In the Spring of 2013, Martin Wolf participated in a symposium at Oxford University, sponsored by the New York Review of Books and St. Anthony’s College. Wolf is the Chief Economics Commentator at the business-friendly Financial Times in London. He had come to a conclusion.
Contrary to commercial and government authorities which continue to believe that cutting government expenditures, reducing public investment and undermining social programs is the key to economic growth, he declared that “austerity has failed. It turned a nascent recovery into stagnation. That imposes huge and unnecessary costs, not just in the short run, but also in the long term: the costs of investments unmade, of businesses not started, of skills atrophied, and of hopes destroyed. What is being done … is worse than a crime, it is a blunder.”
In doing so, he echoed what the critics of the economic policies of the European Union, the United States, Canada and much of the world have been saying ever since the Wall Street meltdown of 2007-2008 and the global financial crisis it precipitated. I’ll return to this issue later. First, however, I first want to express some personal scepticism about Economics and economists in general.
From my first week on campus as an undergraduate in 1963, the formal study of Economics annoyed me. The preternatural self-confidence of even the first-year Economics majors was disconcerting. Their expensive clothes, expensive cars, well-shined shoes and manicures made them seem like models fresh from the shoot of Playboy magazine’s “Back to Campus” issue, featuring Fall fashions, snazzy sports cars and … pictures.
Then, when I browsed through their principal textbook, Paul A. Samuelson’s Nobel Prize-winning tome, Economics (now in at least its 19th edition), I understood that, even as a working-class interloper, this was not for me. The notion that the intersection of supply and demand curves and the calculation of marginal rates of utility had anything to do with the real world struck me as being akin to a magic show. Whatever it was, I could not and would not believe that it had anything to do with work or the price of lettuce.
I have not substantially changed my mind, though I am more prepared to acknowledge that Economics is actually about something. I will even concede that its various narratives, punctuated with occasional simulation games, modeling exercises, case studies and experiments in “behavioral economics” tell us something of importance about the world that we temporarily inhabit. I have not, however, come to view Economics as a uniformly worthwhile endeavour. As a result, I find certain economists are more or less praiseworthy than others. Those who are most admirable are the ones who connect their graphs and charts to the plight of poor people and the luxuries of rich people while at least attempting to analyze and explain the differences between them. Economics, for these splendid individuals, is not mainly a series of abstractions and “the economy” is not an ideal construct dissociated from the aroma of a fine brandy or the stink of the sewer drains where the homeless nervously sleep.
From the beginning, the arrogance of “econometricians” baffled me. I simply refused to believe that Economics was much like the science such latter-day positivists imagined. If it was anything, it was a pretentious attempt to describe and justify avarice and excuse the fact that hundreds of millions of people were on the edge of starvation in a world where food was abundant.
I was admittedly a tad moralistic, but it seemed to me that “academic” Economics seemed to matter. It mattered especially to the activities of working bankers and business executives whose decisions determined the life chances and choices of large populations. Such decisions, moreover, seemed actually amoral—though quite ideological, which is not exactly the same thing. Mostly, I felt that Economics was all about conceptualization, reification, the operational definition of capricious concepts, the empirical measurement of smoke and mirrors, and whimsical formulation of duplicitous statistical forecasts for which the main enjoyment was discovering ex post facto, why the predictions inevitably failed.
The “economy” and its component parts including the ever-elusive calibration of foreign exchange rates, interest rates, marginal tax rates and the price of gold was an illusion. Just as credit seemed like phony wealth, so the magical formulae and quaint algorithms through which the direction of the stock market could be plotted using a slide-rule (this was a long time ago) seemed fraudulent. So, I limited my exploration of the subject to a sprightly reading of Robert L. Heilbroner’s charming little book, The Making of Economic Society (now in its 13th edition). Heilbroner wrote pleasantly about economic history, which at least seemed connected to reality, even if (or perhaps because) it took matters out of the domain of pseudo-mathematics and into the world as I was living it.
So it was that, when the time came to look at what professional economists were writing about the “Great Recession” that seemed to catch everyone from the rigidly right-wing US Federal Reserve Chairman Alan Greenspan to the allegedly liberal Democratic Party advisor Larry Summers by surprise, I didn’t look for a book that would rehearse the tiresome internecine debates between so-called free marketers and watered-down Keynesians. It was plain to me that the inflexibly neoliberal ideologues had shaped and shifted the economic conversation since Ronald Reagan recited his first inaugural address. They had brought upon us the catastrophic collapse of 2007-2008. What’s more, they lacked insight, modesty and shame since they were (and still are) convinced that the best way out of the mess is to repeat past mistakes famously, Einstein’s definition of insanity … only more so.
What interested me was not so much the economic niceties of trying to figure out whether a “stimulus” was required in order to save Casino Capitalism from itself (of course it was). Nor did I want advice about whether a smaller or larger amount of the public treasury should be reluctantly anted up and doled out to corporate villains by men like George W. Bush, Barack Obama, David Cameron, Stephen Harper and whichever Europeans could be found who were willing to sign the cheques and had a public treasury able to honour them. After all, in the financial circus, investment-banking high-wire artists were already flying off in all directions, the carousel was spinning wildly out of control, and the lions were loose among the children. Since I could do nothing practical, I sought a different sort of inquiry. Meantime, I hummed the tune that Doris Day so prettily sang back in 1956: “que sera sera.”
What I wanted to know was why the core idea that had put the entire corporate capitalist system into such profound disarray, ruined the lives so many millions of Americans who’d lost their homes, their small businesses and their retirement savings, and caused so much havoc around the world had been so successful for so long. Why, too, in the midst of the crisis, were people who had the authority to make policy decisions remaining so besotted by the ideas that had created the difficulties in the first place? Mark Blyth has provided the answers that I sought.
Most of us, I am sure, have at least a basic understanding of what “austerity” is. It is the policy or practice of limiting public debt. Here are its main assumptions.
First, when private individuals incur debt—whether desperate for a “pay-day” loan of $100 or seeking $1,000,000 to help leverage a buy-out—that is considered their own business and, of course, that of their creditors. At least until someone invented bundled mortgages and created toxic assets, personal debt was fairly straightforward.
Debt is regarded as a necessity in a growing economy. Debt makes commerce possible. It allows people to make large purchases such as homes, appliances and automobiles. It permits me to invest in your company and to take away a profit or incur a loss as the case may be. For most people, it is limited by personal credit ratings and policed by contracts whereby, if you fail to repay the loan, someone will garnishee your wages, repossess your furniture or break your knee-caps. Circumstances for the well-to-do, I should hastily add, are sometimes more complicated. In all such cases, however, “austerity” is a seldom-used term. After all, when you run out of money and nobody wants to lend you more, you stop spending. It’s not austerity, it’s being broke.
Public debt is another matter. According to David Hume, one of the more important but rather badly neglected classical liberal theorists, it was always bad practice for the state to borrow money. Public debt permits a politician to spend lavishly on projects that win public approval without imposing onerous taxes. Public debt “enables him to make a great figure during his administration, without overburdening the people with taxes. The practice,” he continues, “will therefore … almost certainly be abused ...” Public debt is like a government credit card with (almost) no limit and (almost) no payment schedule. What’s worse, when the debt finally comes due, governments can simply print more money, thus inviting the ravages of inflation. Public debt, in short, results in annual deficits (we no longer seem to care about cumulative debt) that pass the burden of our avarice on to our children and our children’s children, which is plainly an immoral thing to do.
So, today, the call for austerity (limiting government borrowing at least to reduce public deficit and thereby “balance the budget”) is not so much an economic issue as it is a morality play in which phrases such as “living beyond our means” are uttered in order to make taxpayers feel guilty about receiving public heath care or benefiting from proper public transit. We must, we are portentously told by the most portly among us, “tighten our belts.”
One of the obvious problems with this classical analysis is that it makes no sense in the real world. In the private sector, it is acknowledged that you have to have money to make money. Lacking investment funds, aspirant entrepreneurs and potential stock purchasers have no opportunities other than to work for wages in order to survive. But, that’s not all. Even (or especially) capital investors need massive public investment. Merchants, for example, require transportation systems to ship goods to and fro; but, no private investor is apt to be able to build a comprehensive highway system and, even if the roads were privately financed and owned, we know from experience that the pressure of costs added to a product that required long-distance shipment would likely inhibit trade—just ask London consumers and vendors about the price of coal from Newcastle!
Roads and seaports, schools, social agencies, research facilities, building and food inspection services, fire departments and police forces are only marginally attractive prospects for private investors, yet they are crucial to a thriving economy. Exclusive private schools, for example, may encourage the conceit of the upper classes, but a robust public school system is needed if employees are to be available to work in the factories, staff the retail outlets and ensure that every customer has “a nice day.” While it may be enjoyable to shift the children to Mr. Toff’s Academy, ordinary people cannot afford such luxuries, though literate and numerate people are needed in all parts of a fully modern economy. And, of course, there must be a well-equipped criminal justice system complete with holding cells, forensic laboratories, court rooms, jail cells, heat-sensing helicopters and armoured vehicles to accommodate the needs of people who wanted something more than a smile, but lacked to means to acquire expensive commodities by socially approved means.
In Austerity: The History of a Dangerous Idea, Mark Blyth offers us more than a merely readable journey through intellectual and social history. Although I’d encourage every professional economist to read it thoroughly (perhaps as penance), this book is written expressly for the laity. Its seven sensible chapters contain a total of only seven graphs. Each one is clearly presented and is clearly important to the narrative; however, Blyth eschews technical language and asks only that the reader pay attention, which is easy enough for it presents both an economically credible story and a persuasive interpretation of why that idea of austerity has been so widely believed as an important element in our overall economic strategy—particularly today when it is being tested more than any time in at least eighty years and is either barely passing or actually failing the test at almost every turn.
Blyth writes about Adam Smith. He pretty much ignores Karl Marx (which is a pity, but he does have to appeal to a larger market). He deals with Ayn Rand, Friedrich Hayek and Joseph A. Schumpeter. He considers John Maynard Keynes at some length. He explains why Keynes matters and why it was important that government and business abandoned his methods, thus precipitating the Great Recession. He talks about Germany and Greece. In the end, he will (or should) make you angry. Blyth has written a “feisty” little book (less than 250 pages of text).
Austerity has some big supporters among “praiseworthy” professional economists. Harvard University’s Dani Rodnik concurs with Blyth in the belief that “among all the calamities spawned by the global financial crisis, none was as easily avoidable as the idea that austerity policies were the way out.” The University of Queensland’s John Quiggan adds that “of all the zombie ideas that have been reanimated in the wake of the global financial crisis, austerity is the most dangerous.”
With such endorsements you may presume that you are in good hands. When you have finished, you will have learned four important lessons.
First, you will have a better understanding of economic history and a more poignant appreciation of George Santayana’s dictum that people who don’t know their own history are condemned to repeat it. We didn’t know. We repeated. And we might be foolish enough to do so again.
Next, you will have a serviceable understanding of all those terms that remain obscure to people who are not professionally trained to manage “econospeak.” Words and phrases such as “derivatives” and “repo runs” will enter your vocabulary so effortlessly that you’ll think of Austerity as an economist’s Rosetta Stone.
Then, you’ll have become convinced (if you weren’t already) that the financial crisis as it applied to Lehman Brothers, General Motors or the mortgage lenders at Fannie Mae and Freddie Mac really wasn’t natural or necessary. You’ll have discovered that, although the financial crisis and the consequent recession were not planned, both could have been avoided. You may end up with a somewhat reduced view of Bill Clinton. And you’ll carry away a reasonably good idea of why there can (and probably will) be a “next time,” if political leaders do not begin to cut their strings (or if the voters don’t cut them through electoral means) and begin at least to try to control their current corporate masters.
Finally, you will have seen an example of informative writing which takes its educational task seriously. I seldom tire of reminding myself of Henry A. Giroux’s mantra and repeating it to anyone willing to listen.
This is it: education is a moral and a political project. Every discipline from accountancy to zoology has what’s fashionably called a “cognitive” component, otherwise known as “content” or “the intellectual stuff you have to know” to call yourself an accountant or a zoologist or anything in between. Many have a “behavioural” or “skill” component, otherwise known as “the physical stuff you have to be able to do” in order to appear qualified in your field. Aircraft pilots, nurses and engineers will know a little more about this than philosophers and mathematicians. But you also have to understand that your discipline exists within a social and political context. It necessarily involves a moral component (distinguishing between right and wrong) and a political component (learning how to maximize the good and minimize the evil). Economics is no different. In fact, since it purports to comprise our most basic understanding about the material foundations of our society, it requires more moral and political attention that most, if not all, others. Mark Blyth’s book will help economists and others to understand what is at stake.
Howard A. Doughty teaches political economy at Seneca College in Toronto. He can be reached at firstname.lastname@example.org.