Scrutinizing Britain's initiatives in search of lessons for America

In the index to Margaret Thatcher's memoir, The Downing Street Years, is an inconspicuous but revealing sign of hard times. Under "employment," a suspiciously brief entry, the reader is advised to "see also unemployment," a subject that deservedly commands greater attention. When Thatcher became prime minister, in 1979, unemployment was rampant. As part of a larger effort to reverse Britain's economic decline, she and the Tories began to glorify self-employment. She was convinced that the welfare state, with its promise of cradle-to-grave security, had turned once-industrious Britain into a "dependency culture." The revival of Britain, she believed, hinged on effecting a cultural transformation -- turning a socialistic culture into a business-oriented, individualistic "enterprise culture." She wanted to raise the social status of the entrepreneur and foster positive attitudes toward profit, growth, and moneymaking.

Today, when cries for welfare reform in the United States include the promotion of self-employment as a magic method of thinning the welfare rolls, it's wise to examine the results of Thatcher's initiatives in the United Kingdom. But it's equally important to understand how her self-employment programs allowed precisely the people they targeted to fall through the cracks.

Thatcher came by her entrepreneurial ideals honestly enough. She was the daughter of a prosperous grocer in the midlands. Self-help, thrift, work, respectability, and religion were the keynotes of her petit bourgeois world. Economic independence and financial discipline were paramount to the family business. Thatcher came to believe that the same stringent discipline that governed household finances should be applied to government budgets.

The grocer's daughter wanted Britain to become a nation of capitalists, property-owning entrepreneurs with stocks and options. But more than ideology made self-employment an imperative. The monetarists' bungling of the first Thatcher government (1979Ñ83) aggravated the worldwide trend of rising unemployment. Three million people out of work went against the grain of a socialist Britain haunted by the ravages of the 1930s. Self-employment was, among other things, an attractive antidote to unemployment.

The Thatcher government instituted a number of initiatives to foster self-employment. Perhaps the most important was the reduction of the top tax rate from a punishing 83% to a bearable 40% -- certainly an incentive for wealth creation, and a boon to rentiers living off the fruit of the past as well as to entrepreneurs determined to reap the benefits of the future. As Nigel Lawson, the chancellor of the Exchequer, put it, "If you reward enterprise, you get more of it." Just to make sure, the Thatcher government inaugurated specific measures to help small business. The Business Expansion Scheme attempted to stimulate investment by offering tax relief up to £40,000 to individuals investing in nonpublic U.K. companies. The Loan Guarantee Scheme facilitated bank borrowing by small companies. The Enterprise Allowance Scheme provided £40 a week for up to a year to unemployed persons who wanted to start businesses. And the Thatcher government helped establish local enterprise agencies to advise small businesses on marketing, design, business planning, information systems, and the like.

Did Thatcher's initiatives work? Britain did indeed make substantial headway in stimulating self-employment during the 1980s. From 1979 onward, there was an average net increase of 500 new companies every week. At the giddy height of the boom, in 1987, 45,000 new businesses took off. By the following year, about 11% of the labor force was self-employed; that amounted to more than 3 million entrepreneurs and reflected an increase some six times greater than the rise in self-employment in the previous three decades combined. Between 1983 and 1988 the Business Expansion Scheme helped more than 3,000 companies raise £750 million. The Enterprise Allowance Scheme helped 325,000 individuals become self-employed. The Loan Guarantee Scheme aided more than 19,000 businesses from 1981 to 1987, providing £635 million in loans. The venture-capital industry, which hardly existed before Thatcher's ascent, amounted to more than £1 billion by 1987. And finally, the 1980s saw a proliferation of management buyouts.

But those impressive figures are deceptive; the self-employment initiatives were decidedly flawed. In 1988 the National Audit Office reported that government programs provided funding largely for those who would have become self-employed anyway. One in six entrepreneurs assisted by the Enterprise Allowance Scheme fell by the wayside within a year -- perhaps inevitably so. And the new small companies never created enough jobs, because too many of them were one-person shows. The Business Expansion Scheme was much more successful in assisting service businesses than high-tech ventures or, for that matter, manufacturing companies. Many of its greatest beneficiaries, however, were wealthy individuals more interested in a handy tax shelter than in a thriving enterprise culture.

The Thatcher government responded somewhat slowly and belatedly to the problems posed by rising unemployment. And the recession of the late 1980s hurt entrepreneurial businesses along with more-established companies. The initiatives did not provide sufficient employment and opportunities for those who were pushed out of work by recession, retrenchment, and rationalizations. It's no wonder, then, that Thatcher herself joined the ranks of the un-, I mean, self-employed in 1990.

How can self-employment help the United States address unemployment and its associated social and economic ills? The Thatcher experiences suggest that promoting entrepreneurial companies requires careful coordination of resources. It's not a matter of initiating a half-baked or even a full-blown industrial policy. But it does mean linking financing for start-ups with solid training and sustained support to develop and enhance the managerial skills of would-be entrepreneurs. Otherwise, the spirit of capitalism will founder for lack of know-how. If we envision self-employment partly as a means to create good jobs for those who need them, then we must direct initiatives at the inner city and the poor rather than confine funding to middle-class managers.

The Thatcher experiences also underline the necessity of linking business enterprise and social welfare. Insensitivity to the condition of the poor not only is morally reprehensible but represents a long-term threat to the legitimacy of free enterprise. Fostering the right climate for small business isn't enough unless we remember, as any visitor to Britain can testify, how quickly the weather can change.

Charles Dellheim ( wrote The Disenchanted Isle: Mrs. Thatcher's Capitalist Revolution (Norton, 1995).