05 Feb Review of Mark Blyth, Austerity: The History of a Dangerous Idea
Mark Blyth explains through a very interesting examination of intellectual and natural history the idea of austerity. A very dangerous idea, indeed, that affects us all. Throughout the book, Blyth shows that there is not a single case of the country that would succeed in reducing its debt or solving the crisis by playing by the austerity instruction sheet rules, what else in securing peace and prosperity through austerity.
I borrowed this book from Ljubljana City Library and read it in a couple of days. Mark Blyth, the author of this book, is a professor of International Political Economy at Brown University in Providence, Rhode Island, USA. His book on austerity is written in a very accessible manner, also for readers without economic background. In the book, Blyth explains why austerity is a very dangerous idea.
A fancy way of what austerity is supposed to be is that it is a “growth-friendly fiscal consolidation.” Sounds really exciting. The state will be fiscally consolidated while remaining friendly to economic growth. Right at the beginning Blyth argues that austerity is a dangerous idea for three reasons:
- it doesn’t work in practice;
- it relies on the poor paying for the mistakes of the rich; and
- it rests upon the absence of a rather large fallacy of composition that is all too present in the modern world.
Blyth elaborates really well on all three points throughout the book, which is structured in three parts, part one is on why supposedly we all need to be austere, part two is on austerity’s twin histories—intellectual and natural history—and we find short conclusions in part three.
In his own jargon, Blyth titled the sub-chapters, for example Counting the Bullets in part one, followed by altogether seven main chapters of the book. In Blyth’s argument, a whole generation of economic thinkers “saw markets as good and the state as bad”. So, Blyth decides to give us a lesson from the history of economics as a science by describing a “neoliberal economics” old instruction sheet. Starting with two main assumptions of the new neoclassical economics as neoliberal economics is also known, that any theory of the behavior of aggregates, such as “financial markets”, must take into account that individuals—which are investors, firms, and funds—, are self-interested agents who maximize the pursuit of those interest and that markets clear. Further, systematic mistakes by markets are impossible, which anybody born after 1990 has experienced as absolutely not true, I have the 2008 global crisis in mind.
Blyth presents the problem of this old instruction sheet of neoliberal economics, if you make the parts safe, for example, the individual banks, then you make the whole, the banking system, also safe. In Blyth’s words that is “miles away from the expectations of the instruction sheet, a sheet that was quite wrong about the world in the first place.” Blyth claims that the 2008 crisis has cost us, including the lost output, $13 trillion, which caused a 40 to 50 per cent increase in the debt of the states involved in the crisis. Following this short economic lesson, Blyth leads us to the conclusion of part one of his book, by stating, what we all may have heard in the media, but have probably forgotten, that prior to the 2008 crisis debt of the states was falling but bank delivered losses, passed the cost on the state and the state got the blame for generating the debt. This pattern—banks make the losses and states, that is we, the citizens paying for them—repeat itself. Blyth calls these neoliberal mantras, which serve only to save the banks simply a stylized theory of the world.
Part two of the book has three chapters. It describes an intellectual history of austerity as an idea in two periods, from 1692 to 1942 and from 1942 to 2012. Blyth describes then also the natural history of austerity from 1914 to 2012 in this part of the book. In describing the intellectual history of austerity and its classical origins, from Locke to Hum and Smith, Blyth logically concludes why in the Euro crisis that we saw northern European savers juxtaposed with profligate southern Europeans, as Blyth calls them, “despite the fact that it is manifestly impossible to have overborrowing without overlending.”
In the later part of Blyths’ examination of austerity’s intellectual history, he presents us with new and neo-liberalism. Intellectually, Blyth claims, the rather dramatic policy turn started in the late nineteenth and at the beginning of the twentieth century, when “British Liberal Party elites essentially sided with Mill over Ricardo.” Liberal British party elites sought to “develop the role of the state as both the defender of capitalism and as a tool of social reform…”. Long-term consequences of that turn brought important reforms, such as universal pensions, unemployment insurance, and the intensification of industrial regulation, But, that all changed with the emergence of the so-called Austrian economics that rejected Ricardo and brought their “fundamental reaction against the modern economy.” Blyth claims that the representatives of Austrian economics were the original “neo” liberals. Furthermore, Blyth cites Joan Robinskos that pithily stated how Hitler found out “how to cure unemployment before Keynes had finished explaining why it has occurred.” Later in the book, when describing the natural history of austerity, Blyth more in detail explains—by referring to Sheri Berman’s brilliant illumination—what the German Social Democrats (the SPD) of the period after the first world war got all wrong. In short, the SPD thought that nothing is to be done after the first war situation in Germany let alone let the system meltdown until socialism will magically appear.
Blyth turns to Europe further in explaining the austerity’s intellectual history from 1942 to 2012. In Germany led ordoliberal Europe the statement of the day is: Erst sparen, dann kaufen! In an interesting detail, Blyth explains the pros and cons of being an Austrian, as he calls the representatives of Austrian economics. He gives credit to Austrians for explaining the credit cycle and the dangers of excessive debt but the proposal that follows—”maximum austerity as quickly as possible”—makes absolutely no sense to Blyth. Although these ideas are “(p)politically attractive to some, especially to antistatist conservatives, such ideas resonate in theory, they detonate in practice.” Blyth also accused the Austrians that they wanted to “abolish the state once and for all as the only way to save ourselves from boom and bust cycles.” Meanwhile, German ordoliberals had supposedly transcended the “”can’t live with it, can’t live without it” problem by turning the state into the framework for the economy…”.
Blyth this part of the description of the austerity intellectual history until the present, that is until 2012, by explaining the austerity foreign road test, namely the Washington consensus and the IMF’s monetary model. Not a single country that imposed the full list of austerity measures—fiscal discipline, reordering public expenditure priorities, tax reform, liberalizing interest rates, (maintaining) a competitive exchange rate, liberalizing trade and foreign direct investment (FDI), privatization, and deregulation—achieved some meaningful result, rather the “end of history” as if was popular at the end of 1980s and the beginning of the 1990s, for real. No OECD countries, as for example France, Italy, or Scandinavian countries, nor Korea, Taiwan, and latterly China pursued that kind of policy in that period. Blyth presents here us also with the origins of expansionary austerity by an obscure Italian researcher.
In the last section of the second part of the book, Blyth describes the austerity’s natural history, from 1914 to 2912. Along three avenues. In the first examinations, Blyth describes several large states during the 1920s and the 1930s— the United States, the United Kingdom, Sweden, Germany, Japan, and France— going on and off the gold standard. Then, Blyth presents the lesson from the 1930s in Denmark, Ireland, Australia, and Sweden. Lastly, Blyth presents cases from the REBLL alliance countries—Romania, Estonia, Bulgaria, Latvia, and Lithuania—in the years immediately after the start of the crisis in 2008.
This last case of REBLL countries is convincingly presented, in the best possible style of writing by Blyth. These countries committed to austerity to stabilize local banks’ balance sheets through an agreement with the Western banks and the troika (EU-IMF-EC) in Vienna in 2009. It was essentially the consequence of the REBLL countries’ unique growth model that Blyth described as “open to money coming in and people going out.” Blyth concludes the lessons from the REBLL alliance that austerity is actually an “ideology immune to the facts and basic empirical irrefutable. This is why it remains, despite any and all evidence we can muster against it, a very dangerous idea.”
Blyth wrote the conclusion of the book on fifteen pages. If someone doesn’t have the time to read the whole book, the conclusion is more than worth reading. There is one metaphor that I have not quite understood. Blyth claims that austerity as an economic policy has not been successful either in bringing peace, or prosperity, nor, crucially, a sustained reduction of debt. This non-result of austerity Blyth compares metaphorically as similar to the Mongol Golden Horde in “furthering the development of Olympic dressage.” All in all, Blyth really succeded in describing “schizophrenia over the role of the state in the economy—the “can’t live with it, can’t live without it, don’t want to pay for the problem”—which in turn becomes a neuralgia regarding the state in general.”
Even, more, Blyth recommends that if the state does the exact opposite in crisis to the austerity playbook, it will not only survive, it will prosper. Above all, states should not bail out their banks. Blyth concludes that the states will have to deal with their debts “through taxes and not through austerity.”
The only thing I am missing in this book is more elaboration on how austerity measures influence societies and states in actually not securing peace and prosperity, and crucially for the topic of this book, a sustained reduction of debt. Is that even possible? Peace it’s not really a topic of this book, but prosperity partly is and debt definitely, and there is probably not enough elaboration on debt in this book. Blyth also doesn’t elaborate in detail on the mentioned growth model of the REBLL countries, which Blyth described as “open to money coming in and people going out.”
Without references, the book has 244 pages, and a preface additionally. It is structured for fast reading, the only thing that bothered me a little was, that it repeats in the titles of subchapters part one, part two, and so on, while already the whole book is divided into three parts. Otherwise, it’s a recommended reading not only for those involved in economic policy and for those with an economic background, but particularly for those without economic background. It is important not only to understand more of the reasoning behind how our states behave in times of difficulties but also to know to whom we should and to whom we should not entrust our state.
Not a single country that imposed the full list of austerity measures—fiscal discipline, reordering public expenditure priorities, tax reform, liberalizing interest rates, (maintaining) a competitive exchange rate, liberalizing trade and foreign direct investment (FDI), privatization, and deregulation—achieved some meaningful result, rather the "end of history" as if was popular at the end of 1980s and the beginning of the 1990s, for real.