In 1975, the United Kingdom voted overwhelmingly in favour of European integration.  Little over forty-years later, the UK has reversed its decision in favour of leaving the EU, citing aspirations of reclaiming sovereignty and taking back control.

The referendum on whether the United Kingdom should remain a member of the European Economic Community (EEC), a predecessor to the European Union, resulted in an overwhelming majority of the population, with all four nations in the region, voting in favour of continued membership and European integration. The pertinent issue prompting Britain’s withdrawal was that economic conditions did not improve in Britain as a result of EU membership. Steep EU membership fees, the impact of immigration on jobs and wages, and most importantly, a stagnation of the British economy had become apparent for the better part of a decade. It would be a mistake to dismiss the significance of economic conditions on Britain’s decision to leave the EU. However, what remains pertinent and continues to be so is that the British government had, for decades, engineered the conditions for economic stagnation.

Thatcherism

Ever since Margaret Thatcher claimed the keys to 10 Downing Street in 1979, one fact has remained paramount, the British economic system has, in relative terms, remained in favour of the free market and the consequential neoliberal portfolio that accompanied. Thatcher spearheaded a neoliberal agenda in the UK, favouring limited government involvement in the economy which resulted in government spending cuts, the privatisation of state-owned assets, deregulating industries, and reduced government borrowing in the name of balancing the budget.

During the first initiation of neoliberalism, the British economy contracted by 2.2 percent. During the economic contraction, manufacturing was hit the hardest. The reason behind Thatcher’s programme was simple. State involvement in the economy, of which manufacturing was heavily dependent, created a culture of dependency within the UK. Thatcher wanted to unleash the potential of the private sector, which was more cost-effective, more efficient, and in the eyes of Thatcher, superior to anything the government could provide.

The process of privatisation and its impact on manufacturing provides a striking example of economic stagnation. The post-war consensus saw widespread support for state involvement in the economy to spearhead economic prosperity. For five decades, manufacturing hubs in Glasgow, Manchester, and Belfast became the centres of Britain’s industrial output and, as a result, the engine of the British economy, with London remaining the financial capital of not only the UK but also the European continent.

Since Thatcher kickstarted the programme of neoliberalism in the early 1980s, Britain has become one of the trailblazers of privatisation. What is often overlooked, however, is that the privatisation that occurred under Thatcher was a privatisation of a very particular type. In economic theory, the process of privatisation that occurred in the UK is often referred to as rentier economics.

Rentier economics

Thatcher’s privatisation often involved the transfer of state-owned enterprises, often in the form of utilities, which had substantial asset bases, such as water, electricity, or telecommunications. What also happened was the transfer of infrastructural assets, which is generally used for the delivery of those utility services.

This trend remains dominant in the UK today, where there are very few utility services which continue to be provided by the state. Indeed, there are a few exceptions, including the water services in Scotland and Northern Ireland, which were insourced (re-nationalised) by the Scottish and Northern Irish assembly respectively. Another prominent example is the London Underground, which continues to be provided by the British government.

In theory, privatisation doesn’t present a major challenge to economic activity. In many cases, it did indeed unleash the potential the private sector has to offer. However in the UK, when private industries were given the infrastructure that was essential for the delivery of a particular service, the company itself did not need to deliver the service. This is the very heart of the problem of the British economy.

To simplify this, McDonald’s provided the most common example of rentier economic activity. McDonald’s operates more often than not in a franchise framework. That is, McDonald’s restaurants are not operated by McDonald’s themselves but by individuals within any given area. What is interesting is the fact that McDonald’s generates more profit from the rent received by the franchises than it does from the production of fast-food. What then occurs is that McDonald’s is driven, in profit terms, by having more restaurants in operation as opposed to providing the good or service which it is commonly assumed to provide.

The story is similar within the utility sector. British Telecommunications (BT), which was privatised under Thatcher in 1984, operates under similar conditions. For BT to make a profit, they no longer had to produce a quality service, they simply had to maintain the same, if not more, level of rents paid to them. As such, since Thatcher took office, the quality of utility services outside of public hands has witnessed a continual reduced rate of satisfaction.

Reviving the British Economy

A simple way of understanding the economy is through gross domestic product (GDP) and, more specifically, through the accumulation of gross value added (GVA). GVA measures the value of goods and services provided by a given area in its overall contribution to the economy. As mentioned previously, the engine of the British economy was concentrated in four major centres, and thus, Glasgow, Manchester, Belfast, and London were all GVA-positive. Since privatisation, the need for manufactured goods has reduced in importance and therefore, Glasgow, Manchester, and Belfast have slipped into GVA-negative territory. The only area that remains GVA-positive in the UK is London. Put more simply, this means that the UK economy is driven by London.

As such, the companies based in London continue to record vast amounts of profits, but contribute little to innovation. What happens, then, is the companies generating profit are too fearful to invest in the productive activities in the economy because they simply don’t need to. The result is a never-ending cycle of low aggregate demand, which reinforces the pessimism of the investors, who, fearing low demand, reproduce it by not investing.

Therefore, it is no secret that in the 2016 Brexit referendum, London voted heavily to remain, because in the “London bubble,” the economic activity remains prosperous. In the rest of the country, privatisation hasn’t assisted in the way that Thatcher had hoped. Therefore, when partaking in the referendum, it’s usually a question of whether you want to retain the status quo or attempt change. Since those parts of England outside London had already lost the beating heart of their livelihoods, manufacturing, the status quo seemed incompetent of providing for the twenty-first century.

Conor McLaughlin is the Research Coordinator of the Defence Research and Engagement portfolio at Edith Cowan University (ECU).

This article is published under a Creative Commons Licence and may be republished with attribution.