4

The movement from Keynesianism to monetarism:

Institutional analysis and British economic policy
in the 1970s
PETER A. HALL

The 1970s witnessed a revolution in British economic policy. When the decade began, Britain was the
paradigmatic case of what has often been termed the Keynesian era.1 By the 19805 Britain was leading
again but in a different direction. Under Prime Minister Margaret Thatcher, monetarist modes of
economic policy-making replaced their Keynesian antecedents. How are we to explain this change in
direction? That is the empirical question to which this chapter is addressed.

For those who are interested in the role of institutions in political life, the evolution of British economic
policy during the 1970s also poses an important set of theoretical challenges. First, it invites us to
explore the relationship between institutions and political change. Institutions are usually associated
with continuity: They are by nature inertial and linked to regularities in human behavior. As a result
political analysts have been able to demonstrate how national institutions impose a measure of
continuity on policy over time.2 However, macroeconomic policy-making in Britain is a case of change,
even radical change, in policy. We can use it to examine what role, if any, institutions play in the
process whereby policies change. The question is whether institutional factors contribute to the
explanation of change as well as continuity.

The shift from Keynesian to monetarist modes of policy—making also provides an appropriate case for
the kind of analysis we associate with historical institutionalism. As most of the essays in this volume
indicate, those who approach the world from the standpoint of historical institutionalism accord
prominence to the role of institutions in political life, but they are not concerned with institutions alone.
Rather, their analyses explore the role of several variables — often encapsulated as institutions,
interests, and ideas — in the determination of political

For comments on drafts of this chapter, I am grateful to the participants in the Boulder conference and especially Douglas
Ashford, Peter Katzenstein, Peter Lange, Frank bongstreth, Theda Skocpol, Sven Steinmo, and Kathy Thelen as well as
Judith Goldstein, Geoffrey Garrett, and Rosemary Taylor. For research support, I would like to thank the German Marshall
Fund.
From Keynesianism to monetarism 91

outcomes. 3 The extended process whereby Britain moved from Keynesian to monetarist policies
involved underlying changes in the world economy, a -clash between social and political interests, and a
contest between competing interpretations of the economy. Therefore, by examining it we can situate
the impact of institutions within a broader matrix of-competing interests and ideas as well.

Within this matrix, institutions interact with interests and ideas in a variety of ways. By providing
routines linked to processes of socialization and incentives for certain kinds of behavior, they contribute
to the very terms in which the interests of critical political actors are constructed. By making organized
activity and the expression of political views more or less viable for certain groups, they affect the
power with which the interests of key social groups are pressed. In many instances the routines that
have beefn institutionalized into the policy process filter new information, affecting the force with
which new ideas can be expressed. In some cases institutions act as vehicles for individual or collective
intentions. In other cases they alter behavior in such a way as to produce wholly unintended
consequences of considerable moment for a nation. As we shall see, the institutions associated with
economic policy-making in Britain did not fully determine any of the outcomes of interest to us here, but
they structured the flow of ideas and the clash of interests in ways that had a significant impact on
these outcomes.

THE COURSE OF BRITISH POLICY

In broad terms the evolution of British policy in the two decades following 1970 is clear. It is well
represented by the differences between the economic policies that the Thatcher government pursued
during the early 1980s and those to which preceding governments had adhered with little interruption
since the Second World War.4 Under Thatcher inflation replaced unemployment as the central target
of macroeconomic policy. Her government rejected reliance on an active fiscal policy in favor of
efforts to secure balanced budgets. Monetary policy, once seen as subsidiary, became the principal
instrument of macroeconomic management and was oriented, initially at least, to the rate of growth of
the money’ supply.
The Thatcher government discontinued the incomes policies that had been a longstanding feature of
British policy and,‘ after thi1ty—five years of rising public expenditure and taxation, it sought
lower levels of both.5

In large measure these changes represented a revolution in ideas that is best captured in terms of the
concept of policy paradigms. In technically complex fields of policy, such as that of macroeconomic
policy-making, decision-makers are often guided by an overarching set of ideas that specify how the
problems facing them are to be perceived, which goals might be attained through policy and what sorts
of techniques can be used to reach those goals. Ideas about each of these matters interlock to form a
relatively coherent whole that might be described
92 Peter A. Hall

as a policy paradigm. Like a gestalt, it structures the very way in which A policy—makers see the
world and their role within it.6

The economic doctrines associated with Keynesianism and monetarism are ideal examples of this sort of
policy paradigm. Each is based on a fundamentally different model of the economy. After all, the
economy is simply a set of human relationships and material flows that cannot be perceived by the
naked eye. It must be interpreted or modeled to be understood, and from divergent models flow
different prescriptions for policy. Thus the discrepancies to be found between the policy
recommendations of Keynesians and monetarists were not sim— ply incidental. They derived from
very different conceptions of how the economy worked.

Keynesians tended to regard the private economy as unstable and in need of government intervention;
monetarists saw the private economy as basically stable and government intervention as likely to do
more harm than good. Keynesians saw unemployment as a problem of insufficient aggregate demand,
while monetarists believed that a “natural" rate of unemployment was fixed by structural
conditions in the labor market that would be relatively impervious to reflationary policy. Keynesians
regarded inflation as a problem arising from excess demand or undue wage pressures that might be
addressed by an incomes policy; monetarists argued that inflation was invariably a monetary
phenomenon containable only by controlling the money supply.7

In the 19705 and 19805, then, Britain witnessed a shift in the basic policy paradigm guiding economic
management. Thatcher’s policies were not simply ad hoc adjustments to pieces of policy; they were
rooted in a coherent vision associated with monetarist economics. Today mainstream economics has
synthesized portions of both the monetarist and Keynesian paradigms. In the 1970s, however, two
competing doctrines contended for control over British policy, and the monetarist paradigm emerged
victorious.

If we are going to trace the impact of institutions on this revolution, however, we must do more than
note that it took place. For our purposes the precise trajectory of British policy is also important and can
best be understood as a series of stages. In particular, although the basic paradigm guiding policy
changed only in 1979 with the election of the first Thatcher government, several steps in a monetarist
direction were taken by the preceding Labour government during 1976 to 1979.

The economic policies of the 1970-4 Conservative government under Edward Heath might well be seen
as the starting point of the British journey toward monetarism. They represent the high—water mark of
Keynesian policy-making. Although Heath was elected on a platform that promised reductions in public
spending, lower levels of government involvement in the economy, and movement toward greater
market competition, his government responded to rising levels of unemployment and inflation during
1971-2 in classic Keynesian manner with substantial increases in public spending, a relaxed monetary
policy, a statutory incomes policy, and massive industrial subsidies.8 In short, Heath‚
From Keynesianism to monerarism 93

initial effort to break with the Keynesian formula ended in an: abrupt about—tum‘back toward it.

— The opening years of a new Labour government elected in 1974 under Harold Wilson mark a second
stage in the evolution of British policy. The Labour government arrived in office just in time to greet
risitig levels of inflation and economic stagnation associated with the oil price. rock of l973w4. It
responded by pumping money into the economy to counteract the effects of recession in the hope that
the trade unions would adhere to a voluntary incomes policy.9 In short, the initial response of the British
authorities to the economic shocks of the midl970s was highly Keynesian.

In 1976, however, British economic poiicy turned in a monetarist direction. As early as October 1976,
the new Labour prime minister, James Callaghan, broke with postwar tradition to tell his pafrty
conference that a fiscal stimulus could no longer be used to counteract rising levels of unemployment.
Within a year, monetary targets had assumed considerable importance in economic policy—making
and the government had embarked on the deepest cuts in public iexpenditure ever accomplished in
postwar Britain. In short, British policy changed to a significant degree even before Thatcher took
office. However, as some commentators put it, the policy—makers of 1976-78 were at best
“unbelieving monetarists.”10 They pushed policy in a monetarist direction unenthusiastically and without
fully renouncing the Keynesian principles on which the postwar consensus had been based.

The full renunciation came in 1979 when a Conservative government under Margaret Thatcher was
elected and began to put a full—blown monetarist program into operation. This is the last stage of the
policy evolution examined here, although, as the 1980s progressed, monetarist ‘policies themselves
underwent another process of change.

In some respects these changes in British policy paralleled those adopted elsewhere in the world. By the
end of the 1980s many governments had become hesitant about Keynesian reflation and more
interested in controlling the monetary aggregates, reducing taxation and expenditure, and expanding the
role of market mechanisms in the allocation of resources. However, several features of the British case
were distinctive and especially worthy of explanation. Not only did" the shift from Keynesian to
monetarist modes of policy—rnal<ing follow a particular trajectory in Britain, it also came relatively
early and in an unusually abrupt and radical fashion. Other nations tended to follow the British-lead
hesitantly and in a more piecemeal way. In most cases their governments altered some dimensions of
policy but left others intact. Few embraced the monetarist program with the fire or coherence of the
Thatcher government.11

INSTITUTIONS, IDEAS, AND INTERESTS

The dynamic whereby Britain moved from Keynesian to monetarist policies was a complex one in
which institutions, interests, and ideas all played significant
94 Peter A. Hall

roles. Before turning to the impact of institutions, which is the principal concern of this essay, a brief
look at the other components of the process is in order.

Economic developments

Two economic developments, experienced by most nations but especially intensely by Britain, had a
significant causal impact on the movement toward monetarism. The first was the substantial
acceleration of inflation that the world witnessed in the 1970s. British inflation rose dramatically to
peak at 25 percent annually in the spring of 1975. The second was the general stagnation of eco nomic
production accompanied by rising rates of unemployment that Britain experienced in common with most
of the industrialized world after the oil and commodity price increases of 1973-4. The origins of these
developments are a matter of controversy but, whatever the causes, the results were clear. British
economic performance deteriorated sharply during the 1970s.12

In significant measure, the move toward monetarism was a response to the persistently poor
performance of the economy during the 1970s and the apparent inability of Keynesian policies to rectify
the situation. As is often the case, disillusionment with the results of past policy set in- motion a search
for alternatives.

However, economic developments alone do not explain why Britain settled on monetarism as an
alternative, nor do they explain the more particular trajectory of British policy. There was no
one—to—one correlation between economic change and policy response. Britain’s initial response
to rising levels of inflation and unemployment was decidedly Keynesian. Policy turned in a
monetarist direction only after a substantial time lag. Moreover, cross—national evidence suggests that
monetarisni, of the sort pursued in Britain, was not the only possible response to the economic
difficulties of the 1970s. Many other nations reacted to similar problems with quite different policies.
Therefore an adequate explanation for the course of British policy must contain some additional
variables.

C amending social interests

Like most kinds of policy, a macroeconomic strategy tends to favor the material interests of some social
groups to the disadvantage of others. Although both have some generalized merit, Keynesian and
monetarist policies are not exceptions to this rule. Perceiving this, the organizational representatives of
the working class generally argued for Keynesian policies during the l970s, while the spokesmen for
capital leaned more strongly toward monetarisrn. Among the segments of British capital, those in the
financial community tended to favor monetarist policies more than did many industrialists. Within the
labor movement, public sector employees tended to resist the monetarist program more forcefully than
did workers in the private sector.

To neglect the conflicts of material interest at stake in the promulgation of a

From Keynesianism to monetarism 95

policy is invariably a mistake, even when these are not an apparent component of the policy process.
Even when hidden or highly mediated, the struggle for power and resources is invariably a critical part
of the framework in which politics is conducted.13 As we shail see, thgigdisfiibution of power among
broad social groups with divergent interests bctisiff/iillfb a factor in the movement from Keynesianism
to monetarism at several pbints. In particular, the initial steps toward monetarism were precipitated by a
shift in the relative power of organized labor and finance capital over policy—making during the
1970s; and the penultimate step toward full-blown monetarism was made possible by a bitter electoral
contest for the support of key social groups, in which the Conservatives drew significant segments of
the working class away from the social coalition behind Labour.14 In recent years it hastbecome clear
that the movement from Keynesianism to monetarism in Britain ultimately involved a broader series of
conflicts among segments of the working class and capital from which clear winners and losers
emerged.15

However, here as elsewhere, those conflicts were mediated in a significant way by political and
economic institutions that channeled contention in certain directions, privileged some actors at the
expense of others, and profoundly affected the balance of power at any one time. If monetarism could
well be said to represent the victory of some groups over others in British society, the process whereby
monetarist policies replaced Keynesian ones cannot be seen exclusively in these terms. The institutions
of the British policy process shaped both the terms in which the contending groups would see their
interests and the relative power with which the latter would be pursued.

The flow of ideas

The shift from Keynesian to rnonetarist modes of policy-making is ultimately a story about the
movement of ideas, as the concept of competing policy paradigms underscores. The availability and
appeal of monetarist ideas was central _ to the direction of change in British macroeconomic policy. As
the problems of i inflation and unemployment proved persistent in the face of Keynesian
prescriptions, policy-makers naturally began a search for alternative solutions; and, among the proffered
alternatives, monetarist doctrine displayed special merits. In particular, it spoke directly to the problem
of inflation, which was coming to preoccupy the British, at a point when Keynesian solutions seemed
increasingly un— A wieldy and more focused on issues of unemployment.

However, the evolution in British policy was not primarily the result of changing views among
economists. Because the Keynesian and monetarist policy paradigms turned on highly divergent views
of the economy, it was very difficult to secure definitive evidence for the superiority of one over
the other in the terms of economic science. As a result, in the 1970s and early 1980s when British policy
turned toward monetarism, the vast majority of British economists, both
96 Peter A. Hall

inside and outside the civil service, remained resolutely Keynesian.16 In this case the movement of
policy preceded, rather than followed, the weight of professional opinion. Under Thatcher the
Conservatives took up the monetarist case as much for political, as economic, reasons and then imposed
monetarist policies on a rather reluctant set of economic officials.

As in so many other cases, the influence of the new ideas in this case depended heavily on the
circumstances of the day, some economic but others highly political and all conditioned by the
institutional framework within which policy was made and power over policy acquired. The mere
existence of monetarist ideas did not ensure that they would be accepted by policy¬´makers. The
problem is to explain why those ideas, rather than others, were taken up by key actors and why those
actors, rather than others, were able to secure influence over policy. 17

Institutional factors

The central concern of this essay is the role that the institutional context of policy—making played in
the evolution of British policy. How should we conceptualize the institutional setting in which British
economic policy has been made? The concept of institutions is used here to refer to the formal rules,
compliance procedures, and customary practices that structure the relationships between individuals in
the polity and economy. Institutions may be more or less formal but invariably serve to regularize the
behavior of the individuals who operate within them. 18

With regard to the direction of British economic policy and the distribution of power in the political
economy, it may be useful to think in terms of three levels of institutions, each with a particular impact
on these outcomes.

1. At an overarching level, the basic organizational structures we associate with a democratic polity and
a capitalist economy can be said to contribute to the general balance of power between labor and capital
and to militate in favor of some lines of policy over others. Notable at this level are the constitutional
provisions for regular elections and economic institutions that leave the owner» ship of the means of
production in private hands. The impact of this overarching structural framework on economic policy
has been explored by a variety of scholars.19 It tends to impose very broad constraints on the direction of
policy.

2. At one level down, a number of features intrinsic to the basic organization of the state and society in
each nation might also be said to affect the distribution of power among social groups and the kinds of
policies that can be formulated or implemented most readily. At this level we see more variation across
nations; and an important body of literature associates these institutional differences with divergent
patterns of economic policy. Institutional features relevant at this level might include the structure of the
trade union movement (including its degree of density, concentration, and centralization), the
organization of capital (including
From Keynesianism to monetarism 97

_its managerial forms, the nature of employer organization, the relationship among segments of capital,
and the way in which they are inserted into the international economy), the nature of the political system
and the structure of the state (in _» cluding the nature of the party system, the administrative division of
responsi bility within the state, and its receptivity to external advice).20

3. Although not always as sharply delimitedgas the preceding factors, the standard operating procedures,
regulations, and routines of public agencies and organizations should also be seen as institutional factors
of some importance for poiicy outcomes. Some of these may be relatively formal, others more informal
but no less potent. As a group, institutional factors of this sort are more mutable than those at the
preceding levels: A regulation is changed more readily than a regime. However, routines and regulations
of this sort are far from transitory. They can privilege some kinds of initiatives or the interests of some
social groups over others with great consequences for the distribution of power and the direc tion of
policy.21

THE PROGRESS OF POLICY

Policy under the Heath government, 1970-4

Although it is unconventional to open an account of the turn toward monetarism with the policies of the
1970-4 Heath government, the latter provide a basepoint that can tell us a great deal about the
importance of the changes that were to follow. Here is a case of the dog that didn’t bark. Many of
Heath’s objectives were similar to those that Thatcher would pursue ten years later. I-Iis electoral
platform emphasized the importance of lowering taxes, reducing public spending, reviving market
competition, and limiting state intervention in the economy. Confronted with rising levels of
unemployment and inflation, however, Heath backed away from each of these objectives toward a
traditional Keynesian reflation.22 The contrast with the first Thatcher government is striking. In the
face of an even deeper recession, Thatcher refused to alter the course of »a highly deflationary
monetarist program.

How can we account for the different behavior of the two governments? Some say that Thatcher was
simply more determined. She was a self-confessed “conviction” politician, but Heath was also
justly known as a highly stubborn political leader. It is significant that Thatcher’s term in office
followed the years of Heath government: Her behavior was clearly influenced by the negative lessons
conventionally drawn from Heath’s about—tum. Of potentially even greater importance, however,
was the state of the monetarist paradigm when Thatcher came to office. By 1979 it was a fully
elaborated alternative to the reigning Keynesian paradigm with a significant base of institutional
support in the City, among economists at several universities, and in the media. Thatcher was able to
resist massive pressure from inside and outside the government to reverse the course of
98 Peter A. Hall

policy in 1980-81 in large measure because she could draw on the monetarist paradigm, to explain what
others saw as unanticipated events and to rationalize her resistance to demands for change. ' ’

By contrast, when faced with similar pressure to alter his initial policy positions, Heath had no
conceptual framework with equivalent coherence or institutional support on which to base his resistance
to demands for a reversal of course. Monetarist ideas enjoyed some currency among American and
British economists in the early 1970s, but they had no substantial base of institutional support within the
British policy—ma]<ing system. Although many elements of the Heath program resembled those later
pursued by Thatcher, the former were simply a loose collection of aspirations formulated in a relatively
ad hoc fashion, lacking the coherent backing provided by a full—fledged policy paradigm. As a
result, when Heath encountered unexpected economic developments that seemed to dictate a change in
policy, he had nothing to fall back on for guidance other than the one policy paradigm already
institutionalized in the policy process, namely the Keynesian paradigm. In the face of rising
unemployment and inflation, it dictated reflation and an incomes policy, which the government
accordingly pursued.

It is notable how deeply the Keynesian paradigm had been institutionalized in the British policy process
by the early 1970s. The structure of British govem— ment lent itself to the institutionalization of a
particular policy paradigm. In contrast to the American polity, where many different agencies have a
voice in a policy process that is highly permeable to multiple sources of outside advice, the British
system vested a few senior civil servants in the Treasury with a virtual monopoly over authoritative
economic advice. A small, hierarchical organization dominated by career civil servants, the Treasury
alone enjoyed access to the latest economic data and to the government’s macroeconomic model on
whose forecasts policy was based. By 1970 both the equation systems in the Treasury’s econometric
models and its standard operating procedures for formulating a budget judgment institutionalized a
Keynesian view of the economy.23 Outside the government, there were virtually no infonned sources of
alternative advice. The only other institution generating economic forecasts was the National Institute
for Economic and Social Research and it, too, was resolutely Keynesian. Given how deeply entrenched
the Keynesian paradigm was within the institutions of the British policy process, it is not surprising that
the Heath government retreated toward traditional formulas shortly after taking office.

Policy in the opening years of Labour government, I974—5

In 1974 an economic crisis, precipitated by massive oii price increases, and the election of a Labour
government under Harold Wilson initiated a second stage in the evolution of British economic policy
during the 19703. How wouid a new government respond to a new economic crisis?

Once again the degree to which the Keynesian paradigm was institutionalized
From Keynesianism to monetarism 99

within the Treasury was central to the response. Although the oil price increases had significant
wealth effects on the British economy and rising rates of inflation were altering the savings ratio and
fiscal multiplier in such a way as to render the economy resistant to traditional reflation, Treasury
officials had difficulty appreciating these developments. The forecastfffliat their econometric
models generated were based on parameters derivedfrorn regressions on past data that could not reflect
these more recent changes in underlying economic relationships. The seats on the train of econometric
equations always face backward. Partly as a result, many Treasury officials were inciined to treat the
stagnation of 1974 much as if it were a normal recession for which reflation was prescribed.24

Equally important at this point, howeveg, were several institutional features of the British polity.
Prominent among them was the electoral constraint. Labour had been elected with a minority
government in February 1974 and another election was anticipated shortly. Therefore the government
faced strong incentives to reflate by expanding spending programs tied to further electoral support. In
addition, because the trade unions enjoyed a position of extraordinary institutional power within the
Labour Party itself, Labour governments had difficulty imposing unwanted austerity measures on
them. Those difficulties were intensified by growing union opposition to the incomes policies of
the 39605. Accordingiy the 1974 Labour government had pinned its hopes for wage restraint on a
nebulous Social Contract with the unions, by which the latter were supposed to practice voluntary wage
restraint in exchange for favorable economic, social, and industrial relations policies. The government
pursued expansive spending policies in the hope of securing union cooperation but was left defenseless
when many trade unions naturally sought substantial wage increases in the face of rapidly rising
inflation. A rapidly rising public sector wage bill expanded public spending even further.

As a result, public expenditure increased by 6.1 percent in volume terms during 1974—5 alone; and
within two years the government had spent half again as much as its initial public spending plans
projected for its entire term of office. The public sector deficit for 1974-5 exceeded all expectation,
rising to almost 10 percent of gross domestic product (GDP). If we can reasonably think‘ of each
government as having a given economic increment that reflects the amount of reflation and debt-
financed public spending that it can afford during its term of governance, the 1974-9 Labour
government inadvertently spent the entire increment during its first year in office. This episode of
profligacy set the stage for the radical changes in policy that were to come.

POLICY CHANGE IN 1976-7

In 1976 and 1977 British economic policy turned in a somewhat monetarist direction. These years mark
a critical transition stage in the movement toward monetarism. On the one hand, the deep spending cuts
and restrictive monetary
100 Peter A. Hall

policies of these years reflected more than the normal deflationary stance that Keynesians might be
expected to adopt in such circumstances, and they were accompanied by a new concern for the’ rate
of growth of the monetary aggregates. The policy-makers of this era admitted that they were inspired in
part by disillusionment with the capacity of Keynesian techniques to cope with the problems of
Contemporary economic management. On the other hand, these policies did not yet represent full
acceptance of the monetarist paradigm. They were ad hoc measures taken in response to the collapse of
the Keynesian paradigm. Those who implemented them remained essentially Keynesian in their outlook
and aspirations. Full embrace of the monetarist paradigm came only after the election of a new
Conservative government in 1979.

How, then, are we to explain the about-tum that economic policy took in 1976-7? Some would attribute
it to the demands of the International Monetary Fund from which Britain sought a conditional loan in the
autumn of 1976; and the IMF certainly played a role in these developments.25 However, the shift in
policy began well before the IMF negotiations of autunm 1976 and continued after the government had
again secured room for maneuverability in 1977-8. Even within the Labour cabinet, there was a good
deal of feeling that the overspending of 1974-5 and ensuing balance—of—payrnent problems
demanded a new round of expenditure cuts.26

Moreover, the austerity measures of 1976-7 soon went beyond the consensus of cautious Keynesians. A
substantial number of the economic policies adopted in this period were virtually forced on the
government by the financial markets. in this respect the radical change in policy that took place
between 1974-5 and 1976-7 refiects a most interesting shift in the distribution of power among social
forces. The expansionaiy policies of 1974-5 were largely a response to the power of organized labor.
Consequently many commentators regard the 19705 as a decade when the trade unions gained
overwhelming power in the British polity. But this is not the whole story. The power of the trade unions
peaked in 19745. After they agreed to enforce a rigid incomes policy in the spring of 1975, the unions
began to lose both their leverage over the government and their influence over the rank and file.
From 1976 to 1977 it was the power of finance capital, working through the financial markets, that
rose dramatically. If the early 1970s brought increases in the power of the trade unions, the second half
of the decade saw an important shift of power over policy toward the financial markets.

In part the growing power of the financial markets was a direct consequence of past policy. As the
expansive policies of the early 1970s propelled the public sector deficit upward, the government had
to borrow more heavily from the financial markets; and its growing dependence on debt rendered the
government increasingly sensitive to the views about economic policy expressed in those markets.27 In
addition, however, a series of changes in the institutional practices of the markets for government debt
(the gilt markets) that happened to occur in these years substantially reinforced the power of the markets
vis—a-vis the government. Here was a classic case of unintended consequences.
From Keynesianism to monetarism 101

The relevant changes began in 1971 when the Heath government introduced a series of reforms,
associated with the White Paper on Competition and Credit ‘ Control (CCC), designed to allow
greater competition in the banking sector by eliminating quantitative controls on credit. Onge the
quantitative controls that had been the fulcrum for monetary policy sinc§(i958 were removed, the
government Was to exercise influence over the rnoriélary aggregates and overall levels of credit in
the economy primarily by varying interest rates, notably the bank rate (minimum lending rate) fixed
by the Bank of England. The full story of CCC cannot be told here.28 Suffice it to say that the primary
object of the reform was credit control and the management of competitive conditions in the banking
system and not the gilt markets. However, the reform had significant, if imperfectly understood, side
effects on the gilt market.

Before CCC the Bank of England managed the gilt market according to a “cashiers’ ” approach
to market management. In a nutshell its premise was that the best way to ensure demand for government
bonds was to minimize the risks associated with holding them by minimizing changes in interest rates
and therefore in bond prices.29 Since monetary control under the new CCC system was now to be
achieved primarily by allowing fluctuations in interest rates, however, a system for marketing gilt based
on limiting changes in interest rates proved to be incompatible with it. Accordingly the authorities
developed a new approach that might be termed the “economists’ ” approach to gilt
management.30 If the premise behind the so-called cashiers’ approach was that gilt could be made
attractive by minimizing the losses investors could suffer, the premise behind the economists’
approach was that gilt could be made attractive by offering investors the possibility of large profits.
In order to. sell gilt, the authorities would force interest rates up just enough so it would seem to the
market that rates could go no higher. Believing interest rates would next fall, investors would then buy
gilt because, as interest rates fell, bond prices would rise and they would be holding a rapidly
appreciating commodity. The theory was that gilt might not be as secure an investment as it had been
under the old regime but it would retain marketability based on the high return it could bring. British
officials did not initially realize that CCC would require a new system for marketing gilt, but by 1974
they had been forced to implement the new system.

Once in place, however, the new system precipitated many changes in the behavior of purchasers and
brokers in the gilt market. First, it vastly increased the cohesiveness of the market, namely the extent to
which purchasers of gilt acted together. Previously purchases of gilt had been relatively even over time
but, in order to avoid losses under the new system, investors had to act at precisely that point when
interest rates seemed to peak. The herd instinct, always present in such markets, was deeply reinforced.
As a result, the authorities might sell gilt only in dribbles for several months; and then, after moving the
bank rate up a notch, suddenly sell millions of pounds’ worth of bonds in a day.

Second, these new practices in the gilt market made it much more important for brokers and purchasers
to predict‘ changes in interest rates with some accuracy. A number of bankruptcies among brokerage
102 Peter A. Hall

houses in the early years of the new system rammed this point home._ As a result the brokerage houses
began to hire young economists in increasing numbers to monitor government policy with a View to
predicting interest rate changes and gilt prices. Brokers developed much greater interest in the
government’s overall economic policy; and they began to speculate publically about that policy in a
rapidly growing number of circulars published for the benefit of their clients. By 1976 dozens of
these publications were circulating in the City, including Philips and Drew’s Economic Forecasts,
Greenwell’s Monetary Bulletin, Capel’s Discussion Papers, Messel’s Monthly Monitor, Rowe
and Pitrnan’s Market Report, Vickers da Costa’s The British Economy, and many others. The
views promulgated in these circulars were widely followed by investors and given coverage in the
quality press. The Chancellor of the Exchequer himself began to complain about the influence now
wielded by these “teenage City scribblers.”

The new market practices and the circulars to which they gave rise were responsible both for
accelerating the speed with which the markets responded to a change in government policy and for
rendering that response increasingly monolithic. As the cohesiveness of the market increased, so did its
leverage vis-a-vis the government. Just as investors generally bought gilt in one grand rush, so they held
off together when conditions seemed unpropitious. The more they held back, the more desperate the
government became to sell gilt and the more likely it became that the authorities would have to offer
better terms, either by increasing interest rates or by ruling out such increases through reductions in the
public sector borrowing requirement (PSBR). In short, there was a growing element of self-fulfilling
prophecy to the new dynamic in the gilt market. The cohesiveness of the market made it increasingly
easier for purchasers of gilt to extract policy concessions from the govemment.31

A third consequence of these developments was the appearance of growing concern inside the City for
the rate of growth of the money supply. Since their principal task was to predict the direction of interest
rates and bond prices, most of the young economists flowing into the City were naturally interested in
the monetary aggregates. These economists gradually discovered that the amount of gilt the government
had to sell depended on the relationship between the rate of growth of the money supply (M3), the level
of bank lending to the private sector, and the size of the PSBR — all of which could be predicted
reasonably accurately. Once the government adopted a target for M3, as it did from 1976, its need to sell
gilt could be predicted with remarkable facility.32 Once such predictions became possible, the market
could wait with little risk for the government to raise interest rates or cut public spending and the PSBR,
knowing that the authorities had little choice if they were to meet their targets. In effect, with
unparalleled cohesiveness and a remarkable arsenal of information, the market could virtually hold the
Government to ransom.33
What is most interesting is that these developments did not involve any conspiracy
From Keynesianism to monetarism 103

on the part of the financial community vis—a—vis the government. The City has never been
notoriously sympathetic to Labour governments, but the periodic unwillingness to purchase gilt that
forced concessions on the government in this period was not produced by an organized movement. It
was simply the summary result of a series of decisions madeby individual investors trying to follow
market cues so as to maximize thenjoivn profits. If the relevant incentives for unified action had
not been present in the institutionalized practices of the market, those individuals would willingly have
broken ranks. in their own interest.34

A similar dynamic developed in the foreign exchange markets in the 1970s. Although it cannot be
described in detail here, this market also put increased pressure on the government in the 1970s. Massive
growth in the Euromoney markets during the decade generated huge’ sums of capital that could be
moved relatively quickly from one currency to another, and the foreign exchange market began to
respond to many of the same signals as the British bond markets. As a result, speculative pressure in the
two markets began to reinforce one another, and the government often found itself simultaneously
unable to market gilt or fend off a run against sterling unless it initiated further increases in interest rates
and/or reductions in public expenditure.

The newfound power of the financial markets was not lost on either side. The permanent secretary of
the Treasury observed of this period: “If markets take the view that policies pursued by a particular
country are likely to damage assets held in that country or in that country’s currency, they are likely
to behave in ways which can actually enforce a policy change. Market behavior has become a
signiÔ¨Åcant input into decision-making.” 35 One broker waxed almost philosophical: ‚ÄúThe
gilt—edged market is in some sense a contemporary extension of the checks and balances that Bagehot
spoke of. It is a check on Labour Govemments, on socialism, and on their tendency to increase public
expenditure too much. This is especially true now that we have monetary targets.36

As a consequence, increases in interest rates and reductions in public spending were forced on the
government at numerous points in the 1976-8 period. One reflection of the new climate was a
dramatic increase in the number of major financial statements issued by the chancellor each year.
Another was the renewed attention the government gave to monetary policy, reflected for instance in
its decision to let the exchange rate appreciate in the fall of 1977 despite adverse effects on exports
rather than allow inflows of foreign exchange to expand the money supply.37 Behind the unbelieving
monetarism of 1976-7 lay a set of institutional changes that had intensified pressure from the
financial markets.

The shift to wholeheartea’ monetarism under Thatcher

If the 1976-8 years mark a period of transition, ‘the full move to monetarist modes of policy-making
came only with the election of a new Conservative
104 Peter A. Hall

government under Margaret Thatcher in May 1979. Once in office, that government began to shift the
orientation of economic policy quite dramatically. It lifted exchange controls, set a fixed target for
sterling M3 and raised the minimum lending rate by 3 points to 17 percent to enforce its targets. Its
first budget took a new approach to macroeconomic management based on a medium-term
financial strategy that set explicit targets for the rate of growth of the money supply several years
ahead. Reducing the rate of inflation became the foremost priority of government policy and reducing
the public sector deficit its principal means to that end. Although monetary policy was relaxed
slightly at the end of 1980, the 1981 budget was deflationary yet again, despite the sharpest increase
in unemployment that Britain had experienced since 1930. With these measures, Thatcher embarked on
a course that broke radically with the character of British economic management since the war.38

In order to explain this final step toward monetarist modes of policy»mal<ing, we must answer two
questions. Why did Thatcher and the Conservative Party embrace a monetarist approach to economic
policy? Why were they elected to office in 1979? Once again the answers lie in a complex interaction
of interests and ideas in which institutional factors played a critical mediating role.

The explanation should begin with the collapse of the preceding paradigm and what is often referred to
as the Keynesian consensus. A change in the situation of the economy initiated the process. Inflation
and unemployment began to rise simultaneously in Britain during the 1970s, calling the trade-off that
most Keynesians postulated between these two variables into question and generating effects that
Keynesian models had difficulty anticipating or explaining. One result was a series of mistaken
forecasts. These were naturally followed by some serious failures of policy to produce the results that
had been intended. Such policy failures set in motion a set of institutional developments of some
moment.

In the first instance, the monopoly of authority that the Treasury had enjoyed over matters of
economic policy began to erode and a range of new institutions associated with what might be termed an
outside marketplace in economic ideas developed in Britain. As economic problems intensified and
the capacity of the Keynesians in the Treasury to deal with them satisfactorily seemed to decline, a
number of outside institutions were established to provide alternative analyses of the economy and
economic policy. Prominent among these were the research departments of brokerage houses, which
expanded in response to changes in the financial markets noted above and whose circulars constituted
an influential samizadr on economic matters. Independent institutes were also fonned and gained new
prominence, such as the Centre for Economic Forecasting at the London Business School, the
Cambridge Economic Policy Group, and the Centre for Policy Studies established by the Conservative
Party. When some disgruntled members of Parliament forced the Treasury to release the details of its
model for forecasting the British economy in 1976, these institutes gained an important additional
resource.
From Keynesianism to monetarism 105

The 1970s saw an unparalleled expansion in the amount of coverage given to sophisticated economic
matters in the British press, much of it monetarist in ‘tone. From 1975 to 1979 thousands of articles
with a monetarist slant appeared: » in The Times, The Financial Times, The Economist,., The Daily
Telegraph, and elsewhere in the press. The government facedfitin avalanche of opinion, all the more
significant because few British econoniists held monetarist views during these years. Why, then, did
so many journalists take them up? Many began to popularize monetarist ideas because they were
searching for a standpoint from which to mount informed criticism of the government’s policies. As
one influential journalist put it: “This was a period of intense humiliation for a lot of thinking
people within Whitehall and the City. . . . A number of us made a conscious decision to pin these people
bloody-well down.” 39 Others took up monetarist analyses simply because the latter became the
“angle” of the day. As one explained, “We saw monetarism as the major alternative to the
Keynesian orthodoxy that ruled in Britain and we were interested in it from that angle.”40

As an institution, the media are a critical transmission belt between the state and society that is
sometimes neglected by those who focus on the traditional channels of interest interrnediation.
However, because the media fasten onto _ particular issues in search of an angle, they act more as a
magnifying glass than as a mirror for popular opinion. ‘The ferocity with which economic journalists
took up monetarist issues during the 1970s was central to their popularization in Britain.

The nature of the British party system also played an important role in the progress of monetarist ideas.
In the British system, where two parties are usually the only viable candidates for office and the victor
generally governs alone, the party that is out of office is always casting about for a coherent
standpoint from which to mount an effective attack on the government’s performance, especially in
issue areas of great concern to the electorate.41 Thus, many Conservatives began to show interest in
inonetarism as a coherent standpoint from which to attack the Labour government’s lackluster
economic policies. They faced strong institutional incentives to pick up and press the alternative
economic doctrine.

Moreover, monetarist ideas had a special appeal for those on the right wing of the Conservative Party,
who gained influence after the 1974 electoral failure of the moderates under Heath. In monetarism
they found a highly coherent rationale for many of the policy initiatives they had long favored.
Monetarist doctrine provided cogent economic reasons for cutting public spending and taxation,
reducing the public sector deficit, rejecting incomes policies, shrinking the public sector, and limiting
the legal power of the trade unions.42 Accordingly Sir Keith Joseph and Margaret Thatcher deliberately
schooled themselves in monetarist doctrine and founded the Centre for Policy Studies to promulgate
such ideas more widely within the party.

The Conservative electoral victory of 1979 was the result of many circumstances.
106 Peter A. Hall

However, the evidence suggests that two factors made a crucial difference to the outcome.43 One was the
popularity of the Conservatives’ policy positions, including a number pertaining to the economy that
were‘ closely tied to a monetarist outlook. The other was an electoral backlash against the difficulties
the preceding Labour government had experienced with the implementation of an incomes policy,
intensified by popular resentment against the wildcat strikes that broke out in the public sector during
the 1979 “winter of discontent.” Given Britain’s poor economic performance, Labour faced an
uphill electoral battle. But the electorate reacted with special force against the tortuous efforts to secure
voluntary wage restraint that were the hallmark of the 1974-9 years. In this respect the organization of
labor was relevant to the rise of nronetarism in Britain. The fragmented nature of the British trade unions
had made it especially difficult for the government to implement a successful incomes policy. Each
round of crisis bargaining carried a political cost. The authority of the government itself seemed to have
been undermined by its constant efforts to placate the unions; and the popularity of the unions
themselves dropped precipitously between 1974 and 1979.

In the face of this crisis, monetarism seemed to contain a formula for restoring governmental authority.
The monetarists claimed that the government could control inflation — and the unions — simply by
adhering to a rigid target for monetary growth. They believed that monetary targets would force the
trade unions to accept moderate wage increases or risk unemployment. One of the subtexts, in effect, of
the 1979 Conservative campaign was an attack on the trade unions. Some of the most popular planks in
Thatcher’s platform were promises to ban secondary picketing and stop social security payments to
the families of strikers. With these and further promises to sell off council houses and lower income
taxes, Thatcher put together an electoral coalition that drew many middle-class voters and important
segments of the working class away from the Labour Party.44

CONCLUSION

As even this brief summaiy suggests, the movement from Keynesian to monetarist modes of economic
policy—making in Britain was a complex process with many ingredients. In it,“ economic
developments, conflicts of interest among social groups, and new ideas all played a role. However, the
process as a whole was structured by the institutional framework that characterizes the British polity and
policy process.

What do institutions do? Let us summarize the impact that each level in the institutional framework of
British policy—mal<ing had on the course of policy. In overarching terms, British policy-making takes
place within a framework marked by the combination of capitalist reiations of production and
democratic electoral institutions. On the one hand, this framework did not dictate a monetarist solution
to the economic difficulties of the 1970s, as the divergent paths taken by
From Keynesianism to monetarism 107

many other nations with a similar political—economic framework indicate. On the other hand, it tended
to impose broad constraints on policy—makers that militated strongly against radical schemes
involving substantial alterations to the existing relations of production. The power of businessmen to.
oppose such schemes is unusually great where they control means of prgpttction and investment so vital
to economic prosperity and where the electorél ‘constraint soon translates any downturn in business
confidence and prosperity into a loss of votes.

Even more germane to the actual course of policy was the organization of the state and society in
Britain. Prominent among their features was the organization of the British trade union movement.
Powerful enough to create strong inflationary pressures, it was also organizationally fragmented
enough to render neocor— poratist solutions to the problems of unemployment and inflation, of the
sort associated with incomes policies, especially difficult to attain. As we have seen, the
difficulties the l974w9 Labour government experienced persuading a fragmented trade union
movement to adhere to a wage norm paved the way for its 1979 electoral defeat and for the popularity of
monetarist ideas in many quarters. In this case we can see how the institutions devised to represent the
interests of a social group, such as the working class, themselves affect the definition and expression
of those interests. A less fragmented union movement might have been inclined to pursue neocorporatist
solutions longer than the British unions did and it might have been able to implement them more
effectively.45

Several features of the British political system also seem to have affected the course of policy. On the
one hand, a party system characterized by intense twoparty competition, compared to the continental
pattern of coalition governments, gave the Conservatives strong incentives to seek a clear alternative to
Labour policies, of the sort that they found in monetarism. On the other hand, once in office, the
Conservatives had the capacity to institute radical changes in economic policy in part because the British
system of “responsible” government vests great power in a cabinet and its prime minister. It is
difficult to imagine a German, French or American administration carrying through such a substantial
break with the past as the British achieved; and, indeed, their efforts to do so were all dissipated more
quickly than those of the British.46

This analysis suggests that, while we are used to thinking of institutions as factors of inertia tending to
produce regularities in politics, some kinds of institutional configurations may be systematically
biased in favor of change. The combination of responsible cabinet government and a two—party
political system that we find in Britain may be precisely such a configuration.47 A two-party system
gives the party that is out of office strong incentives to propose innovative lines of policy so as to
develop a distinct profile in the eyes of the electorate and a basis from which to mount an effective
critique of the incumbent party. A system of responsible cabinet government concentrates power
effectively enough to permit a new government to implement distinctive innovations in policy.48

The unusually concentrated character of the British media also played an important
108 Peter A. Hall

role in this episode. Four newspapers dominated the national market for a quality press in Britain during
the 1970s, and three gave an extraordinary amount of coverage to monetarist ideas and issues at a time
when they were still largely unaccepted by British economists. Such coverage intensified the pressure
for monetarist policies that the government faced in 1976-9 and paved the way for those seeking to
persuade the Conservative Party of the advantages of a monetarist program.49 In this case a particular
configuration of institutions provided the proponents of a new set of ideas with an influential
platform from which to launch them.

At the very least this case reminds us that the electoral systems and popular media associated with
democratic polities can be important institutional sites for the initiation of political change. While many
of the institutional features of the state itself tend toward inertia, democratic political systems contain
avenues for innovation. Monetarist policies were virtually imposed on a reluctant set of of— ficials
by politicians responding to the media and the matrix of incentives in the electoral arena.

Finally the standard operating procedures adopted by British officials constitute a third level of
institutions with a substantial impact on the trajectory of policy. The routines and decision—making
procedures of the Treasury acted as filters for response to outside economic developments. Both the
Heath and Wilson govemments initially reacted to rising levels of unemployment and inflation in a
quintessentially Keynesian manner in some measure because a Keynesian approach to economic
management had been routinized into the standard procedures of the Treasury. They were built into the
econometric model that became increasingly central to policy—making in the early 1970s. It was the
failure of this model, built on estimates of past economic relationships, to anticipate the changing
relationships in the economy during the 19705 that led to many mistaken forecasts and growing
disillusionment with Keynesianism itself.

The inertial impact of these routines was further reinforced by the structure of the British Treasury itself.
Operating in considerable secrecy, it was staffed by career civil servants and vested with great authority
over macroeconomic policymaking. Partly for this reason, monetarist doctrines gained influence
faster in the Bank of England, where senior officials were close to the financial community, and
among politicians who were ultimately to press them upon officiais. Similarly, we have seen how a
change in the operating procedures of the financial markets altered the incentive structure facing
investors there in such a way as to intensify pressure on the government for monetarist policies in the
1976-9 period. Here is a classic case in which institutional reform had significant unintended
consequences and one that demonstrates how the power of particular social interests is shaped by the
institutional framework in which they find themselves. The institutional reforms associated with
Competition and Credit Control greatly enhanced the power of the financiers operating in the gilt
markets vis—a—vis the British government during the second half of the 1970s. Although
From Keynesianism to monetarism 109

a wider struggle for power and resources among social groups often lies behind the surface of policy-
making, that struggle is mediated by political and economic institutions that channel it in certain
directions and privilege some groups at the expense of others. Those institutions transmute as well as
transmit the preferences of such groups and they can have a often unintended, impact on the outcome.
3"’

In sum, institutions alone did not produce the changes made to British economic policy during the
19705. The latter were the outcome of a complex process driven, in large measure, by the problems
generated by new economic developments, the pressure of competing social interests expressed in both
the financial and electoral markets, and by the apparent viability of old and new economic ideas for
the purposes at hand. However, th; institutional setting in which British policy was made contributed a
good deal to the precise trajectory that policy was to follow. The institutionalized routines of the policy
process structured the interpretation that policy—makers put upon the new economic developments.
The configuration of the labor and financial markets intensified pressure for some lines of
policy over others, and the institutional character of the media and electoral arena added public and
political appeal to some economic ideas more than others.

Institutions emerge from this analysis as critical mediating variables, constructed by conscious endeavor
but usually more consequential than their creators intended. They are not a substitute for interests and
ideas as the ultimate motors of political action, but they have a powerful effect on which interests and
ideas will prevail. Institutions are a force not only in instances of political inertia but in cases of political
change as well. As such, they deserve the attention that has been devoted to them.

NOTES

1 For basic reviews of British policy during the Keynesian era, see F. T. Blackaby, ed., _ British Economic Policy
1960-74 (Cambridge: Cambridge University Press, 1979); Andrew Shonfield, Modern Capitalism (New York:
Oxford University Press, 1969); ' ' ' and J. C. R. Dow, The Management of the British Economy 1945-1960
(Cambridge: Cambridge University Press, 1964).
2 Examples of neoinstitutionalist studies examining stable patterns of policy include Peter A. Hall, Governing the

Economy: The Politics of State Intervention in Britain and France (New York: Oxford University Press, 1986),
ch. 9; Geoffrey Garrett and Peter Lange, “Performance in a Hostile World: Economic Growth in Capitalist
Democracies, l974~82,” World Politics 38, no. 4 (July 1986); Fritz Scharpf, “Economic and Institutional
Constraints of Full-Employment Strategies: Sweden, Austria, and West Germany, 1973-82” in John
Goldthorpe, ed., Order and Conflict in Contemporary Capitalism (New York: Oxford University Press, 1984), pp.
2575-90; Sven Steinmo, “Political Institutions and Tax Policy in the United States, Sweden and Britain,”
World Politics 6] , no. 4 (July l989):500—35; and John Zysman, Governments, Markets and Growth (Ithaca, N
.Y.: Cornell University Press, 1983).
3
For a more general statement reflecting this view, see James March and Johan Olsen, “The New
Institutionalism: Organizational Factors in Political Life,” American Political Science Review 78, no. 3 (Sept
1984):734~49. It is also well represented in the essay‘by Margaret Weir in Chapter 7- of this book and her
“Ideas and Politics: The Acceptance of Keynesianism in Britain and the United States,’ ’ in Peter A. Hall,
ed., The Political Power of Economic Ideas: Keynesianism across Nations (Princeton, N.t.: Princeton University
Press, 1989), pp. 53-86.
4 Although there were three Thatcher governments, 1979-83, 1983-7, and 1987-91, for the sake of simplicity I
will refer to all of them as the Thatcher government.
5 For surveys of the economic policies of the Thatcher govemment, see Peter Riddell, The Thatcher Decade

(Oxford: Basil Blackwell, 1990); Geoffrey Maynard, The Economy under Mrs. Thatcher (Oxford: Basil
Blackwell, 1988); and Martin Holmes, The First Thatcher Government (Brighton: Wheatsheaf, 1985).
6 See Peter A. Hall, “Policy Paradigms, Social Learning and the State,” Comparative Politics (forthcoming).
7 See Peter A. Hall, The Political Dimensions of Economic Management (Ann Arbor, Mich.: University

Microfilms, 1982), ch. 1; K. Cuthbertson, Macroeconomic Policy (London: Macmillan, 1979); K. A. Chrystal,
Controversies in British Macroeconomics (Oxford: Philip Allan, 1979).
8 On the Heath policies, see Hall, Political Dimensions of Economic Management, ch. 2; Martin Holmes, Political

Pressure and Economic Policy (London: Butterworths, 1982); and lock Bruce-Gardyne, Whatever Happened to
the Quiet Revolution? (London: Charles Knight, 1974).
9 See David Coates, Labour in Power? (London: Longman, 1980); and Hall, Political Dimensions of Economic

Management, ch. 3.
10 See William Keegan and Rupert Pennant-Rae, Who Runs the Economy? (London: Temple Smith, 1979);

Samuel Brittan, The Economic Consequences of Democracy (London: Temple Smith, 1977).
11 For accounts of the trajectory of economic policy in this period in several other industrialized nations, see Peter

A. Hall, “State and Market," in Peter A. Hall, Jack Hayward, and Howard Machin, eds. , Developments in
French Politics (London: Macmillan, 1990); Paul Roberts, The Supply-Side Revolution (Cambridge, Mass.:
Harvard University Press, 1984).
12
For a general review of economic performance in this period, see Andrea Boltho, ed. , The European Economy
(Oxford: Oxford University Press, 1982), esp. C115. 1, 2.
13 For an influential statement of such a position, see Peter A. Gourevitch, Politics in Hard Times (Ithaca, N.Y.:

Comeli University Press, 1986).

14 This is a point well made by Geoffrey Garrett, “The Politics of Structural Change: The Construction of

Social Democracy in 19308 Sweden and Neoliberalism in 19803 Britain,” Cornell University Western
Societies Program, Occasional Papers, forthcoming.
15
For analyses that emphasize this point, see Joel Krieger, Reagan, Thatcher and the Politics of Decline
(Cambridge: Polity Press, 1986); Stuart Hall and Martin Jacques, eds., The Politics of Thatcherism (London:
Lawrence and Wishart, 1983); and Bob Jessop et al. , Thatcherism: A Tale of Two Nations (Cambridge: Polity
Press, 1989).
16 By the 1990s, of course, many aspects of monetarist doctrine had been integrated into the conventional wisdom

of neoclassical economics, but this was not the case in the period under scrutiny here. For further discussion of the
incommensurability of the policy paradigns at that point see Hall, Political Dimensions of Economic
Management, ch. 1.
17 For further elaboration on this approach to explaining the impact of new economic ideas, see Hall, ed., Political

Power of Economic Ideas, esp. the introduction and conclusion.

18 For an elegant analogous formulation, see G. John Ikenberry, “Conclusion: An Institutional Approach to

American Foreign Economic Policy,” International Organization 42, 1 (Winter 1988).

19 For further elaboration see Adam Przeworski and Michael Wallerstein, “The Structure of Class Conflict in

Democratic Capitalist Societies,’ ’, American Political Science Review 76 (1982):215—38; Adam
Przeworski, Qapitalism and Social Democracy (Cambridge: Cambridge University Press_, 1985)? - Charles
Lindblom, Politics and Markets (New York: Basic Books, 1977); Fred Block, “The Ruling Class Does Not
Rule: Notes on the Marxist Theory of the State,” Socialist Review 33 (May—JLme, l977):I5—28; Claus
Offe, Disorganized Capitalism (Cambridge, Mass‘.: MIT Press, 1985); Claus Offe, Contradictions of the
Welfare State (Cambridge, Mass.: MIT Press, 1984); and Hall, Governing the Economy, ch. 10.
20 For a limited sample of relevant arguments, see: Hall, Governing the Economy, ch. 9; Peter Evans, Dietrich

Rueschemeyer, and Theda Skocpol, eds. , Bringing the State Back In (Cambridge: Cambridge University ,Press,
1985); John Goldthorpe, ed., Order and Conflict in Contemporary Capitalism (New York: Oxford University
Press, 1986); Bernard Elbaum and William Lazonick, eds. , The Decline of the British Economy (Oxford: Oxford
University Press, 1986); Suzanne Berger, ed., Organizing Interests in Western Europe (Cambridge: Cambridge
University Press, 1982); Robert Boyer and Jacques Mistral, Accumulation, Inflation, Crises (Paris: Presses
Universitaires de France, 1983).
21 Cf. Hugh I-Ieclo and Aaron Wildavsky, The Private Government of Public Money (London: Macmillan, 1979).
Much of the literature in organization theory is pertinent here. For overviews see Paul C. Nystrom and William H.
Starbuck, Handbook of Organizational Design (New York: Oxford University Press, 1981); Graham Allison, The
Essence of Decision (Boston: Little, Brown, 1971); Stewart Clegg and David Dunkerley, Organization, Class and
Control (London: Routledge and Kegan Paul, 1980); Herbert Simon, Administrative Behavior (New York: Free
Press, 1976).
22 See Michael Stewart, Politics and Economic Policy in the UK since 1964 (London: Pergamon, 1978), ch. 5.
23 Cf. Paul Orrnerod, Economic Modelling (London: Heinemann, 1979).
24 Cf. Barbara Castle, The Castle Diaries, 1974-76 (London: Weidenfeld and Nicolson, 1980); Harold Wilson,

The Final Term (London: Weidenfeld and Nicolson, 1980); Ninth Report from the Expenditure Committee,
Public Expenditure, Inflation and the Balance of Payments. H. C. 328 (London: HMSO, 1974).
25 Cf. H. Fay and S. Young, The Day the Poona’ Died (London: The Sunday Times, 1977).
26 See Castle, Castle Diaries, 1974-76, p. 546 et passim. Extensive documentation for the account given here of

British economic policy can be found in Hall, Political Dimensions of Economic Management.
27 Public sector borrowing as a percentage of gross domestic product rose from 3.2% in l962—7 to 6.8 % in

1972-7. In the five years to 1980, the government had to sell £41,825 million worth of public sector debt; and,
by 1980, it had some £57 billion worth of bonds outstanding, equivalent to 42% of GDP compared with a U.S.
debt of 16% of GDP at that time. In 1977 government bonds absorbed 90% of the UK. capital market as opposed
to only 30 % of the U.S. domestic capital market. See Adam Ridley, “Public Expenditure in the United
Kingdom: The Biggest Crisis of Them All,” in Ruble and Veler, eds., Wachsende Staatshaushalte (Bonn:
Ahntell, 1978), Table 10; The Times (London), Nov. 26, 1979, p. 17; The Bank of England Quarterly Bulletin
(June 1979), pp. 138 ff.
28
For more detailed accounts of Competition and Credit Control, see Michael Moran, The Politics of Banking
(London: Macmillan, 1988); Hall, Political Dimensions of Economic Management, ch. 3; K. K. Zawadzki,
Competition and Credit Control (Oxford: Basil Blackwell, 1981).
29 From.the investors’ point of view, this meant that gilt was a safe, if low-retum investment, on which one just

might make a good profit should interest rates fall.

30 This and the cashiers’ theory are explained in David Gowland, Monetary Policy and Credit Control

(London: Croom Helm, 1978), pp. 28 et passim.

31 The major limit to this leverage was imposed by the fact that large institutional investors generally put their

inflows of funds into overnight paper while they waited for the gilt market to move and, after a period, the
resulting imbalance in their asset portfolios began to incline them more strongly toward reentry into the gilt
market.
32
Cf. G. T. Pepper, “The Uses of Monctarism for Practical Working Economists,” Journal of the Institute
of Actuaries 96, no. I (l970):403.
33 What these City circulars were doing was defining — and, in the process, creating — the

“confidence” that the financial community had in various government policies. They were perfectly
explicit. To take only one example, the report that stockbrokers Rowe and Pitman prepared immediately after the
1979 budget declared that: “If . . . the financial markets consider that the consequences of the fiscal
policies announced in the Budget will be a Borrowing Requirement in excess of £8.5 billion, confidence will
be impaired and interest rates will have to move upwards again in order to keep monetary growth under
control.” Market Report (March l979):p. 3.
34
Although I do not pursue it here, this sort of dynamic also lends itself to a gametheoretic interpretation. These
developments were initiated by a change in the strategy of the Government that altered the payoff matrix for
investors in bonds, who altered their behavior accordingly and then devised means for improving their access to
the relevant information. New institutions devised for this purpose, in turn, made coordination of market behavior
more feasible and enhanced the leverage that operators in the market had vis-a-vis the government.
35 Sir Douglas Wass, “The Changing Problems of Demand Management.” Lecture to the Johnian Society,

Cambridge University, Feb. 15, 1978, p. 99.

36 Interview, London (July 10, 1980).
37 For details, see Hall, The Political Dimensions of Economic Management, ch. 7.
38 Although there is not space to follow the trajectory of policy under the Thatcher 3 government here, it should

be noted that monetarist policy itself underwent some significant changes during the 1980s. In particular,
monetary control proved much more difficult than Thatcher had anticipated and by the middle of the decade
the money supply had become only one of several targets at which monetary policy was aimed. Nonetheless, the
nature of policy over the 1980s remained sharply different and the ideas that guided it remained quite different
from those that had prevailed in preceding decades. For more extensive discussion of T hatcher’s policies, see
Riddell, The Thatcher Decade and Peter Smith, The Rise and Fall of Monetarism (Harmondsworth: Penguin,
1988).
39
Interview, London, Aug. 11, 1980.
40 Samuel Brittan, private communication.
41
Cf. A. M. Gamble and S. A. Walkland, The British Party System and Economic
Policy I 945 -83 (Oxford: Oxford University Press, 1984).
42 See Andrew Gamble, “The Free Economy in the Strong State” in Ralph Miliband and John Saville, eds.,

The Socialists’ Register 1979 (London: Merlin, 1979), pp. 1— 25; and Robert Behrens, The Conservative
Party from Heathto Thatcher (Famsborough: Saxon House, 1980).
43
See Ivor Crewe, “Why the Conservatives Won” in Howard Penniman, ed., Britain at the Polls, 1979
(Washington, D.C.: American Enterprise Institute, 1981), pp. 263—- . 306.
From Keynesianism to monetarism 113
44
Geoffrey Garrett, “Endogenous Electoral Change: The Political Consequences of
Thatcherism,” paper presented to the Conference of Europeanists, Washington, D.C.,April 1990.
45 On this point, there is a large literature; see especially John Goldthorpe, ed., Order and Conflict in

Contemporary Capitalism (Cambridge: Cambridge University Press,1984) and Peter Lange, Geoffrey Garrett, and
M’. "ael Alvarez, “Government Partisanship, Labor Organization and MaCr0ec0nomf§,Performance,
1967-1984," American Political Science Review (forthcoming). '
46 In Germany the government is usually constrained not only by its coalition partners but by a powerful

Bundesrat and independent central bank. Thus, the famous wende of the new Kohl government proved to be quite
moderate. In the United States, Congress, the Federal Reserve Bank, and an independent judiciary limit the
capacity of a new administration to pursue a coherent economic strategy. Thus the Reagan administration rapidly
retreated from its promises to control the budget deficit and soon encountered opposition to its tax
reformsfln France the government can be constrained both by the power of the presidency and the legislature, if
the opposition is well represented there. Thus the program of the 1986-9 Chirac government, while inspired by
Thatcher’s ideas, never attained the same results. See Peter Katzenstein, Politics and Policy-making in West
Germany (Philadelphia: Temple University Press, 1987); Andrei Markovits, ed. , The Political Economy of
Germany (New York: Praeger, 1982); David Stockman, The Triumph of Politics (New York: Norton, 1985);
Howard Machin and Vincent Wright, eds., Economic Policy and Policy-Making in Mitterrand’s France
(London: Pinter, 1985).
47
For an analogous but slightly different argument, see John Keeler, The Limits of Democratic Reform (Oxford:
Polity Press, forthcoming), ch. 3.
48 The caveat that must be entered here, of course, is that the dynamics of two-party electoral competition can lead

the parties to converge on a similar set of platforms in order to secure as many votes from the center of the
political spectrum as possible.Cf. Anthony Downs, An Economic Theory of Democracy (New York: Harper &
Row,1957). It may well be that deep dissatisfaction among the electorate is the necessary trigger for a dynamic of
innovation, as opposed to one of convergence, to operate.
49 See Wayne Parsons, The Power of the Financial Press (London: Edward Elgar, 1989); and Peter A. Hall,

Political Dimensions of Economic Management, ch. 6.