Lecture 7 Government industrial policy and the changing structure of the British economy: 1979-date; privatisation. This was the most important single policy issue for Margaret Thatcher. When she came to power in 1979 she wished to reverse Britain's relative economic decline via an ideological and economic paradigm shift from government intervention and state ownership of industry to supply-side Laissez-faire economics. Nationalised industries were thus privatised on a substantial scale, and there was wholesale deregulation of the industrial economy. The principal economic rationale was that the decentralised system of resource allocation achieves productive and allocative efficiency Pareto optimality), thus the privatised industries should become more efficient if subject to market forces and no longer in receipt of substantial government subsidy. Thus the economy would grow at a faster rate. By creating a more free market environment, the Thatcher governments would encourage a market driven sectoral-shift from an economy based on manufacturing and the extractive industries to a retail and financial service sector based economy. This transition had been occurring for some time, but 1 .-
regional policy and nationalisation had slowed it down. Now the free market would speed it up. The Thatcher government wanted to encourage a fundamental shift in public attitudes towards the capitalist system, it wanted to create a society which had a vested interest in maintaining this system. Adam Smith had commented that people were inherently self- interested and so the Thatcher government attempted to create a share owning democracy whereby British people would have a pecuniary interest (share dividends) in the capitalist system. This was initiated by the privatisation of the utilities: gas, electricity, water and the telephones. These were natural monopolies and thus subject to supernormal profits, thus expected share values and dividends were likely to be high. Shares to private investors were sold at less than their anticipated market value in order to encourage sales, and shares were sold in small quantities to prevent the institutional share holders from purchasing them. It was hoped that the dividends generated for shareholders would create a more general culture of share ownership, where the public would go on to purchase shares in existing private sector companies, not just in the privatised industries. Many members of the public purchased shares in the privatised utilities, but the hoped for culture of general share ownership was not achieved. The cutting of subsidies to nationalised industries created high unemployment in the 1980s, in excess of 2
three million, the highest since the Depression of the 1930s. The Thatcher government sought to address this problem through stimulating inward Foreign Direct Investment (FDI). This was the policy of attracting mainly American and Japanese businesses to locate in Britain to create fresh employment. It was also a policy of ensuring that Britain was increasingly integrated into the global capitalist system, and reliant upon businesses from other capitalist countries. The purpose of this was to ensure that no future Labour government could reverse the policy. Because the utilities are natural monopolies, it was technically difficult