This article is taken from the December/January 2023 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issues for just £10.

Liz Truss’s premiership was short, but the debris — misjudged ideas and shattered reputations — may take years to clear. According to William Hague in the Times, the message was that “ideology is dead” and “it’s competence we need now”. 

In his view, Britain needs less rhetoric on low taxes and the small state, and more “pragmatism” over such policy areas as education and the National Health Service. Hague’s target was the free market think-tanks, notably the Institute of Economic Affairs, that supported and advised Liz Truss, just as they supported and advised Margaret Thatcher almost 50 years ago. 

The Thatcher agenda was not refuted by the Truss premiership

But the Thatcher agenda was not refuted by the Truss premiership. The case for free markets and sound money developed in twentieth-century Britain as a response to decades of experience of their opposite — to recall, nationalisation and state intervention from the 1940s, and of inflation and high taxation amounting to virtual expropriation in the 1970s. 

Truss had 44 days at 10 Downing Street, and though she and Kwarteng made only one mistake, it was colossal and disastrous. They gave their blessing to unfunded tax cuts and announced measures that would expand the budget deficit, even though the existing deficit was large and the Covid-hit public finances already risked unsustainability. 

Stupidly, they ignored the institutional and market checks on fiscal profligacy. They ignored the Office for Budget Responsibility and the potentially hostile verdict of investors in government debt. 

The supply-sider argument for unfunded tax cuts had been articulated in the summer of 2022 by economists close to the IEA. But supply-side economics is only one rather maverick strand in an enormous body of liberal thought. It was certainly not dominant in the early years of the Thatcher period, when instead the government was committed to sound money in the form of “monetarism”. 

To be more specific, in the “medium-term financial strategy” (MTFS) of 1980 the Conservative government made pledges to lower the budget deficit (in order to ensure fiscal sustainability) and to reduce money growth (in order to curb inflation). 

The strategy was intended to act as a constraint on spendthrift members of the Cabinet: taxes could not be cut unless government spending had earlier been reduced. In effect, unfunded tax cuts were proscribed. The contrast between supply-sider Trussonomics and Thatcherite monetarism could hardly be more total. 

Less is heard nowadays about the second element in the MTFS, the targets for money growth. However, here too the policy-making of the early 1980s remains relevant today. The central message of monetarism was that the rates of increase in prices and the quantity of money were related. In other words, slow growth of the quantity of money ought to be consistent with low inflation or even price stability, whereas rapid growth of the quantity of money was to blame for excessive inflation. 

Two key facts need to be highlighted to understand money and inflation since the Great Financial Crisis of 2008-9. 

First, the decade to the end of 2019 saw the lowest increase in the quantity of money over such an extended period since the Second World War, and this was associated with modest increases in nominal national output and negligible inflation. 

The average annual increases in the most widely-tracked measure of money and in nominal gross domestic product were virtually identical at 3.8 per cent and 3.7 per cent respectively. (The widely-tracked money aggregate is taken to be M4x broad money.) 

Meanwhile the average annual rate of consumer inflation, at just under 2.1 per cent, was near to being exactly on target. The numbers demonstrate the cogency of Milton Friedman’s prescription of low and stable money growth if central banks and governments want to deliver approximate price stability. 

The Bank of England lost the plot when the Covid-19 pandemic hit

Second, the Bank of England lost the plot when the Covid-19 pandemic hit in March 2020. It was scared by forecasts of profound recession and reacted by foolishly large purchases of government bonds known as “quantitative easing”. In the year to February 2021 the quantity of money rose by 15.4 per cent – by far the highest number since the late 1980s, which suffered from the Lawson boom. 

Whereas the Bank of England showed every sign of not understanding what was happening, monetarist economists — including the author of this column — gave correct warnings in spring 2020 that inflation might reach double digits. 

Macroeconomic developments since 2010 testify to the validity of the principles that informed Thatcherite monetarism. Lord Hague might give the derogatory label “ideological” to these principles and advocate “pragmatism” instead. Does he mean politicians should listen to their civil servants, make decisions in response to headlines and muddle through? 

The point, of course, is that ideology and competence are not antithetical. At her best, Thatcher showed that ideology and competence can be combined to achieve good government. Unfortunately, Truss was not another Thatcher.