Lady Thatcher's relationship with Friedrich Hayek and Milton Friedman
This article follows the publication of an archive of documents on Margaret Thatcher’s relationship with Hayek and Milton Friedman by the Thatcher Foundation.
The sad passing of Lady Thatcher this week will inevitably lead to reams of analysis on her rise to power, her philosophy, her record and her legacy. Indeed, this has started already. Yet nobody so far has really spoken about her relationship with the two key liberal economic thinkers – Friedrich Hayek and Milton Friedman.
This perhaps should not surprise us. For the truth is, Lady Thatcher was never really in hoc to any single economist. For her, economic liberty was one of the means to achieve what she wanted: a revived Britain. She once remarked that "economics is the method, the object is to change the soul". Market economics was one principle through which she wished to unleash the “vigorous virtues” which she believed were inherent in the British people. More economic liberty would allow the creativity and entrepreneurialism, so stifled by the depressing neo-Keynesian corporatism of the 1970s, to re-assert itself.
But it would be wrong to say that these two Nobel prize-winning economists did not have a profound effect on both her outlook and policies, in different ways. Hayek’s broad philosophy, expressed through the Constitution of Liberty and the Road to Serfdom, resonated with Lady Thatcher’s inner beliefs, and he championed the need for robust trade union reform. Friedman, on the other hand, provided a critique against the junk Keynesianism which had led to the stagflation of the 1970s, and provided the intellectually coherent monetarist alternative which could help cure Britain’s inflationary disease.
Thatcher once wrote that “the most powerful critique of socialist planning and the socialist state which I read at this time [the late 1940s], and to which I have returned so often since [is] F.A. Hayek's The Road to Serfdom." When, in 1984, Hayek himself sent Lady Thatcher a leather-bound edition, Thatcher’s reply showed her high opinion of him. A hand-written ‘It means so much to me!’ appeared under the sort of pleasantries one would usually expect following such a gift.
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Hayek’s critique of socialism, in particular the way in which the ideology undermines individual liberty, was always a cornerstone of the intellectual underpinning of the Thatcher governments’ outlook. Whilst it would be easy to overstate how important his influence was on purely economic matters, what’s striking about the primary sources provided by the Thatcher Foundation is the respect that Lady Thatcher and Keith Joseph had for Hayek’s opinions on policy, and how ready Hayek was to interject on British public policy matters through letters to The Times newspaper.
In fact, when Keith Joseph was drafting ideas for names for the institution I work for – eventually settling for the bland CPS, one of its proposed names was the Hayek Foundation. This is all the more surprising given that it was only five months later that Keith Joseph actually read Hayek’s The Constitution of Liberty. The effect on Joseph of Hayek’s work was clearly profound enough, however, for Joseph to write to James Callaghan in 1976 to suggest Hayek be considered for a life peerage, and for Joseph to actively help Hayek in attempts to obtain BBC television coverage.
Whilst Hayek himself was never overtly party political (unsurprising, given that he had previously authored ‘why I am not a conservative’), he was unafraid to undertake public debate. In the letters that he wrote to the Times newspaper prior to the Thatcher government’s election, he criticised those who sought political power for its own sake, both within the Liberal party (slamming any party that might prop a socialist Labour party in coalition) and within the Conservative party itself (arguing that it was policy change, not merely the election of a Tory government that was necessary to revive Britain). In particular, he saw trade union power as the primary reason for the UK’s economic difficulties, stating:
“There can indeed be little doubt to a detached observer that the privileges then granted to the trade unions have become the chief source of Britain's economic decline.”
In fact, the need to curb the trade unions was something which Hayek pursued after the Thatcher government’s election in 1979 – which, incidentally, he described as ‘the best present on my eightieth birthday anyone could have given me’. In August 1979 he wrote to Lady Thatcher suggesting that the matter was so urgent that it required a referendum. Correspondence with Lady Thatcher suggests that he saw trade union reform as being even more important than getting to grips with inflation, and in an article for the Times he was quoted as growing frustrated with the pace of change. He was clear who was to blame – not Thatcher, but the ‘wets’ within her own party:
“what are officially called the wets, and what I call the descendants of the muddle of the middle, are the obstacle to her doing what she would like to do”.
On economic policy, Hayek was more doubtful on the direction of travel. He pressed Lady Thatcher to move faster in cutting public expenditure, urging her to balance the budget in one year rather than five – and to follow more closely the example of Chile. But it was on monetary policy where he was more at odds, lamenting the influence of Milton Friedman’s monetarist school on government thinking. Hayek instead argued that interest rates should be hiked further to kill off inflation immediately, and the resultant bankruptcies and job losses accepted as the price for faster adjustment. In polite correspondence between the two, Lady Thatcher was at pains to point out that the social impact of even faster adjustment might not have been viable, and that the nature of the UK as a democracy meant that Chile’s example was not directly transferable.
Despite his disagreement on these issues the correspondence and willingness to meet one-on-one suggests a good relationship between the two, and Hayek was willing to come out to bat for Lady Thatcher against attacks from Keynesians. In a strong letter written for The Times in 1982 he stated:
“It is Mrs Thatcher’s great merit that she has broken the Keynesian immorality of ‘in the long run we are all dead’ and to have concentrated on the long run future of the country irrespective of possible effects on the electors…Mrs Thatcher’s courage makes her put the long run future of the country first.”
The relationship of Lady Thatcher and Keith Joseph with Milton Friedman was somewhat different. The earliest mention of him was a letter from the CPS to the IEA which said they would not publish Friedman’s ‘Capitalism and the Jews’ because it was not up to “Milton Friedman’s usual standard”.
Milton Friedman himself, in correspondence with the IEA’s Ralph Harris in 1978, expressed scepticism over whether Lady Thatcher had what it takes to turn Britain around, having met her at a dinner.
Lady Thatcher and other members of the Cabinet subsequently met him in February 1980. At that time, Friedman was producing his Free to Choose series. He was broadly supportive of what the Government were trying to achieve, but had been critical that they had raised VAT to pay for income tax cuts rather than cutting public spending more deeply. He’d also expressed concern over their method of M3 targeting to control the money supply, advocating instead Monetary Base Control. The fact that the meeting was a more formal gathering than the cosy chats with Hayek suggests either that Friedman’s policy advocations were taken more seriously or that Lady Thatcher had a better personal relationship with Hayek (or maybe both!)
Yet Friedman came out to defend the Government and ‘monetarism’ in the Times newspaper against an attack from Cambridge academics, explaining like Joseph that monetarism was a necessary but not sufficient condition for British prosperity, which required “a broader front to restore and improve incentives, promote product investment, and give a greater scope for private enterprise and initiative.”
Like Hayek, he also lent support to Lady Thatcher’s leadership against the ‘wets’ in her own party. Appearing along with Hayek on Panorama in 1981, he praised the Prime Minister for sticking by her guns – but lamented the fact the Conservative party was divided over the right course.
Evidence from the primary sources analysed here suggests Hayek’s main influence occurred through the intellectual critique of socialism that he did so much to espouse. This clearly had a big effect on Lady Thatcher, Keith Joseph and other future Cabinet ministers like Norman Tebbit, and underpins many of the small l “liberal” policies adopted through the 1980s, including significant trade union reforms. On economic policy, Hayek provided armoury on the attack against Keynesian advances, but Lady Thatcher’s government never embraced a Hayekian outlook on macroeconomics, with policies more closely resembling the Friedmanite monetarist approach. It’s ironic then, that Lady Thatcher and Keith Joseph appear to have got on much better with Friedrich Hayek on a personal level.