Financialisation and the Thatcher Governments
A Turning Point
The early 1980s can be seen as a turning point in the development of socio-economic systems. In the 1970s the first responses to economic slowdown in advanced economies had been to intensify interventions at national level with a broadly Keynesian character. The Thatcher administration pioneered what eventually became a general movement away from those positions. Macroeconomic policies became more restrictive and emphasized the use of monetary policy to reduce inflation. The trend of the previous fifty years towards more public ownership was reversed. Here again the Thatcher governments led the way, with major privatisations after the 1983 election. Public spending was subjected to tighter constraints; although spending on social security continued to rise, this was now due to a rapid rise in the number of claimants while the level of benefits was reduced or grew much more slowly. The tax structure became less redistributive; in Britain the three Thatcher governments brought the top rate of income tax down from 85% to 40% while raising expenditure taxes to compensate for lighter direct taxes. The labour market and employment flexibility became an increasingly important theme in social and economic policy (although the way the flexibility objective was pursued in Britain, largely through trade union reform, was not widely imitated in other countries with different legal systems). Industrial policies became, in general, less protectionist and member states of the EU were now ready to agree on a stricter competition regime. The social consequences of this change in direction are well known, summed up in the title of Hobsbawm's celebrated article, "The Forward March of Labour Halted". Inequalities in the distribution of income and wealth, which had tended to narrow over the first three quarters of the century now started to widen again - in terms of both individual incomes and the functional distribution between labour and capital.
Political versus Economic Forces
It is difficult now to assess the extent to which this broad shift in socio-economic development was brought about or significantly shaped by the Thatcher government. Would the broad trend of economic policy really have been very different without this episode in British politics? There is no intention here to diminish the role of the individual or the contingent in socio-economic development. It is certain that without the three Thatcher governments things would have happened in a different way, at a different pace and even perhaps with different long-term outcomes. Nevertheless these notes attempt to put the contrary case - that many of the developments attributed to political change have a clear economic logic and that the role of political factors - "neoliberalism" in general and "Thatcherism" in particular - has been overstated. If this view is valid it has practical implications in that it suggests that some current problems, interpreted as primarily political, have an economic dimension which is not fully taken into account. To focus the discussion, the main phenomena considered are those associated with the term, "financialisation". The central question therefore becomes, to what extent can we explain these phenomena by reference to the policies of the Thatcher governments.
What is Financialisation?
Rather than offer a specific definition, it might be useful to call three other definitions into question. For Duménil and Lévy, finance is primarily an interest group. They identify finance with the dominant fraction of the ruling class, and financialisation would therefore correspond to a reinforcement of that domination. For Karel Williams and his co-authors, financialisation is a narrative, an interpretative discourse suggesting certain ways of understanding corporate problems and strategies and likewise tending to block other views and approaches. Both definitions are valid over a wide range; both can be buttressed by a vast array of evidence. They have the disadvantage that they turn attention away from finance as an economic function, one that is central to the working of capitalist economic systems. A third common view insists, on the other hand, exactly on dysfunctionality; we can conceive of a modest, functional financial system centred on support for economic development and environmental protection. Against such a model the actual financial system is characterized by predation, speculation and needless complexity; to resolve the problems of the "real economy" it is necessary to correct the hypertrophy of the financial sector. Once again, there is no shortage of evidence; speculation, predation, "churning" of transactions are demonstrable facts. The correction of these dysfunctions - to benefit the households and enterprises which make use of the financial system - then suggests an agenda of reform. The danger of such a reading is that it tends to interpret most financial developments in recent decades as aspects of the same hypertrophy, neglecting the relationship of many financial changes to changing patterns of economic development.
Foreign Exchange - a Casino?
The kind of error that is referred to can be illustrated by the very general misreading of the size of the FX market. This is measured every three years by the BIS which never fails to report an astonishing growth in the value of transactions - most recently (April 2007) these were estimated at more than $3 trillion a day. There is no relationship between this figure and either international trade or international investment flows. Too easily it has been concluded that the FX market must therefore be a gigantic casino, sustained by nothing other than speculation on exchange rate movements. But this view simply cannot survive a closer examination of the data. The majority of transactions reported are in fact FX swaps which do not involve either party taking an open position on exchange rate movements. They are essentially money market instruments whose function is to permit the transfer of liquidity across currency zones. Far from representing speculation, the flows involved help to stabilise routine recycling within the banking system. Nor are they disproportionate in scale when measured against relevant money market data - for instance against the flows through the TARGET payments system (over 2 trillion euros per day in 2009). Here a failure to comprehend the function of a set of financial transactions has led to a complete misunderstanding of their meaning and their consequences.
The Strange Death of Keynesian Europe
It might be useful to put forward a different - in fact, an alternative - turning point in postwar economic development. This is the Volcker shock. Appointed to the chair of the US Federal Reserve in the summer of 1979, Paul Volcker was confronted with an alarming slide of the dollar on the foreign exchange markets. After some months consideration, he reacted with a complete change in the direction of US monetary policy, raising interest rates to unprecedented levels. Note that the Thatcher government had anticipated this move: UK interest rates in 1979 averaged 13.0% as against 8.5% the previous year. But it was the US move which changed the international economic environment: US rates went from 7.2% in 1978 to 11.4% and 14.0% in 1980 and 1981 respectively. Longer-rates followed - also reaching 14.2% in 1981. Prime rates - those charged to the largest corporations, soared to over 20%. If the general turn away from Keynesian strategies in Europe is to be understood, one must surely take into account the circumstances which rendered these strategies extremely difficult to finance. The politics of the situation are also interesting. The turn to restrictive policies came in December 1979, under Jimmy Carter and long before the accession of Ronald Reagan. Nor can Paul Volcker be regarded as a "neoliberal". He had stated a few months previously that a consensual price and incomes policy would be the best way of stabilising US inflation and therefore the dollar. Such a political agreement, however, was infeasible in practice. The scale of the emergency should be emphasized - the US authorities were faced with a flight from both monetary and real US assets - negative real interest rates were no longer stimulating economic activity but rather feeding waves of speculation in alternative stores of value - gold, oil reserves, D-marks. The switch to restriction may owe something to the doctrines of Milton Friedman; it owes more to the complete failure of the accommodating policies of the late 1970s. There was a key European input into the US decision but this was not British but German. In the autumn of 1979, Volcker visited Bonn and sought Bundesbank support for the dollar. He was urged by Buba President Otmar Emminger and Chancellor Helmut Schmidt, neither of them an obvious neoliberal, to get the money supply under control, a response which surely sowed the wind for the Europeans. For the US itself, however, the change in monetary policy was in many respects a success - dollar hegemony was restored, recession was short-lived, and US economic performance improved, especially relative to that of the European economies. In fact, in the late 1970s, the British economy was generally considered to be a basket case - in retrospect, after economic policies were changed across the Western world and when British growth rates eventually improved, Margaret Thatcher came to be seen as prescient and as a pioneer of market-oriented reform. But this reassessment came slowly ((At the Dublin Council of 1979, famous for her plea, "I want my money back," Thatcher characterised Britain as the poorest economy in the European Community. She asked for investment from the Germans. They responded, it seems, by asking, "What would you like us to invest in - British Leyland?")). For the main actors at the time, the Volcker shock was a drastic tightening of the constraints on economic policy.
The Role of the City
Should one look on the Thatcher governments as representing the interests of the City of London as against those of industry? It is true, firstly, that historically there has been a tension between financial and industrial capital in Britain, with the former tending to favour a strong currency, the latter easy credit conditions. Britain's return to the gold standard in 1925, at the old 1914 parity is the best known example of this clash of interests. There were certainly aspects of policy under Margaret Thatcher which were to the advantage of the City - starting with the dramatic abolition of restrictions on foreign investment, on almost her first day in office. Deregulation of the financial sector followed. However, these moves both had a clear macroeconomic logic. It would be easier to reach the government's counter-inflationary goals if capital imports were permitted to raise the exchange rate while the chosen counter-inflationary instrument, monetary policy, would be more effective if interest rates were set in a more competitive way across the financial sector as a whole, without partitions or protected groups of intermediaries to shield particular borrowers from the general pressure. This aspect of the strategy had in fact been adumbrated by the previous Conservative government of Edward Heath, in the 1971 Bank of England document, Competition and Credit Control. In the early years of the Thatcher experiment, high interest rates as such were probably the biggest benefit conferred on the financial sector: as rates rose in the money markets the margin between rates paid to depositors and the rates charged to the banks' debtors widened and bank profits soared. However, in the recession provoked by high interest rates, this was an embarrassing development and a special tax on their windfall profits in 1981 took in 400 million pounds. As with the Volcker shock, there is another story to be told about the City, one that situates changing financial structures in the context of an emerging global economy. After the Second World War, decolonization and the decline of sterling threatened the City, as an international financial centre, with a certain relegation. It acquired a new role with the development of the off-shore Eurodollar financial system. This grew out of the increasing activity of US multinationals in Europe. During the Kennedy administration the US authorities decided that it was useful to have this off-shore system which insulated the biggest US multinationals from changes in domestic policy. With the growth of international trade and investment, offshore markets in other important currencies joined the Eurodollar markets and again London won the lion's share of the business. At that time, and well into the 1970s, the off-shore banks and bond markets were effectively separated from the domestic financial system of the US, as can be seen from the frequently divergent paths of on-shore and off-shore interest rates. Clearly the British were happy to have these lucrative activities on their own territory, but the logic of their development had little to do with the British economy. The decisive moves came not from any change in domestic policy but from the abandonment of exchange controls in the other leading economies, firstly Germany and then in the US itself. It was this liberalisation which transformed London from an important secondary financial centre to a key hub of a globalised system. But these developments were extended over a long period, they depended on continuous processes in the internationalisation of economic life as well as on breaks and discontinuities. "Big bang", the subsequent re-regulation of the stock exchange, necessary to attract US banks and investment houses, tended to move the City further away from domestic control and further integrate it into the circuits of globalised finance.
The practical import of Monetarist doctrines was not the use of monetary aggregates - experiments in quantitative control of the "money supply" led to a host of insoluble technical difficulties and were abandoned, in both Britain and the US, almost as soon as they were attempted. Rather, monetarism involved a reassignment of instruments - with monetary policy given much greater prominence - and a new priority in targets - with disinflation now the highest priority. The actual consequence of monetarist strategy was to increase the prominence of the financial system - since high real interest rates sharpened financial tensions - and also to promote the substitution of security markets for bank deposits because it was, in the first instance, the latter which were restricted by policy. However, there are no clear links between the project of monetarist disinflation and financial development. The focus of the strategy was, in fact, on the labour market: restrictive macro policies would hold back the prices set by companies and they, in turn, would put pressure on employees. It was intended both to contain wage growth in the short run and to weaken organized labour on a permanent basis. Unemployment was central to the macroeconomic strategy (the "Medium-term Financial Strategy") and, although this was not admitted officially, it was understood by all concerned. There were also obvious political risks and only the crushing defeat of Labour in the election of 1983 stabilised the new direction of policy and encouraged a much more ambitious programme of market-oriented reform. Even in this domain, however, there were conditioning factors of an essentially economic nature. As such, the reassignment of macroeconomic instruments was a simple corollary of the breakdown of Bretton Woods and the general move to floating exchange rates. It is a standard Mundell-Fleming result that monetary policy becomes more potent and fiscal policy less so when exchange rates float because exchange rate movements will now tend to reinforce changes in monetary policy but counteract those in fiscal policy. This suggests a perspective in which the growth of economic interdependence made existing control mechanisms less effective, but this was a cumulative process at work throughout the 1960s and 1970s, not a matter of a sudden change in direction. The other slow process at work relates to the increasing difficulty of the steering problems posed by Western economic development as profitability fell, and productivity became so that, by the late 1970s many governments were failing to maintain the dynamic of economic development. This situation provoked serious doubts about economic strategies even before the political turn of 1979, for example in the famous renunciation of Keynesianism by James Callaghan as early as 1976 ("I tell you, in all candour, that that option no longer exists..."). Thus, a change of macroeconomic strategy may have been hard to avoid, even though one can imagine a less brutal and better managed change of direction.
The Ideology of Finance
Free market doctrines come in many forms, with different priorities and strategies. It is most certainly possible to find a version which emphasizes the role of financial processes in economic adaptation but it is doubtful whether these doctrines were particularly influential among British Conservatives at the time of the Thatcher experiments. The economics of Michael Jensen grew out of a specifically American set of problems. In the 1980s the US was faced a very severe competitive challenge from the industrial systems of Germany and Japan. Jensen argued for a process of restructuring in a way which had analogies with some Marxist accounts of the economic slowdown at the time, although Jensen's normative position was of course very far from Marxist. The key notion is of restructuring through the operation of the capital market, in a kind of social Darwinism where capital market valuations decide on the survival or elimination of enterprises. Jensen argued that oligopolistic industrial structures, insulated from capital market pressures, had led to a certain decadence in American industry, a failure to contain costs, to rationalize investments and so on. The appropriate response was to intensify capital market pressures and especially the market for corporate control, that is the threat to displace underperforming managements in a takeover. The doctrine of shareholder value, although it is the best known, is only one example of this broader view of capital markets - in fact the earlier writings of Jensen, it is suggested that equity markets with dispersed shareholders only provide weak and limited control over corporate developments. At that point he considered that the effective restructuring could be better brought about through the activities of corporate raiders and other forms of private equity, relying primarily on bond finance. It was the growing political resistance to this type of restructuring that led to a reformulation of Jensen's position in terms of shareholder value (his recent writings suggest that the crises of the twenty-first century may now have destabilised his entire position , which did require that the valuations made on security markets had some rational basis). It is clear that Jensen's views on takeovers were very influential - especially on the European Commission - but there is no reason to think that they were an important influence on the Thatcher governments. As suggested above, the main focus of Thatcher's macroeconomics was on the labour market. The fact that restrictive policies could only impact the labour market by putting immense pressures on enterprises - particularly in the manufacturing sector - was a necessary but undesirable aspect of the strategy as a whole. Where possible, the Thatcher governments mitigated these pressures. Intellectual influences on the Thatcher project include Hayek and Friedman - Jensen is not commonly cited among them.
Pensions - an exception?
One factor behind the rapid growth of the financial sector, particularly in Britain and the US, has been the withdrawal or curtailment of various forms of public provision. Examples are health care and higher education but most importantly, pensions. In 1980, the government broke the link between average earnings and the basic state pension, starting a slow decline in its relative value from 23% of average earnings then to some 16% today. Entitlements linked to the secondary state scheme, SERPS, were cut back in 1986. However, the government was not satisfied with the main private sector alternative, the occupational pensions provided at the time by most of the largest employers. These were difficult and costly to transfer when an employee went from one company to another and were therefore perceived by the government as working against labour market flexibility. Tax changes were introduced as part of a heavy promotion by the government of personal pensions, which were then marketed by the institutional investors in an unscrupulous way. Millions of people were persuaded by commission-hungry sales forces, to leave SERPS or occupational schemes and to join quite inferior schemes with very heavy charges. Here there does seem to be a direct "financialisation" of British economic relations by the Thatcher governments. This was the "mis-selling" scandal - but it is doubtful whether it was of long-term benefit to the companies involved because a large number of the contracts had to be unwound and the customers compensated. There are other examples of the same process - for example, the shift to house ownership under the Thatcher governments widened the scope for mortgage finance. However, the main motives behind the policies concerned the labour market rather than any attempt to develop the financial sector as such.
The Regulatory Regime
The late 1980s saw the introduction of a new regulatory regime for the financial sector, associated with the "big bang" reforms which opened up the City of London to US and other outside dealers. It was a relatively relaxed regime, relying to a very great extent on self-regulation by the various financial sub-sectors - insurance, banking and so on. The New Labour administration of 1997 replaced this decentralized system by a single authority (FSA) which exercises direct governmental control. This latest structure, modeled on the SEC in the US, corresponds to a certain Americanisation of British practice, which can also be seen across Europe. In effect, very lightly regulated financial sectors, largely insulated from external forces, have now become very interdependent; a more homogeneous regulatory system is a functional consequence of this development, while the predominant influence of the US is to be explained by its central role in the emergence of global finance. Analogous processes can be found in the specific sphere of banking, although there the coordination of national systems was guided by a specific institution - the Cooke committee of the BIS. In any case, these functional developments are not to be attributed to the Thatcher governments, which repeatedly failed to understand the actual nature of the forces in play.
The Assault on Public Goods
Nothing in the above is intended to exonerate the Thatcher governments which were responsible for immense harm to British society. The explicit attempt to dismantle many public goods was accompanied, in practice, by increasingly predatory incursions of private business into the public sector; the supposed release of entrepreneurial energies is often better seen as, in the terms used by Rosa Luxemburg, the state as a field of accumulation (see Colin Leys' work on "neo-liberal politivs"). It is hard to doubt that subsequent waves of privatisation - first in Western Europe and even, after the collapse of the Soviet Union, in Central and Eastern Europe were significantly influenced by the Thatcherist precedent. In turn, privatisation has pushed forward financialisation by widening the range of activities requiring market finance but the two processes are not the same; this can be seen clearly in the French case where early privatisations were deliberately shielded from stock market pressures - the decision to promote a shareholder economy was distinct from, and later than, the decisions to return industrial enterprises to the private sector.
The main point of the above notes is to insist on important distinctions in current political-economic analysis. A range of economic forces finds expression in market developments; these cannot all be interpreted in terms of political initiatives. It is true that the Thatcher governments, although socially reactionary, did have a prescient view of some of the forces concerned, while the Keynesian and/or Left-wing opposition to those governments often struggled to comprehend them. However, Thatcherism is best seen in terms of specifically British conditions at a specific point in time; it is not a microcosm of socio-economic change in the late twentieth century.
Cette ressource a été publiée dans le cadre du colloque franco-britannique "The Thatcher Legacy 1979-2009", organisé par l'université de Lyon 2 et l'université de Sterling les 4 et 5 décembre 2009.
Pour citer cette ressource :
John Grahl, "Financialisation and the Thatcher Governments", La Clé des Langues [en ligne], Lyon, ENS de LYON/DGESCO (ISSN 2107-7029), janvier 2010. Consulté le 22/09/2023. URL: https://cle.ens-lyon.fr/anglais/civilisation/domaine-britannique/l-heritage-thatcherien/financialisation-and-the-thatcher-governments