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The Enemy Within
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From the start, this project was cloaked in the language of “efficiency”, “modernisation”, and — most pernicious of all — “economic freedom”.14 Thatcher’s groupies argued that the unions were vested interests getting in the way of the operation of the free market. The neoclassical theory of wage determination posits that workers are paid a wage equal to the “marginal product” of their labour.15 Essentially, firms pay workers a wage equal to the value of the output they produce. If a firm paid a worker over this amount, another firm could afford to undercut them whilst still making a profit, and if they paid workers less, then another firm could poach the worker with a higher salary and still make a profit. In the perfect world of equilibrium inhabited by the professional economist, the economy runs like a well-oiled machine, everyone fulfils their function, and society’s resources are used in the most optimal way. By extension, workers who demand wages above their marginal productivity reduce the profitability of the companies they work for, therefore reducing the efficiency of the economy as a whole. The unions were committing a cardinal sin — disrupting the operation of the free market — and the state had no choice other than to intervene.
But over the course of the post-war period, the marginal productivity theory of distribution largely held. When the UK had a powerful labour movement able to argue for pay rises on behalf of their workers, on aggregate wages and productivity rose in unison — workers were paid a wage equal to what firms could afford, no more and no less. In fact, there is now a great deal of evidence to suggest that strong union movements actually raise productivity and improve firm performance.16 But after Thatcher’s battle with the unions, wages stopped rising in line with productivity. Without the unions to demand that firms paid workers a salary equal to their marginal output, bosses had no incentive to do so. Instead, they set about internally redistributing resources from workers to shareholders, making billions in the process.17
From the start, this project was cloaked in the language of “efficiency”, “modernisation”, and — most pernicious of all — “economic freedom”.14 Thatcher’s groupies argued that the unions were vested interests getting in the way of the operation of the free market. The neoclassical theory of wage determination posits that workers are paid a wage equal to the “marginal product” of their labour.15 Essentially, firms pay workers a wage equal to the value of the output they produce. If a firm paid a worker over this amount, another firm could afford to undercut them whilst still making a profit, and if they paid workers less, then another firm could poach the worker with a higher salary and still make a profit. In the perfect world of equilibrium inhabited by the professional economist, the economy runs like a well-oiled machine, everyone fulfils their function, and society’s resources are used in the most optimal way. By extension, workers who demand wages above their marginal productivity reduce the profitability of the companies they work for, therefore reducing the efficiency of the economy as a whole. The unions were committing a cardinal sin — disrupting the operation of the free market — and the state had no choice other than to intervene.
But over the course of the post-war period, the marginal productivity theory of distribution largely held. When the UK had a powerful labour movement able to argue for pay rises on behalf of their workers, on aggregate wages and productivity rose in unison — workers were paid a wage equal to what firms could afford, no more and no less. In fact, there is now a great deal of evidence to suggest that strong union movements actually raise productivity and improve firm performance.16 But after Thatcher’s battle with the unions, wages stopped rising in line with productivity. Without the unions to demand that firms paid workers a salary equal to their marginal output, bosses had no incentive to do so. Instead, they set about internally redistributing resources from workers to shareholders, making billions in the process.17