Trickle-down Economics – The Thatcher Legacy

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This was originally posted in 2013 just after the death of Margaret Thatcher. Now that the Conservatives have amassed a majority at the General Election, I am re-publishing as the message holds even firmer today.

“In our system, everything is done according to a pyramid approach: the order is given from the top and carried out at the base.”

No, this was not Margaret Thatcher but Jiangwen Qu – professor at Kumming’s Centre for Asian Studies, talking about China. (Taken from China’s Silent Army, Juan Pablo Cardenal and Heriberto Araujo).

He went on to say: “We believe that other countries should follow this model, because if you let everybody give their opinion it is difficult to make decisions.”

Yet, it demonstrates how in our so-called democracy, the top-down theory of decision-making was so faulty. Margaret Thatcher won three general elections because the Labour Party was split between the left-wing (originally led by Michael Foot) and the right, which broke away to form the Social Democrats. In the UK’s ridiculous “first-past-the-post” election system, a party needs only 35-40% of the vote for a substantial majority – that was Margaret Thatcher’s luck. This luck had already been seen in her victory over Edward Heath in the leadership contest in 1975 – although it has to be said that she took full advantage of that luck.

Margaret Thatcher always said that she believed in democracy but made great fortune from its deficiencies. Apart from a rigged election system that gives minor parties full majorities, she did not practice democracy in terms of decision-making. Her cabinet (where the Prime Minister is supposed to be prima inter pares – first amongst peers) was where “the order is given from the top and carried out at the base”. This was her style from the time she became Prime Minister to the time she was thrown out by those who had the substance to rebel after 13 years of her idiosyncratic style of democratic rule.

Leadership and Democracy

Within a system such as ours, Margaret Thatcher did not split the country – her support was far less than half the country (usually than 40% of the voting population) and even those that voted for were split between various streams of the Tory party. She fragmented it. Her supporters in 2013 would mainly be found in UKIP today  although she would have still used the Tory Party as it is the only vehicle for power. The split was far worse as it demonstrated that rule of a democratic party would be by just the largest minority and with extreme policies.

Those policies did change the economic landscape that had been moving to rigid control by sclerotic centrist organisations such as Trades unions, Public Sector, old-style corporations and successive governments that had no vision for society.

Thatcher destroyed the comfiness of society in her own terms and put in its place more top-down doctrines around monetarism. Because liberalism had floundered after the first World War, centrist forms such as socialism and corporatism were, it seemed, all that there was left. Even the linking of Liberals and Social Democrats in he 1980’s was to prove a failure of liberalism as the Liberal Party moved towards a centrist European ideal and away from the localism and bias away from the centre that had characterized the party from its inception.

Strong leadership takes advantage of democracy in the UK (and still does) and the trade-off between the two is a constant battle. Where no leadership exists (and this is a story of today) then democracy does not replace it until some form of leadership appears. In the UK, we still have sclerotic centrist organisations that support the status quo and no vision or leadership for the 21st Century that would inspire the change that wealthier and better-educated citizens would aspire to.

The Centre going Forward

There is a massive danger that the completely centrist and statist system operating in China (as quoted in the first paragraph above) will, because of China’s growth and rapid ascendance, come to dominate political thinking the world over. Liberal Democracy is already wilting in western Europe as major decision-making is made by the unelected (in Brussels and for some time in Italy) with nations such as Portugal, Spain, Cyprus and Ireland ruled from the centre (read Germany). This is far away from localism and screams about the loss of Liberalism. The now-disgraced and jailed Chris Huhne remains a fan of the EU and the Euro – not a surprise that his background is social democracy not liberalism.

The 20th Century was a battleground between the forces of darkness epitomized by  extreme Nationalism, Communism and Fascism on one hand and the forces of democracy on the other. Millions lost their lives and millions more suffered in gulags and concentration camps for democracy and the end of extremism.

The 21st Century battleground is more complex as the war between the different political forces of centrist and localism is splintered by the battles for resources and markets (and by the impending battle for climate and conservation) and between north and south and rich and poor and corruptors and corrupted.

Thatcherism knew only Hayek-style liberalism – an understandable reaction against socialism and the fear that fascism was created around that fear. In its place, The Road to Serfdom (Hayek’s best known work and Thatcher’s quasi-bible) postured a place for Government in monetarism and information provision – working to ensure that the market could work through transparent pricing. This was its limit and disregarded the essence of society (although Thatcher did not assert that society did not exist, she might as well) as did Hayek in his complete opposition to anything that wreaked of socialism – even social democracy was something that Hayek viewed as naturally leading to totalitarianism.

The problems that Hayek missed and that Thatcher and Reagan made possible (and that China is already risking) is that while socialism runs everything from the centre, the opposite camp of economic liberalism naturally tends towards a small minority at the top owning all the assets and all the decision-making apparatus. It is clear from the history of the last 30 years that the rich are getting richer while the poor get poorer (in terms of direct wealth and the supporting services offered to them) and that the dynamism needed in society from the other sectors is dying. Margaret Thatcher notoriously believed that there would be a trickle-down effect. That was nonsense and that is now proved.

Worse, a market-led economy which is based around numbers only (with GDP growth as the religion) leads to huge societal dislocations. The NHS is a valid case where management by statistics leads to deaths and the complete abandonment of human character – as evidenced by the maltreatment of the elderly. The opposite system (as in the USA) based on insurance only leads to only the wealthy having good medical services.

Worse, the motivation by quantity alone means that quality of life is abandoned in the drive for more goods. This is the market at work when left to its own devices. The market is driven by the simplest routes to success – numbers. We cannot be solely market-driven even if the market is the best form of driving entrepreneurialism.

People-centricity not Centrism or top-down

Society has experimented with many forms of government and economics. On the latter, we have a general agreement that market-led economics works best, but it is market-led not liberal or libertarian markets. Market-led means that other decision-making mechanisms are relevant wherever the market tends to extremism – such as domination of the market by monopolies or when the rich 1% control all the assets.

In the West, we believe that democracy works best because we all have a stake and are all equal under the law. Huge, developing countries like India and Brazil have similar philosophies but are riven by corruption. China is a centrist “civilization state” which directs from the core and will, at some stage, erupt into democracy. Russia is a centrist state by tradition and a mafia-dominated chaos.

Where we believe in equality under the law, we have to strike balances which Hayek / Thatcher / Reagan economics cannot achieve. This balance has to ensure that the drive is towards the individual but that society steps in to take out excesses. The balance is developed by society – with civil society and civil society organisations strengthened against the powers of the centre wherever they are.

This is far away from a socialist state where assets are owned and / or controlled from the centre and where equalization is the norm. Balance (whatever it is called) rewards entrepreneurship but would not award bankers or managers in the same way. It would not have made the reduction to 45% in the top income tax rate in the UK – whether or not this had been financially sensible in the short-term – as it shows a total disregard to society and the motivation of the great majority of its citizens that are struggling to prosper.

People-centricity and a focus on society using the best of the market and democracy but using brain power and ingenuity as well as technology represent the 21st Century as we struggle against top-down, centrism, climate change, resource degradation and inequality.

It is not what Margaret Thatcher intended as it requires not just the whip but also the driving force of human capability in all areas of society to see beyond the numbers or the desire to control from the top. It is leadership by motivation and inspiration.

With the death of Margaret Thatcher, let’s lay to rest trickle-down economics  along with socialism and fascism.

When Bush Senior said “it’s the economy, stupid”, society was shelved.

Let’s talk society not just economics. Human brain power not numbers. Ingenuity not GDP. Well-being not hospital stats. Quality not quantity. Society not just economics. Real leadership, motivation and inspiration.

Institutionalized!

Will Self’s excellent new book “Umbrella” (http://www.amazon.co.uk/Umbrella-Will-Self/dp/1408820145/ref=sr_1_1?ie=UTF8&qid=1348396331&sr=8-1) brilliantly describes the torture of individuals put into “mental institutions” and how (until very recently in the UK) they were appallingly treated.

 

Old people in Care Homes have similarly been shown (one example had a miniature camera secured in the room of a care home) to have been malnourished, beaten and generally abused.

 

Maybe it is improper to use these examples of Institutions that have become uncaring and out of control to symbolize the problems faced regularly by all of us, but it is no coincidence. We have all become “Institutionalized” by the edifices that society has created to carry out the basic functions of society. This is not new. Ossification of institutions is a regular occurrence in society. The reason that monarchs are overthrown, for example, is because the institution of monarchy – the rule of society by one person or clique – becomes, eventually, intolerable to society in general.

 

Cracks in the Institutional Wall

 

We are all confronted by Institutions throughout our lives. From hospitals to school, from government departments to businesses, individuals live their lives working in and being confronted by Institutions.

 

Institutions have been defined as: “An institution is a system of rules, beliefs, norms and organizations that together generate a regularity of (social) behavior” (Greif, Institutions and the Path to the Modern Economy: Lessons from Medieval Trade).

 

They provide “equilibria” to society as a method or ordering our behavior. Greif also developed notions of dynamic institutions to show how institutions change through time.

 

Common Threads’ focus is that the institutions developed in the 19th Century for politics, economics, education and other key areas of society don’t work well in the 21st Century. The aim has been to generate some discussion of where the problems may be and look at some potential solutions rather than try to develop a theoretical analysis (when this is being done elsewhere – for example, in the area of economics at ESNIE (European School on New Institutional Economics – http://esnie.org/).

 

Major economic dislocations as we have seen since 2007 in the West – the banking disasters leading to huge debt problems leading to depression in Greece and the potential for this throughout Europe – could presage major changes in the way institutions develop. Often, the cracks in the wall have to be very large before we either build a new wall or try to fill in the cracks – which is what is being done now.

 

The changes in our institutions that are being made – small changes in banking (mainly in terms of individuals) are akin to deck chairs being moved around on the Titanic. Whether in our political institutions or our economic ones (or wherever large organizations have been set up to provide societal equilibrium) the danger is that they do not change enough to enable society to prosper – rather, built on the foundations of the 19th Century, they fail to deal with the issues that face them (and us) today.

 

Building Order out of Chaos – Challenging Entropy?

 

Just like the walls of Jericho were built to keep out intruders (subject to the odd trumpet) and we build firewalls in our computer systems to keep our systems secure, society builds our Institutions also to have effective walls against change and to build ourselves a cover against the outside world. Maybe we are genetically primed – our cells work within walls that allow us to withstand the chaos that would otherwise ensue. The Second Law of Thermodynamics essentially describes entropy – the natural tendency for good energy to dissipate into bad (useless) energy. Our life on this planet is a constant grind against the power of entropy and, maybe, our desire to build this equilibrium is a natural and instinctive drive for order within chaos.

 

This natural tendency to build order exists throughout civilization and can produce stability and contentment. But, as Darwin wrote: “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.” (Origin of Species).

 

The key is that Institutions cannot be left to ossify but have to change to meet the changes in environment that exist externally. New order has to be developed constantly.

 

In business, in relatively free markets, businesses come and go on a regular basis. The FTSE 100 started in 1984 and today only three companies from those 100 remain in the FTSE 100 – GKN, Rolls Royce and Imperial Tobacco. This is because the FTSE 100 reconstitutes itself every three months. The Dow Jones started in 1896 – who remembers American Cotton Oil or National Lead or United States Rubber? That is not to belittle business – there is a tough economic law that works hard to reward success and punish failure. Companies that don’t work hard to change to meet the needs of the external environment simply fail. Apple is a great example of a company that was close to collapse in the 1980’s but (under Jobs) completely redirected itself so that it is now the highest valued company in the world. But, for how long? Most companies fail (70% in the first three years).

 

Taking Down the Walls

 

Within the rest of society, change is harder. In our fight against the ravages of chaos, we allow pressure to build up, often learning the wrong lessons. This so often leads to an explosion as pressure gets too much. Society is not very good at understanding where the pressure is building. We defend the status quo for too long and then find ourselves unable to contain the whirlwind that attacks us.

 

In the UK, we have prided ourselves on our ability to change gradually so as to release the pressure before it gets too much. Not since the middle of the 17th Century has England fought a Civil War. This is held up to be the result of the changing democratic scene – from Magna Carta through rule by nobles to rule by the Commons (elected nobles); constant enlargement of the vote from 1832 onwards to women in 1918 (as long as they were over 30 and lived in a decent house) to 18 year-olds in 1969.

 

The walls have been dismantled brick by brick and most democracies follow a similar path.

 

The challenge now is that, in an age where developed societies have reached a decent level of economic wealth, politicians are losing any connection with those they are supposed to represent. Only around 50% of the voting population bothers to vote in general elections. More are now linking up with one-issue groups who they believe will push agendas on their behalf rather than hope that a political party will (by the mere casting of a vote every five years) carry out a manifesto that cannot meet most aspirations.

 

This means that the one issue lobbyists are getting greater powers to influence. Their techniques and ability to make change happen is developing constantly. Originally, such groups were primarily labour organizations (Trades Unions) and, in the UK, this developed into the Labour Party. Now, there are groups within the Third Sector that campaign on any range of issues from the environment to health, from taxation to education, from peace campaigners and human rights to fox-hunting (both sides). Organized campaign groups now operate as a key part of society so that individuals are now useful only at elections.

 

This means that more Institutions have been developed to challenge the political parties (it happens throughout the world). This is not a challenge to the political process – it may even solidify it by shoring up the political process within a wall of campaigning institutions.

 

What role for Society?

 

It is in this context that several have questioned the future in which we grow Institutions to work with other Institutions to govern (or run other aspects of our lives). This response to the walls around politics and government may be a natural one but is questionable as the new Institutions (of the campaigners and lobbyers) are run by a small number of people and funded in many ways. They are not accountable in the same way as political parties are supposed to be (and continue as long as they are funded). Their funds come from a variety of sources and confusion exists amongst society in separating out charitable work from campaigning and lobbying. In the UK, there is no register of lobbying so there is no transparency that is at least attempted in the US (which has its own problems owing to funding regulations that allow companies to fund to whatever level).

 

There is a real danger that the way we are evolving the democratic process is anti-democratic. Democracy is supposed to be government by the people. We have a three-tier system now whereby professional politicians are influenced by a small number (relative to the population) of professionally-run organizations throughout a term of office – remembering the individual citizens only when elections loom.

 

Is this the best we can do?

 

Building the Walls from the Bottom Up

 

In Australia (as I have mentioned in an earlier post), The Centre for Civil Society (under Vern Hughes) – http://www.civilsociety.org.au/ – has developed some new insights and a challenge to the norm in http://www.civilsociety.org.au/CivilSocietyPolitics.htm.

 

This is worthy of investigation as one means of providing greater involvement in our own future.

 

Also critical is the use of technology. Changes in the means of communication have always brought with them the means to radically change society. The printing press, the telegraph, the telephone, the TV, the computer and the internet, the mobile phone, wireless comms – all lead to more and faster information and an enabling of the individual.

 

This is a critical cause of concern for leaders of legalist states such as in China but also offers challenges (and opportunities) to so-called democracies.

 

Individuals are now empowered by technology by dis-empowered by institutions. This means that empowerment is taken up by online shopping or social networking rather much more than for social change or betterment. It means that civil society will continue to be badly served by national and international institutions that meet lobbyists in the corridors of power but are insufficiently grappling with society itself (rather the funneling through funded organizations).

 

Yet, power exists. Libya is a exciting example. Just recently, armed militia groups (a powerful central non-government organization) were ousted by people – civil society coming together to say, “thanks for toppling Gaddafi, your work is done!” In Egypt, Tahrir Square was the centre of civil society’s success to overthrow a dictator. Here, the Military Institutions delayed the correct response and we will have to wait to see if the elected President, Morsi, will serve his citizens or other Institutions (including religious).

 

Civil society (we, the people) should see the 21st Century as one where we are allowed to deliver. The forces for 19th Century equilibria often stand in the way of progress – and are standing in the way of serious climate change policies on an international scale. Institutions set up to effect change may be set up for the right reasons but we are now institutionalized and should seriously re-evaluate our reaction to the new Institutions just as we challenge the old ones. If we need a wall, then we should be blowing that trumpet to unsettle the existing ones.