There is No Alternative

by Claire Berlinski

  A diva, again. The image comes up over and over. So do the others.

  Powell’s secretary knocks on the door. Our time is up. I fit in one more question. “Why does she matter?”

  “I think,” he says, “the overall message would be that you can change a country—a lot of people think you can’t; you can run a country, you can administer it, but don’t be silly, governments come and go, life goes on, you can’t change it. Now, you have Mr. Sarkozy saying he can change France—and it will be very interesting to see if he does—but she shows that it can be done. I think that’s a very important lesson. And from the point of view of the rest of the world, well, I think she did a better job than anyone of exposing socialism and really destroying it. I mean, there’s no socialism left in this country and there’s not much left in Europe. No one believes in socialism anymore.”

  5

  The Sledgehammer

  The Russians, who are lucky to have such a marvelous sense of humor, if only because they’ve had so little to laugh about, recount a story about Leonid Brezhnev’s arrival at the pearly gates. St. Peter tells him that he has not exactly led the sort of life that would qualify him for heaven, but that he can choose between a capitalist and a socialist hell. To St. Peter’s surprise the former Soviet leader replies that he would prefer a socialist hell. St. Peter tells him to think carefully: This is no time for propaganda! But Brezhnev repeats that he chooses the socialist hell. St. Peter grants his wish but, greatly puzzled, asks for an explanation. “Ah,” replies Brezhnev. “It is because I know that in a socialist hell they will always be short of fuel!”

  —ONE OF MARGARET THATCHER’S

  FAVORITE JOKES86

  Margaret Thatcher was not an economist. Her views about economics were not original. Her critics often note this with derision. “Thatcherism,” sniffs the economist Frank Hahn, “as represented by Mrs. Thatcher herself, is intellectually without interest. It consists of homilies on the virtues of work and ambition and on providing the carrot and stick to elicit these virtues.”87 Hahn appears to be suggesting that there is something wrong with this, but I am not sure why. It is hardly a politician’s job to be intellectually interesting. It makes no more sense to criticize Thatcher because her ideas were unoriginal than it does to criticize Adam Smith because he was not a good politician.

  Thatcher herself was exceedingly proud of the unoriginality of her economic opinions. She held it to be a measure of their value. She did not invent Thatcherism, she claimed; she merely rediscovered it, in much the way doctors have recently rediscovered the medical value of leeches—both are tried-and-true, old-fashioned cures only latterly obscured by high-tech faddism, and if both cures are rather unpleasant, well, when a patient is dying it is no time to be squeamish. (This is my analogy, not hers, although she did once liken herself to a tough nurse who refused to coddle her patients lest their muscles atrophy.)

  “When people spoke about the ‘Thatcher experiment,’” she remarked after her resignation, “they missed one very important point. I am a trained research chemist. I know what experiments are. And I never confused my country with a bacterial culture. The proof that the theory worked was, I knew, already to be found in the economic progress of the West.”88

  As these remarks suggest, there is a theory behind Thatcherism. Nigel Lawson, Thatcher’s chancellor of the exchequer from 1983 to 1989, correctly insists that Thatcherism is not “whatever Margaret Thatcher herself at any time did or said.”89 Rather, as he puts it, Thatcherism is “a mixture of free markets, financial discipline, firm control over public expenditure, tax cuts, nationalism, ‘Victorian values’ (of the Samuel Smiles self-help variety),90 privatization and a dash of populism.”91 He is right, but his phrasing might suggest that these ingredients are independent or equally weighted. In fact, all but nationalism and populism, which are not economic policies, derive from the first on the list: free markets.

  Free-market economics and Thatcherism are often held to be synonymous. This is nearly true, but there is an important additional dimension to Thatcherism—a faith in the morally redemptive power of the free market that goes well beyond standard economic claims. Generally, free-market economists favor free markets for two reasons: because they believe free markets are efficient, and because they are, by definition, free. (To make the latter point non-trivial, add the suppressed premise: freedom is good.) Thatcher believed both these assertions to be true. But equally importantly, she believed that free markets not only served but created robust, self-sufficient, and moral citizens, and vice versa.92 “We must not focus our attention exclusively on the material,” she declared in 1977,because, though important, it is not the main issue. The main issues are moral. In warfare, said Napoleon—the moral to the material is as three to one. You may think that in civil society the ratio is even greater.

  The economic success of the Western world is a product of its moral philosophy and practice.

  The economic results are better because the moral philosophy is superior.

  It is superior because it starts with the individual, with his uniqueness, his responsibility, and his capacity to choose.

  Surely this is infinitely preferable to the Socialist-statist philosophy which sets up a centralized economic system to which the individual must conform, which subjugates him, directs him and denies him the right to free choice.

  Choice is the essence of ethics: if there were no choice, there would be no ethics, no good, no evil; good and evil have meaning only insofar as man is free to choose.93

  Free markets, she emphasized again and again, forced individuals to take responsibility for the outcomes of their choices. “People must be free to choose what they consume, in goods and services,” she told the Greater London Young Conservatives:Choice in a free society implies responsibility on the part of the individual. There is no hard and fast line between economic and other forms of personal responsibility to self, family, firm, community, nation, God. Morality lies in choosing between feasible alternatives. A moral being is one who exercises his own judgment in choice, on matters great and small, bearing in mind their moral dimension, i.e. right and wrong. Insofar as his right and duty to choose is taken away by the state, the party or the union, his moral faculties, i.e. his capacity for choice, atrophy, and he becomes a moral cripple in the same way as we should lose the faculty of walking, reading, seeing, if we were prevented from using them over the year.

  . . . The Socialists would take away most or all of these choices. A man would do what he was told by the state and his union, work where work was “found” for him, at the rate fixed and degree of effort permitted. He would send his children to school where the education authority decided what the children are taught and the way they are taught, irrespective of his views, he would live in the housing provided, take what he could get, give what he was obliged to give.

  This doesn’t produce a responsible or a moral society.

  This does not produce a classless society; on the contrary it produces the most stratified of all societies, divided into two classes: the powerful and the powerless; the party-bureaucratic elite and the manipulated masses.

  And are these rulers better fitted to make choices on our behalf or to dispose of resources? Are they wiser, less selfish, more moral? What reason have we for supposing that they are?94

  It is critical fully to appreciate that Thatcher’s enthusiasm for free markets can’t be reduced to an enthusiasm for economic efficiency—this is a charge often made, but it simply isn’t so. A moral society, not an efficient one, was her ultimate goal.

  Almost everyone—no, everyone—has heard the phrase “free market.” But try asking the next five people you meet to explain what a free market is and why it might be desirable. My own admittedly casual research suggests that few people have given the matter much thought. This is surprising, because more than any other concept in economics, and perhaps more than any other idea in history, the concept of the free market has had a direct—a vital—i
nfluence on the lives of billions.

  The argument for free markets involves a beautiful, fascinating, counterintuitive theory. It is one of the great achievements in human thought. It is also, basically, simple. A free market is one in which the prices of goods and services are determined by individual sellers and buyers, not by the government. It differs from a planned or command economy in that no centralized authority makes decisions about resource allocation.

  The central claim of the theory is this: Free markets allocate resources efficiently because the decisions men and women make about what to buy, what to sell, and how much to pay or charge for those goods convey critical information about what people really want and how much they really want it—as opposed to what the government believes they want, or worse still, what the government believes they should want. I use the word “efficient” because economists are partial to it, but I am aware that the word carries cold and technocratic overtones. You may substitute “an allocation of resources that makes people happier.” That is what we really mean. Or more bluntly, you can put it this way: “an allocation of resources such that fewer people starve to death.”95

  A free market is more efficient than a controlled one because in a free market, prices convey critical economic information—information about the relative scarcity of goods. This in turn guides the myriad decisions of individual actors in the economy about what to produce and what to consume. This point tends to be abstruse in the abstract but intuitively obvious in the specific. Why, for example, are Hawaiian pineapples cheaper than Alaskan pineapples? They are cheaper because they cost less to grow. They cost less to grow because light, in Hawaii, is abundant. Why is Hawaiian seal blubber more expensive than Alaskan seal blubber? It is more expensive because seals, in Hawaii, are scarce.

  Suppose that the Alaskan pineapple farmer—who grows his pineapples under halide lamps and thus pays a high monthly electricity bill—is finding it tough to stay afloat in a market flooded by cheap Hawaiian pineapples. Rather than selling the hothouse and buying a seal-spear, he persuades the federal government to give him farm subsidies on the grounds that without them, he will go broke. This is hardly a far-fetched example; the federal government dishes out billions of dollars every year in farm subsidies on precisely these grounds. The Alaskan farmer can now charge less for his pineapples than they cost to produce. At the supermarket, however, the price of Alaskan pineapples and the price of Hawaiian pineapples will now be similar. Perhaps the Alaskan farmer will even be able to undercut the Hawaiian one. Ceteris paribus, the consumer will pick the cheaper pineapple.

  This state of affairs disguises an important truth: The Alaskan pineapples do not really cost what the Hawaiian ones do. The government subsidy comes from money taken from taxpayers. The consumer is not, in fact, paying the same price for Alaskan pineapples as he is for Hawaiian ones—quite the contrary. He is paying more for them, but doing so indirectly. Since the true cost of Alaskan pineapples has been obscured from him, he is apt to buy more of them than he would if he knew how much they really cost. But he has not been offered the information he needs, in the form of a price, to express his preference, in the form of a purchase.

  I, for one, would not want Alaskan pineapples enough to pay their real price. I would rather keep the money that has been taken from me, buy a Hawaiian pineapple, and spend the difference on the latest issue of Public Choice. But it is clearly absurd to imagine that any government functionary, however well-meaning and prescient, could predict that this is how I would prefer to spend my money. It is even more absurd to imagine that the government could predict the preferences of every actor in a large economy with this degree of precision. In a free market, the government does not have to predict anything of the kind—the price mechanism does the work for them.

  Consider another hypothetical scenario. Imagine the government has decided that the price of pineapples is simply too high. It decrees that all pineapples must now be sold for a dollar each. This will ensure that everyone, even the poor, has equal access to pineapples.96 Thanks to the Fair and Compassionate Pineapple Program, pineapples of every provenance will appear, at the supermarket, to be cheap. If they are cheap enough, I will buy more of them. I may well buy every last pineapple in the store: I have been known to do this when something I like is on sale.

  There is obviously a problem with this. If I buy all the pineapples, there will be none left over for anyone else. And if the government has capped the price of pineapples, no one will voluntarily start growing more of them, because in reality it costs two dollars to grow a Hawaiian pineapple and twenty to grow an Alaskan one. Pineapple farmers are not charity workers, and pineapple farming has now become not only unprofitable, but a form of personal economic suicide. Very quickly, you will have a pineapple shortage. Now apply this example across the board, to all food items: Soon you will have food queues. Ultimately, you will have starvation.

  Is my example simplistic and far-fetched? Try putting that question to anyone who grew up in the Soviet Union. Gorbachev, apparently, struggling to solve precisely this problem, once asked Thatcher how she made sure the British people got enough food. She didn’t, she told him tartly. Prices did. By extension, anything that distorts the information conveyed by prices is harmful to the market’s functioning and leads, sooner or later, to oversupply of things that people do not want and shortages of the things they do want—as Soviet planners discovered. “It was a shame,” recalled Gorbachev in 2001, “and I continue to say that it was a shame, that during the final years under Brezhnev, we were planning to create a commission headed by the secretary of the Central Committee, [Ivan] Kapitonov, to solve the problem of women’s pantyhose. Imagine a country that flies into space, launches Sputniks, creates such a defense system, and it can’t resolve the problem of women’s pantyhose. There’s no toothpaste, no soap powder, not the basic necessities of life. It was incredible and humiliating to work in such a government.”97

  The free market is a simple concept, and the empirical evidence that it provides goods and services more efficiently than a command economy is about as strong as we can hope to have in the social sciences. Command economies everywhere have resulted in waste, shortages, poverty, and immiseration. That is why the great command economies of the twentieth century collapsed and the free-market economies are still here. Of course, the free market is a model, and like all models, it can only be approximated in reality. But it can be approximated to greater and lesser degrees, and those degrees matter. A freer market, Thatcher believed, is almost always a better one.

  Despite the manifest failure of any number of command economy experiments, the concept of a free market continues to arouse great suspicion. Many people who are in no doubt that they favor freedom of religion, free speech, free assembly and free elections feel no such instincts about free markets. Likewise, many people who claim to believe in free markets think that free markets are fine for the widgets they talk about in the textbooks, but not for food, water, medicine, energy, or, indeed, jobs. After all, they think, you can’t trust that essential goods will be provided by impersonal market forces. No, the government had best step in to make sure there’s enough of those to go around. But if you accept the argument that free markets work better than ones that are not free, then logically, the essential goods are the ones you least want the government allocating by decree. The more you need the commodity in question, the more you must hope it is being produced and sold in the most efficient way possible.

  No one in his right mind believes free markets will function smoothly with no government intervention at all. Even the most enthusiastic free-marketer willingly concedes that governments must make and enforce the laws that permit a free market to operate: You may not sell your widgets at gunpoint, for example, and if you promise to deliver fifty widgets on the first of January, you must do just that—you must not take your customer’s money and decamp for the Caymans. No one believes you should be allowed to buy or sell anything; not even the late, great
Milton Friedman would have said that parents should be allowed to sell their children’s eyeballs to the highest bidders. To prevent people from doing these things, you must have a legal system; to have a legal system, you must raise taxes. Enthusiasts of free markets accept this but believe that government intervention should be the exception, not the rule. The government’s role, in other words, should be confined to the smallest possible sphere.

  Yes, but how small is the “smallest possible sphere”? Those on the Left side of the spectrum often ask this in a sly, knowing way, as if the question is basically unanswerable and the optimal size of government thus a matter of taste. In fact, the question is not unanswerable at all, and the answer is quite precise.

  The answer is 14 percent of GDP.98

  From a commitment to free markets, Thatcher believed, certain policies followed logically: monetarism; financial deregulation; reducing controls on prices, wages, and exchange rates; lowering taxation; reducing government spending; privatization; and curtailing the power of trade unions to set wages that did not reflect market demand for labor. These were the policies Thatcher put in place, with varying degrees of success.

  Let us look first at monetarism because this is where Thatcher’s critics usually start. Those who are inclined to sneer when they say the name Thatcher are likewise inclined to pronounce the word monetarism much as they would the words pervert or pathogen. Often the criticism reflects a conflation of monetarism with the rest of Thatcher’s policies and personality. In fact, monetarism was only one component of Thatcherism, and not the most significant one. But because it is so widely held to be the defining Thatcherite dogma, it warrants our attention.

  So what is monetarism, really?

  The story begins with the Phillips Curve. If you took Economics 101 as an undergraduate, you may remember it. In 1958, the economist A. W. Phillips described a relationship between inflation and unemployment. Simply put, he argued that when unemployment falls, workers interpret this, correctly, as a sign that there is now a greater demand for what they are selling—labor. They therefore increase the price of labor by demanding higher wages. Employers then pass on the cost of these higher wages to the consumers in the form of higher prices. Rising prices, inflation—same thing. The Phillips Curve implied that you could have low inflation or low unemployment, but not both. It also implied that there was a reasonably simple cure for unemployment: Create inflation.