Mark Blyth’s 2013 book “Austerity: The History of a Dangerous Idea” features a compelling discussion on the ideological history of austerity, why it has persisted until present day despite its flawed history, and what alternative solutions to the approach of austerity are. Drawing on his own working-class background – where the cutting of public services would have affected citizens like himself the most – as to show the immorality of austerity, due to its negative, disproportionate impact on poorer citizens, the author argues emphatically against austerity and its persistence as a solution to economic problems across the world.
The book contains two main sections. After introducing the issue of austerity and how the notion of “debt” is used as an excuse to cut government spending, the first part involves Blyth looking at the austerity situations in the US and Europe respectively and contrasting the two. The next part features a discussion of the intellectual history of austerity, all the way from the Enlightenment period of the 1700s to modern intellectuals, before Blyth analyses austerity in practice by looking at the present-day situation. Lastly, he wraps up his findings, as well as his own views on the correct steps forward, in a conclusionary section.
As Blyth lines out, austerity refers to the process by which governments cut spending on public services and social welfare, as they attempt to reduce deficits. It is often used as a solution in times of economic crisis, such as the Great Depression of the 1930s, and the Global Financial Crisis (GFC) of 2008. However, as Blyth argues, it is not public spending that causes financial crises which lead to austerity, but rather the failings of private sector entities. This is a view that Blyth expands on throughout this book, using both these economic crises as key reference points in critiquing austerity. As it was written in 2013, the book comes at an interesting time, following not long from the 2008 crisis and its aftermath, but also just before the 2015 Greek crisis.
Blyth opens the text by giving an overview of what austerity is, as well the notion of debt which tends to lead to arguments in favour of it. He uses an effective analogy against the logic of austerity when speaking about Bill Gates walking into a bar – even though analysis of the average wealth would suggest everyone in the bar is a millionaire, the reality is vastly different. By the same accounts, the reality is that distributionally, austerity serves to hurt the poorest citizens the worst. Proponents of austerity argue that a state’s balance sheet must be reduced, otherwise growth will be undermined by rising debt levels. But as Blyth highlights in this analogy, those at the bottom end up paying a greater share than those at the top.
The author then considers the austerity situations in US and Europe. He routinely points out, especially in this section of the book, that what we associate with being public sector failures – that, in turn, are used to justify austerity – are in fact private sector failings, which result in economic crises. Regarding the US, Blyth summarises that they suffered from having banks that were “too big to fail”. In analysing why US banks were seen as “too big to fail”, Blyth refers to a 2008 statistic that the top six US banks had an asset-to-GDP ratio of 61.6%. However, the resulting austerity is often paid for by the poorest – Blyth points out how US banks have awarded themselves $2.2 trillion in compensation since the crisis, highlighting that they continue to prosper in the wake of the chaos they themselves caused. Whilst letting the banks fail could be seen as a solution, Blyth points out that there are 311 million people in America, of which 72% live paycheck to paycheck and there are over 70 million handguns. He acknowledges that letting the banks fail would be devastating to these people, and lead to a potentially deadly national situation – whilst this is true, it would be interesting if he perhaps delved further into other potential solutions, such as nationalisation. Nationalisation would seem to be an appropriate solution, as it would take control of the banking system out of the private hands currently corrupting it and allow citizens to have a greater degree of control being within the public sector.
Following on from his discussion of US banks, which paints a very bleak picture, Blyth refers to a 2011 statistic from the US Financial Stability Board looking at a list of systemically important worldwide banks. Of the 29 banks named, which are essentially “too big to fail”, eight were US, but 17 were European. Hence the European system is in fact “too big to bail”, an even more alarming predicament to be in. This links in with another point Blyth makes about how Europe can be viewed as economically to the right of America around this time. Blyth analyses a range of European countries to display how this situation arose, and why failures of the private sector are often conflated with that of the public sector. Greece is highlighted as being in economic crisis, but Blyth shows how this is a result of actions from financial institutions like the ECB and IMF, rather than Greece’s national government. Spain and Ireland are mentioned as two countries which were financially prospering beforehand but then significantly by the crisis, because of actions from banks such as bond buying, loans, and repo market activity. Following this, Portugal and Italy are brought up as examples. Unlike Ireland and Spain, both countries suffered from low growth, low productivity, and an ageing population. They likewise suffered though, and Blyth shows how this was not due to any sudden government spending, but rather the effects of the bond market. This all leads to what Blyth terms the “greatest bait and switch in modern history”, in which private sector problems were construed as the “debt” caused by “out of control” public spending. Analysing a range of European countries that highlight this point was an effective way for the author to propose this idea. Blyth concludes here that EU actors failed to see a banking sector rising that was too big to fail – again, it could be questioned whether there are perhaps more nefarious motives, with EU elites knowing there were potential negative implications from what was occurring. Blyth’s analysis of Greece does seem to foreshadow the crisis that occurred just two years after his book was published. He finishes this section by questioning, due to its evident failings, if people ever did seriously think austerity was a good idea – this leads him to turn to the intellectual history of austerity.
In looking at the intellectual history of austerity, Blyth seeks to evaluate if austerity has ever, in practice, worked. He coins the phrase ‘can’t live with it, can’t live without it, don’t want to pay for it’ to describe the problem liberal theorists encountered regarding the role of the state. This is because whilst they did not principally believe in it, its existence was necessary to impose and protect the free market they valued, as well as the notion of private property; yet they did not desire paying taxes to pay for it. Blyth’s discussion of the intellectual history of austerity is very comprehensive, analysing the views of a range of intellectual figures. He shows how the views of Enlightenment liberal thinkers such as Adam Smith, John Locke and David Hume served to establish an ideological tenet in which states should be limited so they cannot create large public debts, and in practice should do little more than protect private property. The evocation of philosophers was a good way for Blyth to analyse the history of austerity, aside from just looking at political figures – it allowed him to study the foundations on which austerity is based. It is worth noting, however, that these arguments persisted in a time when governments were mostly ruled by monarchs who cared little for their citizens, and at a time where many societies were transferring from feudalism to capitalism. The economic conditions present today are vastly different, and Blyth could perhaps have persisted on this point more, though he does acknowledge it. Nonetheless, it was on this foundation the austerity argument fully emerged in the 1920s. Such arguments were severely discredited by the Great Depression of the 1930s; however, Blyth notes that ideologies like Ordoliberalism and Austrian economics remained, and as neoliberalism gained traction in the 1980s, they re-entered mainstream academic circles.
Blyth introduces the ideology of Keynesianism, which was very supportive of state intervention in the economy and emerged in the wake of the Great Depression from the writings of economist John Maynard Keynes. In his discussion of Keynesianism, Blyth rejects the notion often proposed by austerity advocates that Keynesianism intervention is responsible for 1920s German hyperinflation. Firstly, he notes that surrounding countries who did not adopt Keynesian policies around this time also experienced hyperinflationary episodes. Furthermore, though the inflation may have been caused by government policy, it was tied to Germany trying to break the economic stranglehold resulting from war repatriations owed from World War 1, particularly to France. So, narrowing it down to Keynesian money printing was an oversimplification of the reality.
Blyth then looks at figures and ideologies that stood in opposition to Keynesianism, and hence advocated for austerity. His analysis of David Ricardo serves to provide a good foundation as to the beginnings of pro-austerity arguments, whilst analysis of Joseph Schumpeter shows how pro-austerity advocates were in an intellectual minority around the time Keynesian ideology was prominent. He continues his discussion of Ordoliberalism, and contrasts it with the Austrian school of economics, another free-market ideology which remained prevalent throughout the 20th century. Blyth raises a strong counterargument to the trade logic within Ordoliberalism, that encourages all countries to be in surplus. He points out this is logically impossible – not all countries can be net exporters, as some countries must be importing by the same amount that others are exporting. Whilst Ordoliberalism acknowledged the need for a state to provide social welfare and services, as well as a central bank, within the free market they supported, the Austrian school with its adherents like Frederik Hayek, Milton Freidman and Murray Rothbard remained steadfastly against state intervention of this kind. Analysis of the Austrian school is necessary as their ideas have sprung up in the wake of most recent financial crises. However, as Blyth correctly asserts, whilst these ideologies may correctly point out the causes of an economic crisis, that does not mean they possess the correct solutions. Indeed, it may be the case that their ideology will result in an even worse financial situation than which they are criticising.
The author analyses several present-day notions that serves to support austerity, before proceeding to debunk them. A group of countries that Blyth refers to as the REBLL alliance (Romania, Estonia, Bulgaria, Latvia, and Lithuania) are held up by prominent Eurozone actors as to examples of the supposed benefits of austerity. These countries are considered to have bounced back well from the 2008 crisis, because of the austerity measures they implemented. Whilst Blyth shows it is true that these countries rebounded well, he also highlights other reasons as to why they did so. Firstly, these countries were not in relatively prosperous economic situations before the crisis, so were affected in different ways. They also were treated differently by the EU banking sector because of this and a variety of other reasons that Blyth delves into. Blyth goes on to deconstruct the work of prominent Italian political economist Alberto Alesina, in which he argues spending cuts has a more positive economic effect than raising taxes. Despite Alesina himself acknowledging the limitations of this conclusion in his 1998 “Tales of Fiscal Adjustment” paper, this work is very highly regarded by anti-Keynesians and was influential at international institutions such as the IMF. Blyth thoroughly criticises Alesina and his findings, noting that Alesina himself acknowledges in a 2009 update to “Tales” that the sudden rising of debts are due to financial sector bailouts, yet then proceeds to dismiss this important point which would seem to contradict his own ideology. Blyth’s debunking of the prevailing notion of austerity, using contemporary examples, is very thorough and serves to dismantle a range of key arguments from pro-austerity advocates.
This book is very comprehensive in explaining the background of austerity, and its history of failing when applied in the real world. However, there are a few criticisms that I would propose for it. One criticism is that in arguing for letting the banks go bankrupt, Blyth arguably becomes too extreme in his solution, as failing banks is something that (as he himself acknowledges) is a very dangerous route to go down. He effectively analyses the Irish system and how providing aid to banks was an inadequate solution, but his argument of Iceland’s effectiveness in letting banks go bust can be called into question. Iceland’s economy and their banks are much smaller than the likes of US and UK, whose banks have more of a potential influence on the international stage. Hence conclusions from Iceland’s situation may not directly apply to other, more powerful countries.
Alternatively, Blyth seemingly fails to take his criticisms far enough concerning the treatment of bankers. By and large, bankers faced little repercussions for their role in causing the economic crisis of 2008, with most of the top bank managers keeping their position. Consequently, their bonus systems have continued unscathed, which is unsurprising due to their being no clear punishment for their failings. Hence, such failings and financial crises are only likely to reoccur. Furthermore, the subsidies given to banks came with little to no conditions, thus were never likely to enact significant positive change within the banking sector. These are points I feel Blyth could have acknowledged more. Restructuring bailout schemes would seem to be a much more positive route to go down, than letting the banks go bust entirely. In general, Blyth when speaking about the banks provides a very effective critique but could perhaps expand more on the solution.
Blyth convincingly argues that it not a sovereign debt crisis, but a banking crisis lying at the heart of problems that are being faced by the global economy. However, a minor criticism is that he perhaps takes too lenient a view of the roles played by governments and economic elites and presumes positive intentions. As a point of improvement, Blyth could have developed more on why politicians feel the need to implement austerity measures. The idea that it is misled economic philosophies perhaps obscures a more nefarious reality, with ulterior motives at play. Expanding on this work from Blyth, a point of future research could be analysing alternatives to austerity in greater depth, as well as how alternative approaches can be implemented in the current economic framework.
In conclusion, Blyth presents a very compelling narrative in his book and effectively argues against the morality of austerity, as it serves to punish the poor for mistakes made by the rich. His use of a range of statistics strongly back up the points he makes, and his discussion of the intellectual history of austerity is very comprehensive, referring to key academic figures and economic ideologies to illustrate how this ideology came to be. Furthermore, in discussing responses to the GFC of 2008, the findings of the book are very relative for today’s economic climate. Whilst effectively showing austerity’s failings in the US and Europe, Blyth could perhaps have expanded more on solutions in certain areas, and some of the solutions he does provide such as letting the banks fail can be questioned. But overall, the narrative he presents throughout is compelling and a great introduction for any individual seeking to learn about what austerity is and why it arises, particularly in times of crises.
Reference
- Blyth, M. (2013) Austerity: The history of a dangerous idea. Oxford University Press.
Left Philosophy 