Margaret Thatcher made Britain a less, not more, desirable place to do business

The ex-PM's greatest mistake was her failure to recognise that social cohesion is crucial to long-term economic growth
'Margaret Thatcher’s most important long-term legacy is likely to be the huge rise in inequality which she caused'. Photograph: Murdo Macleod for the Guardian Murdo Macleod/Guardian

Margaret Thatcher's most important long-term legacy is likely to be the huge rise in inequality that she caused. The widening of income differences between rich and poor that took place during the 80s (particularly from 1985) is the most rapid ever recorded. The most widely used measure of income differences shows inequality increasing by more than a third during her period in office.

The proportion of children living in relative poverty more than doubled during the 80s, and the damage has never been undone. Many of the effects of inequality have long lag periods. As Danny Dorling says in his 2004 study of the rise in violence: "Those who perpetrated the social violence that was done to the lives of young men starting some 20 years ago [the mid-80s] are the prime suspects for most of the murders in Britain." The young men were those whose childhood was blighted by the effects of relative poverty and inequality on family life.

Thatcher is often credited with showing that you could get to the top whatever your background. But as weand others (including Alan Krueger, chair of Obama's council of economic advisers) have shown, wider income differences reduce social mobility and make it harder for people with poorer backgrounds to do so. Now she would more likely have been beaten to the Tory leadership by one of the Etonians in cabinet. Although the "right to buy" and the privatisation of utilities by selling shares to new small investors was often justified as giving rights to "the little people", the reality is that the less well-off fell ever further behind the rich.

Though she recognised the dangers of global warming, Thatcher's industrial and economic policies prioritised economic growth. But growth rates in the decades since her period in office have been lower than during those that preceded her; nor does the balance of research evidence suggest that greater inequality acts as a spur to growth. Understandably, less cohesive societies – with more drugs, more crime and lower mobility – waste talent, and are not good places to do business.

Weakening the power of trade unions was not only essential to her project, but several studies suggest that their continued weakness may be an important part of the reason why inequality has not declined in the intervening decades. International studies of OECD countries suggest a close relationship between the decline in trade union membership and the rise in inequality. From a peak of 13 million in 1979, trade union membership had declined by 30% by 1990, and is now not much more than half what it was. In a world where most media talking heads come from the top few percent of income earners, unions are not only important in wage bargaining, they also provide some of the few well-informed voices whose job it is to speak on behalf of the less well-paid. That bonuses and top incomes continue to rise while the incomes of the rest of the population struggle to keep up with inflation tells us that what we needed was legislation to ensure employee representation on company boards and remuneration committees as many of our European partners have.

The price we all continue to pay for Thatcherite policies is to live in a less cohesive and more antisocial society, in which community life is weaker, people feel less able to trust each other and fewer of those in government have the experience and compassion to represent or understand the vast majority.

Thatcher's infamous failure to recognise the existence of society was a double failure. A growing body of research now shows that the quality of social relations is among the most powerful influences on the happiness, health and wellbeing of populations in the rich countries. After material needs have been met, research has repeatedly shown that further rises in material standards contribute less and less to wellbeing. In rich societies such as the UK, what makes most difference to the real quality of our lives is the quality of community life and social interaction.

Statistics now confirm what many people have always recognised: that inequality is divisive and socially corrosive. The evidence shows that greater equality provides the foundation on which higher standards of social wellbeing can be built.

As a result, Labour authorities in eight or so British cities have set up fairness commissions to reduce income differences locally. By raising the pay of their own staff to a minimum of the living wage, they have set an example which a growing number of large private-sector employers have followed. As working families in poverty now account for more than half of those below the poverty line, a government committed to "making work pay" should surely encourage this trend and raise the minimum wage. The news last week that they are instead considering cutting or freezing the minimum wage surely undermines any pretence that the government is acting either coherently or in the public interest.