considerable extent by the activities of the print union Society of Lithographic Artists, Designers, Engravers and Process Workers (SLADE) prior to 1979 (Prior, 1980: 160). The Conservatives had kept up to date with the conduct of SLADE from 1977 and had been in regular contact with those adversely affected by its activities (CRD, 1979c). Despite Prior’s Employment Bill strongly representing the economically liberal tradition that many of the hawks adhered to, there was disquiet about the new legislation in some circles. This concerned not so much its ideas and general approach but whether it went anything

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like far enough. In the autumn of 1979, Sir Geoffrey Howe, much to Prior’s annoyance, delivered a speech which strongly attacked the unions (Prior, 1986: 160). In addition to the ubiquitous Howe and Joseph, John Hoskyns and the Number 10 Policy Unit were also pressing for a much tougher approach and were already concerned that the government was failing to get a grip on the situation (Hoskyns, 2000: 130). It was in this context that the steel dispute of 1980 turned out to be a further headache for Prior. The activities of the strikers gave a boost to those demanding further legislative attacks on the trade unions, and there were also various moves made behind the scenes by those wishing to take a tougher line on the trade unions. Alfred Sherman remained ensconced at the CPS and sent a memo to Hoskyns insisting that the Steel Dispute was nothing short of an insurrection (CRD, 1980). Hoskyns himself continued to advise both the Prime Minister and the Chancellor that not only should the proverbial trade union bull be taken by the horns, but also that there was widespread public support for such an approach (CRD, 1980). Prior was nevertheless able to resist those who wished to see a tougher Employment Bill, and his legislation became the 1980 Employment Act during the summer of that year, much as it had originally been drafted. His position remained precarious, however, with many in the Conservative Party anxious to be more aggressive on the trade union reform front. In September 1981, Margaret Thatcher engaged in a significant reshuffle of the Cabinet to shore up her own position; this included removing Prior from the Department of Employment. The reshuffle was chiefly the result of opposition in the Cabinet to the government’s macroeconomic policies and will therefore be covered more extensively in Chapter 4. But Thatcher’s decision to replace Prior with the long-standing hawk Norman Tebbit was hugely significant. Even before Tebbit’s appointment, there was movement on the key issue of trade union immunities. Prior had turned his attention to it following the passing of the 1980 Employment Act (Prior, 1986: 169–70). He had published a green paper which had covered the issue, and Tebbit (1988: 185) acknowledges that this provided a sound basis for his own policy proposals. Tebbit’s priorities were to further undermine the closed shop, to tighten the definition of the term ‘trade dispute’, and to restrict the immunities enjoyed by the

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trade unions against damages claims for unlawful acts (Tebbit, 1988: 185). All three of these aims were compatible with the liberal tradition of industrial relations. Not long after becoming Employment Secretary, Tebbit produced a paper, dated 21 October 1981 (CAB, 1981b), proposing significant reform. He stated that: The response from industry to the Green Paper on Trade Union Immunities has shown that there is wide support for legislation to redress the balance of bargaining power. I am confident that there is wide support in the country for further legislation to tackle the more evident trade union abuses and to begin to tackle the uniquely privileged position of trade unions under the law. The unions themselves are currently demoralised and will have difficulty in mounting an effective campaign of sustained opposition. (CAB, 1981b) Tebbit also noted that the step-by-step approach was the correct one, and that the government would have to avoid provisions which the unions could render ineffective through their opposition or which employers would be reluctant to utilise. All changes should instead be designed to work in practice and should be easy to explain and defend on grounds of principle (CAB, 1981b). The lessons of the 1971 Industrial Relations Act had clearly been learnt. In terms of undermining the closed shop, a number of measures were proposed, including an increase in the amount of compensation due to workers unfairly dismissed due to a closed shop, a right of action for dismissed workers against the union rather than against the employer alone, an extension of interim relief payments to dismissed workers, and periodic reviews of any closed shop arrangement by secret ballot. So-called ‘union labour only’ requirements in contracts would also be outlawed, and the definition of the term ‘trade dispute’ was to be narrowed so that a trade dispute would not exist unless an employer was in dispute either with his own employees or with former employees dismissed in the course of the dispute (CAB, 1981b). This constituted a further undermining of secondary picketing. But the most crucial aspect of the document concerned the immunity of trade union funds from actions in tort, and Tebbit readily conceded that his proposed changes on this were the most contentious

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of all his proposals (CAB, 1981b). Under existing law the unions could not be sued for industrial action, even when the action was not taken in contemplation or furtherance of a trade dispute or for unlawful acts carried out by either the union or on its behalf by its officials. Tebbit intended to end this and make unions liable for illegal acts in the same way as individuals were, although he also proposed a limit on damages to avoid the possibility of unions being bankrupted by a single case. He closed by stating that although he appreciated the industrial and political risks involved in taking this step, it was clearly sound in principle, urgently required, and the potential benefits were evident (CAB, 1981b). Tebbit’s proposals were discussed in a large meeting of the MCES on 29 October 1981. Those present included Thatcher, Tebbit, Howe, Joseph, Prior, William Whitelaw, John Nott, Peter Walker, Michael Heseltine, Patrick Jenkin, John Biffen, David Howell, Leon Brittan, Lady Young, Nigel Lawson, Cecil Parkinson, Francis Pym, George Younger, Humphrey Atkins, Norman Fowler, Nigel Havers, Lord Mackay, Michael Jopling, Michael Roberts, Robin Ibbs and Lord Hailsham (Quintin Hogg). The seniority of the attendees as well as their number was an indication of the importance of the proposals (CAB, 1981a). On the key point of union immunities, Hailsham was, as Lord Chancellor, the main stumbling block. He had already submitted a response paper to Tebbit’s proposals and stated in the meeting that if trade union immunities were removed, then defending any limitation on the amount of damages which could be awarded against them would be difficult from a legal perspective (CAB, 1981a). The committee approved Tebbit’s proposals on the closed-shop, ‘union labour only’ contract requirements, tightening the definition of a trade dispute and secret ballots. Tebbit was unable to get approval for his key proposal on immunities, however, and was asked to consider them again in consultation with Hailsham and the law officers (CAB, 1981a). Tebbit proved tenacious and produced a further paper, dated 6 November 1981, covering the issue of trade union immunities in light of the earlier MCES meeting. He had not consulted with Hailsham or the law officers, but his officials had consulted with their officials. He restated his commitment to the original proposals for removing trade union immunities and insisted that the principle was sound and that

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there was unlikely to be a better opportunity to follow through on it (CAB, 1981b). Following the submission of Tebbit’s paper, the MCES met on 10 November and Tebbit’s proposals were given final approval (CAB, 1981a). They would reach the statute book the following year as the 1982 Employment Act. The practical measures contained in the 1982 Employment Act were a hugely significant part of the government’s industrial relations reform strategy, and that is why a lot of space has been devoted to their development in this chapter. Further measures to undermine the closed shop, such as an increase in the amount of compensation due to those dismissed for not belonging to a trade union, largely built on the work that Prior had begun with the 1980 Employment Act. But the highly significant part of the Act was the removal of trade union immunities for actions in tort, meaning that for the first time since 1906, trade unions could be sued for damages (Taylor, 1993: 322). There was also the redefinition of the term ‘trade dispute’ which further restricted immunities. Tebbit’s legislation, building on the relatively tentative Employment Act of 1980, was the model for subsequent industrial relations lawmaking by the Conservative Party. Tactically it fitted in with the step-by-step approach. Tebbit (1988: 186) maintains that it merely tilted the balance of power away from the trade unions and did not require the creation of a complex new legal structure nor compel the unions to do anything. Both of these features contrasted with the 1971 Industrial Relations Act. Its two main strands were defence of the individual against the union (most obviously through the undermining of the closed shop) and the weakening of trade union bargaining power (through the abolition of various union privileges and legal immunities). These were to be features of all employment legislation passed by the Conservatives under the Thatcher and Major governments. The 1984 Trade Union Act, drawn up under Tebbit and passed by his successor Tom King, sought to make trade unions more responsive to their members by insisting on secret ballots for elections, strike decisions, and the maintenance of political funds. Additional Employment Acts in 1988 and 1990 chipped away further at trade union privileges and immunities whilst continuing to undermine the closed shop and making other provisions to protect individuals from their unions (Taylor, 1993: 322–4). The combined impact of

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this legislative activity stopped some way short of the Powellite ideal outlined in 1965, but it nevertheless represented a decisive move in that direction. Trade union reform was unquestionably the centrepiece of the Thatcher government’s labour market policy agenda, but it was also part of a larger philosophy that led to reform in other areas. Free-market ideas, as well as the theory of a natural rate of unemployment, were strongly influencing policy making by the time the Tories regained office in 1979. The logic was that the labour market should be viewed as a market like any other and would respond to reforms that let demand and supply work in a less inhibited fashion. Reducing trade union power was a vital part of this approach, but was insufficient on its own. The natural inclination of the government to reform the labour market in line with free-market principles was reinforced by the political problems posed by the very high rates of unemployment experienced after 1979. The recession of 1980–81 had led to a steep rise in the number of jobless to what would eventually be more than three million. The numbers out of work did not peak until the summer of 1986 and provided an intractable problem for the government. Under such circumstances, the unemployment problem could not be left to itself. At the height of the battles between the pro-monetarist ‘dries’ and the neo-Keynesian ‘wets’, a 15 July 1981 meeting of the MCES discussed the issue of employment. At this time Prior was still Employment Secretary and highlighted that unemployment would soon reach three million and would still be rising in 1983, even if the economy began to recover. The young, those nearing retirement, and the long-term unemployed were particularly problematic groups from this perspective, and additional funding would be required to finance schemes to deal with the problem. Despite their cost, he stated that a failure to finance such schemes would eventually end up costing more in public expenditure terms. Instead, the right course, according to Prior, was to take advantage of the productivity improvements which had been made after 1979 and go for growth (CAB, 1981a). Prior represented the full neo-Keynesian position, whilst Michael Heseltine, who was also present, took a more nuanced position by suggesting capital investment in housing, improvement of existing housing for resale, and schemes for environmental improvement.

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The monetarist position was set out by Sir Keith Joseph and Alan Walters, the latter by now having taken up his position as economic advisor to the Prime Minister. Walters insisted that, whilst some schemes for the unemployed were worthwhile, most were essentially cosmetic and the real cause of unemployment was the presence of excessively high real wages in the British economy. Joseph argued that additional public expenditure could lead, through higher taxation and public borrowing, to the loss of more jobs than the number created (CAB, 1981a). At no time was the Thatcher government to knowingly resort to demand management policies in an attempt to reduce excess unemployment. With Prior’s subsequent removal in favour of Tebbit, all ministers in the key economic portfolios believed neo-Keynesian polices to be inflationary in the long run. Macroeconomic policy was used exclusively to maintain low and stable inflation under the chancellorships of both Sir Geoffrey Howe and Nigel Lawson. A great deal of thinking therefore focused on policies designed to improve the functioning of the labour market. The initial part of this strategy had been the weakening of the trade unions, but this had largely been accomplished by the 1982 Employment Act, and the decline of union power was symbolised by the overwhelming defeat of the National Union of Mineworkers (NUM) in the 1984–85 Miners’ Strike. With unemployment still stubbornly above three million, the labour market reform agenda therefore moved into other areas. One of the key figures intellectually was Patrick Minford, then of the University of Liverpool. Minford had risen to prominence as Britain’s leading authority in the then relatively new research area of rational expectations. He had worked in the Treasury and had been a part of its academic panel, in addition to completing his doctoral thesis under the supervision of Alan Walters. He was one of the few academic economists in the United Kingdom who was to support the government’s decision to raise taxation in the 1981 budget at a time of recession, and was also one of the economists invited to the Treasury in October 1979 to discuss the ideas which eventually became the Medium Term Financial Strategy (MTFS) in the 1980 budget (see Chapter 4). In the late 1980s. he was to become one of the so-called Gooies, an advisory group of outside experts set up by Nigel Lawson whilst Chancellor (Lawson, 1992: 389–90). Minford’s

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links to leading policy makers within the Thatcher government were therefore strong. When Friedman initially postulated in the 1960s that there existed a natural rate of unemployment compatible with stable inflation in any given economy, he had not investigated its underlying determinants in any great depth (Smith, 1987: 29). By the mid-1980s, the high unemployment rates being experienced throughout most of industrialised Europe in spite of there being no obvious deficiency in demand led to the NAIRU (the non-accelerating inflation rate of unemployment, as the natural rate of unemployment had come to be known by economists) becoming influential as a potential explanation for unemployment. Research into the NAIRU and its determinants by economists such as Minford (1983) and Layard, Nickell, and Jackman (1991) proliferated from the early 1980s onwards. Minford (1983) produced the first substantial monograph on the issue of unemployment within the NAIRU framework in 1983. He concluded that the NAIRU was determined primarily by a combination of union power and the tax and benefits system. Increasing levels of benefits, direct taxation, and trade union power would tend to lead to an increase in the NAIRU. The trade union issue had largely been resolved by the mid-1980s, and the Minford analysis therefore implied that the government should focus its attention on reforming the tax and benefits system if its members intended to effectively tackle the problem of unemployment. The budgets of Howe and Lawson had already significantly raised the tax thresholds for low earners, so the Minford/NAIRU prescription would have been to drastically cut unemployment benefits. But such proposals were political dynamite, particularly at a time of high unemployment. The idea eventually pursued was a brainchild of Lord Young of Graffham’s then Chairman of the Manpower Services Commission (MSC), and would develop into the ‘Restart’ policy. Rather than cutting benefit levels, Young suggested that policy should instead focus on monitoring the behaviour of those who received benefits and cut down on eligibility. This policy would be implemented by Young once he became Employment Secretary in September 1985. Patrick Minford (2005: 55) credits Restart with much of the fall in unemployment that occurred after its introduction in 1986, although trying to disentangle its effects from the cyclical upswing then occurring is fraught with hazard.

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Other measures to deregulate and liberalise the labour market in the 1980s were driven by the economically liberal proposition that the labour market would function best if relatively undisturbed by intervention (Taylor, 1993: 321–5). It would be wrong, however, to claim that the response of the Tories to the problem of unemployment and therefore to the labour market in general was driven purely by free-market ideas. Schemes such as the Enterprise Allowance Scheme (EAS) and the Youth Training Scheme (YTS) were designed to both soften the impact of unemployment and encourage self-employment within the service sector in particular. Such policies clearly indicate the extent to which the government’s central belief that the removal of barriers to labour market flexibility would bring down unemployment in the long term was moderated by political pragmatism and an acute acceptance of the limits of labour market adjustment in the short run.

Conclusions In stark contrast to the Heath government, the Thatcher ministry was relatively successful in its attempts to implement industrial relations reform. There were several reasons for this. First, the Tories had learnt the lessons from the problems experienced with the 1971 Industrial Relations Act and had altered their tactics accordingly. As early as 1976, they had ruled out an all-in-one reform measure and instead settled on a gradualist approach which developed into the step-bystep legislative agenda seen after 1979. They also kept the necessary legislation as simple as possible, in contrast to the complicated provisions of the Industrial Relations Act, and did not bring in reforms which required the unions to play an active part, such as registration, as had been the case under the 1971 legislation. The increasing unpopularity of the unions and the very high rates of unemployment experienced after 1979 also made it easier to enact enduring industrial relations reforms than had been the case during 1970–74. There were also deeper reasons underlying why the Conservatives remained committed to pursuing industrial relations reform throughout the period covered in this chapter. Bad industrial relations had long been a major and far from discreet feature of the British economy. From the mid-1960s onwards, many Tories believed that taking a tough approach on the subject of trade union reform would

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yield electoral benefits. Additionally, many Conservative Party policy makers prior to 1975 thought that trade union militancy contributed to inflation. After 1975, most of the party’s leading policy-making figures thought trade unions were responsible for unemployment. There were therefore strong macroeconomic incentives to construct policies designed to reduce trade union power. But if reform of industrial relations was a priority under both Heath and Thatcher, it took different forms under each leader. Policy makers during 1964–74 had not sought a consistent philosophy and, as a result, the Industrial Relations Act of 1971 was an inconsistent and sometimes incompatible mix of measures designed to address industrial relations matters. Since various forms of collectivism were seen to have failed by the late 1970s, the Conservatives under Thatcher tended to pursue reforms consistent with economic liberalism. An additional reason for this was the increasing influence of free-market thinking among senior policy makers from 1975 onwards. This trend was covered in more detail in Chapter 2. It should also be noted that labour market policy making was, until the 1980s, dominated by the need to reform industrial relations. Ideas to reform the labour market as a whole were not influential to any great extent until the very high unemployment rates of the 1980s made labour market reform on a broader scale a political necessity. Although exhibiting a preference for market liberal ideas to solve such problems, policy makers under Thatcher did tolerate interventionist schemes if they helped to solve one of the government’s most intractable political and economic problems. Such an approach was continued by the Major ministry during the period 1990–97 (Dorey, 1999).

4

The Conservative Party and Its Macroeconomic Policies, 1964–97

The history of macroeconomic policy making in the Conservative Party during 1964–81 in many ways parallels the history of the party’s making of microeconomic policies during the same period. Just as libertarian conservatism began to exert more influence than paternalist conservatism in microeconomic policy as the period progressed, so monetarism became the dominant intellectual force in Conservative macroeconomic policy making at the expense of neo-Keynesianism. There are two significant differences, however. First, unlike interventionist ideas, which continued to impart some influence after 1981 in areas such as regional policy, the collapse of neo-Keynesianism in the Conservative Party was total and the idea that macroeconomic policy could not deliver a trade-off between inflation and unemployment in the long term became ingrained in the thinking of the party’s economic policy makers. This leads on to the second difference, which was that the collapse of neo-Keynesianism did not settle the form which macroeconomic policy would take, as there remained a variety of possible policy frameworks which were compatible with the idea of a long-run vertical Phillips curve as discussed in Chapter 1. The story of macroeconomic policy making under the Thatcher and Major governments was therefore one of trying various macroeconomic policy frameworks until a successful one was found. This trial-and-error process effectively ended with the introduction of inflation targeting in the autumn of 1992 and the subsequent opening up of the monetary policy-making process. For these reasons, the 1981–97 period is much more important to the story told in this 104

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chapter than has been the case in the previous two chapters. It is therefore covered in much more detail. The lack of access to official papers has meant a consequent reliance on secondary sources, although the narrative of what took place is relatively uncontroversial and the conclusions should therefore be fairly robust.

Macroeconomic thinking under Edward Heath’s leadership As we have already seen, a criticism frequently made of the Heath government is that it began with objectives and ideas that can be roughly described as proto-Thatcherite but abandoned them when the going got tough from 1971 onwards (Holmes, 1997: 147–9). In the arena of macroeconomic policy, this argument is difficult to sustain. Throughout 1964–74, the macroeconomic ideas which influenced Conservative policy making remained remarkably consistent. But changing economic circumstances after 1970 meant that implementing policies consistent with these ideas required drastic changes in policy. As was outlined in Chapter 2, between the 1964 general election and the 1965 Conservative Party leadership contest, Edward Heath was Shadow Chancellor and established considerable authority over the party’s policy-making process. By the time Heath became leader, the party’s Future Economic Policy Group (EPG) had already been meeting under his chairmanship for six months (CRD, 1966c). The EPG was at the centre of Tory economic policy making during 1964– 70, and despite Iain Macleod’s appointment as Shadow Chancellor, Heath chose to retain the chairmanship of the group. The EPG continued to meet until November 1969, and what is clear from the minutes of the meetings (CRD, 1965) and the documents circulated (CRD, 1969d) is the complete lack of penetration of the idea that ‘money matters’, let alone the idea of full-blown monetarism. To a great extent this is unsurprising. During 1965–69, those who would go on to become leading advocates of monetarism in academia, the City, and the financial press were only beginning to develop their ideas (Pepper, 1998: 3–19). The seminal postulation of a vertical long-run Phillips curve would only be made by Phelps (1968) and Friedman (1968) during the later stages of this period, and the use of monetary targets by Roy Jenkins in 1968–69 was little

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remarked upon at the time and was carried out only at the insistence of the International Monetary Fund (Smith, 1987: 34–7). The membership of the EPG was unlikely to be sympathetic towards monetarist thinking in any case. Aside from the ubiquitous Heath and Macleod, Reginald Maudling and Terence Higgins were also regular attendees. Maudling was a convinced neo-Keynesian, whilst Higgins would continue to stress the importance of cost-push inflation and the need for an incomes policy, even after the collapse of the Heath government and its counterinflationary policies in 1974 (CRD, 1974). Edward Boyle was another notable member who was highly sympathetic to neo-Keynesianism. One absence from the group is important to note. Although monetarism did not have a great following in the upper echelons of the Conservative Party during the 1960s, it did have a strong and articulate advocate in Enoch Powell. Powell had resigned over Harold Macmillan’s refusal to countenance public-spending cuts during the winter of 1957–58 and had been in contact with Lionel Robbins, an economist sceptical of Keynesian thinking, during that episode (Heffer, 1998: 212). He had also discussed monetary economics with Dennis Robertson, an earlier associate of Keynes’s who had left Cambridge after falling out with Keynes and others over the role of money in economic theory (Heffer, 1998: 212). Powell’s strained relationship with Heath, as well as his economic outlook, inevitably meant that he was excluded from the EPG (Heffer, 1998: 390). Powell was nevertheless keen to raise the economic issue whenever he could. During early 1968, the Conservative Research Department (CRD) explored the views of academic economists on the causes of inflation. Unsurprisingly, given that the economists sampled included Christopher Dow, Alban Phillips, and Richard Lipsey, the view of the CRD research paper was that cost-push factors were a major cause of inflation (CRD, 1969e). The paper found its way into Powell’s hands and in a 5 March 1968 letter to Brendon Sewill of the CRD, he objected to its analysis of inflation, insisted that money played the primary role in the inflationary process, and suggested that a seminar be organised to discuss the subject (CRD, 1969e). Given that he presumably conferred with Heath, Sewill’s reply surprisingly stated that a seminar would be organised for after Easter (CRD, 1969e). Easter of 1968 fell on the 14 April; Powell would deliver his infamous ‘Rivers of Blood’ speech just six days later. He

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was immediately sacked from the Shadow Cabinet, and the seminar on inflation never took place. It is highly doubtful that Powell would have convinced Heath and his colleagues of the virtues of monetarism in any case, but the events described nevertheless constitute a missed opportunity for monetarism to receive a hearing at the top of the Conservative Party prior to Margaret Thatcher’s leadership. The macroeconomic ideas which dominated Conservative policy making during 1964–70 were instead those of an immediate post-war vintage. Cost-push factors were believed to play an important role in inflation, the Phillips curve trade-off was deemed to be robust, and demand management through fiscal policy was seen as the tool through which the desired trade-off between inflation and unemployment could be attained. Papers from the EPG (CRD, 1969d), which reconvened in October 1966 following the March 1966 general election, indicate the continuing dominance of this neo-Keynesian outlook. The earliest EPG meetings after the election took place between November 1966 and March 1967 and were crucial in determining the macroeconomic policies pursued by the Tories throughout Heath’s time as leader. The problematic issue of incomes policy was identified as early as the first meeting, on 8 November (CRD, 1969d). A meeting of the group on 19 January 1967 considered the problem more fully, and the acceptance of the cost-push explanation for inflation was implicit in the discussion. The main dividing line within the group was between those such as Arthur Cockfield, who believed that higher growth rates would reduce cost-push pressures, and those such as Maudling, who had himself tested this idea to destruction as Chancellor during 1962–64 (CRD, 1969d). CRD staffer Brian Reading argued that productivity agreements at plant level could reduce inflationary pressures and avert the need for an incomes policy (CRD, 1969d). Given his later role in advocating monetarism within the Conservative Party, it is worth noting that Sir Keith Joseph attended this meeting, but he is not recorded as having contributed. He would later become a full member of the EPG in November 1967. Thinking had advanced sufficiently so that by June 1967, a formal document for discussion could be produced, which outlined the collective views of the EPG on economic policy. The crucial statements with regard to macroeconomic policy were that a Conservative

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government would maintain the pressures of demand at as constant a level as possible and thereby break the ‘stop-go cycle’ and that there should be a broadly based policy which could be termed a policy for prices and incomes (CRD, 1969d). In its essentials, this was a neo-Keynesian framework for macroeconomic policy. With the outlines of macroeconomic policy largely set, the EPG moved on to other issues including taxation, industrial relations, and regional policy. But documents circulated within the EPG after 1967 provide updates on the macroeconomic thinking of the group and indicate the continuing dominance of neo-Keynesianism. One such document was written by Brian Reading not long before the EPG was disbanded in June 1969 and was circulated to all members. It summarised the main parts of macroeconomic strategy under a prospective Tory government as follows: demand management to moderate between inflation and unemployment; that fiscal policy, and primarily expenditure rather than taxation, should be used to moderate demand (particularly when slowing the economy); that although a statutory prices and incomes policy should be ruled out, some arm-twisting techniques should nevertheless be used (CRD, 1969d). Intriguingly, the document also states that monetary policy could be more important than had hitherto been thought. Whoever annotated the paper wrote ‘how’ in the margin, but the point never appears to have been followed up in the group’s subsequent discussions (CRD, 1969d). Reading’s paper, which also covered other areas of economic policy, was discussed at a meeting of the EPG on 12 June 1969. Despite discussion of a number of the issues covered by the paper, the macroeconomic strategy outlined by Reading went unremarked upon, presumably signifying the EPG’s endorsement of it (CRD, 1969d). An even more revealing document was sent by Maudling to Heath that same month. It tackled the issue of inflation, which was referred to throughout by Maudling as ‘the cost of living’. Maudling is unremittingly neo-Keynesian in his outlook. The paper briefly debates the various explanations for inflation, including cost-push and demand-pull factors and briefly mentions the money supply, although his consideration of the latter is brief and superfluous to his overall analysis. The central argument of the document is that successful demand management would hopefully lead to both low

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unemployment and low inflation, but that if this did not materialise a prices and incomes policy would become necessary (CRD, 1969e). It was a remarkably prescient document, which largely predicted the events of 1970–74. At this point it is worth considering the political and economic problems which made the prices and incomes policy issue so troublesome for the Conservative leadership. As highlighted in Chapter 2, support for economic freedom was prevalent in the middle and lower ranks of the Conservative Party throughout the post-war period. The prospect of a statutory prices and incomes policy was anathema to this section of the party’s support base. But as Maudling’s paper noted, although demand management could be used in an attempt to find an acceptable trade-off between inflation and unemployment, there was no guarantee that such a compromise existed. If it did not, then the only additional instrument available from the neo-Keynesian perspective was a prices and incomes policy. Expansionary demand management could then be focused exclusively on reducing unemployment, whilst a prices and incomes policy could be used to control inflation. Given that voluntary prices and incomes policies were usually toothless, statutory arrangements would probably be required. The prospect of a prices and incomes policy would remain the elephant in the room in the EPG. A paper authored by Brendon Sewill in February 1967 noted the economic and political problems. In the paper, Sewill wrestled with the problem of how to find some sort of compromise between the preferable but incredible option of a voluntary prices and incomes policy and the feasible but politically unpalatable option of a statutory one. Tony Newton’s reply to Sewill’s paper effectively summarised the political problem, which was that the party was split on the issue of incomes policy, was known to be split, and was likely to remain split. Newton’s limp suggestion was to try and take the political edge off of the issue by renaming any prospective prices and incomes policy a ‘productivity policy’ (CRD, 1967d). Given the intellectual ascendency of neo-Keynesianism and the economic and political problems outlined above, Heath and Macleod had only two realistic options on declared macroeconomic policy going into the 1970 general election. They could say that they hoped to manage demand in such a way as to find a suitable compromise between inflation and unemployment, but admit that if this proved

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impossible a prices and incomes policy would be required. This would have angered many in the party and would have been politically embarrassing, since the Tories had made political capital from the Wilson government’s own controls on prices and incomes during 1964–70. Alternatively, they could vow that there would be no prices and incomes policy and hope that a suitable compromise between inflation and unemployment would be found through demand management alone. Heath and Macleod went for this second option (Campbell, 1993: 272). When asked directly in June 1970 how his government planned to combat inflation, Heath argued that tax cuts and the government taking a firm grip on public sector prices would be sufficient (CRD, 1970e). During 1970 and 1971, the incoming Heath government largely held to its plan to manage demand in a stable manner in order to find an acceptable balance between inflation and unemployment. But the 1971 slowdown in economic activity and rise in unemployment that did not result in a corresponding fall in inflation proved crucial. The origins of the so-called U-turn in microeconomic policy by the Heath government were covered in Chapter 2. Our present chapter now considers the macroeconomic dimension to this change in policy. Once again the story begins with the meeting of the Ministerial Committee on Economic Strategy (MCES) on 5 May 1971, during which Tony Barber informed the committee’s members that unemployment could reach one million before the end of 1971. Although the Chancellor himself was sceptical of using fiscal or monetary policy to increase demand, he was open to the option of accelerating spending on infrastructure. Others at the meeting were concerned at the prospect of unemployment and deemed a figure of one million out of work to be publicly unacceptable. Under such circumstances, it was thought appropriate that measures to stimulate faster growth be considered, such as further relaxation of the restrictions on credit. Despite this there was, at least at this stage, a view within the committee that stimulatory macroeconomic policies would be seen as a weakening of the government’s stance on inflation (CAB, 1971b). By 5 July, the unemployment problem was such that the government was already intending to implement an infrastructure works programme at the cost of £100 million; on 22 November the

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distinctly nonmonetarist proposal of the government, committing itself to a target rate of growth or unemployment reduction, was put forward (CAB, 1971b). As was covered in Chapter 2, Sir William Armstrong’s proposals for state-led industrial reorganisation were put forward and adopted in early 1972, in the form of the Industry Act, and this also acted as a catalyst for expansionary macroeconomic polices. In a 19 January 1972 meeting of the MCES, Heath explicitly linked Armstrong’s proposals to a deliberate stimulation of the economy by declaring that, in addition to the proposed modernisation of Britain’s economic infrastructure, there would need to be an increase in economic activity and a reduction in unemployment in 1972 (CAB, 1972a). In the lead-up to the 1972 budget, the focus of macroeconomic policy continued to shift towards expansionary demand management. In a 2 March 1972 meeting of the MCES, the government’s chief economic advisor, Donald MacDougall, presented the Treasury’s latest economic forecasts. He insisted that the government’s Committee of Economic Advisers considered the high levels of unemployment and of spare capacity in the economy to constitute a large-scale waste of resources and said that both should be reduced as quickly as possible. A very substantial boost to demand was therefore required. In summing up the meeting, the Prime Minister declared that the MCES accepted the general case for reflationary action to reduce the forecast level of unemployment, and said that the Chancellor would take the views expressed in the meeting into account when formulating his budget. The dangers of inflation were not mentioned (CAB, 1972a). Barber’s reflationary budget of 1972 included substantial tax cuts; this was followed up by large public-spending increases in the autumn (Dell, 1996: 386–9). Fiscal expansion coincided with two key developments. First, the Bretton Woods system of fixed exchange rates broke down in August 1971 when President Nixon suspended the convertibility of the US dollar to gold. Despite a spell in the European ‘currency snake’ during the spring of 1972, which proved to be as embarrassing as it was brief, sterling would be free to float for the remainder of Heath’s time as Prime Minister. Second, as highlighted in Chapter 2, in 1971, Competition and Credit Control (CCC) came into operation and created a free market in credit. Under CCC, short-term interest rates were the main policy tool for restraining credit growth, but the Conservative leadership proved

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reluctant to increase interest rates and credit surged. Consequently, the stock of money in the economy (measured by the broad monetary aggregate, M3) increased by approximately 44 per cent between the first quarter of 1971 and the first quarter of 1973 (Cairncross, 1996: 125). Under the Bretton Woods arrangements, such fiscal and monetary laxity would have seen sterling hit its lower target band against the US dollar, and policy would have had to have been reversed. With sterling free to float, expansionary policies could be continued for a much more prolonged period. With demand management now assigned the task of generating growth and employment, the government needed an anti-inflationary policy. The importance of money in the inflationary process had never featured in the economic thinking of the party’s most senior policy makers during Heath’s leadership, and this state of affairs was not about to change. Wage increases were thought to be the underlying cause of inflation; as early as 12 May 1971, MCES members were moving towards a neo-Keynesian policy of comprehensive prices and incomes controls. In discussing the difficulties of restraining pay increases in the private sector, particularly if monetary and fiscal policy were relaxed, the Committee stated how it would then become appropriate to consider a policy which recognised and applied some form of norm for incomes but nevertheless allowed for exceptions where justified (CAB, 1971b). On 21 July, the Chancellor put forward a potential scheme for penalising employers who awarded wage increases thought to be excessive; although the MCES rejected the proposal, they did so only because of the practical difficulties, rather than because of the principle of businesses being at liberty to set their own rates of pay (CAB, 1971b). Perhaps reflecting the influence of the Treasury’s neo-Keynesian predilections, Barber was a strong advocate of proposals to limit price and wage increases; his 1 April 1971 memo for the MCES suggested measures such as government leaning on private sector firms to keep prices down (CAB, 1971c). Despite the overwhelming dominance in government of neo-Keynesian ideas, the Prime Minister was constrained politically by his pre-election manifesto commitment not to introduce a statutory prices and incomes policy. In light of this, Heath attempted to come to an arrangement with the Confederation of British Industry (CBI) and Trades Union Congress (TUC) over the fixing of prices and wages which would bypass the need for legislation. When this

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approach failed in November 1972, he had no option but to face the truth of the 1969 Maudling paper, mentioned earlier; a statutory prices and incomes policy was introduced (Dell, 1996: 392–3). The result was an unprecedented peacetime extension of government intervention into the British economy’s basic price mechanisms. A Ministerial Committee on Counter-Inflationary Measures had to be set up under Barber’s chairmanship to cover the numerous issues that arose from the government’s attempts to fix prices and wages. An early meeting on 14 November 1972 agreed that the Minister of Agriculture should bring maximum pressure to bear on firms to hold down food prices (CAB, 1972b). In 1973, the Committee discussed everything from the pay implications of National Health Service (NHS) reorganisation and museum charges to fire service pay and bread prices (CAB, 1973). Whilst many of these topics would have been legitimate concerns for any government, it was extraordinary that they should all have been discussed as part of counterinflationary policy making. Debates as to the likelihood of success for the government’s policies now raged between economists. The well-respected National Institute of Economic and Social Research (NIESR) enthusiastically cheered on the government’s approach, as did many economists and Treasury officials with neo-Keynesian views (Dell, 1996: 394–9). By contrast, a small number of monetarist economists, most notably Alan Walters and David Laidler, warned that such policies, and in particular the rapid expansion of the money supply, would lead only to massive inflation in 1974–75 (Smith, 1987: 48). In 1973, the government was forced to abandon its expansionary policies by a combination of inflation, the Organization of the Petroleum Exporting Countries (OPEC) oil price rise, and the Miners’ Strike. Public expenditure cuts were announced and, in the autumn of that year, quantitative controls on credit were effectively reintroduced through the Supplementary Special Deposit Scheme (‘the Corset’), as was detailed in Chapter 2. By this time, events rather than ideas were driving policy making and the reversal of policies owed more to necessity than to an intellectual rethink. But the Tories were soon to have time on their hands to reconsider their economic outlook, as Heath’s gamble of a February election in 1974 to face down the National Union of Mineworkers (NUM) failed and led to a minority Labour government, led once again by Harold Wilson.

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Macroeconomic thinking, 1974–79 The economic experiences of Britain during the mid-1970s shifted the focus of political economy in the country towards solving the twin problems of inflation and militant trade unionism. Neo-Keynesians tended to claim that the inflationary episode of the mid-1970s was a result of cost-push inflation brought about by a wage-price spiral and severely aggravated by the OPEC oil price increase of October 1973 (Cairncross, 1992: 182–225). The problems of inflation and trade union militancy were therefore inextricably linked. Hence, a workable solution would require some combination of trade union legislation and a prices and incomes policy; most neo-Keynesians favoured the latter. Fiscal and monetary policy could then be preserved as tools for discretionary demand management. By contrast, monetarists thought the two problems separate. Inflation, at least in the long run, was a purely monetary phenomenon, which could be controlled only through low and stable growth in the quantity of money (Pepper and Wood, 1976). Although most monetarists accepted that excessive wage rises could cause short-term inflation, the long-run impact would be higher unemployment, as workers were priced out of jobs (Pepper and Wood, 1976: 47–8). Although trade union militancy was an increasingly damaging phenomenon, it was higher unemployment rather than higher inflation which resulted. Some combination of prices and incomes policy and a weakening of trade union power would therefore be required, with most monetarists naturally preferring the latter. The Conservative Party was split on the issue, but the experiences of the Heath government unquestionably strengthened monetarist arguments in the eyes of many party members. If neo-Keynesian ideas were correct, then only trade union legislation or a prices and incomes policy would bring down inflation. Both had failed during 1970–74, and widespread Conservative distaste for prices and incomes policies on both free market and moral grounds was now strengthened by the fact that such an approach did not seem to work either. Within the Conservative Party, the three most senior politicians attracted to monetarism were Sir Keith Joseph, Margaret Thatcher, and Sir Geoffrey Howe.

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As we saw in Chapter 2, despite the loss of the February 1974 general election, Edward Heath retained the leadership of the Conservative Party and chose to install Robert Carr as his Shadow Chancellor. In June 1974, Terence Higgins sent a private paper to Heath on counterinflationary policy. The letter illustrated that the Tory leadership had no fixed ideas on how to deal with inflation, and Higgins claimed that the experiences of 1970–74 would at least allow the party to formulate the questions that needed to be answered on the issue. Higgins went on to argue that 1970–74 had disproven the idea that cost-push inflation could not persist, and said that a prices and incomes policy was therefore a necessity. Higgins thereafter considered previous prices and incomes policies and made tentative recommendations, including tighter government control over the nationalised industries (CRD, 1974). The Higgins paper persuaded Heath to hold a meeting on counterinflationary policy on 17 June 1974. Heath chaired the meeting, with Higgins, William Whitelaw, Robert Carr, Lord Carrington, Peter Walker, Sir Geoffrey Howe, Maurice Macmillan, Tom Boardman, John Peyton, and David Howell also in attendance. Heath introduced the Higgins paper and argued that only higher unemployment or a prices and incomes policy could reduce inflation (CRD, 1974). That Heath did not differentiate between a permanently higher rate of unemployment and a temporary one indicates that he was still thinking in terms of the original Phillips curve and could, like Higgins, be regarded as neo-Keynesian in his outlook. Most of the group must also have been of a similar opinion, as subsequent discussion focused on how a wage-price spiral had led to inflation during 1970–74. The one exception was Howe, who argued that the loss of control over the money supply was a factor. This point does not seem to have been taken on board, as a subsequent note from the CRD dated 26 June and a second paper by Higgins focused exclusively on how to avoid a wage-price spiral. A reply to the second Higgins paper by David Howell did consider the money supply, but was largely noncommittal. Howell stated that although many of the money-supply arguments were dubious, the Tories had nevertheless become associated with printing too much money, and this impression needed to be corrected. A further paper by the CRD dated 2 July came down on the side of a prices and incomes policy and continued

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to regard a monetarist approach to tackling inflation as likely to lead to higher unemployment in both the short and the long run, an argument consistent with the original Phillips curve trade-off proposition (CRD, 1974). A second meeting was held on 4 July 1974, with Barber now in attendance and Jim Prior added to the group. The only individual present at the first meeting but not at the second was Sir Geoffrey Howe. Given that Howe was typically a fastidious attendee of such meetings and offered no apologies for his absence, it is likely, though impossible to prove, that he was excluded from the group for his heretic remarks about the money supply during the first meeting. Minutes of the meeting record that Carr rejected monetary and fiscal deflation as the only means of tackling inflation, and this view was generally accepted by others present. The meeting then continued to discuss both the inflationary problem in general and the idea of a wage-price spiral in particular within a neo-Keynesian intellectual framework (CRD, 1974). Between the two elections of 1974, Sir Keith Joseph and Margaret Thatcher were less involved than Howe in economic policy making (Cockett, 1994: 235–6). Joseph spent the period immediately after the February election defeat reconsidering his economic outlook and, besides readopting a rigorous free-market outlook, he was also converted to monetarism, principally by Alan Walters; Thatcher herself was similarly converted in turn (Campbell, 2000: 262–3). Joseph, Thatcher, and Alfred Sherman (the latter having been deeply involved in Joseph’s intellectual conversion) then went about setting up a new policy-making body so as to develop their ideas. As we saw in Chapter 2, the Centre for Policy Studies (CPS) was established in May of 1974 with Heath’s blessing. With Sherman ensconced as Director, the CPS supported Joseph in his series of speeches during the summer and early autumn of 1974, which outlined his new economic philosophy. The decisive speech from the macroeconomic perspective was that made by Joseph in Preston on 3 September 1974. Joseph became the first leading politician since Enoch Powell to put the full case for monetarism, including the argument that unemployment would increase only in the short run should monetarist policies be adopted (Denham and Garnett, 2001: 256–60). The speech was given extensive coverage in the Times (Denham and Garnett, 2001:

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257), which under the editorship of William Rees-Mogg had become strongly pro-monetarist. Despite Joseph’s intervention, the Tories went into the October 1974 general election with a largely neo-Keynesian counterinflationary prospectus (Dale, 2000a: 233–6). A narrow defeat to Harold Wilson’s Labour Party ensured that Heath’s position as party leader had become untenable, yet he refused to resign. Meanwhile, Joseph effectively ruled himself out of the contest, following his controversial Edgbaston speech. Edward du Cann, a long-standing enemy of Heath’s, briefly looked the individual most likely to challenge the incumbent. But when he too withdrew, Thatcher put herself forward as the main challenger to Heath’s position and duly won the ensuing leadership contest, as we saw in Chapter 2. This was a hugely significant moment in the development of macroeconomic thinking within the Conservative Party. The removal of Heath was clearly a necessary condition for the rise of monetarism at the very top of the party as Heath was, and would remain, completely opposed to monetarist ideas (Campbell, 1993: 679–811). The exclusion of Howe from the counterinflation discussions during 1974, most likely on account of Howe’s views on the importance of the money supply in determining inflation, indicates just how strongly Heath would have continued to resist such ideas; Ranelagh (1991: 127) has highlighted his unwillingness to countenance monetarism at Shadow Cabinet level. Whether the fall of Heath was a sufficient condition for monetarism to emerge is more open to question. Keegan (1984: 33–65) argues that monetarist ideas only flourished within the Conservative Party because a small band of monetarists were able to gain control of the party and ensure their adoption. The implication is that Thatcher’s coup was a necessary condition for the adoption of monetarism by the Tories. This is too strong a conclusion. Heath had long jealously guarded policy making and, had he remained leader, would have been able to continue frustrating the still relatively small group at the top of the party who passionately believed in monetarism. But it is difficult to believe that a likely alternative leader, such as the more conciliatory William Whitelaw, would have been able to avoid at least accommodating the monetarist views of those such as Thatcher, Joseph, and Howe. What we can certainly conclude is that under Thatcher’s leadership, monetarist

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ideas, like free-market ones, were always likely to receive a sympathetic hearing. To the surprise of many, Thatcher chose not to make Joseph her Shadow Chancellor and instead gave him a roving brief as policy coordinator. She instead chose Howe, who had been identified by Thatcher and Joseph as a Tory with similar economic ideas to their own (Campbell, 2000: 322). The activities of Joseph and the CPS gave monetarist ideas a clear head start as policy making under Thatcher got into its stride. Those who continued to take neo-Keynesian solutions seriously had no equivalent generator of ideas. Nevertheless, if the party was to carry a monetarist macroeconomic agenda into government, such a policy platform needed broad-based support in the party, or at the very least the absence of outright hostility. The forum for developing such support was the Economic Reconstruction Group (ERG). The ERG began meeting under Howe’s chairmanship in June 1975 (CRD, 1975). The economic advisor to the group was, crucially, Brian Griffiths, a committed monetarist then at the London School of Economics (LSE). Along with Adam Ridley, a CRD staffer who acted as Secretary to the committee, Griffiths would provide most of the group’s discussion papers. Other regular attendees included Sir Keith Joseph, Sir Ian Gilmour, David Howell, John Nott, John Biffen, Jim Prior, Sally Oppenheim, and Sir Leonard Neal. Other individuals came and went, depending on the issues being discussed. Meetings of the ERG began in June 1975 with a view to producing a paper on economic policy by the end of July, which could then be considered by the Shadow Cabinet. The general consensus prior to the first discussion was outlined in a paper written by Adam Ridley and circulated to ERG members in advance of the meeting. It stated that the following were broadly agreed on: public expenditure was too high; the absorption of private enterprise into the state sector needed to stop; price, profit, and dividend controls were harmful and needed to be relaxed and eventually abolished; and control of the credit base/money supply was a necessary but not sufficient condition for controlling inflation (CRD, 1975). The last point is the most interesting, as it indicates that whilst the Tories were now taking the role of money seriously, they had not yet ruled out that other factors might have a role in the inflationary process. Prior to the second meeting of the group, Ridley circulated a more detailed paper on inflation, which explained how the analysis of

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the unemployment/inflation trade-off had changed, and how the Friedman/Phelps idea of a natural rate of unemployment and the role of expectations was now widely regarded as important. This was a remarkable document in the sense that it demonstrated how far the Conservative Party’s thinking on economic matters had come in less than a year. What was still more remarkable was that those in attendance, including a number who would later strongly criticise monetarist policies, endorsed the arguments and agreed that controlling the money supply was a prerequisite for controlling inflation (CRD, 1975). This monetarist ascendency was secured over a series of four meetings of the ERG, held between November 1975 and January 1976. The first of these, held on 20 November, was chaired by Howe with Biffen, Gilmour, Howell, Joseph, Nott, and Prior also present. Prior argued during the meeting that wage controls could prove to be a useful tool in controlling inflation. This was a direct challenge to the monetarist position that inflation was a monetary phenomenon. Joseph countered with the view that the money supply was the principal cause of inflation, and the minutes do not record any individual arguing back against Joseph’s position (CRD, 1975). Buttressing this embrace of monetarist arguments was the rejection of demand management, referred to by the ERG throughout their deliberations as ‘fine tuning’. Fine tuning was first discussed in a meeting held on 12 December 1975, and those present took a broadly sceptical position that agreed that the public would have to be educated away from demanding great things of government policy (CRD, 1975). A second meeting on fine tuning was held on 15 January 1976 with Alan Budd, an economist from the London Business School who was sympathetic to monetarism, present to give advice on the problems associated with fine tuning. Although Budd did not come down conclusively against fine tuning, his advice certainly implied that it should be downgraded in future policy making (CRD, 1977a). An earlier meeting held on 11 December 1975 discussed a Griffiths-written paper on monetary policy which focused in particular on the explosion of the money supply under the Competition and Credit Control (CCC) regime. Griffiths noted that the Bank of England viewed the failure of CCC a consequence of the supply and demand for money being inherently unstable, but he also advanced his alternative view that CCC had failed due to interest rates being

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kept too low for political reasons. The ERG seems to have come down on the Griffiths side of the argument and discussed how political pressures to keep interest rates low could be countered. The link between the money supply and inflation was also discussed. The group concluded that although the link between money and inflation could not be conclusively proven either way, the importance of monetary policy had clearly been neglected in the past and should receive much more attention in future (CRD, 1975). The resulting paper, put to the Shadow Cabinet in July 1975, argued for a gradual reduction in the money supply to counter inflation (CRD, 1975). Following the meeting of January 1976, during which Alan Budd had warned of the dangers of fine tuning, Griffiths and Nott, both of whom could be expected to side with the monetarist position, were asked to prepare a paper on the implications of the ERG’s conclusions on monetary policy. The resulting paper, presented to the ERG in June 1976, advocated monetary guidelines, a reforming of the monetary indicators, and the insertion of ‘outsiders’ into the Bank of England and the Treasury who would understand and not obstruct the switch of emphasis from fiscal to monetary policy (CRD, 1977a). At a meeting on 20 May 1976, the pro-monetarist Griffiths was also put in charge of writing the sections on general economic management and monetary policy in the ERG report that was to be sent to the Shadow Cabinet for discussion in July of that year. During that same meeting, the group concluded that targets for the money supply could prove useful and that the methods for controlling it did exist (CRD, 1977a). This marked another major intellectual step. But this did not mean that the debate amongst Conservatives about macroeconomic policy making was in any way settled. When the ERG first met during the summer of 1975, inflation was registering at a post-war high, and discussions inevitably centred on how to carry out a successful disinflation. As outlined above, the importance of the money supply in the inflationary process was acknowledged and it was thought that a successful disinflation would therefore require reductions in the money supply. But most monetarists openly acknowledged that a reduction in the money supply would lead, at least in the short run, to stagnant growth and a rise in unemployment. In their second meeting, on 26 June 1975, the ERG recognised the political problems which this would pose. These were

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discussed further in a subsequent meeting held on 8 July that year (CRD, 1975). Two days later, Adam Ridley produced a paper entitled ‘Gradualism or Sudden Death’, which outlined two alternative strategies for carrying out a disinflation. The paper was discussed at the next meeting of the ERG, on 18 July. Gradualism was defined as the gradual reduction of the money supply over a period of years so as to bring about a progressive fall in inflation. This strategy was advocated because expectations were seen as needing time to adjust so as to avoid a sharp downturn in output and employment. The paper outlines how this approach was the favoured one of the prominent financial journalist Samuel Brittan, and of respected monetarists, including David Laidler and Michael Parkin, as well as the approach being advocated by the Tories at that time (CRD, 1975). The alternative strategy, referred to in the paper as ‘sudden death’ and ‘Sam Brittan Mark II’, is essentially the New Classical approach to a disinflation, which would become associated in the United Kingdom with Patrick Minford. The argument behind it was that since people’s expectations adjust rapidly to credible changes in economic policy, a large one-off contraction in the money supply would ensure a rapid disinflation with little loss in terms of output and employment, provided the policy was seen as credible. Given the risk involved in the ‘sudden death’ approach, both the paper and the ERG members unsurprisingly came down in favour of gradualism, as did the ERG paper submitted to the Shadow Cabinet later that month (CRD, 1975). The paper and meeting outlined above demonstrate how seriously the ERG considered the economic problem of expectations and how they could lead to higher unemployment during a disinflation if people adapted only slowly. If expectations of inflation ran above the rate of inflation, as was likely during a disinflation, then, according to monetarist theory, wages would be set at too high a level and people would be priced out of work. Following the 1976 budget, the Times financial journalist Peter Jay wrote a notable article which put forward a possible strategy for carrying out a disinflation in light of this problem (Keegan, 1989: 40–1). Not only did it advocate the setting up of an independent currency commission to ensure stable growth in the quantity of money, but it also argued that an incomes policy could coexist alongside it, so as to ensure that the

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slow adaption of expectations during a disinflation would not lead to excessive wages and consequent unemployment. Despite advocating a policy for incomes, Jay saw it as a tool against unemployment in contrast to the neo-Keynesian tendency to view it as a counterinflationary measure. Whether Jay’s article was the source of this development is impossible to ascertain, but the ERG soon began to think along these lines. A formal prices and incomes policy was anathema to Howe and other market liberals, but a more informal way of controlling wages and thereby limiting the rise in unemployment during a disinflation became a political prize worth going after. An ERG meeting on 19 May 1977 discussed the possibility of an informal incomes policy, and it was agreed that, if introduced, it should be done through existing institutions such as the National Economic Development Council (NEDC) and the Diamond Commission (CRD, 1977b). But incomes policy continued to constitute political dynamite in the Conservative Party. A significant number of MPs who supported a monetarist approach did so not so much because they were enthusiastic monetarists, but because they were set against a prices and incomes policy and monetarism promised low inflation without a need for such direct controls over the workings of the price mechanism. Many such MPs provided the backbone of Margaret Thatcher’s support within the party. On the other hand, there was a significant faction within the party which was well represented within the Shadow Cabinet and hoped to keep incomes policies on the agenda as a tool for disinflation policy. Sir Ian Gilmour and Jim Prior were the faction’s most prominent spokesmen (Howe, 1994: 101). If the view that an incomes policy was an anti-unemployment rather than anti-inflationary tool was to become declared party policy, then the members of the ERG needed to be persuaded to support such a position. This was done with the publication of The Right Approach to the Economy in October 1977, which was cosigned by Howe, Joseph, Howell, and Prior. The Right Approach to the Economy insisted on firm fiscal and monetary policies, including lower public borrowing and a gradual reduction of the money supply (Conservative Central Office, 1977). What was most significant, however, was the pamphlet’s insistence that government should come to some conclusions on the scope of pay increases ‘if excess public expenditure or large-scale unemployment

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is to be avoided’ (Conservative Central Office, 1977: 13; my italics). It was unemployment that was the significant word, as it implied that an incomes policy had nothing to do with countering inflation and that inflation was not a consequence of wage increases. In this sense it was a thoroughly monetarist document which implicitly rejected neo-Keynesianism. In this development lay the origins of the defeat of the wets who opposed monetarism during the crucial 1979–81 period. But Margaret Thatcher remained deeply suspicious of any incomes policy, mainly on the grounds that it implied intervention in the economy (Campbell, 2000: 389–90). Perhaps related to this was her November 1977 appointment of Nigel Lawson as a Treasury front bench spokesman. In his early years as a financial journalist, Lawson had been an advocate of aggressively expanding demand, but had thereafter largely converted to monetarism (Keegan, 1989: 1–63). But, most significantly, Lawson had been one of the first high-profile financial commentators to come out forcefully against a prices and incomes policy, in his case as far back as the early 1960s. He regarded such a policy as a fundamental threat to freedom (Keegan, 1989: 16–17). On entering the House of Commons, he naturally specialised in economic affairs, and for a time was also a member of Norman Tebbit and George Gardiner’s squad of backbench hit men known as the ‘Gang of Four’, who strongly supported Margaret Thatcher (Tebbit, 1988: 147). Although Lawson would increasingly become the central figure in the Conservative Party’s making and executing of economic policy over the following decade, at the time of his appointment to the Treasury front bench team in 1977, he had not played a formal role in the party’s economic policy making under Thatcher’s leadership. More than a year prior to his appointment, Lawson had written a letter to the Times replying to the Peter Jay article referred to above, in which Lawson argued in favour of statutory obligations for monetary policy (Keegan, 1989: 41). In this letter lay the origins of the Medium Term Financial Strategy (MTFS). Despite his evident distaste for incomes policy, whether voluntary or statutory, Lawson nevertheless took seriously the problem of expectations and their likely impact on unemployment during a disinflation. The argument for pre-announced targets for the money supply was that policy credibility would be

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established and expectations would adjust much more quickly than would otherwise be the case. The Right Approach to the Economy had declared that openly proclaimed monetary targets could reduce inflationary expectations (Conservative Central Office, 1977: 8), and Lawson’s arrival on the policy-making scene appears to have given further support to this position (Howe, 1994: 155). In March 1978, Howe became involved in a public debate with Sir Douglas Wass, the Treasury Permanent Secretary, during which he openly advocated precise commitments to reducing the growth rate of the money stock over time (Howe, 1994: 155). It was the intellectual framework that would lead to the introduction of the MTFS in 1980.

Broad-money monetarism and monetary base control (MBC) Following the 1979 general election, Margaret Thatcher ensured that the Treasury was ‘fully manned’ with ministers who agreed with the monetarist approach. The macroeconomic strategy was for a gradual disinflation to be brought about by a progressive decline in the money supply. Fiscal policy would be conducted in such a way as to support this monetary strategy, with the public sector borrowing requirement (PSBR) funded through the sale of gilt-edged securities to the nonbanking sector. The PSBR would also be reduced over time, which would hopefully allow interest rates to fall. The problem posed by inflationary expectations leading to high wage claims would be dealt with partly through the use of the NEDC as a forum for explaining to both sides of the wage bargaining process that excessive wage claims would lead only to higher unemployment (Howe, 1994: 215–16). The second and more important part of this strategy would be a medium-term financial plan, which was intended to credibly commit the government to a declining rate of monetary growth. The main problem for the incoming Thatcher government was the technical difficulty of controlling the money supply. Of those who sat on the ERG committee during 1975–77, only Griffiths possessed any sort of technical expertise in the finer points of monetary control. Although the issue of how to control the money supply was raised during meetings held in 1975 (CRD, 1975) and 1976 (CRD, 1977a), the discussions were rudimentary and reached no firm conclusions.

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Neither the report on economic policy submitted to the Shadow Cabinet in July 1976 nor The Right Approach to the Economy gave any details as to the specifics of monetary control (CRD, 1977a). The main approach appeared to be an attempt to build on the macroeconomic framework that had been in operation since the International Monetary Fund (IMF) intervention in 1976. The essence of the IMF-imposed policy was that domestic credit expansion (DCE) would be controlled through changes in short-term interest rates and the PSBR would be reduced so that it could be fully funded by the sale of gilt-edged securities to the nonbanking sector. With credit (the assets side of the banks’ balance sheets) expanding at a controlled rate, the banking sector’s liabilities (mainly deposits, which constituted the vast bulk of the money stock) would do likewise. Rather than acting directly on the supply of money, it instead acted so as to influence its demand. This initially related to the broad M3 measure of the money supply, which became £M3 from 1977. Broad money’s status as the relevant monetary indicator was well entrenched, and a meeting of the Chancellor and outside monetarist economists in October 1979 to discuss the medium-term financial plan saw universal endorsement of £M3 (Her Majesty’s Treasury, 1980). It should be noted, however, that most monetarists expected the monetary aggregates to move together and not to decouple as extremely as they later would (Walters, 1986: 118). The macroeconomic side of Howe’s 1979 budget included an increase in interest rates so as to reverse the accelerated growth of the money stock which had begun during the last months of the Callaghan government. Lower targets for both the PSBR and £M3 figures were also set for 1979/80. But there was an alternative to the credit counterparts approach to monetarism. Rather than acting on the demand for money, the Bank of England could try to directly control its supply. This would involve controlling the monetary base, which consisted of notes and coins in circulation and reserves held by the clearing banks. By ensuring constant growth in the Bank of England’s balance sheets, the monetary base of the economy would grow at a steady rate and, assuming a constant money multiplier, so would other measures of money. This method was known as monetary base control (MBC). Within the ERG, long-time MBC supporter Brian Griffiths had floated the idea in papers circulated among the group. A paper written by Griffiths for ERG members in July 1975 argued that the Bank of

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England could control the level of reserve assets held by the banking system and that this in turn would control the money supply (CRD, 1975). Although this approach was not rejected outright, it was discussed only fleetingly. But MBC gained one particularly influential fan during 1975–79 in Margaret Thatcher. Thatcher’s personal economic advisor in Opposition had been Gordon Pepper, then the most prominent of the City of London’s monetarists. Pepper had convinced Thatcher of the virtues of MBC and, shortly after taking office, the new Prime Minister commissioned an enquiry into the method. Pepper is relatively generous when describing Thatcher’s ability to master the details of monetary control and believes that her support for MBC had genuine intellectual foundations (Pepper and Oliver, 2001: 30–2). By contrast, Lawson (1992: 80) insists that her attraction to MBC was derived principally from Pepper’s assertion that it could ensure monetary control whilst delivering lower interest rates. The Prime Minister’s enquiry would take the form of a series of meetings amongst Lawson and Treasury and Bank of England officials (Lawson, 1992: 77). As Chancellor, Howe retained overall authority over the process; the result would be a green paper, published just prior to the 1980 budget, entitled Monetary Control (HM Treasury and the Bank of England, 1980). This was a hugely important document that effectively determined whether monetarism in the United Kingdom would take the form of control of the credit counterparts or control of the monetary base. Lawson, the minister most directly involved, can be regarded as agnostic on the issue of MBC. His memoirs are relatively sceptical of the approach, but he concedes that by the start of the deliberations in the autumn of 1979, he appreciated the problems associated with controlling the money supply through short-term interest rates alone and was open to the idea of MBC (Lawson, 1981: 81). Given his pragmatism over matters of monetary control, Howe too was probably agnostic on the MBC issue at the time, although he does write sceptically of the method in his memoirs (Howe, 1994: 152–3). Aside from Griffiths and Pepper, other monetarist economists with whom the Tories liaised whilst in Opposition included Alan Walters, Patrick Minford, Terry Burns, Alan Budd, and Tim Congdon. The last three were sceptical of MBC and were to a greater or lesser extent content with a credit counterparts approach to monetarism. This took

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on significance when Burns was appointed to the position of Chief Economic Adviser to the Treasury in early 1980. In truth, however, the attitudes of the Treasury’s senior mandarins did not provide the main obstacle to the introduction of MBC. The more important institution within the debate was the Bank of England. The introduction of MBC would have had massive implications for how the Bank would operate in future that would include the end of its traditional role as lender of the last resort and the loss of its ability to set short-term interest rates. Such institutional upheavals meant that the Bank was set dead against the imposition of MBC (Lawson, 1992: 80). The Bank had no constitutional right to veto the imposition of MBC or any other monetary arrangement, but its opposition would prove important. In his memoirs, Howe states that the proposals to introduce MBC were ultimately rejected because the economic change and turbulence of the period meant that the establishment of a totally new basis for monetary policy was implausible (Howe, 1994: 152). In addition to sharing Howe’s scepticism of such a radical shift in policy, Lawson (1992: 81) regarded the Bank’s opposition to MBC as decisive. With Lawson’s mind made up, the verdict of the Monetary Control green paper was inevitable. Despite limited concessions to the MBC position, the green paper came out in favour of controlling the credit counterparts through fiscal policy and interest rates so as to control the growth in the money stock (HM Treasury and the Bank of England, 1980: 15). This form of monetarism would thereafter be used by the government, despite a second debate over MBC in 1980, following an alarming overshoot in the monetary aggregates.

Planning and implementing the Medium Term Financial Strategy (MTFS) This chapter has already highlighted the origins of the MTFS, and this section will take the story up to its unveiling in Sir Geoffrey Howe’s 1980 budget. Politically, Nigel Lawson had been the strongest advocate of such a medium-term approach to financial goals. His early pronouncements on the issue, highlighted earlier in the chapter, were formalised in an article published in the Times on 14 September 1978. The article was written in advance of the anticipated election that autumn, which was ultimately delayed to the following May and

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highlighted the need for accepted rules in economic policy making (Lawson, 1992: 67). The rational expectations school was becoming increasingly prominent in the economics profession by this time, and the implications of its analysis argued for clearly stated policy rules over discretion. Its most notable UK representative, Patrick Minford, advocated such an approach. Alan Budd’s appearance at an ERG meeting in 1976, at which he argued that the government should create an atmosphere of more certain and stable expectations, has already been mentioned in this chapter (CRD, 1977a). He and Terry Burns, who along with Jim Ball and others had developed the international monetarism framework favoured by the London Business School, wrote an Economic Outlook article, published in October 1977, which argued in favour of a medium-term financial plan (Congdon, 2011: 124). Tim Congdon, by this time an economist in the City of London who also enjoyed close links with the Conservatives, also supported such a scheme and submitted a memorandum calling for a medium-term financial plan to the House of Commons spending committee in 1978 (Congdon, 1992: 49–55). Howe (1994: 155) relates in his memoirs how he frequently discussed the idea of such a plan with Nigel Lawson and Adam Ridley prior to the election; after the 1979 budget, Lawson and Ridley began work on the MTFS. The civil servant most heavily involved was Peter Middleton, then a Treasury Undersecretary in charge of monetary policy and an official who had long taken monetarism seriously. Its progress was quickened by the arrival of Terry Burns as Chief Economic Adviser in early 1980. In October 1979, Burns had attended a seminar to discuss the MTFS, along with other prominent monetarists close to the Tories. By this time, planning was well advanced and the influence of the meeting on policy making cannot be judged with any certainty. It is nevertheless worth noting the conclusions reached. It was agreed by all in attendance that the MTFS should have both fiscal and monetary components (Her Majesty’s Treasury, 1980). This was controversial among monetarists, as Milton Friedman (1980), among others, insisted that there was not necessarily a causal link between the fiscal deficit and inflation. Given the attendance, however, the outcome was unsurprising. Those present believed in the validity of the ‘crowding out’ thesis, which argued that a large, fully funded (that

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is to say noninflationary) PSBR would lead to higher interest rates and a consequent crowding out of private-sector investment. Not only would this strangle growth, but if it persisted, the government could be tempted to monetise the deficit and thereby let loose inflation. The ‘rational expectations school’ took this argument a stage further, arguing that since economic actors would anticipate that the government would eventually print money, their expectations of inflation would shift upwards accordingly. The meeting therefore concluded that descending targets for the PSBR would be necessary to establish anti-inflationary credibility (Her Majesty’s Treasury, 1980). On the monetary side, the two main issues were which monetary indicator to use and whether to aim for a gradual or a rapid disinflation. As noted earlier in the chapter, it was widely believed at this time that the monetary aggregates would tend to move together. Given that empirical studies suggested that broad money had the closest relationship with nominal income, £M3 was, unsurprisingly, chosen as the lodestar. Unanimity was less evident on the issue of whether to carry out a gradual or rapid disinflation, with Patrick Minford arguing in favour of a rapid approach whilst the others present preferred a gradualist one. As highlighted earlier in the chapter, the Tories had regarded a ‘sudden death’ disinflation as too risky ever since it was first discussed as an option in the ERG in July 1975. This innate scepticism, allied to the weight of opinion at the meeting, meant that the agreed outcome was for a gradual rather than rapid decline in the growth of £M3 over a period of years (Her Majesty’s Treasury, 1980). The MTFS unveiled by Howe in his March 1980 budget consisted of declining paths for both £M3 and the PSBR across the period 1980/81 to 1983/84. This represented a framework for making macroeconomic policy more rules-based, as monetarists had long advocated. At the same time, £M3 had fallen within its target range announced in the 1979 budget for the ten months from June 1979. Howe (1994: 158) refers to the 1980 budget in his memoirs as the high-water mark of monetarism, and he is quite right to do so.

Difficulties with implementing monetarism Although monetarist ideas were enjoying unprecedented influence on post-war economic policy in Britain, the economic outlook was unremittingly grim. Tight monetary policy had combined with a global

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slowdown in economic activity to plunge the British economy into recession. As seen in Chapter 2, exchange controls had been abolished as part of the government’s strategy to liberalise the economy; this led to massive capital inflows into London and a dramatic appreciation of sterling. Industry was mercilessly squeezed by the high value of the pound and would suffer disproportionately in the downturn (Smith, 1987: 90–8). In addition, inflation had surged. For reasons outlined in Chapter 2, the burden of taxation had been dramatically shifted from direct to indirect taxes in the 1979 budget. The upshot was a dramatic rise in inflation as the near doubling of the VAT rate fed through into the price index. It was hoped that since this was a one-off step change in prices it would not adversely impact inflationary expectations and wage claims (Lawson, 1992: 35). But this proved to be overly optimistic. Inflation was given a further boost by the second OPEC oil price shock, in 1979–80. A third factor behind the rise in inflation was the commitment by the Tories in their 1979 manifesto to honour the verdict of the Clegg Commission on public sector pay. Clegg’s proposals turned out to be very generous. Despite these problems, Treasury ministers and monetarists in general saw the spike in inflation as a consequence of short-term factors which would soon work their way out of the system (Smith, 1987: 88–9). As long as monetary control was maintained, inflation would eventually fall. But this thinking was soon thrown into chaos. The abolition of exchange controls had made the Corset all but irrelevant, as the banks were able to circumvent its restrictions with little difficulty (Lawson, 1992: 82). Howe announced the abolition of the Corset in his 1980 budget, and this was carried out in June of that year. Following the Corset’s removal, £M3 grew by approximately 5 per cent in both July and August of 1980. As a £M3 target of 7–11 per cent for the whole of 1980/81 had been announced in the 1980 budget, this development threatened to capsize the government’s monetary strategy. Alan Walters had not at this point taken up his role as the Prime Minister’s personal economic adviser, but on arriving in January 1981 he commissioned a report into monetary policy by Jurg Niehans of Berne University, Switzerland. The report arrived in early February 1981 and argued in favour of Britain switching to a monetary base target and controlling the monetary base as the main instrument

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of monetary policy (Niehans, 1981: 75–6). Gordon Pepper and Tim Congdon backed the government’s decision to ignore the £M3 figures and argued that, if anything, policy remained too tight (Pepper and Oliver, 2001: 88–9). Those who paid attention to narrower measures of money, such as Niehans (1981: 25), were also arguing that policy was too tight with the monetary base barely expanding at all. In Number 10, the head of the Policy Unit, John Hoskyns (2000: 123), was similarly of the opinion that policy was too tight whilst Margaret Thatcher was, like all prime ministers, anxious not to see interest rates any higher than was necessary. Along with David Laidler, Walters had predicted the inflation of the mid-1970s by focusing on the excessive growth of broad money (M3) at a time when narrow money (M1) was telling a more reassuring story (Smith, 1987: 48). But by the time of his arrival at Number 10, Walters had become convinced that broad money was proving a misleading indicator and that monetary policy was far too tight (Walters, 1986: 145). A consequence of this was the overvaluation of the pound, with only some of its appreciation during 1979–81 explained by sterling’s newly acquired ‘petrocurrency’ status. The Niehans paper commissioned by Walters came down in favour of this argument (Niehans, 1981: 36). Walters was not the only person to lose faith in broad money as a lodestar for monetary policy. Of the monetarists close to the Tories, Congdon (1992: 83–104) was alone in asserting that broad money’s misbehaviour could be explained by short-term factors which would soon work their way out of the system once the post-Corset distortions unwound. Despite having been thwarted on MBC, Margaret Thatcher had taken seriously Karl Brunner’s conversation with her in August 1980, during which he denounced broad money and advocated the monetary base as the relevant indicator (Howe, 1994: 185). Howe, meanwhile, was the consummate pragmatist on monetary control matters, and if there were a strong case for using narrower aggregates in policy making, he was unlikely to ignore it. The problem that narrow measures of money had always faced was a theoretical one. Essentially, the question to be asked of them was how changes in the monetary base (or a similar narrow measure of money) impacted on nominal output and therefore prices. That this question could not be convincingly answered made many sceptical of using narrow money for targeting purposes. By contrast, the

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explanation of the transmission mechanism from broad money to nominal output was less problematic theoretically. Even those such as Pepper, who argued for MBC, believed it merely to be a superior way of controlling the growth of credit and broad money than relying on interest rates and funding policy. For Pepper (1990: 23) it was still broad money that mattered in the inflationary process. However, broad money suffered its own problems, which went beyond the post-Corset distortions. A crucial financial innovation of the period was the introduction by banks of interest-bearing current account deposits. The transmission mechanism for how changes in broad money impact on nominal output was based on the assumption that money was an unrewarding asset in which to hold one’s wealth. Significant amounts of money would therefore be held only for transactions and precautionary purposes. The introduction of interest-bearing bank accounts opened up the possibility that people would hold money for savings purposes as well, and that increases in people’s holdings of money as savings would therefore not impact on nominal output. Measures of broad money such as £M3 could therefore mislead. Even Congdon, who viewed narrow money measures with extreme scepticism, chose to ignore the £M3 overshoots of the early 1980s on the basis of there being no sign of a revival in output (Pepper and Oliver, 2001: 89). Broad money was not jettisoned at this stage, and it remained the centrepiece of the monetary side of the seminal 1981 budget. Howe announced a £M3 target for 1981–82 of 6–10 per cent, which was consistent with the MTFS target announced the previous year. But the overshoots in £M3 were not to be ‘clawed back’ by adopting even stricter targets for £M3 growth in future years in the MTFS (Howe, 1994: 205). This indicated that £M3 was no longer quite the lodestar it had once been, and Howe explained away the overshoots in a short section of his budget speech (Hansard, 1981: 761). In the 1982 budget, broad money would begin an uneasy truce with narrow money in the MTFS, with Howe announcing targets for M1 (a narrow measure of money), for £M3 itself and for PSL2 (an even broader measure of money than £M3, which included building society deposits). The 1981 budget is usually remembered more for its fiscal element than for its monetary element. Many of the so-called dries involved in the budget-making process, typified by Margaret Thatcher (1993: 155), regarded it as a significant moment of courage, which made

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possible the long-term success of their economic strategy. The budget was a major set-piece battle between the neo-Keynesians and the monetarists, both within the Conservative Party and the economics profession. Although monetarism had unquestionably superseded neo-Keynesian doctrines within the Tory party during the 1970s, the difficult economic events of 1979–81 gave an unforeseen opportunity to the neo-Keynesians within the party to re-establish the supremacy of their ideas. Within the Cabinet, Thatcher had been careful to ensure that the so-called wets who opposed her economic policies were kept away from the economic briefs. The only concession to this was Jim Prior, who had been made Secretary of State for Employment. But this was scarcely a position from which to influence macroeconomic policies. The other undoubted wets in the Cabinet were Sir Ian Gilmour, Francis Pym, and Peter Walker; Lord Carrington and Michael Heseltine were also thought to be sceptical of the government’s policies. Aside from Howe and Leon Brittan, the latter by then Chief Secretary to the Treasury, Thatcher also had Keith Joseph, John Nott, and John Biffen in the Cabinet as dries. Another ally was William Whitelaw, who, though no monetarist, was personally loyal to Thatcher (Whitelaw, 1989: 136). As Gilmour (1992: 30–44) later noted, the wets were at a considerable disadvantage constitutionally. Macroeconomic policy in particular is largely the preserve of the Chancellor and the Prime Minister. If they remain resolute, then the only options open to dissenters in government are to accept collective responsibility or resign. The wets in Cabinet could do little but bide their time; only Prior was outspoken in Cabinet in criticising the budget when Howe presented it to his colleagues, although Gilmour and Walker were also critical (Howe, 1994: 207). There was a backbench rebellion of sorts from Conservatives in the House of Commons, but Lawson (1992: 96–7) claims that this was more to do with individual measures than with economic doctrines. It was in this context that 364 economists, mostly of a neo-Keynesian outlook, signed a letter published in the Times that denounced the budget and called for alternative policies to be pursued (Booth, 2006). The letter also made the fatal prediction that the budget would ‘deepen the depression, erode the industrial base of our economy and threaten its social and political stability’ (Howe, 1994: 209). Having

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effectively raised the neo-Keynesian standard in favour of this prediction, the 364 economists were inviting ridicule if it turned out be incorrect. As to whether the 364 were right or not, Stephen Nickell has argued that later events proved them to be correct in their predictions (Nickell, 2006). A subsequent debate with Tim Congdon eventually focused on a technical argument over whether growth figures for the seven quarters up to the third quarter of 1983 justified the rhetoric used by the 364 (Congdon, 2007: 206–29). Keegan (1989: 84) has claimed that the 364 were wrong only because the fiscal retrenchment was simply cover for monetary expansion. But this defence is not a particularly strong one, given that Howe’s reduction of interest rates by two percentage points was scarcely a state secret. Indeed, this defence is even more damning of the neo-Keynesians, as it would have shown them to be wrong in their relative dismissal of the importance of monetary policy. In any case, what mattered in the competition between monetarism and neo-Keynesianism were the perceptions of who was right. In this context, the battle between the 364 and the government would prove embarrassingly one-sided. The ‘ever deepening depression’ did not occur and, although the level of unemployment continued to rise until 1986, the economic recovery that began in the summer of 1981 would continue until the recession of 1990–91. In this context, the rhetoric of the 364 was made to look ridiculous. With friends like the 364, the wets in the Cabinet were hardly in need of enemies. The coup de grâce came in the autumn of 1981. The need to raise taxes in the 1981 budget had convinced Thatcher and Howe that the control of public spending needed to be tighter, and the extension of cash rather than output limits for departments at this time was part of this process (Howe, 1994: 205). On 23 July 1981, the Cabinet met to discuss public spending and there was a revolt against the cuts proposed. The Prime Minister and her Chancellor found that their only support in Cabinet came from Sir Keith Joseph and the Chief Secretary to the Treasury, Leon Brittan. Even John Nott and John Biffen failed to support the proposals (Howe, 1994: 222–3). Thatcher’s response to this in September 1981 was as successful as it was brutal. Sir Ian Gilmour was sacked and Jim Prior was moved from the Employment brief and given the more peripheral post of Secretary of State for Northern Ireland. His status was also badly

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damaged by having briefed the press that he would sooner resign than be moved before accepting his new role. Three dries came into the Cabinet. Nigel Lawson became Energy Secretary; Norman Tebbit, Employment Secretary; and Cecil Parkinson, Chairman of the Conservative Party, with a seat in the Cabinet as Chancellor of the Duchy of Lancaster. Although Gilmour and others would continue to outline alternative economic policies from outside the government over the coming months and years, the political defeat of the wets and the intellectual defeat of neo-Keynesianism in ideas terms were decisive. Ted Heath would make the final stand against monetarism with his October 1981 party conference speech in Blackpool (Campbell, 1993: 731). In his reply from the platform, Howe ridiculed his former leader by reminding him of his own words from the 1970 Conservative manifesto: ‘Nothing has done Britain more harm in the world than the endless backing and filling which we have seen in recent years. Once a policy has been established, the Prime Minister and his colleagues should have the courage to stick with it’. Neo-Keynesianism within the Conservative Party was politically dead. Howe’s ridiculing of Heath partly explained why monetarism won the competition of ideas in the Conservative Party. Thatcher and Howe were unquestionably in a stronger constitutional position than the wets, as highlighted earlier. But this alone could not explain their victory. What was more important was the moral authority which the dries continued to enjoy. Though Gilmour and the wets had a case when saying that policy was being run by a small cabal, it was a cabal that was pursuing policies that the wets had signed up to in the late 1970s. As highlighted earlier in the chapter, the neo-Keynesian wets effectively signed their intellectual rights away in The Right Approach to the Economy and then repeated the feat by running on the 1979 party manifesto which supported the same policies. They were therefore on very shaky grounds when complaining that policy was not being run in a consensual manner. The contrast of 1981 with the Heath government is illustrative. By ruling out a prices and incomes policy in the 1970 manifesto, the party’s proposed policies were out of line with the neo-Keynesian ideas then dominant at the top of the Conservative Party. Macroeconomic policy thus became a hostage to fortune, so that despite policy after 1972 being consistent with the ideas which Heath and his senior

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ministers had held all along, it was inconsistent with the 1970 manifesto. The 1979 manifesto had corresponded closely to the macroeconomic outlooks of Thatcher, Howe, and the other Treasury ministers (Dale, 2000a: 267), and this was particularly important in providing moral legitimacy to the policies announced in the 1981 budget. It is here where the origins of the relative political success of macroeconomic policy under the Thatcher government when compared with the Heath government lie. But if the 1981 budget secured the ascendency of monetarism in the Conservative Party, it did not end the debate over what form monetarism should take. The standard monetarist recommendation was a target for monetary growth, but the whole idea of money supply targets had been thrown into doubt by the overshoots of 1980 and the phenomenon of different monetary aggregates telling very different stories. The problem was the instability of the velocity of circulation of money, something monetarists had long assumed to be stable (Smith, 1987: 7). Although he accepted the key monetarist propositions that inflation is ultimately a monetary phenomenon and that there is no long-term trade-off between inflation and unemployment, Samuel Brittan believed nominal output targeting provided a viable alternative to money supply targets. Brittan had never been enamoured of using monetary aggregates as lodestars for policy, and regarded the vertical Phillips curve as the crucial monetarist contribution to macroeconomic thought (Brittan, 2005: 297–8). In a pamphlet published by the Institute of Economic Affairs (IEA) in 1981 (Brittan, 1981) he argued that, given the chaotic behaviour of the monetary aggregates, it would be more appropriate to target nominal GDP (output in terms of prices). Brittan had advised the Conservatives during 1975–79 and had strong links with senior ministers. His brother Leon was Chief Secretary to the Treasury from 1981–83, and Nigel Lawson was a close friend whom he had known since their time together as financial journalists. Whether this was decisive or not, the idea of targeting nominal GDP soon found its way into Treasury thinking. Targets for nominal GDP growth had formed part of the MTFS during Howe’s time as Chancellor, but they had been very much an appendage to the monetary aggregates. Howe did not mention the targets in any of his five budget speeches.

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Nigel Lawson, who succeeded Howe as Chancellor following the Tory general election landslide of June 1983, did begin to announce targets for nominal GDP growth in his budget speeches and argued that the growth ‘split’ between price rises and output rises in the growth of nominal GDP could be improved by continuing supply-side reform. But nominal GDP targeting nevertheless failed to play the principal role in the MTFS, with Lawson tending to rely on a combination of the monetary aggregates and the exchange rate when taking decisions on interest rates. The arrival of Lawson as Chancellor was a significant one from an intellectual perspective. His views were similar to Brittan’s in that he regarded the key contributions of the monetarists to be the idea that no long-term trade-off existed between inflation and unemployment and that inflation was ultimately a monetary phenomenon (Lawson, 1992: 413–16). Beyond this, unlike the incorrigibly pragmatic Howe, different elements of his thinking were simultaneously flexible and dogmatic. Unlike most monetarists, Lawson was prepared to consider a wider range of potential nominal anchors for policy than monetary aggregates alone (Lawson, 1992: 416–20). But at the same time, he was much more anxious than Howe had been to find a nominal anchor that could eliminate discretion as far as possible from the policy-making process. His motivation for this was not only to find a nominal anchor that could give him what approximated to a policy ‘rule’ for interest rate decisions, but also to underpin a framework for policy that would allow markets to work out how such decisions were being taken. Both the flexible and dogmatic elements to Lawson’s thinking were on display in June 1981 when, just prior to his departure from the Treasury to become Energy Secretary, he sent Howe a note advocating possible British membership of the rules-based European Monetary System (EMS) (Lawson, 1992: 111–12). On returning to the Treasury as Chancellor, Lawson commissioned a review of monetary policy, to be carried out under the auspices of Peter Middleton. Middleton was a hugely influential Treasury official who had headed the monetary policy division during the 1970s and early 1980s prior to becoming Permanent Secretary in 1983 following the retirement of Sir Douglas Wass. Lawson also arranged a meeting with Gordon Pepper. Pepper’s own view remained that nothing short of MBC would be adequate for controlling monetary growth, but

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he nevertheless offered Lawson qualified advice on the other monetary aggregates and their use under a system enforced by short-term interest rate changes and funding policy. Pepper was disdainful of £M3 and, according to Lawson, argued that M0 could play a role as an indicator (Lawson, 1992: 452). M0 had originally been drawn up by Alan Walters and Rachel Lomax, the latter a Treasury official then in charge of analysis of the monetary aggregates, following the Niehans intervention of 1981. Lawson became attracted to M0 (which then consisted overwhelmingly of notes and coins in circulation) mainly because it showed the best correlation with nominal income of all the monetary aggregates. Lawson nevertheless accepted the ‘black box’ problem associated with M0 but argued that, with no realistic alternative available, M0 could provide a peg on which to hang monetary policy (Lawson, 1992: 453–4). It was to be frequently used as the main monetary aggregate during the mid-1980s. But Lawson became increasingly disillusioned with M0 and other measures of narrow money, and by 1987 the exchange rate was playing the leading role in determining interest rate decisions (Lawson, 1992: 783–93). With interest rate changes based primarily on either the growth of narrow money aggregates or movements in the exchange rate throughout Lawson’s Chancellorship, the £M3 targets were pursued primarily through a technique known as overfunding. This meant issuing more gilt-edged securities to the nonbanking sector than was required to fund the PSBR. The policy of overfunding was ended in October 1985 and, with interest rate decisions based on narrower aggregates, the £M3 target became impossible to hit and was first suspended and then later abandoned by Lawson. To Tim Congdon, whose links to the Conservatives had atrophied somewhat, the ending of overfunding was a serious mistake. Congdon began advising the Conservatives in the 1970s after the ERG read with interest his October 1975 Times article on the future of deficit financing (CRD, 1975). As was noted earlier, he was also involved in the meetings that had led to the MTFS. But after Nigel Lawson became Chancellor, he became far less involved; the reasons behind this are not completely clear. After short-term interest rates rose to 16 per cent in October 1981 to head off a slide in sterling, Congdon wrote an article in the Daily

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Telegraph which argued that the government risked overkill through its tightening of monetary policy. The article clearly worried the Tories, and Conservative Central Office arranged for the publication of a reply in the same newspaper written by Sir William Clark, a backbench Tory MP. Clark’s letter had been revised by the Treasury; it pointed out that Congdon had failed to take the exchange rate into account, unlike the international monetarists (CRD, 1979d). Terry Burns, a leading international monetarist, was by then the Treasury’s Chief Economic Adviser. Congdon had also been to Augusto Pinochet’s Chile during the 1970s and had written about the regime’s economic policies in a favourable manner (Congdon, 1985), which may have led some Tories to regard him as a political liability. Probably decisive was his continuing confidence in the importance of broad money and £M3 at a time when Lawson and the authorities were moving sharply away from taking this aggregate seriously. As highlighted earlier in the chapter, Congdon had argued that once the post-Corset distortions had fully worked their way out of the system, broad money growth would continue to determine national output and hence inflation in the long term. Following the abandonment of overfunding and the £M3 target, he wrote a series of articles during 1985–88, warning of upcoming inflation arising from excessive growth in broad money at a time when Lawson and most economists were relatively unconcerned (Congdon, 1992: 117–53). With the onset of double-digit inflation during 1988–90, Congdon was to look as prescient as Laidler and Walters had done in the 1970s at the time of the Barber Boom. A number of competing explanations for the increase in inflation were offered in hindsight. Both Samuel Brittan and Nigel Lawson argued that the devaluation of 1986 was the crucial factor in the return of inflation, and Lawson (1992: 647–57) regards his decision to allow it as one biggest mistakes of his chancellorship. It can, of course, be argued that devaluation and excessive broad money growth are two sides of the same loose monetary policy coin. Those who continued to highlight the importance of narrow money, such as Patrick Minford (2005: 55), place the blame on Lawson’s shadowing of the Deutschmark during 1987–88. Those of a Keynesian disposition such as Alec Cairncross (1992: 261) have highlighted the fiscal dimension to the boom and in particular the tax-slashing 1988 budget, although Lawson (1992: 808–11) himself rejects this argument as do most monetarists.

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Regardless of who was right as to the causes of the inflation, with Congdon having predicted it before other leading forecasters, this unquestionably gave broad money a new credibility in time for the next wholesale reconstruction of macroeconomic policy, which would come in September and October of 1992. Prior to this, Britain would become a member of the Exchange Rate Mechanism (ERM), so macroeconomic thinking in the Conservative Party on this thorny issue needs to be considered. The collapse of the Bretton Woods system of fixed exchange rates during the early 1970s led many to assume that a flexible exchange rate regime would be the macroeconomic given for the foreseeable future. This was certainly the case in the ERG during 1975–77. All of their discussions implicitly assumed the continuation of flexible exchange rates and a system for monetary control that was domestically enforced. But in 1977, Sir Geoffrey Howe and Adam Ridley met with Arthur Burns, then the Chairman of the United States Federal Reserve Board (the ‘Fed’). The substance of their discussions appears to have convinced Howe that a system of fixed exchange rates could deliver a noninflationary economic environment (Howe, 1994: 131). In this context, the rise of the European Monetary System (EMS) in 1978 as a European system of fixed exchange rates was a very significant development. A meeting on 29 November 1978 consisted of Howe, Ridley, Christopher Soames, John Nott, Nigel Lawson and Francis Pym; they discussed the Conservative response to this new fixed exchange rate system. The decision taken was to come out in favour of EMS membership in principle (Howe, 1994: 110–11), although the commitment espoused in the 1979 manifesto was rather ambiguous given the expressed aim to make domestic monetary targets the centrepiece of macroeconomic policy. As outlined earlier in the chapter, the focus of policy through to the summer of 1980 was on keeping the growth of £M3 within the target ranges set out in the MTFS. Even afterwards, macroeconomic policy was at least presented as being based on the behaviour of the monetary aggregates, even if it had been tacitly accepted that the various monetary measures would have to be treated with great care so as to interpret them correctly in light of financial deregulation and innovation. Beneath the surface, however, the picture was even more complicated.

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During 1979–81, the value of sterling surged against the dollar and other currencies. As noted earlier, there were various reasons cited for this phenomenon. The Niehans paper of February 1981 had put emphasis on the tightness of monetary policy, and a partial easing of policy in this regard did take place during 1980–81, with short-term interest rates coming down from 16 per cent to 12 per cent. ‘Benign neglect’ of the exchange rate in 1981 was, however, seemingly no longer the policy of the government, if indeed it ever had been. Part of the reason for this was the Treasury. It had been conditioned by the years of the Bretton Woods system to take the exchange rate into account, and the type of monetarist thinking which arrived in policy making via the IMF in 1975–76 had partly been based on seeing the exchange rate as a major transmission mechanism for inflation. It was during the 1970s that the ‘international monetarists’ at the London Business School (LBS) had developed their theories on how inflation was determined in small, open economies like Britain’s and had concluded that the exchange rate was a crucial channel for the transmission from monetary growth to inflation (Ball and Burns, 1976). One of their leading figures, Terry Burns, became Chief Economic Adviser to the Treasury in 1980 and might well have reinforced the idea in the Treasury of the importance of the exchange rate in the transmission mechanism for inflation. But a belief that the exchange rate played a role in the inflationary process and should therefore be taken into account in interest rate decisions was scarcely the same thing as advocating a system of fixed exchange rates. During 1981, the Treasury was certainly doing the former, as its response via Sir William Clark to the Congdon article in October 1981 described above indicates (CRD, 1979d). Interest rates had been increased from 12 per cent to 14 per cent in September and then 16 per cent in October so as to halt a rapid depreciation of sterling. It was this that led Congdon to argue that the authorities risked overkill by tightening policy. The crucial figure in the shift from taking the exchange rate into account in policy making to using the exchange rate as an anchor for policy was Nigel Lawson. Howe argues that he was sympathetic to joining the Exchange Rate Mechanism (ERM, as the EMS became known) in theory from 1978 onwards. But the conditions of his chancellorship, with large fluctuations in the value of sterling and its related role as a petrocurrency, militated against serious consideration

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of membership during his time at the Treasury (Howe, 1994: 111–12). Lawson returned to the Treasury in 1983 as Chancellor, seeking to put macroeconomic policy onto firmer foundations. His time as Financial Secretary during 1979–81 had convinced him that the exchange rate was the main transmission mechanism for money growth to inflation and that the disinflation of the period had occurred largely because the high exchange rate had imposed a strong anti-inflationary discipline on the economy (Lawson, 1992: 62–3). Given this and his enthusiasm for policy rules, it was unsurprising that Lawson was soon advocating ERM membership. The debate over the ERM then became an intensely political one, with Margaret Thatcher strongly opposed to the idea (Thatcher, 1993: 554). Her views were strongly reinforced by two monetarists, Brian Griffiths and Alan Walters, both of whom viewed monetary policy making as a strictly domestic affair (Stephens, 1996: 50). Griffiths would serve as head of the Number 10 Policy Unit during 1985–90 and although Walters’s official role at Number 10 ended in 1984, he regularly corresponded with the Prime Minister from his academic post in the United States. In 1989, he returned to Number 10 and into a political firestorm that would end both his and Lawson’s careers in government. Lawson argues that it was the influence of Walters from afar that led to Thatcher vetoing his November 1985 proposal for ERM membership (Lawson, 1992: 501). The events of 1985–89 were extraordinary in terms of the deteriorating relations between the Prime Minister and the Chancellor, but need not detain us here as they are well documented elsewhere and both sides had by 1985 clearly established their intellectual positions. The essentials were that by 1987 Lawson had become disenchanted with the monetary aggregates and, with ERM entry vetoed by Thatcher, decided to shadow the Deutschmark in what amounted to informal ERM membership. Lawson hoped that by linking sterling to the Deutschmark, British monetary policy would acquire the same credibility enjoyed by the fiercely anti-inflationary German Bundesbank (Lawson, 1992: 419–20). Whether he received approval from the Prime Minister and at what stage she knew about the arrangement remain subjects of debate, but in March 1988 she demanded that shadowing end and that sterling be allowed to rise above the informal ceiling Lawson had set for it (Lawson, 1992: 794–6). Following further deterioration in their relationship over the next eighteen months, caused

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by a combination of factors, including the return of Walters and Thatcher’s continued opposition to ERM membership, Lawson resigned in October 1989. On Lawson’s resignation, John Major became Chancellor. He was able to succeed where the formidable Lawson had failed, and ERM membership was secured in October 1990 (Dell, 1996: 544–5). Major argues in his memoirs that the Prime Minister knew that she could not afford to lose a second Chancellor so quickly over the issue, and though she was reluctant, he eventually persuaded her to join (Major, 1999: 154–6). A month later, Thatcher fell from office, and Major succeeded her as Prime Minister. Norman Lamont, who had always been sceptical of the ERM, became Chancellor in the new government (Lamont, 1999: 208). The brief history of Britain’s membership of the ERM is well known and shall not be dwelt upon here. There remains disagreement amongst economists regarding the viability of fixed exchange rate systems in the long term. But there was one factor which guaranteed that British membership of the ERM was ill-fated from the start. In 1990, Germany was reunified, and Ostmarks were converted to Deutschmarks at a one-to-one rate, which led to a large increase in the German money supply. With the Bundesbank likely to tighten monetary policy at a time when Britain was headed for recession, an enduring alignment of exchange rates was always likely to be difficult to achieve. Because of the inevitable tightening of German monetary policy, sterling found itself under consistent pressure to remain above its lower band value. To retain confidence in the currency, the government could not be seen to discuss an alternative macroeconomic framework, as this would be seen by the markets as a forerunner to sterling’s exit from the ERM. A run on the pound would almost certainly then have ensued. The situation did lead to some internal discussion in other areas of policy. With the economy in recession and inflation falling rapidly, how to revive the economy without resorting to the usual monetarist measure of interest rate cuts was a pressing question during 1991– 92. Some old ideas from the interventionist stable such as measures to boost the housing market made a return (Lamont, 1999: 307–8). Lamont does, however, refute the accusation that the widening budget deficits of the period were a return to neo-Keynesian demand management; he claims that they instead represented the impact

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of the recession on tax revenues and benefit payments (Lamont, 1999: 498). It is important to note at this point the quiet revolution that had taken place in the intended role of fiscal policy. In 1979, it was designed to reinforce the £M3 target by ensuring that the PSBR was fully funded. With the ending of overfunding in 1985, funding policy and fiscal policy in general became divorced from monetary control, and fiscal policy henceforth became a tool for managing the public finances alone (Congdon, 2007: 93–5). The essential strategy was to balance the budget over the economic cycle and ensure that it was fully funded with the issuing of gilts to the nonbanking sector. This approach would continue following the September and October 1992 reconstruction of policy and would endure up until the beginning of quantitative easing (QE) in 2009.

The emergence of inflation targeting After sterling crashed out of the ERM on 16 September 1992 (Black Wednesday), Britain’s economic policy makers were faced with a problem. Successive frameworks for macroeconomic policy had been discarded since 1979; now a complete overhaul was necessary. Inflation targeting had emerged from the intellectual consensus that was forming during the second half of the 1980s. This consensus viewed the monetarists as broadly correct insofar as there being no long term trade-off between inflation and unemployment, but it also claimed that the instability of the velocity of circulation for all measures of money made monetary targeting fraught with hazard (Goodhart, 1995: 61). This consensus helped to initiate a search for a form of policy making that constituted ‘constrained pragmatism’ and was based on the assumption that money neutrality held in the long run (Bernanke et al., 1999: 19–25). Inflation targeting was one such idea; in 1988, New Zealand became the first country to introduce an explicit inflation target, with Canada becoming the second in 1991 (Bernanke et al., 1999: 86–144). After Black Wednesday, inflation targeting to some extent constituted the ‘last idea on the shelf’ within the Treasury. Norman Lamont had considerable sympathy for monetary aggregates and regarded M0 as a useful proxy for consumer spending, although he did not believe it to be a leading indicator (Lamont, 1999: 276). M0 and M4, the latter

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by then the relevant broad money indicator so as to include building society deposits, were given ‘monitoring ranges’ within the reconstructed macroeconomic policy framework, although these would later be dropped by subsequent chancellors (Lamont, 1999: 276). But the nominal anchor was the new target for inflation (measured by retail price index, excluding mortgage interest, or RPIX) of 1–4 per cent. Inflation targeting proved highly successful throughout the period 1992–2007, although it can be argued that it enjoyed an easy ride in that inflation in the British economy had been all but eliminated and worldwide prospects for inflation were especially benign after 1992. It has also been criticised as a contributory factor in the financial crash of the late 2000s (Saatchi, 2009). The other significant economic idea in circulation during this period was Bank of England independence. Unlike many of the ideas considered in this chapter so far, independence for the Bank was a way to more credibly buttress a nominal anchor by depoliticising monetary policy rather than a nominal anchor in itself. The idea had a precursor in Peter Jay’s 1976 advocacy of an independent currency commission for regulating the money supply, which was mentioned earlier in the chapter. There were significant academic developments during the late 1970s and 1980s that contributed to the argument for Bank of England independence. New classical economists such as Kydland and Prescott (1977) and Barro and Gordon (1983) developed models which implied that monetary policy needed to be depoliticised if inflationary expectations were ever to be brought under control. Empirical evidence also suggested that economies with independent central banks outperformed others in terms of achieving low and stable rates of inflation (Goodhart, 1995: 63). By 1987, Tim Congdon had also come out in favour of Bank of England independence (Congdon, 1992: 135–40). Nigel Lawson had unquestionably read Jay’s 1976 article, and by 1988 he had come to the conclusion that if decisions on interest rates were to be depoliticised and monetary policy made fully credible in the markets, the Bank of England needed to be delegated control over monetary policy (Lawson, 1992: 1059). A proposal was put together by his officials and in November of 1988 he put it to Margaret Thatcher. It was rejected, with Thatcher citing a number

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of reasons (Lawson, 1992: 870–1). One of Lawson’s motivations for proposing independence was Thatcher’s frequent reluctance to raise interest rates. Thatcher’s rejection of Lawson’s proposal was almost certainly caused partially by her unwillingness to give up control at a personal level, and interest rates were a particularly sensitive issue in an economy where the home ownership rate was high. There was, however, a genuine democratic principle at stake in terms of whether interest rates should be under the control of elected politicians or unelected technocrats. In the days when the original Phillips curve was believed to hold true with a trade-off to be had between inflation and unemployment, the use of monetary policy to secure the appropriate trade-off could be regarded as a matter for those democratically elected. By the end of the 1980s, such a trade-off was increasingly believed to be nonexistent, with a stable rate of inflation the best that could be hoped for when conducting monetary policy (Goodhart, 1995: 61). This was a strong argument for making technocrats responsible for decisions on interest rates. Lawson had argued that the Bank’s mandate should be responsibility to protect and maintain the value of the currency, analogous to preserving its internal purchasing power (Lawson, 1992: 1060). This was problematic, as its relatively undefined nature could have resulted in the Bank enjoying too much leeway in the making of monetary policy. Norman Lamont took up Lawson’s proposal during his own chancellorship and twice proposed Bank of England independence to John Major (Lamont, 1999: 321–7). The first proposal came during ERM membership but the second, coming once inflation targeting had been introduced, was the strongest proposal yet put to a Prime Minister. Lawson (1992: 418) had pointed out in his memoirs that inflation targeting worked best under a system of central bank independence, and the prospective mandate was now made more specific, with the Bank responsible for meeting an inflation target. Major nevertheless rejected the proposal, primarily on account of there being a resulting lack of democratic accountability over the setting of interest rates (Stephens, 1996: 278). Nevertheless, the key ideas of the long-run vertical Phillips curve and the importance of establishing credibility that lay behind the arguments for independence of the Bank strongly influenced the reconstruction of policy in October 1992. Lamont (1999: 274–98) regarded the resulting reforms as part of a process of Glasnost. They

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included the Bank’s publishing a monthly Inflation Report that would indicate progress in attaining the inflation target. Lamont also authorised the setting up of a Panel of Independent Economic Forecasters. This process led naturally to Kenneth Clarke’s 1994 introduction of the publication of the minutes of meetings on interest rate decisions, held between the Chancellor and the Governor of the Bank of England. Despite this, Clarke was less enthusiastic than Lamont about full independence for the Bank, and it remained subordinate to the Chancellor in the setting of interest rates until after the Tories left office in May 1997.

Conclusions There are a number of conclusions that can be drawn from this chapter. The first concerns claims regarding the nature of Selsdon Man. One position is that the Selsdon Park meeting of the Heath Shadow Cabinet in January 1970 led to an agreement that ‘proto-Thatcherite’ policies would be followed in government. This argument is wrong, given that Thatcherism had monetarist thinking at its very core and monetarism had not in any serious way penetrated the Conservative Party’s policy-making process during 1964–70. Economic policy at Selsdon was discussed during the third and fourth sessions of Saturday 31 January. These discussions focused on Iain Macleod’s proposed tax reforms and other microeconomic issues. Macroeconomic policy was scarcely mentioned, and monetarist arguments certainly did not make an appearance (CRD, 1970c). Harold Wilson’s coining of the phrase ‘Selsdon Man’ came about following a briefing that Heath gave to the lobby that Saturday on law and order (Campbell, 1993: 264–5). Law-and-order issues were discussed during the first and second sessions of that Saturday, and Heath made his statement to the lobby immediately afterwards (CRD, 1970c). Selsdon Man was therefore created before economic policy had even been discussed at Selsdon Park and had nothing whatsoever to do with the false notion that the Conservatives initially adopted monetarism at Selsdon Park in 1970. The 1970s would see the complete eclipse of neo-Keynesianism within the Conservative Party. This was strongly linked to the decline in academia of the argument that a government could spend its way to higher rates of growth. This decline was confirmed by the events

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surrounding the 1981 budget. But monetarism of the type introduced in 1979–80 did not provide an enduring basis for policy; strenuous efforts were subsequently made to find a policy framework which was not only consistent with the vertical Phillips curve, but also offered a more permanent framework for policy than the original MTFS had done. Multiple ideas along these lines were tried, with the focus shifting from broad to narrow money and then to the exchange rate as potential nominal anchors for monetary policy. The politics of the Exchange Rate Mechanism (ERM) would prove extremely damaging for the Thatcher ministry and even more so for the subsequent Major ministry, as sterling exited the ERM in the most humiliating circumstances imaginable in September 1992. Macroeconomic policy was finally stabilised in the autumn of 1992, with a system of inflation targeting established alongside a more transparent method for the setting of short-term interest rates. Despite this, the Tories did not take the logical final step and grant operational independence to the Bank of England, notwithstanding the overtures made by both Nigel Lawson and Norman Lamont. The failure to grant independence would subsequently come back to haunt the party, as the next chapter outlines.

5

The Conservative Party and the Economy since 1997

The three preceding chapters when taken together provide a detailed analysis of the Conservative Party’s making of economic policy between 1964 and 1997. The task of this chapter is slightly different. Covering events which have occurred since the Tories were ejected from office in 1997, it seeks to put the developments of this period into the context of what came before and thereby provide something of status update on the Conservative Party’s political economy at the time of writing in 2013. The post-1997 period has not been a happy one for the Conservatives politically. After being trounced at the polls in 1997, they scarcely did better at the next general election held in 2001. Although the party’s performance improved somewhat in 2005, it still left them short of 200 seats in the House of Commons. Up against a tired government and unpopular Prime Minister, the Tories were able to secure a plurality of total votes cast in the general election of 2010, and the Conservatives became the largest single party in the Commons. But the result was insufficient to give them a parliamentary majority, and the eventual outcome was a governing coalition of Conservatives and Liberal Democrats. From the perspective of economic policy, the period after 1997 was, at least superficially, a less depressing time for the Tories. Although they had been routed by Labour in 1997, it did not constitute a defeat to a party espousing socialist economic principles, but to one which had largely reconciled itself with Thatcherite political economy. Although Conservatives may have been happy to have seemingly won the battle of ideas over the management of the British economy, 149

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the political consequences for them were awkward, as the party found it difficult to noticeably differentiate itself from a Labour government seemingly comfortable with competitive markets and overseeing an economy that was remarkably buoyant by historical standards during the decade following 1997. The picture would change dramatically in 2007, both politically and economically. After dithering over the calling of a general election, the newly appointed Prime Minister Gordon Brown and his government became increasingly unpopular, whilst a liquidity crisis in the financial markets developed into something far worse. The onset of a major financial crisis in the autumn of 2008 then plunged the global economy into a deep and prolonged recession. In the face of this, the political economy of the Conservative Party faced its greatest challenge in a generation. Now in government and with constraints on its room to manoeuvre, given the presence of the Liberal Democrats in the coalition, at the time of writing the jury remains out on how effectively the Cameron government has dealt with the admittedly difficult economic inheritance left to it by its predecessor.

The Conservatives’ ‘golden inheritance’ and Labour’s theft of it The Conservative Party’s landslide defeat in the 1997 general election evokes comparisons to similar electoral thrashings dished out to the party in 1906 and 1945 (Wheatcroft, 2005: 231). In terms of post-election party morale, there were also resemblances to the scarcely less depressing failure to win outright either of the two general elections that were fought in 1974. But there was an aspect to May 1997 that made it uniquely dispiriting, even in the context of the aforementioned electoral setbacks endured by the Tories in the twentieth century. To a greater or lesser extent, the party’s electoral failures in 1906, 1945, and 1974 could all be put down to the model of political economy which had been either practiced by or advocated by the Conservatives prior to those elections. The 1906 general election could be regarded as a referendum on the Tory policy of tariff reform, whilst many in the party put its 1945 landslide defeat down to the legacy of the ‘hungry thirties’ and the financial orthodoxy that had been practiced during that decade by a Tory-dominated national

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government in the face of mass unemployment. The failure to win either election in 1974 could be explained by the inability of the Heath government to successfully combat the serious economic and industrial difficulties of the period. The Conservative Party had on each occasion reassessed its political economy and re-established its political effectiveness. Although many in the party continued to support tariff reform after 1906 and the party officially backed such a programme in the two general elections of 1910, the 1923 general election defeat on a protectionist platform finally forced the Tories to abandon tariffs; they would go on to dominate politics for the remainder of the interwar years. Following the 1945 defeat, a reformed conservatism was developed in opposition, which was given its most famous exposition in The Industrial Charter (Conservative Central Office, 1947). It was a prelude to three consecutive general election victories and thirteen years of uninterrupted Tory government from 1951 to 1964. As we have seen in previous chapters, the failures of 1970–74 saw the Conservatives radically re-evaluate their policies; they subsequently enjoyed four consecutive general election victories, which kept the party in office from 1979 to 1997. By contrast, in 1997 most Conservatives saw little wrong with the economic programme which had been implemented by the party from 1979 onwards. The proof appeared to be in the pudding as an economy that was almost universally derided as a basket case in the 1970s had emerged by the mid-1990s as one of the strongest in Europe. By 1997 it had been enjoying noninflationary growth for four years, and interest rates and unemployment were both falling towards levels not seen in decades. The industrial relations mayhem of two decades earlier was a distant memory, with days lost to strike activity much reduced (Marchington, Goodman, and Berridge, 2004). Although many Tories, including Thatcher (1993: 726) herself, regretted the results of using the exchange rate as the key variable for conducting economic management during 1986–92, it could be argued that a successful Thatcherite model of political economy was firmly established by 1997. The centrepiece of this was a domestically determined counterinflationary policy with short-term interest rates the main policy instrument and preset inflation targets the nominal anchor. Since constrained pragmatism was not thought to be enough on its own, it was to be buttressed by sound public

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finances and supply-side measures designed to ensure economic competitiveness. Goods and services markets were to be kept free and the labour market flexible, whilst a deregulated financial market would allow financial innovation that would channel funds to where they were most profitable. Taxation was to be as low as possible and was to be levied on spending rather than income whenever politically feasible. But a major problem which the Conservatives faced post-1997 was that the economic principles outlined above were no longer as distinctive as they once had been. After a prolonged and painful period of political reorientation under first Neil Kinnock and then John Smith, in 1994 the Labour Party elected Tony Blair as leader, following Smith’s premature death. Blair was by any reasonable definition on the market-friendly wing of his party and was content to continue to close the gap between his own party’s economic policies and those of the Conservatives. As early as 1989 Blair, as Labour employment spokesman, had formally abandoned the party’s support for the closed shop (Seldon, 2004: 106). Less than a year into his leadership, the Labour Party were persuaded to abandon Clause 4, a statement in the party’s Constitution that committed any prospective Labour government to widespread nationalisation (Seldon, 2004: 213–28). Labour governments had rarely paid more than lip service to this commitment in any case, but abolishing it outright was seen as a moment of symbolism in the evolution of the party’s political economy. Perhaps more significant still was Labour’s new-found willingness to conform to contemporary models of macroeconomic policy making that had been developed following the breakdown of the original Phillips curve relationship in the 1970s and that were based on the widespread acceptance that there was no long term trade-off between inflation and unemployment. In May 1995, Blair made it clear that any prospective Labour government would pursue stringent anti-inflationary policies (Seldon, 2004: 242). The full significance of this statement was only to be seen after the general election two years later. In advance of the election, Shadow Chancellor Gordon Brown had committed Labour to matching Conservative spending plans for the first two years of the new Parliament (Dale, 2000b: 356). In addition to these macroeconomic commitments, there was a refusal to countenance rolling back the Conservative trade ­union-related

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legislative that had been carried out since 1979 (Dale, 2000b: 359), and Labour made no commitment to renationalising any of the industries privatised under the Tories. Quite a bit of this political facelift can be dismissed as the much-practiced political art of catching your opponents bathing and running off with their clothes. But there was a dimension to Labour’s transformation that went beyond the cosmetic and opportunistic. As was noted in the previous chapter, since the 1980s there had been calls from various quarters for the Bank of England to be made independent. This came to a head politically with Nigel Lawson’s ultimately unsuccessful attempt to persuade Margaret Thatcher to support Bank of England independence in 1988. Further overtures were later made by Norman Lamont but he proved to be no more persuasive with Prime Minister Major than Lawson had been with Prime Minister Thatcher. Although both Lamont and his successor Kenneth Clarke opened up the monetary policy decision-making process considerably, the final say on interest rate decisions remained the Chancellor’s (subject to prime ministerial approval). As Chapter 4 showed, from 1975, a mainstay of the Conservative Party’s position on macroeconomic issues had been the assumption that there was no trade-off to be had between inflation and unemployment in the long run. All a government could therefore hope to do through its macroeconomic policies was to ensure stable inflation whilst microeconomic policies could be used to improve the competitiveness  – and therefore the growth potential  – of the economy. Lawson (1984) had stated this explicitly in his 1984 Mais lecture, and it continued to underpin the outlook of subsequent Conservative governments. A situation in which Bank of England technocrats took responsibility for government-mandated monetary policy objectives was therefore a natural end point for the Conservative Party’s macroeconomic reforms. But the Tories did not complete the job, and it was to cost them dear politically. Labour had quietly been taking a greater interest in central bank independence; in 1992 a Fabian Society pamphlet advocating this measure was written by the Financial Times journalist Ed Balls (Balls, 1992). Two years later, Balls became an advisor to Gordon Brown and thereafter the central figure in Labour’s economic policy-making team. On becoming Chancellor in 1997, Brown immediately opted

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to give the Bank of England operational independence on the setting of short-term interest rates with reference to a government-mandated inflation target. The significance of the move was not just economic, but political. With the British economy exhibiting robust growth for a further decade after 1997, the Labour Party wasted no opportunity to insist that it was the granting of central bank independence that was largely responsible, rather than the extensive economic reforms which were carried out during 1979–97 (Balls, 2006). The Tories did little to help themselves by opportunistically opposing the measure when it was first implemented. This was despite the fact that it was fully consistent with mainstream economic thinking and the party’s own policy making from the mid-1970s onwards. A second significant reform carried out early on by the Blair government was the introduction of a minimum wage. Minimum-wage legislation was always likely to be criticised by the Tories, given that it conflicted with the classical labour market theories that had lent intellectual support to their own labour market policies. According to classical theory, a minimum wage was likely to push wages for many jobs above their market-clearing rates. The result of this would be job losses. Such ‘classical’ unemployment was likely to fall most heavily on the least employable in society, who would be unable to sell their labour at the price prescribed by the minimum wage. Unsurprisingly, the Conservative Party therefore opposed its introduction (Dorey, 2003: 128). Unfortunately, and unknowably for the Tories, the political and economic climates for introducing a minimum wage had never been better. With the economy set to enjoy a further decade of robust growth, the impact of minimum-wage legislation on unemployment was not as great as it might have been under less benign economic conditions, whilst the strong tax revenues enjoyed by the Treasury could be used to ensure relatively generous social security schemes for those unable to find work. Additionally, the government did not overplay its hand. As one economist who was no friend to minimum-wage legislation noted, the minimum wage was at a small fraction of median earnings and was comparable to the rate in the United States (Minford, 2005: 60). It was therefore unlikely to have a noticeably harmful impact on employment, particularly in an economy exhibiting strong growth.

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The Conservative Party’s political options on economic matters following the 1997 general election were therefore limited. Party members could with some justification claim to have won the economic arguments that had raged since 1945. Many did (Bale, 2010: 72–3), and Labour’s willingness to ape the Conservative Party’s economic policies provided strong supporting evidence. But the Tories were now facing a party from which they were largely unable to differentiate themselves in economic policy terms and which they would consequently find it difficult to attack. As noted by Dorey (2003: 127), any Tory criticism of the Labour government’s economic policies would now be interpreted by many as the Conservatives repudiating those policies they themselves had enacted under Thatcher and Major. Additionally, the failure of the Tories to grant operational independence to the Bank of England not only allowed Labour to do the deed themselves and obtain the credit for it, but it also meant that the Blair ministry had a policy for which it was responsible and which its members could point to as the reason for the continued prosperity enjoyed by the country during 1997–2007. Whether this was strictly true or not was beside the point. The benign state of the economy also allowed Labour to achieve a long-time political ambition of introducing a minimum wage with minimal political and economic risk. Despite the celebrated (in Tory circles) ‘victory’ of the Conservatives in the battle of ideas, the factors outlined above, combined with the intellectual cul-de-sac the party soon found itself in, led to an understated though nevertheless significant crisis of the party’s political economy.

The Conservative Party’s political economy in opposition, 1997–2005 Even though the Tories had been comprehensively defeated in the 1997 general election, an initial look at their postelectoral situation suggests that they should at least have been optimistic intellectually. The Thatcherite economic model appeared to have triumphed, both in terms of the improved performance of the British economy relative to its competitors and in terms of Labour’s unwillingness to undermine the reforms carried out during 1979–97. In stark contrast to the post-war period up until the rout of the wets in 1981, the

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Conservatives after 1997 were, as noted by Garnett (2003: 107), remarkably undivided on economic questions. But such certainties were deceptive. Although relatively small in number, there had long been critics of Thatcherism within the Conservative Party, most notably among the party’s self-confessed wets. Sir Ian Gilmour was arguably the most articulate of these; he attacked the conduct of the 1979–90 Ministry both in terms of the social impact of the policies pursued and for the way in which Thatcherism constituted a dogma out of place in both conservative thought and the Conservative Party (Gilmour, 1992). But the 1997 general election massacre threw things into sharper relief; perhaps the strongest indictment came from John Gray, a philosopher and erstwhile classical liberal who had been an ally of sorts to the Tories during the 1970s. His argument was not only that individualist free-market liberalism was incompatible with the conservative conception of society as an organic whole, but also that free-market policies had undermined traditionalism and stability in British society to such an extent that conservatism as a political practice was longer possible (Gray and Willetts, 1997: 163). Given that the Tories were understandably reluctant to jettison the economic policies which they believed had turned the economy around and had now been adopted by their opponents, the main intellectual problem appeared to be the reconciliation of a Thatcherite political economy with a form of conservatism that could alleviate the social problems Britain undoubtedly faced. Among the first to face up to this intellectual conundrum was David Willetts. Willetts had been in the vanguard of Thatcherism from the 1970s onwards as, successively, an advisor to Nigel Lawson, a member of the Number 10 Policy Unit, and the Director of the Centre for Policy Studies (CPS). In 1992 he entered the House of Commons as MP for Havant. Willetts spent time in the 1990s thinking about how the liberal market approach to economic issues that had been practiced by the Tories from the mid-1970s onwards could be reconciled with community cohesion, traditionalism, and respect for the organic nature of society. As a one-time student of Gray’s, he took the opportunity to reply to the former’s critique in a joint publication. Rather than seeing markets as a solvent of community relations, Willetts argued that they constituted a core part of them, and that it was state power that had been responsible for the usurping of many of the functions

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once carried out by the voluntary action of communities (Gray and Willetts, 1997: 167–80). Freeing society from the shackles of the state was therefore a vital task which the Conservative Party had dutifully carried out. The question remained, however, where the party went from there; the broader issue of the extent to which market liberalism was compatible with traditional British conservatism in the longer term remained (and remains) largely unanswered. Much of the intellectual energy of the party’s finest minds had, since the 1980s, been devoted to extending market forces into the public services, with the intended aim of making them more efficient and responsive to the consumer. Reforms of education and health care along market-based lines were a staple of the later Thatcher period, as well as of John Major’s premiership, although the application of such principles to local government finance proved disastrous in practice (Butler, Adonis, and Travers, 1994) and the Community Charge played a starring part in Margaret Thatcher’s Götterdämmerung of 1990. But by 1997, such market-based reforms of the public services provided the most obvious area in which the Tories could differentiate themselves from the Blair ministry, which was tentative as far as pursuing such policies was concerned, at least during its first term in office. Following the 1997 general election defeat and John Major’s immediate resignation, the Conservatives held a leadership election which saw William Hague elected party leader whilst Peter Lilley was appointed his deputy. Like Willetts, Lilley had strong Thatcherite credentials and could reasonably be expected to support the economic policies that had held sway in Tory policy making since 1975. But within two years he was rethinking just how great a role market forces really had to play in the public services and stated bluntly that the free market did not alone constitute conservatism (Garnett, 2003: 115). If there was some intellectual merit to what Lilley was arguing, his politics were far less assured. He chose to deliver his lecture at the Carlton Club on the same night that a party was being held elsewhere to celebrate the twentieth anniversary of the first general election triumph of Baroness Thatcher (as she had by then become). Lilley’s arguments therefore came across as a slap in the face to his former patroness and also occurred at a time when he was weak politically. He was, unsurprisingly, soon moved on from his post as deputy leader.

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The issue of the European Monetary Union (EMU) was also bubbling away in the background. The turnover of MPs at the 1997 general election meant that there were now relatively few Conservative MPs who advocated British adoption of the European single currency, which had been proposed by the Delors Report on EMU as far back as 1989. There were, however, a small number of heavyweight exceptions including Kenneth Clarke and Michael Heseltine. There were good reasons why Conservatives should have largely been hostile towards the idea of adopting the single currency. Indeed, one leading Conservative Eurosceptic claimed there to be at least a hundred (Redwood, 2001). A number of these related to issues surrounding the British Constitution and national sovereignty and need not detain us in a book of this nature. The economic reasons for not joining the single currency included the fact that Britain would lose control of its monetary policy on a permanent basis. This was likely to prove extremely problematic, should the British economy have found itself greatly out of sync with the economic cycles of other economies in the so-called eurozone, as had been the case when Britain was a member of the European Exchange Rate Mechanism (ERM) during 1990–92. But unlike under the ERM, should this situation have occurred with Britain part of the EMU, there was no obvious mechanism for an exit, which led Hague in 1998 to describe EMU as ‘a burning building with no exits’. Official party policy was to rule out membership in the single currency for the remainder of the then-present Parliament and the subsequent one. This ‘two Parliaments’ position had originally been agreed upon in the Shadow Cabinet; it was approved in a 1998 ballot of the party members with 84.8 per cent support (Lynch, 2003: 148–9). The Conservatives had, of course, been badly scarred by Britain’s unceremonious exit from the ERM on 16 September 1992, and the event had acted as something as a catalyst for the political woes subsequently experienced by the party throughout the 1990s. Nevertheless the strong opposition within the party to the single currency could not be dismissed as a mere emotional spasm brought about by the prospect of repeating past failures. As far back as January 1989, Nigel Lawson, in the twilight of his chancellorship, had pointed out the impracticalities of monetary union unless it was buttressed by fiscal and political union (Lawson, 1992: 910). With these not on the political agenda, a single currency was always likely to run into trouble at

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some point. Such arguments continued to be made by senior Tories under successive leaders and, though mocked by many at the time, they have come to look remarkably prescient following the onset of sovereign debt crises throughout much of the eurozone in recent years (Oborne and Weaver, 2011). Hague would eventually attempt to make the most of a position on the single currency which he thought reflected the views of the British public at large; a ‘Save the Pound’ tour formed a major part in his 2001 general election campaign. It did him little good, mainly because only a small proportion of the public believed that a Labour government was a genuine threat to sterling’s existence. Although Tony Blair was in favour of entry, he had been outmanoeuvred by Gordon Brown and the Treasury during the early stages of the 1997– 2001 Parliament, and adoption of the single currency became conditional on the meeting of the five economic tests which had been set by Ed Balls and the Treasury (Seldon, 2004: 315–32). These were unlikely to be met in the short term, and in any case the Labour Party was committed to a national referendum as a prelude to British adoption of the single currency. Additionally, the continuing strong performance of the British economy and comparative sluggishness of the eurozone countries meant that the issue of entry was frequently on the periphery of political debate. Two of the key economic issues remained the difference between the major parties on Bank of England independence and the minimum wage. The Tories did not appear to be on the right side of either argument under the political and economic circumstances of 1997–2001. Although interest rates had initially increased under Labour, they subsequently came down, and from 1999 onwards they were substantially lower than they had been throughout most of 1979–97. Equally, the minimum wage had proved popular, and the abstract arguments against it had not gained much traction with the public. In response, Shadow Chancellor Michael Portillo cut the party’s losses and announced in 2000 that a future Tory government would not reverse either Bank of England independence or Labour’s minimum-wage legislation. Going into the 2001 general election, the Tories had few cards to play against Labour on the economic front. Economic proposals in the party’s manifesto included a pledge to establish a Council of Economic Advisers to advise the Chancellor on fiscal policy matters

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(Conservative Party, 2001: 17). This commitment to a great extent presaged the setting up of an Office for Budget Responsibility (OBR) under the coalition government in 2010. Two years previously, the Tories, with Francis Maude as Shadow Chancellor, had pledged that a Conservative government would commit itself to reducing taxation as a proportion of GDP over the course of the next Parliament. But Portillo had subsequently abandoned this dangerous hostage to the vagaries of the economic cycle, and there was relatively little to distinguish the Conservative position on the economy from Labour’s when polling day came around (Dorey, 2003: 129). The Tories initially pledged to cut spending by £8 billion through efficiency savings (Conservative Party, 2001: 17). But a claim by Shadow Chief Secretary to the Treasury Oliver Letwin that taxes under the Tories would be cut by £20 billion led to Labour highlighting the alleged failure of the Conservatives to do their sums and arguing that there was a secret Tory plan to take an axe to spending on public services (Dorey, 2003: 130). Although taxes had increased under Labour, it had been via indirect rather than direct taxation, an approach which the Tories tended to favour in any case, and there was to be no repeat of the 1992 general election, when the Conservatives had successfully exposed Labour’s lack of credibility on the issue of taxation. When the votes were counted, the Conservative Party found itself with a net gain of just one MP in the new Parliament, and Hague immediately fell on his sword. He was replaced by the committed Eurosceptic Iain Duncan Smith. Duncan Smith had overcome Kenneth Clarke in the party’s membership ballot, with the result owing much to the latter’s open stance towards the European Union in general and the single currency in particular. Under Duncan Smith, the Tories remained opposed to British participation in EMU, but the issue declined further in political importance as the government rejected eurozone entry in June 2003 on the basis of the five economic tests not having been met in full (Peston, 2005: 242–3). To the extent that Europe was on the political agenda during the 2001–05 Parliament, it was the largely noneconomic issue of the proposed European Constitution that dominated proceedings. Duncan Smith himself was not to last the Parliament as party leader; he was replaced by the former Home Secretary Michael Howard in

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November 2003. Nevertheless, Duncan Smith was in place long enough to have a genuine influence on the party’s thinking on the issue of poverty. Having been humbled by a visit to the Easterhouse area of Glasgow, he declared that the Tories should become champions of the most vulnerable in society (Bale, 2010: 154). The fruits of his labours on the issue of poverty came only after his ejection from the leadership and his founding of the Centre for Social Justice (CSJ), which would carry out extensive research on the topic. This would eventually provide the Conservatives with a distinct position on a crucial socioeconomic issue without requiring the party to renounce its Thatcherite past. It did not come in time for Michael Howard, but would do for his more fortunate successor. Despite the focus on poverty, the basic Thatcherite model of political economy remained firmly entrenched under Duncan Smith and was not challenged by Howard. In terms of the details of the Tory economic policies promoted under Howard, one of the key events was the inquiry by businessman David James into alleged government waste. When James reported in early 2005, he identified potential savings of £35 billion (Bale, 2010: 241). More significant than the amount was the way in which the Tories proposed to utilise the proceeds. £8 billion was to be used to reduce the budget deficit and £4 billion to finance cut taxes, with the remaining £23 billion intended for the public services. This implied a subtle shift in the Conservative position on funding the public services which was to become more pronounced in subsequent years. The continuing growth of the British economy meant that economic issues were not the main focus of the 2005 general election, despite the Tory manifesto promise of £4 billion in tax cuts. The issue of immigration was for Howard what the single currency had been for Hague in 2001, and the Tories spent a significant part of the campaign attacking the government on this issue (Bale, 2010: 251–2). Despite reduced public enthusiasm for both Blair and his government (which received even fewer votes than Major’s Conservatives had in 1997), the Tories were once again defeated, although their share of the vote did rise and more than thirty net additional Tory MPs were returned to Westminster. In spite of this, Howard immediately offered his resignation and the Tories were once again left to conduct a post-election leadership contest.

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David Cameron and the Conservative Party’s political economy The aftermath of the Conservative Party’s third consecutive general election defeat saw the party engaged in a prolonged leadership contest. Following a membership ballot in which he comfortably beat his main challenger David Davis, David Cameron was installed as party leader in December 2005. Cameron’s central argument throughout his leadership campaign was that the Conservative Party needed to fundamentally change and show the public that it had changed if it hoped ever to regain office. Such a strategy was partly based on research that appeared to show that the Conservative Party was a toxic brand that put off potential voters, even when they were in agreement with the policies the party espoused (Ashcroft, 2005). Cameron and his allies were not the first to think along such lines; this ‘modernising’ faction of the Conservative Party had originally clustered itself around Michael Portillo at the turn of the millennium. Indeed, a strong supporter of the modernisation strategy has pointed out that it had its origins in work done by Daniel Finkelstein, Rick Nye, and Andrew Cooper of the Social Market Foundation prior to the 1997 general election (d’Ancona, 2013). The three claimed that there was much public distrust of Tory motives, even when the party’s policies were popular. This tendency was particularly acute with regard to public services. The preferred strategy for the modernisers was for the party to become more open and inclusive so as to ‘detoxify’ its image among sections of the population that had come to view the Tories with suspicion. The Conservatives also needed to give up the pursuit of the platonic ideal of Thatcherism and instead marry a broadly promarket approach to a respect for people’s anxieties regarding the provision of public services. The problem with such a strategy was that its precise policy prescriptions were far from obvious. It therefore offered relatively little in terms of resolving how Thatcherite economics could be married to a distinctively conservative agenda that took into account such notions as society’s traditions and its organic nature. In any case, the modernisers around Cameron showed no sign of wishing to repudiate the core of Thatcher’s legacy. Indeed, many had been fully supportive of her at the time of her premiership and had acted as junior aides in the party during the late 1980s when she was still Prime Minister.

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A particularly cynical view of modernisation would be that it amounted to little more than a marketing strategy, which did not offer (and did not pretend to offer) deep insights into the party’s political economy. This is perhaps too harsh a verdict, particularly as modernisers would be the first to claim that their position is much more of a disposition than a doctrine and that precise prescriptions on policy were not part of its remit. But even a far more charitable judge of the modernisation approach would struggle to argue that it has provided a solid intellectual base for the sort of rethinking of the party’s position on economic issues that occurred in the late-1940s and the mid-1970s. A critique of state activity was part of the argument Cameron put forward against the Labour Party, which by the time he became Tory leader had been in office for more than eight years and was showing distinct signs of wear and tear. Cameron’s argument was that the state was interfering too much in the lives of ordinary people and that its activities should be curtailed. In some ways this could be regarded as a reheating of traditional Thatcherite arguments against state activity. There was, however, a subtle difference in what Cameron and his allies were arguing. Whereas Thatcherites during the 1970s and 1980s had primarily (though by no means exclusively) focused on the state’s baleful economic role, the ‘Cameroons’ (as the modernising clique around Cameron was dubbed) focused more on its social role. In this respect there were considerable similarities to what David Willetts had argued the previous decade (Willetts, 1994). Although by no means a doctrinaire moderniser himself (he had supported Davis in the 2005 leadership contest), Willetts had strongly influenced the earliest of the modernisers with his writings (d’Ancona, 2013). But this did not greatly impact on the economic arguments put forward by the Cameron-led Conservatives. They remained convinced that the economic reforms of 1979–97 were broadly right and that Labour’s decision not to substantially reverse them had underpinned the continuing strong performance of the British economy (Lee, 2009a: 5–6). This economic assumption existed alongside a political one. The Tories had offered modest tax cuts at each of the previous three elections and had been bested by Labour on all three occasions. Attacks from Labour politicians had long centred on the question of where the offsetting reductions in spending on public services

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would come from if the Conservatives were truly resolved to cut taxes meaningfully. Rather than give Labour the opportunity to play the same card again, the Conservative leadership resolved to set themselves against up-front tax cuts from the outset. The argument developed by Cameron’s close ally and Shadow Chancellor George Osborne was that a prospective Conservative government would ‘share the proceeds of growth’ between tax cuts and increases in public expenditure (Gamble, 2012: 61–2). The underlying assumption was that, with the necessary economic reforms having long since been carried out, a continuing expansion of the British economy was almost a given. Consequently, there was a willingness to largely accept the boundaries between the public and private sectors of the economy which had been established during Gordon Brown’s long tenure as Chancellor of the Exchequer. This acceptance was formalised in the autumn of 2007 when George Osborne committed a prospective Conservative government to matching Labour’s future spending plans in the run-up to the so-called election that never was (Bale, 2010: 349). This is not to say that the Tories were unabashed Brownites; Osborne in particular was strongly critical of the Chancellor recently turned Prime Minister. Brown’s alleged enthusiasm for enacting regulations that made things difficult for entrepreneurs and businesses was attacked, and the Tories also carved out a distinctive position with a proposal for tax breaks for married couples. It is intriguing that this shift appeared to contradict the tax neutralisation position which the Tories had largely made their own during the 1980s, which was covered in Chapter 2. This idea had, however, been in evidence since 1997, with the Tories making a similar promise of a new married couple’s allowance in their 2001 manifesto (Conservative Party, 2001: 7). Another important piece of positioning on taxation came at the 2007 Conservative Party conference, when Osborne promised to raise the threshold for the application of inheritance tax to £1 million. The significance of this measure at the time was more political than it was economic, as Labour’s replacement of Tony Blair as Labour leader and Prime Minister with Gordon Brown had coincided with the establishment of a strong government lead in the opinion polls and the prospect of an autumn general election through which Brown could hope to maintain or increase his parliamentary majority. With the Tories

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in such a weak position, it was hoped that Osborne’s announcement would contribute to staying Brown’s hand. For whatever combination of reasons, Brown eventually chose to postpone the election, with disastrous results for both his own and his government’s popularity and reputation for honesty and competence. The commitment to raising the threshold on inheritance tax is an interesting one from the perspective of the Conservative Party’s intellectual development. From an extreme individualist (or perhaps hedonistic) perspective, it can be argued that inheritance tax is not necessarily a bad way of collecting taxes, as it falls on those who are deceased and is therefore preferable to taxes on the income and spending of living individuals. The ‘small c’ conservative position is slightly different, given that a reverence for continuity, tradition, and family would recommend that property be passed on to succeeding generations, rather than appropriated by the state. But despite the boost that its inheritance tax proposals provided to the Tories during the autumn of 2007, the economic storm which was then just beginning to make itself felt around the world would ensure that this commitment would become much more difficult to defend, come the eventual general election in 2010.

The 2007–08 financial crash and the ‘Great Recession’ Although the precise long-term factors that resulted in the financial crisis which began in the late summer of 2007 are too complex and too disputed to be analysed in great detail here, the basic outline of events is fairly uncontroversial. Various lenders in the United States had offered mortgages to borrowers whose means of repayment were highly suspect. When house prices fell and interest rates increased, this ‘subprime’ debt was subject to a large number of defaults. This bad debt had in many cases long since left the balance sheets of the original lender and had been sold on to other financial institutions. More than this, in a process known as ‘securitisation’, subprime debt had typically been combined with other types of debt and repackaged into complex financial instruments such as the soon-tobe-infamous residential mortgage backed securities (RMBSs) and collateralised debt obligations (CDOs). There were doubts in financial markets concerning which institutions were most exposed to bad

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debt. With banks consequently becoming increasingly unwilling to lend to one another, the wholesale funding market seized up. One of the most visible early impacts of the so-called credit crunch was the first major run on a British bank in well over a century. Northern Rock, a bank based in the north of England, had developed a business model which was particularly reliant on securitisation and continued access to the wholesale funding markets. When this source of financing dried up, it was forced to seek emergency loan facilities from the Bank of England so as to continue funding its assets. When news of this made it into the public domain, a run on the bank took place in September 2007 as depositors sought to withdraw their money. After a period of delay, the government guaranteed all deposits held with Northern Rock, and the bank was eventually taken into public ownership the following February. The Northern Rock crisis was relatively trivial compared to what was to follow in the autumn of 2008. After months of market turmoil, the US investment bank Lehman Brothers filed for bankruptcy on 15 September 2008. This acted as a catalyst for a full-scale meltdown in the financial markets. For a period there were fears of a complete collapse in the global financial system. But at the eleventh hour, policy makers were able to come up with a package of measures mainly relating to the recapitalisation of banks that were holding large amounts of toxic assets and therefore seeing their capital ratios plummeting. Although financial markets were partially reassured, it was not enough to avert a major world recession, which resulted in the very rare phenomenon of an annual contraction in global output during 2009. In the case of Britain, the 2008–09 Great Recession was to be the deepest of the post-1945 period, and it completely altered the political outlook. Up until the collapse of Lehman Brothers, the Conservative Party had been enjoying healthy leads in the opinion polls which, if maintained, would have seen the party win its first parliamentary majority since 1992. Between the cancelling of the autumn 2007 election and the Lehman crisis, Gordon Brown had endured an Annus horribilis, which led to persistent speculation that he would be replaced as Labour leader and prime minister. But the measures his government put in place in the autumn of 2008 to tackle the financial crisis were perceived by some influential economists, most notably the Nobel Prize winner Paul Krugman, as a model for the

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world to follow. His political reputation underwent a corresponding partial rehabilitation. The financial crisis was an unwanted and damaging event for the Tories politically, and they found themselves intellectually and organisationally ill-equipped to deal with it. The party’s leaders had assumed during 2005–07 that the fundamentals of the British economy were sound and that the best thing to do was to neutralise the economy as a political issue. The intellectual focus of the party had instead been on issues such as public services reform and the environment. This was reflected by the think tanks which the party’s leadership had gravitated towards. Whereas links with its traditional economic allies at the Institute of Economic Affairs (IEA) and the Centre for Policy Studies (CPS) had to some extent atrophied, senior Tories had become closely associated with Policy Exchange, which though ostensibly free-market in its approach, tended to put much more emphasis on promoting public service reforms and localism. In addition to this, Shadow Chancellor George Osborne also had commitments as party strategist and chief fundraiser, although he abandoned the latter role in the autumn of 2008, following allegations concerning the solicitation of donations aboard a yacht, which embarrassed the party’s leadership. The perception of many that the crisis was the result of unfettered markets also made it extremely difficult for the Conservatives to construct an effective response to the events of 2007 onwards. Since the Thatcher revolution in the party’s political economy, many Tories had come to see support for the market and financial orthodoxy as almost axiomatic principles with little required in terms of justification. Those Tories who had thought deeply about the market and its role during the post-war period and had argued its corner in the Conservative Party prior to Margaret Thatcher becoming leader were either dead or had long since left the front line of politics. With the free market under sustained intellectual attack in a way it had not been for many decades, its natural political defenders did not prove equal to the task. There were, after all, interpretations of the crisis that did not place the blame squarely at the feet of unregulated markets. Subprime debt had indeed been issued in the United States in large quantities. But it was often with the connivance of and sometimes under outright instruction from US government agencies

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(Butler, 2009). For whatever reason, the Tories appeared strangely reluctant to make such arguments. The macroeconomic aspect of Thatcherite political economy also found itself in need of defence, as the case for a fiscal stimulus was made by a number of prominent economists. The Tory leadership would eventually prove itself to be more robust on this matter, though its inability or unwillingness to cite underlying macroeconomic causes for the crisis allowed a narrative of unregulated markets and avaricious bankers to dominate accounts of what had brought about the financial crisis and the subsequent recession. As with the free market, the allegation can be made that a preference for ‘sound finance’ was nothing more than a reflexive and axiomatic belief for senior Tories, rather than a thought-through position which they had spent significant amounts of time reflecting on. The contrast with senior Tories during the 1970s, who took the time to consider the case for monetarist polices, is stark. In mitigation, it should be stated that the economic problems of 2007 onwards arrived with a suddenness that shocked even those with great economic expertise, whereas the economic difficulties which reached their nadir during the 1970s had long been troubling policy makers. There were, indeed, some potential ‘sound finance’ macroeconomic explanations for what took place from 2007 onwards. Monetary growth had been particularly strong during the period leading up to the credit crunch. The M4 ‘broad’ measure of the money supply moved into double digits in percentage terms in March 2005 and remained there until after the credit crunch began, despite a belated tightening of monetary policy (Greenwood, 2009: 40–1). In March 2007, the Governor of the Bank of England was forced to write his first letter to the Chancellor, explaining why the inflation rate was more than a percentage point above its target. The United States had pursued a still more cavalier monetary policy, with the US Federal Reserve holding interest rates at exceptionally low levels for a prolonged period in response to the 2001 US recession and the 9/11 terrorist atrocities of that same year. A monetarist explanation could also be offered for the subsequent recession. The UK government’s instructions to banks to raise their capital-to-asset ratios in the autumn of 2008 led, unsurprisingly, to banks shrinking their balance sheets by cutting credit lines and restricting the advance of new credit facilities. With the main engine

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of monetary growth shut down, the result was a collapse in the broadly defined money supply during 2008–09 that coincided with a plunge into recession. In response, the Bank of England in March 2009 announced a programme of so-called ‘quantitative easing’ through which £150 billion worth of gilt-edged securities would be bought with newly created money. This approach constituted a classic monetarist approach to the economic difficulties being faced. With interest rates cut to 0.5 per cent, quantitative easing would act on the quantity of money in the economy rather than on its price (Congdon, 2011: 399). Surprisingly, given the traditions of monetarism within the party, the Conservative response to quantitative easing was less than enthusiastic initially. Unable to pass up an opportunity to put the boot into his opponents, the Shadow Chancellor declared that ‘printing money is the last resort of desperate governments’. This did not suggest that he had read a great deal of Friedman and Schwartz’s (1963: 299–419) classic analysis of the Great Depression, although Osborne’s views on quantitative easing would noticeably soften over time. The main reason for this was that the central pillar of Conservative Party macroeconomic policy from the autumn of 2008 onwards was its commitment to fiscal retrenchment in order to reduce Britain’s budget deficit. With fiscal expansion ruled out, the option of further monetary stimulus was to be left on the table under a prospective Conservative government. The final move to a distinctive Conservative position on fiscal policy came in November 2008, but its genesis was during the early stages of the financial crisis and in particular during the run on Northern Rock in 2007. With the prospect of an autumn election still uppermost in Tory minds, there was both a need and an opportunity to confront Gordon Brown and Labour on the issue of the economy. Moving away from the strategy of ‘parking’ the economy as a political issue, Cameron and Osborne attacked the economic policies pursued by Brown throughout his time as chancellor and prime minister. They were particularly critical of his record on fiscal policy, as budget deficits had been run up repeatedly since the early 2000s, despite the continued expansion of the economy. This expansion should have made managing the public finances easier rather than harder. The Tories pledged that if elected they would create an Office for Budget Responsibility (OBR) that would effectively act as a

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government auditor and would advise as to whether fiscal policy was on a sustainable trajectory or not. Lee (2009b) has identified three stages to David Cameron’s leadership in opposition, as far as economic policy is concerned. The 2005–07 commitment to ‘share the proceeds of growth’ constituted the first stage; the attacks on Gordon Brown’s management of the economy was the second; and the third stage began in November 2008 with rumours that the Chancellor, Alistair Darling, was preparing a Keynesian-style stimulus in the 2008 pre-budget report, consisting of increased public spending and a temporary cut in the rate of value-added tax (VAT). In response, Cameron announced that the Conservatives would no longer commit themselves to matching Labour’s spending plans from 2010–11 onwards. This constituted a definitive drawing of the battle lines over public finances; competing proposals for tackling the budget deficit were to be major themes of the 2010 general election.

The 2010 general election and the coalition government The Conservatives fought the 2010 general election on a ‘change’ agenda partly modelled on Barack Obama’s successful 2008 run for the US presidency. Whether conservative politics and a thirst for change are natural bedfellows is highly questionable, and the Conservative campaign was not a notably strong one (Green, 2010). Shortly before the campaign, the Tories had unveiled a ‘big society’ agenda, which emphasised the importance of activities which were not directly associated with either the market or the state, such as volunteering. Since only political eccentrics of various hues could possibly have objected to the desirability of such activities, it was not particularly obvious what purpose the agenda was meant to serve. Aside from its unfortunate acronym, the big society could be caricatured by its opponents as cover for drastic cuts in public spending. It was largely though unofficially dropped by the Tories and, combined with the unexpected phenomenon of Cleggmania, limited the impact of the Conservative campaign (Green, 2010). The centrepiece of the Conservative Party’s argument on the economy was the one that had been developed in opposition from the autumn of 2008 – namely, that a budget deficit of 11.1 per cent

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of the country’s GDP was clearly far too large to be sustainable and needed dramatic reduction. The party’s central argument in support of this approach was that a failure to deal with the deficit would lead to a downgrade in Britain’s international credit rating. The increase in interest rates that was likely to follow would lead to baleful consequences for the nascent economic recovery. The Conservatives therefore proposed to enact an emergency budget within 50 days of forming a government so as to set out a plan for eliminating the bulk of the structural budget deficit within a Parliament (Conservative Party, 2010: 7). In many ways, the manifesto constituted a fairly standard set of post-Thatcher Conservative Party proposals on economic matters with promises to cut waste, simplify taxation, and encourage enterprise and small businesses. But alongside these were proposals to ‘rebalance’ the economy in favour of investment and exports, reform the financial services industry, and create a ‘greener’ economy (Conservative Party, 2010: 1–31). It was not immediately obvious how these aims were to be achieved without resorting to greater government intervention in the economy. The failure of the Conservatives to win an outright majority in the 2010 general election left the party’s leadership in an awkward position. To the extent that its ‘modernisation’ of the Conservative Party had been accepted by many of its members (parliamentary or otherwise), it had been accepted tacitly on the basis of Cameron and his allies delivering a parliamentary majority. Having underdelivered on that count, the immediate post-election period was potentially one of supreme danger for his leadership. A so-called rainbow coalition of anti-Conservative parties was an outside possibility. The Tories could have chosen to go it alone as a minority government and dared the opposition parties to vote down their economic proposals in the knowledge that this would precipitate another general election. The eventual outcome was an alliance between the Tories and the Liberal Democrats, who after tense negotiations agreed to form a coalition government. It was the first formal coalition of two major political parties in British government since 1945 and had profound implications for the governance of the country. Precisely how the government came to be formed and its objectives defined is a subject for future political historians and in any case lies beyond the scope

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of this book. What is required here is a consideration of its stated aims and how these are related to the themes developed in previous chapters. The self-stated central purpose of the government is to reduce Britain’s gargantuan fiscal deficit. All parties had to some degree campaigned on the issue of deficit reduction, but their positions were certainly distinct. Of the three main parties, the Tories had advocated the most rapid fiscal contraction, whilst Labour had supported a much slower rate of deficit reduction. The Liberal Democrats had been closer to Labour but to some extent split the difference. There was also a debate concerning just how the deficit should be closed. Where the Tories had supported the bulk of this reduction coming from spending cuts, both the Labour and Liberal Democrat parties had been more sympathetic to tax rises. The agreed-on coalition policy on deficit reduction proved to be much closer to the Conservative pre-election position than to the Liberal Democrat one. This was hardly surprising, given that Tory MPs outnumbered Liberal Democrat MPs by approximately six to one. The Conservative position on the central issue of economic management was therefore always likely to be adhered to. The Conservative Party’s position on cutting the deficit quickly and doing so primarily through spending cuts rather than by tax increases was one that could be expected from a party that had almost invariably advocated a small state and orthodox public finance policies for more than three decades. The quid pro quo for the Liberal Democrats was an agreement to raise the personal tax free allowance, with a view to helping the lowest paid workers. This was a fascinating development for Tory economic policy. Although a low-tax party in principle, the attitude of Tories towards increasing tax thresholds had been somewhat ambiguous in previous years. The Conservatives had increased the real terms tax thresholds of the lowest-paid workers on a regular basis during the 1980s. But when push came to shove on the public finances at the time of the 1981 budget, it was through a nominal terms freezing of the tax thresholds (at a time when the inflation rate was in double figures) that the government raised the bulk of the income required to reduce the public sector borrowing requirement (PSBR). A rise in either the basic rate or the top rate of income tax was ruled out (Thatcher, 1981: 136–7).

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The reason that the Conservatives have proved to be so schizophrenic on this issue is that there are legitimate conservative reasons to be both for and against raising the income thresholds of the lowest-paid workers. A basic dislike of taxation and the problem of the ‘poverty trap’ suggests that Tory advocacy of increased income tax thresholds for the lowest-paid workers should be a given. But the prospect of a narrowing of the tax base and the engendering of a culture within which certain people see themselves as exempt from income tax is not one most conservatives would view with enthusiasm. Alongside this issue was the problem (for the Tories) of the new 50 pence in the pound additional rate of taxation that been announced by Labour shortly before they left office. At a time of recession and proposed public spending restraint, the politics were awful for the Conservatives, as was to be proved in the aftermath of the 2012 budget. Indeed, it can be argued that the Brown government introduced the tax principally for the reason of wrong-footing the opposing party. Although the party’s commitment not to raise either the basic or top rate of income tax had been a leitmotif of Labour’s broader reconciliation with Thatcherite political economy during the 1990s, the alleged excesses of financiers had put redistributive tax policies back on the political agenda, and Brown was only too happy to exploit the opportunity. The Liberal Democrats were strongly against reducing the top rate of tax and, in the short run at least, the Tories were content to see it remain in place. Nevertheless, the party’s leaders regarded the measure as a temporary one. With the Tories long since convinced that incentives in the tax system were a vital spur to growth, this was hardly surprising. Indeed, it would have required a rejection of almost a half century of Tory thinking and policy making on taxation matters for them to have advocated a different position. When the additional rate was eventually cut from 50 pence to 45 pence in the pound in the 2012 budget, it came at the cost of concessions to the Liberal Democrats, which contributed to the presentational difficulties associated with the budget. With the central lines of the new government’s fiscal and financial strategies in place, the main problem concerned how the government was to implement a strategy of deficit reduction under difficult political circumstances whilst keeping both sides of the coalition happy. Partly in order to do this, the key economic portfolios were split

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between Tories and Liberal Democrats. Whilst the Prime Minister’s closest ally, George Osborne, became Chancellor, it was the Liberal Democrat David Laws who became Chief Secretary to the Treasury. Laws was arguably the most fiscally hawkish of the Liberal Democrats, and though he was soon forced to resign over a parliamentary expenses irregularity, he was replaced by the similarly minded Danny Alexander. Meanwhile, it was the former Liberal Democrat Treasury spokesman Vince Cable who became Secretary of State for Business, Innovation and Skills (BIS). The first test of the new Treasury team was an emergency budget delivered by Osborne on 22 June 2010. It made clear both the pace of the intended reduction in the budget deficit and the extent to which tax rises and spending cuts would contribute to this. Specific spending decisions were to be deferred to the autumn so that the comprehensive spending review could take place in the interim. Nevertheless, the budget was significant in terms of how ministers chose to raise taxes, with the VAT rate increasing from 17.5 per cent to 20 per cent. This approach to VAT was not dissimilar to the one pursued in the 1979 emergency budget, although – unlike 1979 – there was no corresponding move to cut income tax. It did, however, conform to the Conservative Party’s long-standing approach to taxation: increases in indirect taxation were favoured over rises in direct taxes. With fiscal stimulus rejected in favour of policies designed to bring about a faster mending of the public finances, the main instrument used for maintaining demand in the economy has been expansionary monetary policy. With monetary growth still sluggish, the Bank of England continued its programme of asset purchases with newly created money, and interest rates have remained at 0.5 per cent. Efforts to increase the creation of credit by banks which began under the Brown government have continued, with various initiatives including Project Merlin, the National Loan Guarantee Scheme, and the Funding for Lending Programme. So far these have not proved to be notably successful. The proposal for higher capital-to-assets ratios, made in relation to reform of the banking sector by the Vickers Review, may also prove to have a negative impact on credit growth. Vickers also proposes that banks ‘ring fence’ their retail banking activities from their riskier investment banking operations, with only the former eligible for state support in the event of another financial crisis. This marks

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another significant move away from the economically liberal ideal of a free-market-based banking sector. Although the coalition’s approach to macroeconomic policy has been largely in keeping with the financial orthodoxy practiced by the Conservatives since the mid-1970s, this has not been buttressed in practical terms by the traditional Tory commitment to liberalising the supply side of the economy. For political reasons, such policies have been difficult to implement, as the Liberal Democrats have tended to be sceptical of measures designed to loosen up the operation of the product and labour markets. The most obvious case of this came with the publication of the Beecroft Report (Beecroft, 2011), which proposed a substantial liberalisation of Britain’s employment laws. A number of Beecroft’s recommendations were vetoed by Business Secretary Vince Cable, including proposals to make it easier for employers to dispense with workers. As a direct result, the coalition has pursued a mixture of microeconomic policies with no obvious unifying theme. Although some policies, such as the announcement of new Enterprise Zones by the Chancellor in the spring of 2011, constitute a nod to Thatcherite political economy, there have also been U-turns in the face of interest-group pressure on issues such as forestry privatisation. Reforms designed to loosen up Britain’s notoriously tight planning laws remain unimplemented at the time of writing, and reforms to education and welfare, whilst ambitious, are unlikely to yield significant economic gains in the short term. The government has also been content to operate a number of interventionist schemes, such as the Regional Growth Fund, and has been particularly keen to support the manufacturing sector in an effort to rebalance Britain’s economy away from financial services. The incorrigibly interventionist Lord Heseltine was commissioned by the government to produce a report offering recommendations designed to encourage economic growth. When the report was published in October 2012, its 89 recommendations included increased capital spending on infrastructure, planning reform, and a more activist regional policy (Heseltine, 2012). The period between early 2013 and the 2015 general election is likely to constitute a defining period for the coalition so far as economic matters are concerned. Following the so-called double-dip recession and the presentational disaster of the 2012 budget, which

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resulted in numerous government U-turns, the coalition’s leaders shall in all probability have to take firm decisions on its economic strategy in the upcoming period. In this respect, they are faced with much the same situation as that which confronted the Heath government in 1972 and the Thatcher government in 1981. A further quarter of negative growth (the fourth out of five) was recorded for the fourth quarter of 2012, and public borrowing is set to be higher in 2012/13 than it was in 2011/12. Contrary to original intentions, what reduction there has been in the budget deficit has come largely from tax increases, rather than from spending cuts, and what spending cuts there have been have come from the capital budget, rather than through reductions in current spending. The last point is likely to prove damaging to Britain’s long-term rate of growth. With credit-rating agencies already having downgraded the AAA rating of gilt-edged securities, the Chancellor in particular is unlikely to enjoy a comfortable run-up to the next general election. In any case, a credible deficit reduction strategy is a necessary but by no means sufficient condition for a successful economic policy programme. There are various competing options a government can take so as to encourage growth, and in the present political climate, the absence of growth appears to be the coalition’s most manifest threat. Although supply-side liberalisation is likely to remain the favoured Conservative Party approach to the problem, the political constraint of governing with the Liberal Democrats means that the enacting of such policies may be no easier to achieve now than it has proved during the first three years of the coalition’s life.

Conclusions Despite their apparent victory in the battle of ideas regarding how an economy should be managed, the period since 1997 has been a difficult one for the Conservatives in political economy terms. First, the Tories found themselves for a long time unable to substantially differentiate themselves from Labour in terms of policies towards economic management. This, together with the party’s intellectual failure to bind Thatcherite political economy into a broader Conservative vision for Britain, led to the Tories being kept out of office for a prolonged period, during which the British economy grew strongly.

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When the economic good times did finally come to an end with the financial crisis that began in 2007, the Conservatives found their default model of political economy (free markets and sound money) under sustained intellectual attack. Their response to this was underwhelming and almost certainly contributed to their failure to win an outright parliamentary majority at the 2010 general election. Although they criticised the Brown government’s attempts to manage the crisis by aggressively pursuing deficit spending, they were largely unable to counter the popular notion that the financial crisis was caused by unrestrained markets. This was despite there being alternative interpretations which the Tories could have put forward. Although a combination of economic liberalism and sound finance policies remain at the core of the Conservative Party’s political economy as of the present time, the political constraints of coalition government have meant that the Tories have experienced difficulties when attempting to implement their desired economic policies in government since 2010. Although the Liberal Democrats have been willing to support a sustained fiscal contraction in order to reduce the budget deficit, they have been much more reluctant to let the Tories carry out their traditionally favoured microeconomic programme of supply-side liberalisation. The extent to which the coalition in general and the Conservative Party in particular can overcome these problems remains an issue of debate at the time of writing.

6

Conclusions

This book has looked to achieve two main things. First, it has attempted to provide an analysis of the Conservative Party’s making of economic policies, from its period in opposition under Edward Heath through to the fall of John Major’s government in 1997. Second, it has tried to place the post-1997 period of Conservative Party political economy into its historical context. In light of these objectives, this concluding chapter has been divided into two main sections. The first section draws together the analysis carried out in Chapters 2, 3 and 4 and presents some firm conclusions about how the Conservatives chose to construct and implement economic policies between 1964 and 1997. The second section considers the future of the Conservative Party’s political economy in light of the development of the party’s outlook on economic matters since 1964, as well as the events of the present day.

Interpreting the history of Conservative Party economic policy making, 1964–97 The core of this book is an analysis of the Conservative Party’s making of economic policy during the period 1964–97, which was conducted in Chapters 2, 3 and 4. From the perspective of the political or economic historian, some important conclusions can be drawn in the following seven areas: the nature of Selsdon Man; the nature and underlying causes of the Heath government’s 1971–73 U-turn; the importance of the 1975 Conservative Party leadership election; the nature of microeconomic, industrial relations, and labour 178

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market policies under Thatcher and Major; the post-1975 rejection of neo-Keynesianism and pursuit of monetarism; the search for an appropriate nominal anchor, particularly during 1979–92; and the continuities and changes in the party’s approach to taxation policy across the whole period. Beginning with the nature of Selsdon Man, a number of accounts of the Heath government, including those of Bruce-Gardyne (1974) and Holmes (1997), have claimed that the policies adopted by the Tories in 1970 constituted an attempt to revise the post-war consensus in favour of market liberalism and sound money. The evidence considered in Chapters 2 and 4 in particular suggest that this interpretation is exaggerated and is heavily dependent for supporting evidence on the rhetorical excesses of Edward Heath and John Davies on either side of that year’s general election. In reality, regional policy continued to be interventionist, the Ridley-Eden proposals for denationalisation were never taken up by key policy makers, and the financial market liberalisation brought about by Competition and Credit Control (CCC) in 1971 (which the Bank of England was largely responsible for in any case) was soon reversed when it interfered with what were considered more important policy objectives. If there is little evidence to support the idea that Selsdon Man was ‘proto-Thatcherite’ in terms of microeconomic policy, there is no evidence whatsoever for believing Selsdon Man to have been so with respect to macroeconomic policy. Chapter 4 showed the extent to which neo-Keynesian ideas continued to dominate macroeconomic policy making in the Conservative Party throughout 1964–70 and showed there was no penetration whatsoever of the idea that ‘money mattered’ during this epoch. Full-blown monetarism of the type that influenced the party’s leadership after 1975 did not so much as make it onto a meeting agenda of the Future Economic Policy Group (EPG) before the 1970 general election. Meanwhile, the relatively small number of Tories in favour of monetarism sat impotently outside of the policy-making process. It is in light of the points made above that the Heath government’s 1971–73 U-turn must be considered and its origins debated. Senior Tory economic policy makers continued to think that there was a long-run trade-off between inflation and unemployment and hoped that demand management alone would lead to a suitable compromise between these two key variables. When this did not materialise,

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they simply applied their ideas to a different economic context, rather than executing a U-turn as such. Demand management was to be used to stimulate growth and a prices and incomes policy used to moderate inflation. The rejection of a prices and incomes policy in the party’s 1970 general election had always been a political act, rather than one based on economic principle, in any case. At the microeconomic level, the government certainly became more interventionist from 1972 onwards. But given that microeconomic policy had not been notably free market during 1970–72, this can hardly be considered compelling evidence for the full-scale U-turn alleged by those such as Holmes (1997). The collapse of the 1970–74 Conservative government and the party’s failure to win either general election held in 1974 made Heath’s position as leader untenable. That Heath was replaced as leader at the beginning of 1975 was crucial in allowing free-market and monetarist ideas to penetrate the party’s main policy-making machinery. Heath was intellectually opposed to such ideas in any case, but in addition to this, he could not have adopted them without implying that his 1970–74 government had pursued misguided policies. A new leader was therefore required if policy was to be substantially recast. In this sense, it was sufficient that Thatcher was not Heath. Although Thatcher was unquestionably the leading candidate for those who supported the adoption of economically liberal and financially orthodox policies, it is difficult to imagine any prospective leader bar Heath himself not having to accommodate such ideas to at least some extent, given the intellectual and political climates of the mid-1970s. Under Thatcher and Major, the party’s microeconomic policies undoubtedly made use of free-market ideas. Most notably, financial markets were deregulated and the denationalisation ideas which had been in circulation in the party during 1964–70 were taken up enthusiastically by the leadership. But one must be careful not to overstate the case. The Thatcher government found it difficult to move away from an interventionist regional policy, and the intended aim of substantially reducing the size of the state was only partially achieved. The principal difficulties which prevented achievement of the latter aim were the political problems associated with either selling off the nonhousing welfare state or substantially reducing its size. This resulted in spending as a proportion of gross domestic

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product (GDP) being only a few percentage points lower in 1997 than it had been in 1979. For much of 1964–97, industrial relations policy and labour market policy constituted essentially the same thing for the Tories. This was because policy makers devoted their efforts to the overriding goal of reforming Britain’s problematic system of industrial relations at the expense of other areas of the labour market, which were also ripe for reform. Once the industrial relations problem was internally regarded as solved by the legislation passed under the Thatcher ministry, attempts to reform the labour market along lines consistent with free-market thinking were driven by the need for the government to respond to the very high levels of unemployment experienced during the 1980s. This process continued under John Major’s leadership. One of the most significant intellectual shifts that occurred under Thatcher’s leadership was the move by policy makers away from accepting the implications of the standard Phillips curve, in which an inflation/unemployment trade-off existed, and towards an intellectual framework within which the Phillips curve was vertical, where no such trade-off was available in the long run. How a consensus in favour of this shift was constructed, and the importance of the publication of The Right Approach to the Economy (Conservative Central Office, 1977) to the process, were outlined in Chapter 4. It was a particularly seminal development in Tory economic thinking, as all subsequent ideas for macroeconomic policy under the Conservatives needed to be compatible with the idea that a government could not spend its way to higher growth and lower unemployment. During the period 1979–92, the Conservative Party’s leading macroeconomic policy makers spent much of their time searching for a robust macroeconomic policy framework that took long-run money neutrality as a given. The various alternative arrangements tried in attempting to find a suitable ‘nominal anchor’ were detailed in Chapter 4, so their most intricate details need not concern us here. It was a clear example of trial and error in economic policy making until a suitable framework for policy was found, as it seemingly was in the autumn of 1992, with the introduction of inflation targeting. One area in which there was remarkable continuity across the period we covered was the Conservative Party’s approach to taxation policy. The key idea of the importance of incentives in stimulating economic activity had penetrated Tory thinking during the 1960s,

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and the only significant tax-related idea to impact at a later date was that of neutralising the tax system so as not to privilege certain types of behaviour over others. The main reason for this continuity was that the Tories needed ideas for reforming the tax system that did not depend on there being a significant reduction in the size of government with resulting proceeds available for the financing of tax cuts. In the case of the Heath government, this was because its leading policy makers did not wish to substantially reduce the size of the state, whilst in the case of the Thatcher and Major governments it was because it proved politically impossible to do so. Besides the specific conclusions drawn above, there are two overarching themes that emerge from the period 1964–97 in relation to Conservative Party economic policy making. The first of these is the importance of the opposition, and more specifically, of the ideas adopted when in opposition. The Heath U-turn, for example, was to a considerable extent determined by the ideas accepted as valid by policy makers when in opposition during 1964–70. Equally, the ideas that underpinned the Thatcher government’s refusal to countenance a U-turn during 1979–81 secured their ascendancy in the party’s making of macroeconomic policy during 1975–77. It should perhaps be unsurprising that thinking in opposition plays such an important role in determining the policies pursued in office, given that it is only in opposition that politicians have time to re-examine existing ideas and consider new ones. Nevertheless, this rarely acknowledged feature of economic policy making should be clearly stated. The second theme is that there was a key period during the mid-1970s when the Conservative Party’s policy makers shifted decisively in favour of free-market and monetarist ideas. There were a number of important factors behind this. Most obviously, Edward Heath was replaced as leader of the party by Margaret Thatcher. Additionally, there was, for various reasons, a distinct ‘changing of the guard’ at the top of the party, as Tories who had largely been reconciled to the post-war settlement, such as Iain Macleod and Reginald Maudling, were progressively replaced with more market-friendly Conservatives, such as Sir Keith Joseph and Sir Geoffrey Howe. But these factors were buttressed by the appalling state of the British economy and the perceived policy failures of government intervention, neo-Keynesian demand management, and prices and incomes policies after the war. After losing office in 1974, a number of Tories

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considered the economic problems then being faced as unsolvable if the set of policies that had been tried during 1970–74 were again to form the basis of the party’s economic programme. They therefore went out of their way to seek out new ideas (or at least old ones that had been mothballed since 1945) which could help them to solve the problems they were likely to encounter once returned to office. Without going the full way to applying Thomas Kuhn’s theory of scientific revolutions (Kuhn, 1970) to economic policy making, we can reasonably say that there was something of a ‘paradigm shift’ taking place in the Conservative Party during the 1970s with respect to economic policy, and we can say that its effects have endured.

The future of Conservative Party political economy Although the Conservative Party was electorally crushed in May 1997, its defeat was not at the hands of a Labour Party dedicated to seizing control of the commanding heights of the economy, but to one which largely accepted Tory reforms of the product, labour, and financial markets and which turned out to be even keener than the outgoing government on depoliticising monetary policy. In the Conservative Party’s own terms, the 1979–97 governments had therefore been successful economically. The economy was no longer the sick man of Europe; even the main opposition party had come to the conclusion that it would only be electable if it committed itself to competitive markets and sound financial policies. But the reconstruction of Labour’s political economy since its darkest days during the early 1980s has had baleful consequences for the Conservatives. Not only has the Conservative Party performed less well electorally since 1997 than during any other comparable period since the 1867 Reform Act, but a party once distinguished by its intellectual adaptability has proved strangely unable to anchor Thatcherite political economy into a broader conservative position that offers both electoral appeal and intellectual coherence. Given that the economic elements of Thatcherism derive much of their content from economically liberal thinking, the question of to what extent market liberalism is compatible with conservative reverence for tradition, continuity, and the organic nature of society is a pressing one. Gray has made the case that the prioritising of economically liberal policies during 1979–97 has made the traditional task

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of the Conservative Party impossible (Gray and Willetts, 1997), and in recent decades, conservative philosophers such as Roger Scruton (1980: 95) have long been sceptical of the emphasis the Conservative Party has put on the desirability of free markets. The essential argument of these individuals is that markets are no respecters of traditions, institutions, or any of the other civic agencies that conservatives typically cherish as central to the stability of any given society. But as was highlighted in Chapter 1, the pro-market or ‘libertarian’ strand of conservatism certainly did not begin with Margaret Thatcher’s capture of the Conservative Party leadership in 1975; and scepticism of an over-mighty state is a legitimate part of the conservative tradition. Indeed, though Hayek was a self-confessed nonconservative, his conception and advocacy of the market mechanism were based on an interpretation of knowledge in a society which, though distinct, was by no means anti-conservative, given its epistemological scepticism (Hayek, 1945). That Thatcher and other Conservatives were so influenced by him does not, at least in isolation, point to a break with the conservative tradition. There are also some very practical reasons why the Tories are likely to find it difficult to break away from a political economy that has the defence of the competitive market economy at its core. The party is now dominated both in Parliament and beyond by members who largely subscribe to the economic principles pursued by the party from the mid-1970s onwards. In addition, most who contribute to the party intellectually, either through think tanks such as the Institute for Economic Affairs (IEA) and the Centre for Policy Studies (CPS) or via Conservative-leaning publications such as the Spectator and the Daily Telegraph, tend to be supporters of the free market and the small state. There is also a distinct lack of competition from other ideas. Although ‘one nation’ conservatism of the type practiced by Rab Butler and others still has a presence in the Conservative Party, it has largely withdrawn from the economic battleground since the defeat of the wets in the early 1980s. The one nation wing has not tended to challenge the primacy of the market and has instead positioned itself as advocating a suitable balance among markets, the state, and civil society (Green, 2005). But since presumably no Conservative politician, whether Thatcherite or otherwise, would reject such

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­ latitudes, it is difficult to identify a distinctive economic position p contained within such an argument. The modernising faction of the Conservative Party has tended to market itself as the main alternative to mainstream Thatcherism within the Conservative Party. But its most distinctive features in prescriptive policy terms tend not to be economic but social. Rather than challenge the core tenets of Thatcherite political economy, the Conservative Party has instead insisted that it has to change its image if it is to market such policies effectively. This includes being more inclusive of groups such as women, homosexuals, and ethnic minorities, both in terms of the party’s policies and its representation. Most modernisers, from its earliest heavyweight figures such as Michael Portillo and Francis Maude through to those who now sit in the Cabinet such as Michael Gove, have tended to be Thatcherite on economic issues. As noted in Chapter 5, whatever position one takes on the achievements of the Conservative Party modernisation agenda, it is difficult to count the development of a distinctive new political economy among them. The 1970s shift in the Conservative Party’s political economy therefore looks as though it is likely to endure for some time yet. This free-market consensus has also tended to coexist with a widespread approval of sound money policies and a tendency to reject unorthodox measures such as Keynesian-style deficit spending. Tory rejection of deficit spending was evident following the financial crisis of 2007–08, when the party leadership refused to back the Brown government’s decision to engage in fiscal expansion. They instead chose to highlight the importance of getting Britain’s increasingly large budget deficit under control. This approach has been carried into government with the support of the Liberal Democrats. But there is a troubling aspect of the party’s economic thought at present, which does lend partial support to those such as Gilmour (1992), who have argued that the party became far too ideological under Thatcher’s leadership. The case for market liberalism and sound money has become almost axiomatic for many Conservatives, with a need to intellectually defend such positions being seen as almost superfluous. During the decade from 1997, there may have been understandable reasons for intellectual complacency, given that such policies appeared to have triumphed around the world, had appeared

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to have secured the long-term prosperity of the British economy, and had been adopted by the main opposition party. When the financial crisis broke in 2007 and intensified in 2008, however, such intellectual overconfidence proved to be inadequate. In a situation where the market economy found itself under attack from critics in a way not seen in decades, the party which had made free market advocacy all but its raison d’être for more than thirty years failed to put up anything like an adequate defence. Although some mitigation must be granted given that other parties of the Right around the world scarcely performed any better in this regard, the fact that the crisis is now popularly viewed as almost completely attributable to the shortcomings of the market mechanism and the greed of financial institutions must count as a significant political failure on the Conservative Party’s part. In the likely event that the Conservatives remain committed to a free-market economy and sound finance, the party’s first intellectual challenge is to fully redevelop the arguments for its position. A decade ago, when the free market appeared to have triumphed absolutely over all competing economic models, an almost quasi-religious devotion to such principles might have been sufficient. But in a climate where widespread faith in capitalism and the free market has been shaken badly by events since 2007, a party that broadly supports such principles must be prepared to strongly argue its case intellectually in a way that the Conservative Party did not appear to be doing during 2007–08. There is second element of the party’s intellectual challenge that sits alongside the one outlined above. Since 1997, the Tories have never convincingly been able to anchor their Thatcherite model of political economy into a broader conservative conception of Britain’s future. In its worst form, this has led to a tendency for the party to think that economic liberalism on its own can be made into a sellable conservative programme, a proposition that is highly unlikely, given the political views of the British electorate as a whole. More frequently the result has been a ‘parking’ of the party’s political economy to one side whilst the party debated how to rustle up an agenda that fitted around it and covered other issues. This has been problematic for a number of reasons. First, it makes the Conservatives look as though they merely wish to throw together an agenda which will act as cover for their only real interest, which

Conclusions   187

is liberalising markets. Second, the ‘parking’ of the party’s political economy has almost certainly led many in the party to take it for granted, and this in turn was a probably a factor in the Conservatives’ weak response to the financial crisis. Third, there has been a consistent failure since 1997 to place the party’s political economy in the context of a broader conservative vision for Britain. Clearly such a vision must be intellectually convincing – not merely an adjunct to Thatcherite political economy, but fully integrated and consistent with it. But alongside this, it must also be electorally popular. One of the earliest and best expositions of the seminal shift in the Conservative Party’s approach to the economy that occurred under Margaret Thatcher’s leadership came in the 1984 Mais Lecture of Thatcher’s Chancellor of the Exchequer, Nigel Lawson. Lawson (1984) noted that, whereas prior to 1979 post-war governments had tended to regard macroeconomic policy as the main instrument for encouraging growth and microeconomic policy as the main instrument for controlling inflation, the Thatcher government sought to reverse this model of economic management. In short, the key to controlling inflation was macroeconomic discipline rather than prices and incomes policies, and the means of achieving stronger growth was supply-side reform and not neo-Keynesian demand management. This combination of financial discipline and supply-side liberalisation has been the Conservative Party’s default model of political economy ever since. But given the present political climate, it is one which the party is only likely to be able to practice properly if it enjoys a parliamentary majority. The nature of supply-side liberalisation is that many of its implications are anathema to left-of-centre parties, and it is notable that the Conservatives have found it especially difficult to carry out supply-side reforms since 2010; the hostility of Liberal Democrat ministers to such proposals has been a key impediment. But an economic programme of financial discipline with little in the way of supply-side reform is neither intellectually coherent nor likely to succeed, and this is the potentially fatal problem which the coalition faces at present. Given that the Conservatives are the only right-of-centre party with substantial representation in the House of Commons at present, there is unlikely to be an opportunity any time soon for them to form a coalition with a party that is like-minded on

188   Conservative Party Economic Policy

s­ upply-side unless the United Kingdom Independence Party (UKIP) wins a substantial number of seats in 2015 reform. To fully practice their favoured model of economic management, the Tories are therefore likely to require a parliamentary majority, something that has eluded them since the 1992 general election. In terms of its political economy, the Conservative Party therefore faces not only the intellectual challenges outlined in this chapter, but a political one that has proved beyond it for more than two decades.

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Index Abbott, Stephen, 74–5, 77, 79–81, 83 Advisory Committee on Policy (ACP), 35, 46, 80 Alexander, Danny, 174 Alison, Michael, 44 Amory, Lord, 74–5 Armstrong, Sir William, 39–40 Association of Engineering and Shipbuilding Draughtsmen (AESD), 73 Asquith, H. H., 19 Atkins, Humphrey, 97 Attlee Ministry (1945–51), 10, 20, 32–3, 72 balance of payments, 54 exchange controls on capital account, 51–2 Baldwin, Stanley, 8 Baldwin Ministry (1924–29), 23, 72 Balls, Ed, 153, 159 Bank Charter Act (1844), 22 Bank of England, 22, 54–5, 119–20, 125–7, 166, 168–9, 174, 179 Bank of England independence, 145–8, 153–5, 159 Competition and Credit Control (CCC), 52–5, 119 Barber, Tony, 39–40, 44, 53, 110, 112, 116 Barber Boom, 139 Barnes, Denis, 83 Beecroft Report, 175 Benn, Ernest, 11, 20, 22 Biffen, John, 37, 50, 61, 97, 118–19, 133–4 ‘big society,’ 170 ‘Black Wednesday’ (16 September 1992), 144, 158 Blair, Tony, 52, 159, 161, 164

Blair Ministry, 154–5, 157, 161 Board of Trade, 34 Bonar Law, Andrew, 8 Bow Group, 73 Boyle, Edward, 44, 61, 106 Bretton Woods system, 111–12, 140–1 British Aerospace, 50 British European Airways (BEA), 45–6 British Gas, 49 privatisation, 49–50 British National Oil Corporation (BNOC), 50 British Overseas Airways Corporation (BOAC), 45–6 Rookes case, 73 British Petroleum (BP), 50 British Steel, 45 Britoil, 49 Brittan, Leon, 97, 133–4 Brittan, Samuel, 121, 136, 139 Brown, Gordon, 150, 152–4, 159, 164–6, 169–70, 173 Brown, Stephen, 75, 79 Brown Ministry (2007–10), 150, 164–6, 174, 177, 185 Brunner, Karl, 131 Budd, Alan, 119–20, 126, 128 budgets 1972, 111 1976, 121 June 1979, 54, 65, 125, 130 1980, 55, 127, 129, 130 1981, 100, 132–6, 147–8, 172 1982, 132 1984, 66 1988, 139 June 2010, 174 2012, 173, 175

201

202   Index

Bundesbank, 142–3 Burke, Edmund, 7–8, 12 Burns, Arthur, 140 Burns, Terry, 126–8, 139, 141 Butler, R.A., 20, 33, 184 Cable, Vince, 174–5 Cable and Wireless, 51 Callaghan, James, 74 Callaghan Ministry (1976–79), 125 Cameron, David, 162–4, 169–71 Cameron Ministry (2010–present), 2, 149–50, 171–7, 187 Campbell-Bannerman Ministry (1905–08), 71 Carlton Club, 157 Carr, Robert, 39–40, 80–1, 83 shadow chancellor, 115–16 Carrington, Lord, 115, 133 Castle, Barbara, 74 Cecil, Hugh, 8, 11 Centre for Policy Studies (CPS), 60, 62, 91, 93, 95, 116, 118, 156, 167, 184 Centre for Social Justice (CSJ), 161 Chamberlain, Joseph, 11, 18–20 Chamberlain, Neville, 11, 19–20 Churchill, Winston, 23 Churchill Ministry (1951–55), 44 City of London, 105, 126, 128 Clark, Sir William, 139, 141 Clarke, Kenneth, 66, 147, 153, 158, 160 Clause 4, 152 Clegg, Hugh, 75 Clegg Commission, 130 closed shop, 69, 73, 75–6, 78–9, 84, 91, 94–8, 152 coalition agreement (2010), 2, 160, 171–4 coalition government (2010– present), see Cameron Ministry (2010–present) Cockfield, Arthur, 64, 107 Community Charge, 157 Competition and Credit Control (CCC), 52–5, 111, 119, 179

Confederation of British Industry (CBI), 46, 112 Congdon, Tim, 126, 128, 131–2, 134, 141, 145 warnings on Lawson Boom, 138–40 Conservative Central Office, 139 Conservative Party conferences 1970, 58 1981, 135 2007, 164 Conservative Party general election manifestoes 1964, 73 1966, 58, 63 1970, 38, 46, 56, 58, 63, 81, 85, 112, 135–6 October 1974, 58 1979, 48, 64–5, 92–3, 130, 135–6, 140 2001, 159–60, 164 2005, 161 2010, 171 Conservative Party leadership elections 1965, 35, 105 1975, 59, 117, 180 1997, 157 2001, 160 2005, 162–3 Conservative Research Department (CRD), 35–6, 92, 106, 115–16 Conservative Trade Unionists’ National Advisory Committee, 75 Conspiracy and Protection of Property Act (1875), 71 Cooper, Andrew, 162 Corfield, Frederick, 37–8 Corn Laws repeal, 16–17 corporatism, 47–8 ‘Corset,’ see Supplementary Special Deposit Scheme cost-push inflation, 25, 106–8, 114–15 Cousins, Frank, 72

Index   203

‘credit crunch’ (2007–08), 165–8 Cross, R.A., 11

Exchange Rate Mechanism (ERM), 140–4, 146, 148, 158

Daily Telegraph, 37, 184 Darling, Alistair, 170 Davies, John, 39–40, 57–8, 179 Davis, David, 162–3 Deedes, William, 37 Delors Report, 158 Department of Trade and Industry, 40 Derby, Edward, 14th Earl of, 17 Deutschmark, 139, 142 Diamond Commission, 122 Disraeli, Benjamin, 11, 17 Disraeli Ministry (1874–80), 11, 17 Donovan Commission, 73–4, 80 Douglas, James, 46 Douglas-Home, Sir Alec, 35–6, 39–40 Douglas-Home Ministry (1963–64), 34, 36 Dow, Christopher, 106 Du Cann, Edward, 117 Duncan Smith, Iain, 160–1

Fair Deal at Work (1968), 80–1, 83 Fforde, John, 52 financial crisis (2007 onwards), 1, 150, 165–9, 177, 185–7 Finkelstein, Daniel, 162 First Fundamental Theorem of Welfare Economics, 18 Fisher, Antony, 21 Fisher, Malcolm, 37–8 Fletcher-Cooke, Charles, 45 French Revolution (1789), 7 Friedman, Milton, 26–30, 70, 88–9, 101, 105, 119, 128, 169 Fowler, Norman, 97 Funding for Lending Programme, 174 Future Economic Policy Group (EPG), 105–9, 179

Economic Reconstruction Group (ERG), 118–22, 124–5, 128–9, 138, 140 Eden, John, 37–8, 44, 46–8, 51, 56, 179 Edwards, J.R., 75 Edwards, Nicholas, 42 Employment Act (1980), 94–5 Employment Act (1982), 95–8, 100 Enterprise Allowance Scheme (EAS), 102 Enterprise Zones, 41–3, 67, 175 European Constitution, 160 European currency snake, 111 European Economic Community (EEC), 21 European Monetary System (EMS), 137, 140 European Monetary Union (EMU), 158–60 Eurozone, 3, 158–9 exchange controls, 52 October 1979 abolition, 54–5, 130

‘Gang of Four,’ 123 Gardiner, George, 123 general elections 1832, 16 1880, 22–3 1906, 19, 150–1 1923, 151 1945, 10, 32–3, 150–1 1950, 10 1959, 10 1964, 3, 34–5, 56, 73–4, 80, 105 1966, 63, 79 1970, 57–8, 80, 81–2, 109–10, 179–80 February 1974, 2, 59–60, 113, 115, 150–1, 180 October 1974, 41, 59, 117, 150–1, 180 1979, 54, 91, 124, 127–8, 151, 157 1983, 137, 151 1987, 151 1992, 151, 160, 188 1997, 1, 3, 149–50, 152, 155–8 2001, 149, 159–60 2005, 161–2 2010, 1–2, 149, 165, 170–1, 177

204   Index

General Strike (1926), 72 German Reunification, 143 A Giant’s Strength, 73 Gilmour, Sir Ian, 14, 91, 118–19, 122, 133–5, 156, 185 Gladstone Ministry (1868–74), 11, 71 ‘Glorious Revolution’ (1688), 7 Godber, Joseph, 75 gold standard, 22–3 Goodhart, Charles, 52–3 ‘Gooies,’ 100 Gove, Michael, 185 Gray, John, 156, 183–4 ‘Great Depression,’ 23, 28, 169 Griffiths, Brian, 118–20, 124–6, 142 Grint, Edward, 75 Grunwick dispute (1976–8), 90–1 Hague, William, 157–61 Hailsham, Lord, 11, 33, 97 Harris, Ralph, 44–5, 60–1 Hastings, Stephen, 45 Havers, Nigel, 97 Hayek, Friedrich, 20–2, 70, 89–90, 184 Heath, Edward, 13, 35–7, 41, 44, 46, 48, 51, 56–61, 66–8, 74–5, 79, 88–90, 105–10, 112, 115–17, 135–6, 147, 178–80, 182 as Prime Minister, 39–41, 47, 53, 58, 85, 87–8, 111–13 RPM abolition, 34–5 Heath Ministry (1970–74), 5, 21, 38, 43, 47, 49, 52–5, 57–60, 62, 64, 67, 69–70, 86–7, 102, 105–6, 110, 114, 135–6, 151, 176, 178–80, 182 Heseltine, Michael, 42–3, 48, 50, 97, 99, 133, 158, 175 Hicks, John, 24 Higgins, Terence, 61, 106, 115 Hobson, John, 75 Hogg, Quinton, see Lord Hailsham Hooker, Richard, 7–8

Hoskyns, John, 91, 93, 95, 131 Howard, Michael, 160–1 Howe, Sir Geoffrey, 57, 73, 75, 79, 81, 83, 88, 115–17, 182 as Chancellor of the Exchequer, 41, 50–1, 55, 65–6, 93, 95, 97, 100–1, 125–37, 141 as Shadow Chancellor, 41, 60–1, 90–2, 118–19, 122, 124, 140 Howell, David, 49–50, 61, 97, 115, 118–19, 122 Hume, David, 9 Ibbs, Robin, 97 Imperial Preference, 19 In Place of Strife, 74, 81 The Industrial Charter, 20, 33, 72, 151 Industrial Development Executive, 40 Industrial Relations Act (1971), 69–70, 72, 75, 77, 81–8, 91, 94, 96, 98, 102–3 Industrial Revolution, 19, 22 Industry Act (1972), 40, 47, 111 inflation targeting, 104, 144–8, 151, 154, 181 inheritance tax, 164–5 Institute of Economic Affairs (IEA), 21–2, 37, 44, 48, 56–7, 60–1, 136, 167, 184 international monetarism, 128, 139, 141 International Monetary Fund (IMF), 62, 106, 125, 141 James, David, 161 Jay, Peter, 121–3, 145 Jenkin, Patrick, 97 Jenkins, Roy, 105–6 Jevons, W.S., 18 Jopling, Michael, 97 Joseph, Sir Keith, 11, 14, 41, 43–4, 50, 56–7, 59–61, 64, 79–80, 88, 90–1, 93, 95, 97, 100, 107, 114, 116–19, 122, 133–4, 182

Index   205

Keynes, John Maynard, 23–5, 27, 106, 139 Keynesianism, 33, 72, 106, 170, 185 King, Tom, 98 Kinnock, Neil, 152 Krugman, Paul, 166 Kuhn, Thomas, 183 Labour Mobility Policy Group, 82 Laidler, David, 113, 121, 131, 139 Lamont, Norman, 61 as Chancellor, of the Exchequer, 66, 143–8, 153 Law, Richard, 33 Laws, David, 174 Lawson, Nigel, 43, 50–1, 54–5, 61–2, 123–4, 126–8, 136, 141, 153, 156, 187 Bank of England independence, 145–6, 148, 153 as Chancellor of the Exchequer, 49, 63–6, 100–1, 137–43, 158–9 as Energy Secretary, 49, 97, 135 Lehman Brothers collapse, 166 Letwin, Oliver, 160 Lilley, Peter, 157 Lipsey, Richard, 106 Liverpool Ministry (1812–27), 16 Lloyd, Selwyn, 73 Lomax, Rachel, 138 MacDougall, Donald, 111 Mackay, Lord, 97 Macleod, Iain, 61, 75, 105–6, 109–10, 147, 182 Macmillan, Harold, 11, 20, 25–6, 33, 106 Macmillan, Maurice, 40, 86, 115 Macmillan Ministry (1957–63), 20 Major, John, 49, 143, 157, 161, 179–81 Bank of England independence, 146, 153 Major Ministry (1990–97), 5, 50, 55, 67, 69–70, 98, 103, 104, 148, 155, 157, 178, 182

Manpower Services Commission (MSC), 101 marginalism, 18 Marshall, Alfred, 18 Maude, Angus, 11, 36 Maude, Francis, 160, 185 Maudling, Reginald, 35, 39–40, 46, 61, 64, 106–9, 113, 182 Mawby, Ray, 75 Medium Term Financial Strategy (MTFS), 100, 123–4, 127–9, 132, 136–8, 140, 148 mercantilism, 15 Middleton, Peter, 128, 137 Miners’ Strike (1984–5), 100, 113 Minford, Patrick, 100–1, 121, 126, 128–9, 139, 154 Minimum Lending Rate (MLR), 53 minimum wage, 154–5, 159 Ministerial Committee on CounterInflationary Measures, 113 Ministerial Committee on Economic Policy (MCEP), 39 Ministerial Committee on Economic Strategy (MCES), 38–43, 47, 50, 64, 94, 97–9, 110–12 monetarism, 29–30, 60, 85, 89, 99–100, 104–7, 113–44, 147–8, 168–9, 179–80, 182 monetary base control (MBC), 125–7, 131–2, 137 Monetary Control Green Paper (1980), 127 Monkton, Walter, 72 Mont Pelerin Society, 57 National Association for Freedom (NAFF), 90 National Economic Development Council (NEDC), 20, 122, 124 National Enterprise Board, 50 National Freight Corporation, 48 National Health Service (NHS), 113 National Industrial Relations Court (NIRC), 84–6

206   Index

National Institute of Economic and Social Research (NIESR), 113 National Loan Guarantee Scheme, 174 National Union of Mineworkers (NUM), 86, 100, 113 Natural Rate of Unemployment, see Non-accelerating Inflation Rate of Unemployment (NAIRU) Neal, Sir Leonard, 93, 118 neo-Keynesianism, 24–5, 28, 30, 81, 86–7, 89, 93, 99–100, 104, 106–9, 112–18, 122–3, 133–6, 143, 147, 179, 182, 187 new classical economics, 121, 145 rational expectations, 100, 128–9 Newton, Tony, 46, 109 Nickell, Stephen, 134 Niehans, Jurg, 130–1, 138, 141 Nixon, Richard, 111 Non-accelerating Inflation Rate of Unemployment (NAIRU), 28–9, 88–9, 99, 101, 119 North Sea oil, 54 Northern Rock, 166, 169 Nott, John, 44, 50, 61, 97, 118–20, 133–4, 140 Number 10 Policy Unit, 93, 95, 131, 142, 156 Nye, Rick, 162 Oakeshott, Michael, 7–9, 20, 30 Obama, Barack, 170 Office for Budget Responsibility (OBR), 160, 169–70 Ofgas, 49 ‘one nation’ conservatism, 11, 14–15, 36, 184–5 One Nation Group, 21 OPEC I (1973), 113–14 OPEC II (1979–80), 130 Oppenheim, Sally, 118 Osborne, George, 164–5, 167, 169 as Chancellor, 174 Ostmark, 143 overfunding, 138–9, 144

Parkin, Michael, 121 Parkinson, Cecil, 97, 135 Peel, Robert, 16–17 Peel Ministry (1841–46), 11, 16 Peelites, 16–17 ‘Pentonville Five,’ 86 Pepper, Gordon, 126, 131–2, 137–8 Peyton, John, 44–5, 115 Phelps, Edmund, 28–9, 105, 119 Phillips, Alban, 25, 106 Phillips Curve, 25, 28–9, 104–5, 107, 115–16, 136, 146–8, 152, 181 Pinochet, Augusto, 139 Policy Exchange, 167 Policy Group on Trade Union Law and Practice, 74–80, 83 Policy Group on Trade Unions and Industrial Relations, 80–2 Poll Tax, see Community Charge Portillo, Michael, 159–60, 162, 185 post-war consensus, 10, 20, 25–6, 33–4, 44, 56–8, 60–1, 67, 72, 179, 182 poverty trap, 173 Powell, Enoch, 11, 21–2, 34, 35–7, 55, 56–7, 60, 78, 106–7, 116 ‘Rivers of Blood’ speech (1968), 56–7, 106–7 Prior, Jim, 61, 90–2, 95, 97–8, 116, 118–19, 122, 133–4 as Employment Secretary, 93–5, 99–100 privatisation, 42, 48–51, 175 Project Merlin, 174 Public Sector Borrowing Requirement (PSBR), 43, 50, 124–5, 128–9, 138, 144, 172 Purchase Tax, 63 Putting Britain Right Ahead (1965), 79 Pym, Francis, 97, 133, 140 Quantitative Easing (QE), 144, 169 Quantity Theory of Money, 23–7 Quinton, Anthony, 8–9, 15

Index   207

Reading, Brian, 107–9 Reagan Administration (1981–9), 63 recessions 1974–5, 62 1980–81, 41, 62, 99, 129–30 1990–91, 62, 134, 143–4 2008–9 (‘Great Recession), 1, 150, 165–9 2011–12, 2, 173, 175–6 Rees-Mogg, William, 117 Reform Acts: 1832 (‘Great Reform Act’), 16 1867, 18, 183 1884, 18 Regional Development Policy Group, 37–8 Regional Growth Fund, 175 Resale Price Maintenance Abolition, 32, 34–5 Restart, 101 Ricardo, David, 15 Ridley, Adam, 118, 121, 128, 140 Ridley, Nicholas, 37–8, 41, 56, 61, 82 and denationalisation, 44–5, 51, 179 The Right Approach to the Economy (1977), 122–5, 135, 181 Roberts, Michael, 97 Robertson, Dennis, 106 Robbins, Lionel, 106 Rolls-Royce, 47, 58 Rookes, Douglas, 73 Rookes v Barnard (1964), 73 Rowntree, Seebohm, 19 Salisbury, Robert, 3rd Maquess of, 8, 17–19 Salisbury Ministry (1886–92), 17–18 Salisbury Ministry (1895–1902), 17–18 Say’s Law, 24 Schwartz, Anna, 28, 169 Scruton, Roger, 184 Seldon, Arthur, 60–1 Selective Employment Tax, 63–5 Selsdon Group, 37

‘Selsdon Man,’ 57–8, 147, 178–9 Selsdon Park meeting (1970), 64, 147 Sewill, Brendon, 46, 106–7, 109 Sherman, Alfred, 60, 93, 95, 116 Steel-Maitland, Arthur, 11 Smith, Adam, 11, 15, 19 Smith, Dudley, 75 Smith, F.E., 11 Smith, John, 152 Soames, Christopher, 140 Society of Lithographic Artists, Designers, Engravers and Process Workers (SLADE), 94 subprime debt, 165, 167 Supplementary Special Deposit Scheme (‘the Corset’), 53–5, 113, 130–2, 139 Steel Strike (1980), 95 Strauss, Norman, 91, 93 Sunday Telegraph, 73 Spectator, 36, 184 Stepping Stones, 91–3 Taff Vale Judgment (1901), 71 Tamworth Manifesto, 16 Tariff Reform, 19, 150–1 Tebbit, Norman, 56, 58, 90–1, 95, 98, 100, 123, 135 and Employment Act 1982, 95–8 Thatcher, Margaret, 41, 43, 45, 56, 58–60, 70, 88, 107, 114, 116–17, 151, 157, 180–1, 185, 187 as leader of the opposition, 41, 48, 51, 59–61, 90–1, 118, 122–3, 126, 182, 184 as Prime Minister, 41, 48–9, 93, 95, 97, 103, 124, 126, 131–6, 142–3, 145–6, 153, 157 Thatcher Ministry (1979–90), 5, 32, 42, 49–50, 54–5, 62–3, 66–8, 69–70, 91, 93–4, 98–103, 104, 136, 148, 155, 157, 161, 175–6, 179–82, 187 Thatcherism, 37, 58, 105, 147, 151, 155–6, 161–3, 167–8, 173, 175, 183–6

208   Index

Thomas Cook, 46–7 Times, 116–17, 121–3, 127, 133, 138 Trade Disputes Act (1906), 71–3, 76–8, 84, 85, 98 Trade Disputes and Trade Union Act (1927), 72 Trade Union Act (1871), 71 Trade Union Act (1984), 98 Trades Union Congress (TUC), 85, 112 Transport and General Workers Union (TGWU), 72, 85–6 Treasury Panel of Independent Economic Forecasters, 147 United Kingdom Independence Party (UKIP), 187–8 United States Federal Reserve Board (‘the Fed’), 28, 140, 168 University of Chicago, 26 Upper Clyde Shipbuilders (UCS), 39, 47 Urban Development Councils (UDCs), 42–3 Value Added Tax (VAT), 63–5, 130, 170, 174

Vickers Review, 174 Walker, Peter, 49–50, 75, 97, 115, 133 Walras, Leon, 18 Walters, Alan, 60, 100, 113, 116, 125–6, 130–1, 138–9, 142–3 Wass, Sir Douglas, 124, 137 Whitelaw, William, 39–40, 61, 64, 97, 115, 117, 133 Wilkinson, John, 46 Willetts, David, 156–7, 163 Wilson, Harold, 73–4, 117, 147 Wilson Ministry (1964–70), 35, 110 Wilson Ministry (1974–76), 113 ‘Winter of Discontent’ (1978–79), 89, 92 Wiseman, Jack, 45 Wood, John, 48 Young, David (Lord Young of Graffham), 101 Young, Lady Janet, 97 Younger, George, 97 Youth Training Scheme (YTS), 102