How Maggie beat the experts
David Smith, Economics Editor
THE battle took place 25 years ago, but the two sides are still at war.
In March 1981, in an event to be marked at the Institute of Economic Affairs (IEA) this week, 364 economists — including Mervyn King, the current Bank of England governor, and Steve Nickell, one of his monetary policy committee (MPC) colleagues — wrote in protest at the Thatcher government’s economic policies.
The 364, who represented mainstream academic economic opinion, were outraged by Sir Geoffrey Howe’s “austerity” budget of 1981, and warned that “present policies will deepen the depression” and called for a rejection of the Tories’ “monetarist” policies.
In fact, though it was not clear at the time, the 1981 budget marked the beginning of Britain’s long economic upturn of the 1980s, which lasted until mid-1990. Far from deepening the depression, it signalled the start of the recovery.
Bank officials said King would not be commenting on the 1981 letter, but Nickell, in a piece for a special IEA pamphlet, Were 364 Economists All Wrong?, defends his views of 25 years ago.
“The 364 economists were perfectly correct to complain about the macroeconomic policy of the day,” he writes.
The fact that unemployment continued to rise for several years after 1981 showed that policy was mistakenly tight, he insists. Inflation, which fell after Howe’s tough budget, would have done so even if policy had not been so harsh, he claims.
Labour peer Lord Peston, another of the 364, insists that what happened was what the letter’s signatories predicted, though he concedes he did not foresee some of the changes of the 1980s, notably the weakening of trade-union power.
But Patrick Minford of the Cardiff Business School, who strongly criticised the 364 at the time, says they were playing “a dangerous and dishonest game” and “the weight of evidence that suggested the 364 were wrong was before their very eyes”.
Derek Scott, former economic adviser to Tony Blair, and in the 1970s an adviser to Denis Healey, says the fact 364 economists signed the letter should have set “alarm bells ringing”. He praises the 1981 budget as a turning point in UK macroeconomic thinking.
In 1981, Thatcher’s strategy had few friends among economists. The Treasury was overwhelmingly staffed by Keynesian economists left over from the 1960s and 1970s. The new brooms, Terry (now Lord) Burns and Alan Budd at the London Business School, were regarded as outsiders.
When Thatcher was asked publicly in 1981 to name two economists who supported her strategy, she said Alan Walters and Minford. Legend has it that when she returned to Downing Street, an official said: “It is a good job he did not ask you to name three.”