Thatcher Fallacy (2)

        

“The Thatcher government’s money supply policy was disastrous for the economy, and was then abandoned.”

Both points made here are fallacious.

The central aim of the post-war economic consensus was full employment. Increasingly, monetary and fiscal expansion was used as a means to achieve this desired outcome. However, this was a false hope. An increase in money supply produces only artificial employment and inflation. When inflation inevitably rises the economy falls into recession and all those jobs, and many more, are lost. When this in fact happened the economic consensus proscribed yet further monetary expansion, thus condemning Britain to spiralling inflation.

In the 1980s this inflationary cycle eventually culminated in the over-haul of the post-war economic consensus. Low inflation became the aim of economic policy instead of full employment. Tax increases, lower public spending and high interest rates tightened the money supply. Far from disastrous, this shift is the basis for the subsequent conditions that have allowed sustainable economic output and expansion.

Neither was the policy abandoned. The Medium Term Financial Strategy (MTFS) was designed to progressively reduce the rate of inflation between 1980 and 1983/84. Once inflation came down (which it did), the MTFS was followed by a policy of ‘flexibility not laxity’ where the squeeze would be loosened. The rapid fall in inflation from 20% to below 5% between 1980 and 1984 vindicated the MTFS.

Critics might point to the abandonment of the main measure of monetary supply, M3. It is true that M3 and the other M’s were abandoned, but this was necessary due to their inherent inaccuracies and the Government’s own micro-economic policy which rendered them even less accurate. But this hardly distracts from the fundamental shift in economic policy.

The Thatcher government’s radical departure from Neo-Keynesian economics was vital to Britain’s prosperity.

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3 thoughts on “Thatcher Fallacy (2)

  1. Daniel you’ve messed up on your terms. ‘Neo-Keynesianism’ was only first heard of in 1982 and was developed as a response to the failure of many monetarist policies. The reduction in inflation that you talk of occured during a massive recession which fits most economic theories of any kind.

    “Tax increases, lower public spending…” Not exactly a new way of thinking and perfectly part of neo-keynesian thought when it comes to controlling inflation.

    The fact is that Keynes would have castigated most chancellors between 1945 and 1983 for their irresponsible behaviour (with the exception of Roy Jenkins). Neo-Keynesian would probably best describe economic policy after 1990 and quite where a massive credit boom fits in with tough monetary controls is beyond me.

  2. Okay then… departure from the post-war economic consensus. Although Neo-Keynesian economics is a term used in far more academic works than mine to loosley describe the post war economic approach, and not without any justification.

    Tax increases and lower public spending were certainly not an entirely new way of thinking. However. it was a break from the consensus.

  3. This is, I’m afraid, utter nonsense. The policy of measuring ‘broad money’ M4, was abandoned because it was realised that the exchange rate was a far greater influence on inflation than money supply. Thatcher and Howe were simply wrong in thinking that controlling the money supply was an essential weapon in the fight against inflation. The price of following this mistaken policy was a deflationary squeeze far, far more severe than was necessary. How many central banks today bother with the money supply indicators? None. The statement at the top of your article, far from being fallacious, is an accurate description of the failed monetarist experiment.

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