Thatcher, Reagan and the market turn

Margaret Thatcher became British prime minister in May 1979, and Ronald Reagan was elected US president in November 1980. Both governments set out to cut inflation, reduce taxes and the role of the state, deregulate markets, weaken the power of unions and, in Britain, sell state-owned industries. Thatcher privatized British Telecom (1984), British Gas (1986) and others, and Reagan cut the top US income tax rate from 70 percent to 28 percent by 1988 and eased regulation of energy, finance and other industries.¹²

The 1970s had undermined the postwar consensus, which rested on Keynesian management of the economy. The oil crisis of 1973 and the collapse of the dollar-gold system in 1971 produced stagflation, high inflation together with high unemployment, which the standard Keynesian tools could not cure. Economists such as Milton Friedman and Friedrich Hayek, whose ideas had long been in the minority, gave a ready alternative, and think tanks and some governments took them up, with Chile's Chicago-trained economists as an early test in the 1970s. Federal Reserve chairman Paul Volcker raised US interest rates sharply in 1979 to 1981, which broke inflation at the cost of a deep recession.²

The turn spread widely. The International Monetary Fund and World Bank attached market reforms to loans in the 1980s, a package later called the Washington Consensus, and after 1989 the countries of Eastern Europe moved from planned to market economies. The Labour governments of Tony Blair and the Democratic government of Bill Clinton later accepted much of the framework. Supporters credit it with ending the inflation of the 1970s and with spurring growth and innovation. Critics argue it widened inequality, weakened unions and contributed to the 2008 financial crisis. 'Neoliberalism' is itself a contested label, and historians debate how coherent the policies were and how far they were driven by ideas as opposed to events.²