The Institute of Economic Affairs (IEA) is enjoying another moment in the sun. Australian politics is starting to move to the beat of its drum as Treasurer Joe Hockey talks about an “end to the age of entitlement”, a sentiment he expressed while in opposition in a 2012 speech to the IEA. In the UK, the IEA strongly pushed the case for market-orientated economic policies since 1955 - years before the intellectual climate changed in its favour. But was the IEA responsible for the shift?
I met Ralph Harris, general director of the IEA between 1957 and 1988, when he spoke at a 1967 debate in the then nearly new University of Essex. He seemed surprised at the intransigence of the students’ prevailing left-wing sentiments. He also looked, in his dark suit, moustache and swept-back hair, as if he came from another world than the campus beautiful people.
Even in those revolutionary days the IEA’s free market ideology was more congenial to economics students, such as myself, than to students of politics and sociology. It owed its founding to Friedrich Hayek, or more specifically, to a summary of his work The Road to Serfdom, which had appeared in the Readers Digest in 1945. That had led IEA founder Antony Fisher to seek out a meeting with Hayek, who convinced him to take on the job of influencing intellectual debate rather than entering politics.
In economics, intellectual spillovers from the US were becoming stronger every year, especially for microeconomics – the effect of individual choice particularly in markets – where the IEA’s interests were centred. My macroeconomics teacher, on the other hand, was not taught microeconomics at all in the 1950s as an undergraduate because his professor believed that the Keynesian revolution had rendered it obsolete. This was far from the case for undergraduates by the 1960s.
There were other influential (on me) people advocating the market-based policies proposed by the IEA. My first-year economics text and lecturer (both Richard G Lipsey) espoused a free market exchange rate policy (adopted in 1973) as a way out of “stop-go” policies supposedly holding back the British economy. Milton Friedman’s Capitalism and Freedom (1962), which I read at the time, was comprehensive on policy and easy to understand for those interested in the theory of markets.
In my turbulent second year I remember taxing my sociology teacher about the Friedman negative income tax proposal for a unified social safety net. My lecturer obviously did not like it. He pointed out that for those on fluctuating incomes, as was common for the very low-paid, matching what should be paid with what was paid in any period would be difficult, giving rise to painful state demands for repayment. Both Friedman’s proposal and the lecturer’s objections were realised in the UK in due course.
Perhaps the IEA’s most important channel of influence over opinion on policy was the stream of slim volumes and pamphlets that they poured forth. As an undergraduate, an IEA pamphlet by Alan Walters on (the advantages of) monetarism proved surprising helpful in its lucidity.
Forgive the economist-speak, but I had found the matrix algebra presentation of regression analysis in econometric lectures and texts opaque. This booklet was a revelation about the meaning and significance of regression coefficients – for which I was extremely grateful.
After graduation, when trying to find somewhere to live in London, the absence of furnished accommodation caused by rent control came home to me forcefully, along with sympathy for the market approach to managing housing that the IEA favoured. But the 1970s, under governments of both parties, was hardly more sympathetic to pro-market policies than had been those during the 1960s.
These years were the nadir of British economic policy, with strikes, three-day working weeks, inflation reaching 25% per annum, and the Chancellor of the Exchequer writing a letter to the IMF promising to pursue sensible policies in exchange for a loan and the pound falling to parity with the dollar.
The IEA and Thatcherism
Obviously something had to change radically. This realisation was what elected Margaret Thatcher first to the leadership of the Conservative Party in 1975 and then to Prime Minister in 1979.
The links between the IEA and Thatcher are much vaunted; the IEA itself devotes a page of its website to picking apart the ideological and practical relationship. Alongside stories of the future prime minister making copious marginal notes while reading IEA publications, former IEA chief John Blundell talks of finding a file stored at Stanford University detailing “endless lunch arrangements” between Ralph Harris and Thatcher’s House of Commons office. Thatcher recognised the contribution of Harris by sending him to the House of Lords soon after she gained office.
Is this evidence of the fundamental contribution of the IEA to the policies of shackling trade unions and of privatisation for which Thatcher’s government became known? Or perhaps it was just that socialism had lost much of its appeal, with the fading of memories and solidarity created by total war, and with rising affluence. And it may have been inevitable that some form of market individualism was the obvious alternative, especially in view of the enormous cultural and political influence of the United States.
It may be tempting to play up the influence of the IEA, but more generally, we have to ask if economic ideas alone, such as those forcefully advocated by the IEA, change economic policy, or should such shifts be attributed principally to the convergence of events, trends and exceptional persons?
A war economy, from which Britain was still emerging in the 1950s, needed central direction by a strong government. But the prosperity of the post-war boom in due course ensured the IEA’s message would become more popular. In the words of their Shadow Monetary Policy Committee, promoting “the intellectual case for a free economy, low taxes, freedom in education, health and welfare and lower levels of regulation” increasingly resonates with an individualised and affluent electorate with diverse interests.
The experience of Edward Heath’s government of the early 1970s shows that without Thatcher, the Falklands War and the influence of the US, the IEA’s line would have had less impact, less quickly. The Heath government’s trade union legislation was ill conceived compared with that of the Thatcher government and the flirtation with “hiving off” state-owned activities was short-lived.
Without the Falklands war, Thatcher would not have been re-elected for the second, more radical, term. And the privatisation of BT – which was the unprecedented big one – would not have happened without an awareness of the liberating effects of deregulation in the US on the spread and development of new telecoms technology.
It is clear, however, that for those concerned with improving (rather than implementing) economic and social policy in Britain from the 1960s to the 1990s, the IEA was a fundamental influence. Joe Hockey’s flirtation with the institute as his government attempts to redraw its relationship with the Australian electorate is only the latest sign that its inspiration continues.