Thatcher Saved Britain

The Story of Britain's Post-War Decline, Thatcher's Policy Revolution, and Economic Renaissance

For as long as I can remember, I have been an Anglophile. The British Isles were the birthplace of liberalism and economics. After the Dutch Republic, Britain was the first country to experience the Great Enrichment.¹ This small archipelago of islands would come to rule a quarter of the world in both population and surface area.

Looking at Britain today, none of this greatness is evident. The United Kingdom’s productivity growth has been anemic since 2008, and both Tory and Labour governments have failed to meaningfully improve the situation.

But I choose to believe that Britain's best days are not behind it, and as evidence, I submit the story of Britain's post-war decline, Thatcher's policy revolution, and the remarkable economic renaissance that followed.

Post-War Decline

After World War II, Britain embarked on an ambitious experiment: constructing a semi-planned economy and a cradle-to-grave welfare state. Successive governments nationalized major industries, expanded the power of trade unions, and dramatically increased entitlement spending.

At first, this approach appeared to deliver both security and growth. But by the late 1960s and 1970s, its failures had become unmistakable. Productivity stagnated, inflation spiraled out of control, and Britain's international standing deteriorated precipitously. Once the world's preeminent industrial power, the country earned the foreboding title of the "sick man of Europe," a label previously reserved for the Ottoman Empire in the late 19th and early 20th centuries, which eventually collapsed.

An overgrown and inefficient public sector coexisted with trade unions that wielded immense power without accountability. By the early 1970s, union militancy had become so disruptive that the government imposed a three-day work week to conserve electricity during miner and railway strikes. The crisis culminated in the infamous Winter of Discontent in 1978–1979. Hospital beds lay unattended as nurses went on strike, trash piled up in the streets as garbage collectors went on strike, and even the dead remained unburied as gravediggers joined the strike wave. For ordinary Britons, the country had simply stopped functioning.

The Thatcher Revolution

Margaret Thatcher, a grocer's daughter from Grantham, rose through the Conservative Party ranks to become Britain's first female Prime Minister in 1979. Her ascent reflected both her formidable political skills and the public's desperation for change after years of economic decline and social unrest.

When Thatcher took office, Britain faced seemingly insurmountable challenges. Inflation peaked above 25 percent in the mid-1970s. State-owned industries had grown bloated and unresponsive to market pressures. Britain's coal sector, for instance, was so inefficient that shipping coal domestically from Yorkshire to Newcastle cost more than importing it from Australia. Productivity lagged behind virtually every other advanced economy.

When Thatcher proposed radical free-market reforms—monetary tightening, privatization, tax reduction, and labor reform—she faced fierce resistance from trade union leaders and many within her own party.

Monetary Policy Reform

On the monetary front, Thatcher's government limited the growth of the money supply to constrain inflation. By the early 1980s, inflation had fallen into the single digits and stabilized.

Privatization Program

Thatcher privatized Britain's major industries, cutting prices, improving quality, and enhancing efficiency. The telecommunications sector exemplifies this transformation: within a decade of privatization, real prices fell by 50 percent while service quality improved dramatically. Gas and electricity saw similar results, with labor productivity doubling.

While the privatization of rail and water was the most controversial, they were largely successful. Despite a few high-profile accidents in the 1990s, railway safety ultimately improved. In 2013, the European Commission found that Britain's railways were the most improved in Europe, and customer satisfaction was second only to Finland. By 2014, total passenger trips had doubled since privatization.

In the water industry, prices rose modestly, but quality improved substantially. After initial price increases in the first six years of privatization, water prices rose only 9 percent in real terms over the next two decades. These higher prices funded greater capital investment. As a result, leaks decreased by a third, the number of customers with low water pressure dropped significantly, drinking water quality improved, and pollution levels declined.

Tax Reform

Tax reform proved equally transformative. Before Thatcher, Britain imposed a top marginal income tax rate of 83 percent, rising to 98 percent on investment income. Such punitive rates discouraged entrepreneurship, drove talent overseas, and stifled growth.

Thatcher slashed the top rate to 40 percent. Paradoxically, as economic incentives improved, the share of total taxes paid by the top 10 percent of earners rose from 35 percent to 48 percent, making the tax system more progressive in practice while expanding the revenue base for public services.

Labor Market Reform

Thatcher also dismantled Britain's stifling industrial relations system. Before her tenure, trade unions could paralyze entire sectors with minimal democratic accountability. In 1979 alone, 29 million working days were lost to strikes.

To restore balance, Thatcher required secret ballot elections before strikes and restricted secondary picketing. The impact was dramatic: union membership declined steadily, and strike days plummeted to just 236,000 by 1997. These reforms restored management's ability to operate and invest without constant threats of industrial disruption.

Results and Legacy

Thatcher's policies fundamentally altered Britain's trajectory from a nation in decline to one on the rise. During her premiership, the U.K. rose from 17th to 2nd in the OECD's productivity rankings, and productivity growth became the fastest in the developed world. Between 1979 and 1997, stock ownership among the British population tripled from 7 to 23 percent, the middle class grew from 33 to 50 percent of the population, and homeownership rose from 53 to 71 percent.

However, Thatcher's critics maintain that Britain's economic recovery and rejuvenation came at a terrible cost. Unemployment rose, especially in Scotland and Northern Ireland. Coal mining and industrial towns were devastated by privatization. Incomes at the bottom end of the distribution initially fell under Thatcher's premiership, making the 1980s a tough decade for Britain's poor. Inequality also increased, and class remains a salient dividing line in British society.

As an ardent supporter of Thatcher, I will be the first to acknowledge that her reforms were a tough pill to swallow. The arduous and painful adjustment that followed Thatcher’s reforms should serve as a cautionary tale. It shows what happens when unions hold a nation hostage, bloated state-run industries stifle economic growth, and when the government spends beyond its means and prints money to cover the shortfall.

But the pain of Britain's adjustment process should not be taken as an indictment of Thatcher's reforms. Britain was going on a drinking spree that was unsustainable and dangerous. Thatcher threw the drunk in a cold bath. The shock was painful, but Britain's muscles became unatrophied. Britain's economy and most (but certainly not all) Britons were made much better off.

Whatever one thinks of Thatcher's record or the tradeoffs involved in her reforms, no one can deny the strength of her conviction. Thatcher could not and would not tolerate the decline of the nation she loved. She rose through the ranks and overthrew the establishment of her own party. She undertook bold reforms that earned her many enemies. But the lady was not for turning.

1. The Great Enrichment refers to the period of modern economic growth that began about two hundred years ago. Before this transformation, stagnation was the norm in almost all societies. A handful of societies, such as Song China or Antonine Rome, managed to double their material living standards, but their progress stalled there. Britain, by contrast, saw its living standards double between 1760 and 1860 and then continued to grow and advance. This blazed the trail for the dramatic human progress seen across the world over the past two centuries.