In 1979, Margaret Thatcher came to power in Britain, pledging to end the raging inflation of the time, curb the growth of public spending and borrowing, and balance the government's books. She did all of that, though she could not spare Britain the recession that inevitably followed the collapse of the inflationary boom.
Indeed, the depth of the economic collapse took the government by surprise. Mrs Thatcher had read her Milton Friedman. Inflation was the Number One enemy, because it eroded confidence in money, made real price movements impossible for entrepreneurs to spot, and so generally messed up the market process. It was like a drug: you needed larger and larger doses to get the same stimulating effect. When you came off it, you would have a nasty hangover of unemployment. But better to get that with over earlier rather than later.
But the government was unprepared for the scale of the downturn. Indeed, many ministers got cold feet. Rather than the pain being spread evenly across the economy, some industries simply collapsed, with huge job losses.
Mrs Thatcher should have been reading her Hayek. For Austrian Economics explained what was happening. Money, said Hayek, was like honey pouring onto a table. It formed a mound where it went into the economy. Turn off the supply, and the central mound collapses, but more of it reaches the outer edges. When Mrs Thatcher turned off the money supply, those industries that had relied on the boom – the heavy state industries in particular, but also luxury goods manufacture, travel, holidays, housebuilding – simply collapsed. But new industries further away from the central boom – the new computer industries for example – actually did just fine.
I don't know that the Thatcher Administration ever quite got it. But having killed inflation, the economy roared back into life, and they wiped their brows and carried on.
In the current recession, we are seeing much the same phenomenon. The firms that are suffering most are the heavy industries and luxuries, like steelmaking, carmaking, housebuilding, and travel. Any retailer selling to customers who can put off their purchases until times improve – people selling anything except food, almost – are also having a hard time. But other sectors are doing much better.
The difference this time, perhaps, is that potentially rising industries – if I knew what they were I'd be rich, but I mean the modern equivalent of the 1980s computer pioneers – are finding it hard to get any of the honey because bank credit has dried up. So it's going to be bad. But maybe not as bad as all the job losses from the big heavy industries might make you think.