Reaffirming the Influence of Milton Friedman on U.K. Economic Policy

Abstract

This paper finds a significant influence of Milton Friedman on U.K. economic policy from the 1970s onward, and especially during the period of the Thatcher Government. The finding is based on a consideration of statements by policymakers and key economic advisers, as well as an analysis of Friedman’s commentary in the 1970s, 1980s, and 1990s on U.K. economic developments. Explicit, public acknowledgments of Friedman's influence were given by Margaret Thatcher, Chancellor of the Exchequer Geoffrey Howe, Bank of England officials, and others in policy circles. Examples of Friedman's influence include the absorption into U.K. policy doctrine of the permanent income hypothesis and the natural rate hypothesis, the rejection from 1979 onward of incomes policy as a weapon against inflation, and U.K. officials' repeated appeals to monetary sovereignty when arguing against monetary union or a sterling peg. Evidence of influence by Friedman on privatization policy and on the official perspective on the current account deficit can also be discerned. Although he had only limited interaction with U.K. policymakers, Friedman had a major influence, reflected in the adoption into actual U.K. policymaking of recommendations made in his writings and in the fact that those writings-which were studied closely by a number of senior U.K. economic advisers-helped alter U.K. economists' conceptual framework and thereby fostered doctrinal changes in U.K. economic policy. This paper's analysis also shows that two prominent critics of the Thatcher economic policy-Labour's Harold Wilson and the Conservatives' Edward Heath-saw this policy as partly due to the influence of Friedman, whom each of them had met before the Thatcher era.