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How Margaret Thatcher's Ideology Emboldened Her to Bite the Anti‐inflationary Bullet

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  • Ian M. McDonald

Abstract

To reduce the rate of inflation, Margaret Thatcher followed a policy of tight money. Milton Friedman in reviewing this policy predicted that it would lead to a modest reduction in output and employment (that) will be a side effect of reducing inflation to single figures by 1982, Friedman (1980, p. 14, my emphasis). I call this prediction Friedman's flaw. Evidence available when Thatcher introduced this policy would have revealed Friedman's flaw‐the cost could have been expected to be immodest. From various biographical and other accounts, I put forward several reasons to explain how Thatcher's ideology made her susceptible to Friedman's flaw. I propose a theory based on loss aversion to explain the costly nature of disinflation.

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  • Ian M. McDonald, 2025. "How Margaret Thatcher's Ideology Emboldened Her to Bite the Anti‐inflationary Bullet," Economic Papers, The Economic Society of Australia, vol. 44(1), pages 49-61, March.
    • Handle: RePEc:bla:econpa:v:44:y:2025:i:1:p:49-61
    DOI: 10.1111/1759-3441.12432
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