In March 1981, 364 eminent British economists published a letter to Margaret Thatcher in The Times condemning her plans to hike taxes even as her monetarist attack on inflation plunged the economy ever deeper into recession. The signatories wrote:

There is no basis in economic theory or supporting evidence for the Government’s belief that by deflating demand they will bring inflation permanently under control and thereby induce an automatic recovery in output and employment … [P]resent politics will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.

Mrs Thatcher was later asked if she could name even two economists who supported her programme:

Margaret Thatcher replied that she could, and named Alan Walters and Patrick Minford. On returning to Downing Street, a civil servant said to her, ‘It is a good job he did not ask you to name three.’

(This comes from the volume “Were 364 Economists All Wrong?”, edited by Philip Booth and published on the 25th anniversary of the letter.)

Mrs Thatcher wrought so many radical changes to British economic policy that it is easy to forget that the priority when she took office in 1979 was inflation. Nothing had so destroyed faith in previous governments as the labour and social unrest that both fed on double-digit inflation and in turn sustained it. The main goal of her Medium Term Financial Strategy, announced in 1979, was to bring down inflation through reduced money-supply growth. It also aimed to reduce the budget deficit, both as a goal in itself and to reinforce the credibility of the money-supply targets, by removing the perceived temptation to monetize and inflate away future debt. More practically, it would keep interest rates lower than otherwise and result in less crowding out of private investment.

Against this backdrop, the 1981 budget was a watershed. With the money-supply targets and inflation still overshooting, it proposed tax increases and other fiscal tightening worth 2% of GDP, apostasy to the Keynesian consensus that then permeated academia. Charlie Bean, now a member of the Bank of England’s Monetary Policy Committee, and James Symons wrote in a 1989 retrospective, “Ten Years of Mrs T”,

[P]olicy tightened despite high and rising unemployment. At a time when the monetary targets were being overshot by a considerable margin, this was an important signal of an irrevocable break with the past. However, it was not simply a disavowal of Keynesian stabilisation policies that represented a break with the past. Equally significant was the fact that it signalled the end of attempts to sustain a cooperative low unemployment equilibrium through the use of neo-corporatist policies.

Mrs Thatcher and Ronald Reagan were both devotees of Friedrich Hayek and Milton Friedman and sceptics of Keynes. But Mrs Thatcher was by far the more committed monetarist; Alan Greenspan remembers meeting her for the first time in 1975 at a dinner in Washington. “I thought, 'This is going to be a tortuous evening, sitting next to a politician I don’t know,' and we started to chat and her first sentence to me was, ‘Tell me why is that the UK does not have an M3?’ At which point I perked up quickly.” Her break with Keynes was also far more profound. While Mrs Thatcher was raising taxes in 1981, Reagan was slashing them and boosting defence spending—textbook countercyclical Keynesian fiscal policy, even if he didn’t call it that.

Both Britain and America began a solid recovery in 1981. “With a delightful irony, the recovery in the economy began almost immediately after the letter from the 364 appeared in The Times,” Tim Congdon wrote on the 25th anniversary of the letter. The academics at the time, he said, were in thrall to “naïve Keynesianism,” drawing a straight line from government's contribution to national expenditure and income to economic fluctuations without regard for potentially more powerful changes in the money supply.

One need not share Mr Congdon's monetarist interpretation to agree with the essence. While Britain’s 1981 budget almost certainly subtracted from demand, that was more than offset by monetary ease as interest rates fell. Indeed, the fiscal restraint probably hastened the fall in inflation, making more aggressive monetary relief possible.

Evidence that this programme turned Britain’s long-term economic performance around is more elusive than fans of Thatcherism would like. British real growth averaged 2.5% from 1969 to 1979; it averaged 2.7% in the subsequent decade, an improvement but no renaissance. Reagan's record is similarly ambiguous. The consensus in 2000 of a team of American, British and Canadian scholars working under the auspices of America’s National Bureau of Economic Research, and Britain’s Centre for Economic Performance and its Institute for Fiscal Studies was that British policies in the 1980s and 1990s arrested the relative decline in Britain’s economic standing, without pushing it notably higher in the ranks. The nearby chart shows that in the years before 1979, per capita output in Germany and France consistently grew faster than in Britain, but in subsequent years, grew more slowly.

The relative improvement in British performance was probably more thanks to microeconomic, not macroeconomic policy. Privatising state-owned enterprises, deregulating various industries and curbing unions’ interference with the allocation of capital and labour helped boost productivity growth from 1.1% between 1973 and 1979 to 2.2% from 1979 to 1987. But because unemployment remained painfully high, the improvement in productivity for those who were working was slow to manifest itself as higher output for the economy as a whole. Britain’s fiscal performance was also disappointing; large budget deficits persisted well into the 1980s, as did high real interest rates, just as in America. The political legacy of Mrs Thatcher’s macroeconomic programme may be more important than the economic legacy. By so thoroughly discrediting the postwar Keynesian consensus, and by doing so more convincingly than in America, Thatcherism helped move the center of gravity in economics from fine-tuning and stabilisation and towards more rules-based, non-discretionary policy. “She showed some of us that the way to improve growth and keep inflation low was to have a long-term program to achieve budget balance and lower money growth,” recalls Allan Meltzer, a conservative economic historian. The ensuing 25-year “Great Moderation” is often ascribed to this new consensus: that fiscal policy should leave stabilisation to central banks, who in turn should firmly fix their focus on a medium-term inflation target. The global financial crisis of 2008 upended that new consensus. Most major economies embarked on discretionary fiscal stimulus, and central banks are, bit by bit, shifting their emphasis from inflation to unemployment. But the foundation of the post-Keynesian consensus remains. Unemployment is nowhere back to a normal level, but except in Japan most rich countries are now tightening fiscal policy. Proponents of David Cameron’s austerity often defend it by invoking the memories of the 1970s with its runaway inflation, deficits and the humiliation of an International Monetary Fund bail-out. As a financial center, this argument goes, Britain cannot take chances with its sovereign creditworthiness the way America, as issuer of the world's reserve currency, can. The problem, of course, is that the 1970s is probably the wrong parallel to worry about; for Britain the 1920s may be more apt. Monetary and fiscal stringency left real output lower in 1928 than in 1918. The main difference between those two decades was that monetary policy was clearly too loose in the 1970s, but too tight in the 1920s. British monetary policy is not wrong headed today as it was in the 1920s, but is constrained with interest rates jammed against zero. That significantly alters the role for fiscal policy.

Similar perspective is necessary for evaluating Thatcherism more generally. Privatisation and the rollback of socialism were causes worth rallying around when 12% of British output was from publicly owned companies; by 1997 that was down to 2%. State capitalism may be the rage in emerging markets but no rich country government today aches to nationalise its economy’s “commanding heights”. Smashing the unions meant more when they dominated every facet of economic and political life than after three decades of declining unionisation rates around the world. As my former colleague Brendan Greeley writes in Bloomberg Businessweek: