FLORENCE – British politics has always been something of an experimental laboratory for the industrialized world. In the 1970’s, Britain was where the preeminent postwar model of how to manage the economy collapsed. That model had been based politically on the creation of consensus, and economically on Keynesian demand management. Today, the equivalent collapse has been of the “regulation-lite” regime in which a party that styled itself as “New Labour” accepted a powerful role for markets – particularly for largely deregulated financial markets.
In the 1960’s, Keynesian policies delivered the illusion that everyone was benefiting, with high levels of employment and significant wage growth. Britain was the coolest place on earth, boasting the Beatles and the Rolling Stones and the pastel fashions of Carnaby Street.
But Keynesianism involved continued fiscal expansion, with no offsetting monetary contraction. By the 1970’s, it had brought to the United Kingdom large and ultimately unsustainable current-account deficits, high levels of inflation, and then political gridlock over what to do. Which group should be the first to make a sacrifice?
In early 1974, Edward Heath’s Conservative government was locked in a struggle with the powerful coal miners’ union over “who rules Britain.” He called a premature election in February, in which there was no clear winner. Heath was deeply unpopular. But the opposition Labour Party was not convincing either, and had little in the way of an intellectual alternative. It simply sought to avoid confrontation with the unions.