Contrary to widespread assumption, the “sea-change” of liberal market
economic policies introduced since 1979 has not boosted British growth,
according to a study from the Centre for Business Research at University
of Cambridge Judge Business School.
While “conventional wisdom” holds that liberal market policies followed since Margaret Thatcher’s 1979 election remain the best model for the UK economy, albeit with additional banking safeguards, “in this report we ask whether this benign view of the post-1979 world is a true reflection of the economic facts.”
The 74-page report, entitled The Macroeconomic Impact of Liberal Economic Policies in the UK, shows that, contrary to widespread belief, GDP and productivity in the UK have grown more slowly since 1979 compared to previous decades.
Average annual growth of per capita GDP fell from 2.6% per annum in the three decades prior to 1980 to 2.2% per annum in the following decades to 2007, and a decline of 0.2% per annum since 2007. The deterioration in the growth of labour productivity after 1979 has been even more marked: 2.9% per annum in the three decades prior to 1980, compared to 1.7% per annum from 1980 to 2007, and a decline of 0.2% per annum since 2007.
The “volatility” of economic growth has also been much greater – coming in “large waves in contrast to the ripples of the 1950s and 1960s.” Although inflation and industrial disruption have improved since 1979, unemployment and inequality have been higher. The average unemployment rate since 1979, at 8.7%, has been two-and-a-half times higher than the average for 1950-79.
Only the deregulation of bank lending (which began in 1971 and intensified after Mrs Thatcher was elected prime minister in 1979) has led to faster GDP growth through boosting both consumer spending and house prices up to the financial crisis in 2007. However this was fuelled by huge, and inevitably unsustainable, rises in household debt ending in financial crisis. Since 2007 the underlying weakness commonly called “secular stagnation” has been revealed, and per-capita GDP is now 20% below what it would have been if the 1950-79 trend had continued, but with no prospect of regaining that trend.
“Other than this unsustainable boost to demand from financial liberalisation there is little evidence that other liberal market policies taken together improved the trend rate of economic growth in the UK even temporarily.” Liberal market policies including lower tariffs and income taxes, free movement of capital, and labour, limited legal immunity for trade unions, privatisation, support for small firms and light-touch business regulation “did not produce the goods” in terms of higher growth in GDP and productivity, the study says.
The report is not party political or ideological, nor does it attempt to present detailed alternatives to the current liberal market regime. Instead, it takes a factual look at key economic statistics to illustrate that, in a complex economy like the UK, the widespread “assumption that free markets will generate optimal outputs is shown to be untrue.”
The study says that much of the support for liberal UK economic policies since 1979 has come from a belief that Britain’s economic performance improved compared to Western European competitors. But the study argues that such an underpinning is misguided because this relative performance is due not to any improvement in the UK growth rate of GDP, but instead to a “dramatic slowing” in economic growth in continental Europe beginning in the 1970s – with GDP growth of just 1.6% per annum in the original six European Union countries between 1979 and 2007 (compared with 4.5% per annum between 1950 and 1973).
“The future implications of the analysis in this paper are worrying,” the study says. “The trend of productivity growth in a UK economy heavily denuded of manufacturing by decades of globalisation is unlikely to be much above 1.4% per annum,” along with slower growth in per-capita GDP as an aging population reduces the proportion of working-age people.
Given that the economic crisis in the UK which began in 2008 has been the deepest and most prolonged for more than a century, this is an “appropriate time to question whether the UK is following the most appropriate form of capitalism,” the study says, concluding that a “wider range of varieties of capitalism are available to policy-makers than is commonly assumed.”
The study is co-authored by Ken Coutts and Graham Gudgin. Both are Honorary Research Associates at the Centre for Business Research at Cambridge Judge Business School, University of Cambridge. Ken Coutts is also Emeritus Fellow of Economics at Selwyn College, Cambridge, and Graham Gudgin is also visiting Professor at the University of Ulster.
(Source - Cambridge Judge Business School, University of Cambridge, Press Release)