Labour’s Choices

The threat of a return to the 1970s has long been a rhetorical feature of the British establishment. From the New Labour government’s Third Way reforms, to Jeremy Corbyn’s ambitious manifestos, and through to the current Labour Government’s rather modest spending increases, any prospects of redistributive taxation and spending, resurrection of trade union power, more worker-friendly policies, or state direction of industrial policy have been relentlessly attacked as a return to that dreaded decade.

The accusations are peculiar because, on the face of it, recent years have been very different from the 1970s. Trade-union power and militancy in the UK remain far weaker than before, the state no longer controls capital flows as it did prior to 1979, and competing ideological systems no longer overlap with geopolitics as they did during the Cold War. 

Talk about going back to the 1970s, then, isn’t prompted by any real prospect of returning to those years or the conditions that underpinned them. Rather the 1970s have come to stand as a kind of shorthand for catastrophe—a catastrophe that Labour governments are particularly prone to. It was in the 1970s—as few in Britain are allowed to forget—that the overwhelming power and intransigence of the unions paralyzed British life, crippled the economy, and fuelled uncontrollable inflation, while state control and ownership stifled innovation and created inefficiency. On both the left and the right,¹ the crisis of the 1970s is perceived to have laid the ground for Thatcher’s rise; facing the spiralling crisis, the 1974–79 Labour Government—led first by Harold Wilson, then by Jim Callaghan—is either portrayed as having been helpless in the face of the economic crisis and union power, or as having advanced its own strand of neoliberal reform now seen as mostly indiscernible from Thatcherism. 

The salient problem with these stock-standard readings is that the 1970s were not simply a time of crisis that led, automatically and inevitably, to Thatcherism. They were, in fact, a time of deep contestation over the future direction of economic policy in the UK. Far from being prisoners of a broken system, the Labour Party in this period debated and explored not one, but several, alternatives to the Thatcherite program then beginning to emerge. The Labour Party’s experimentation in these years was connected to the fact that the 1970s were, despite the difficulties and uncertainties that surrounded them, a time in which labor and other social movements were confident in their power and believed that the future belonged to them. Their failure reflected not historical necessity, but the changing composition of social pressures that Party leaders faced.

What lessons does this tumultuous decade hold for the present? An accurate reading of the 1970s above all discredits a fatalistic reading of history. Instead, it encourages a rediscovery of policy experimentation and mass mobilization.

“There is no other way”

When Harold Wilson’s Labour Party entered government in March 1974, it did so amid deep domestic conflicts and uncertain international economic conditions. The 1973 “oil shock,” when the Organization of Petroleum Exporting Countries (OPEC) dramatically increased the price of oil, had exacerbated existing economic difficulties in the UK. By the end of 1973 the country was in recession, inflation was accelerating, and there was a growing current account deficit. The Conservative government had sought to bring down inflation through statutory controls on wages and prices. However, the price controls were full of loopholes and the government confronted a powerful trade union movement that rejected statutory control and wage increases that did not match the increase in prices. Industrial action by the National Union of Mineworkers led the Conservatives to declare a three-day work week to limit energy use, and then to call a general election in the hopes of securing a mandate for its policy of confrontation with the unions. To their surprise, they lost the election.

Labour replaced the Conservatives, first as a minority government and then with a small majority after a second election in October. It was influenced not only by the difficult economic context, but by a wide range of new left groups and social movements that had been growing in size and influence since the late 1960s. Many new ideas were being developed within these movements, including ones for democratic control over companies and the state. While the Labour leadership resisted the more radical elements of these policies, it nevertheless entered the February 1974 election with the Party’s most radical manifesto since 1945, promising to “bring about a fundamental and irreversible shift in the balance of power and wealth in favour of working people and their families.”

Labour’s strategy emphasised cultivating a close relationship with the unions and an economic strategy based upon cooperation with them. The failures of the Conservatives, in their efforts to confront the unions, appeared to confirm the realism of this approach. Indeed, Wilson’s insistence that “there [was] no other way to approach an economic strategy except based on the Social Contract with the trade unions” echoed Thatcher’s later argument that “there is no alternative” to her own policies.²

The logic of this “Social Contract” was that unions agreed to cooperate with the government to restrain wage increases in exchange for policy concessions. These concessions included an extension of price controls, new rights for workers and unions in the workplace, increases in the “social wage” through higher benefits and subsidies for food and housing, and an industrial strategy that involved expanding the state’s powers to direct investment toward priority areas.

As the government continued to face major economic challenges over the next five years, its emphasis in many of these areas would shift. The importance of cooperation with the unions, however, would remain central to how it approached economic policy.

An ambivalent era

The conservative historian Dominic Sandbrook has described 1974 as “the worst year in British political history.” Maintaining this claim in a recent podcast, he passively recognised the underlying class dimension to this appraisal. Sandbrook noted “an interesting divergence” in the experience of 1974: 

If you were paying that 83 percent [marginal] rate of tax, or 98 percent on your ‘unearned income’….if you invest in property or any of these other markets that have collapsed, then you [were] sitting and saying ‘this is Weimar Germany.’ If you [were] not one of those people, [was] your life terrible? Arguably not. Especially if your income [was] protected by your union.

While there was a great deal of wage volatility in the 1970s, real average weekly earnings grew by an average annual rate of 5.5 percent over the course of the decade. This contrasts with a stagnation in real wages in the UK since 2010, and an average rise of 1.6 percent and 1.7 percent in the 1990s and 2000s.

These gains can be connected to the unprecedented degree of strength, mobilization, and radicalism within the British labor movement and wider social movements of the 1970s. The 1974–79 Labour government held an ambivalent position in regards to both the social movements and the neoliberal tendencies that emerged alongside and succeeded them. Real wages rose significantly in the first year of the Labour government, supported both by the government’s removal of statutory wage controls and extension of price controls and subsidies, and by a pre-established new phase in the incomes policy of the previous Conservative government. Labour also embarked on a dramatic range of redistributive measures: increasing pensions and food subsidies while raising taxes on higher incomes, while also extending the power of trade unions in the workplace.³

After 1975, in a context of rising inflation, pressure on the UK’s balance of payments, and pressure on company profits, the Labour government shifted course. The “Social Contract” with the unions was renegotiated, with much greater focus now placed on wage restraint. The government also began to cut spending while providing new tax reliefs to corporations. The spending cuts agreed upon by the government in exchange for IMF support in 1976, often seen as the most significant turning point in economic policy in the 1970s, were largely a continuation of these policy shifts.  

As a result of these shifts, and the cooperation of the unions, real wages fell for some time after 1975. Frustration with these constraints on wages, especially in the public sector, led unions to break from their cooperative relationship with the government’s wage policy at the end of 1978, leading to the wave of strikes known as the “Winter of Discontent.” 

Labour and Thatcherism

The mixed picture from this record provides material for the two most common narratives about the 1974–79 government: that it was doomed in helpless attempts to maintain the status quo amid the turbulence of economic crisis and union power, and that it anticipated Thatcher by embracing neoliberalism. But given the economic and political difficulties that it faced, the government’s efforts to manage the economic crisis had notable successes. Labour’s position in the polls improved from the second half of 1977 and it led the Conservatives in most surveys at the end of 1978, benefitting from a significant improvement in economic conditions, including a revival in real wages. Far from being hostage to the unions, the government’s close working relationship with union leadership had allowed it to pursue a relatively successful incomes policy until 1978. The explosion of strikes at the end of 1978 was not a manifestation of union leverage over government, but a backlash to the extent of union concessions in the previous three years. 

To the chagrin of unions, the government had become overconfident in its ability to secure more concessions after several years of wage suppression. Indeed, those in agreement with the common assessment that the Callaghan government had embraced neoliberalism might point to the significant, though nuanced, shift in the distributional impact of government policies after 1975. The wage share of GDP fell and income inequality began to rise from historically low levels in the mid-1970s, at rates that would accelerate significantly under Thatcher from 1979. The government had also implicitly begun to prioritize reducing inflation over reducing unemployment, despite record levels of unemployment that would also, ironically, help fuel Thatcher’s victory in 1979. 

However, the significance of these turns in government policy is often exaggerated. A year after the IMF crisis of 1976, the government returned to a policy of Keynesian-style reflation in an effort to maintain union cooperation and reduce unemployment, with budgets in 1977 and 1978 that introduced tax cuts in exchange for union wage restraint, and increased public spending in areas such as health, education, and pensions. This contradicts the supposedly historic nature of both the IMF crisis and Callaghan’s speech to the 1976 Labour Party conference, which has been seen as  a rejection of reflationary spending and historic turning to neoliberalism. Rather than a change in policy ideas, it more likely represented a short-term effort to appeal to financial markets, where neoliberal ideas about government spending were increasingly popular. 

The same can be said of the government’s adoption of money supply targets, which have been seen as a sign of its conversion to “monetarism.” The Chancellor Denis Healey viewed these as largely symbolic concessions to “the monetarist mumbo-jumbo” that were, again, pursued in order to satisfy financial markets.⁴

The distributional impact of the government’s policies was also mixed. While it maintained the high tax rates on the rich introduced in 1974, it expanded tax loopholes and did not adjust thresholds in line with inflation, while cutting public spending. But the public spending cuts did not extend to social security benefits, and the government oversaw substantial increases in areas such as health and pensions, while also introducing a new state system of supplementary pensions.⁵ The design of the incomes policies agreed with the unions, particularly between 1975 and 1977 when there was the highest level of overall wage suppression, was also focused on allowing higher wage rises for lower earners and reducing the level of wage inequality.⁶

The 1974–1979 Labour government, then, was neither helpless nor entirely ineffective. Instead of conceptualizing the 1970s as a catastrophic period inevitably leading to Thatcherism, it is better understood as a period of rapid policy experimentation with mixed results.

Three opportunities

At least three responses to the crises of the period were on the table: a socialist one from the left of the labor movement, a corporatist one from the Labour leadership, and the Thatcherite one. 

The socialist response was rooted in a criticism of the postwar system’s dysfunctions and a diagnosis of the 1970s crisis resembling that advanced by proponents of the neoliberal school. The left of the Labour Party embraced the proposals of Stuart Holland, a former advisor to Harold Wilson for the nationalization of a wide range of profitable companies and “planning agreements” that would give the state and unions far more extensive powers over the decisions of major companies.⁷ A major justification for this approach was that the internationalization of the economy rendered traditional “Keynesian” approaches based on demand management ineffective. Here, Holland and the Labour left argued against the more sanguine view of many on the Labour right, who argued that traditional policies based on redistribution and demand management could still work. 

Arguments for expanding the state’s role in investment were given further impetus by rising inflation. Labour’s initial response to inflation was focussed on price controls. It was aware of price controls impacting profits, and that new measures would therefore be needed to support investment without depending on private-sector profits. Callaghan argued in 1972 that “if the key control of prices means that there are not sufficient funds available for investment, then we should expect the state to intervene with the necessary funds, perhaps in exchange for some holding—equity or otherwise—in the concern.”⁸

This was not the approach that Callaghan would pursue in government. Ideas for an economic strategy based on an extension of state control over investment had essentially been discarded by 1975, and the government instead turned to a policy of seeking to boost private-sector profits. The socialist approach was undermined by its association with the left of the Labour Party—particularly with the personality of Tony Benn—and by a lack of interest from union leaders and members.

But this does not mean that the Labour government was left with no alternative to Thatcherism. The policies that the Labour government pursued after 1975 did bear many resemblances to the neoliberal turn that took place on an international level in the early 1980s. In particular, they sought to boost profits at the expense of wage share, and retreated from much of the ambitious social agenda with which they came to power in 1974. But there were still very important differences between this agenda and the agenda pursued by Thatcher. 

To start with, an economic strategy managed through the cooperation of the unions, rather than by crushing them, could not have been based upon the mass unemployment, legislative assault on workplace organization, and devastation of manufacturing through which Thatcherism transformed the structure of the UK economy and labor relations in the 1980s.  The union cooperation that remained central to Labour’s economic strategy would also have required ongoing government concessions in support of the “social wage.”

Accounts of Thatcherism also often understate the extent to which it depended upon improved economic prospects that were already evident at the end of the 1974–79 government term. In particular, it benefited from increasing oil and gas extraction from the North Sea. Thatcher’s governments used North Sea oil to support tax revenues while overseeing tax cuts that were particularly favourable to the rich, and to maintain energy supplies while suppressing the 1984–5 miners’ strike. Thatcher would oversee the privatization of much of the UK’s energy sector. The 1979 manifesto of the Labour Party, strongly criticized by the left as a rightward turn in party policy enforced by Callaghan, presented a very different picture. It argued that North Sea oil provided an “advantage in securing full employment” and put forward a policy agenda, based on cooperation with the unions, that included higher spending in social services, an extension of public ownership, new training schemes, and moving to a thirty-five-hour work week.

This approach also maintained within it the capacity for more socialist responses to the crisis, even if those were not pursued. Ideas that any “social contract” should include the democratization of the economy, by extending the role of workers in company decisions, investment, and economic policy, persisted in important parts of the labor movement throughout the 1974–79 government, and would be supported even within the right of the Labour Party until the second half of the 1980s. 

If the path offered by the left of the labor movement was difficult and unlikely, the path pursued after 1975 by the Labour leadership with its union allies initially appeared much more plausible than the path advocated by Thatcher. If the Labour leadership had been more conscious of the sacrifices that it was demanding from workers during this period, or the trade unions more effective in securing greater concessions before 1978, this perception of the options facing the UK could have persisted into the 1980s.

Labour governments then and now

The story of the 1974–79 Labour government is an illustration of the starkly diverging political trajectories that can respond to the same economic pressures in the same moment. The implications of this can also be applied to the current era, and the UK’s new Labour government. 

Policies now, as then, are likely to involve particularly strong distributional choices in a context of weak productivity growth and high international uncertainty. On top of this, both the current Labour leadership and the leadership of the 1970s seem to be characterized by a general preference for “muddling through” in economic policy rather than pursuing any dramatic new agendas, and an ambivalent position with respect to the distributional choices they face. It follows that, like the Labour leadership in 1974–79, Starmer’s Labour has claimed a rhetorical commitment to some limited forms of industrial policy and public ownership while rejecting more ambitious and strategic proposals for planning, public ownership, and public investment to pursue a comprehensive green transition. Starmer’s implicit promise of a more “normal” and “boring” politics has strong affinities with Wilson’s focus, in 1974, on appealing to the British public’s desire for a “quiet life.”⁹

It is here, however, that important possible differences between the governments then and now emerge. For Wilson in 1974, a “quiet life” meant strong cooperation with a powerful trade union movement and with key figures on the Labour left. The 1970–4 Conservative government that it replaced had been undone by its inability to maintain good relations with the trade unions. By contrast, the most notorious moment for the reputation of the recent Conservative governments was not a confrontation with unions, but with the Bank of England and financial markets under Liz Truss. A government in search of a quiet life is most likely to make concessions to those making the most noise.

The trajectory of the 1974–79 government also reinforces this story. The government was at its most progressive at the start and end of its tenure, when it most strongly felt the need to make concessions to the labor movement. It was at its most regressive in the middle years, when the labor movement was more quiescent and the biggest threat to a “quiet life” was instead financial markets. But the nature of the concessions that it made also varied according to the issues in question. Particularly in the key 1974–5 period, the government was most willing to make concessions on areas that the unions were most concerned about, such as prices, pensions, and labor relations. When it came to extending control over ownership and investment, however, it faced far less pressure, and moved toward a moderate form of neoliberalism as the path of least resistance. 

The implication of this history is that the direction of economic policy should not be seen as predetermined either by economic forces beyond the control of the UK government or by the ideological inclinations of the Labour leadership. Its distributional choices are crucially dependent upon the strength, engagement, and mobilization of the social and political movements that challenge and engage with it. Its strategic choices about economic policy are further dependent on the priorities of those movements.