Luxurious bees and chastised puritans. A history of the debate on austerity.

To understand why the economy goes awry has always been a tough call. In 362 AD the city of Antioch needed a bailout. The emperor visited the city and replenished its granaries. To put the economy back in shape, he decided to cap the prices of many consumers’ good. Deflation ensued and the city revolted against the austerity: “Cannot you see the number of shops in this city?” According to its citizens, Antioch has prospered thanks to their prodigality: if anything, the emperor had to support their lifestyle. Julian, recalling the virtues of the Stoics, answered: “a well-conducted city needs bread […] meat only when it is growing luxurious […] to speak of fish and poultry is the extreme of profligacy”.

In the late debate on the EU debt crisis, austerity has been framed by its proponents as a morality tale between Northern “saints” and Southern “sinners”. Their opponents lamented the negative effects by claiming that austerity does not create economic prosperity. However, the current crisis also shows that the debate has become more complex.

Austerity: The Great Failure, written by the economic historian Florian Schui, tells us that in Western history this debate has resurfaced many times. In its basic form, both parties are unresponsive to what the counterpart says. On the one hand, proponents of austerity praise the virtues of thrift in contrast to vicious profligacy. On the other hand, opponents of austerity are mainly concerned with practical matters. For them, what the others call vice allows economic growth. In the late debate on the EU debt crisis, austerity has been framed by its proponents as a morality tale between Northern “saints” and Southern “sinners”. Their opponents lamented the negative effects by claiming that austerity does not create economic prosperity. However, the current crisis also shows that the debate has become more complex. This is why Austerity: The Great Failure is relevant to us; the purpose of the book is to provide an understanding of how the debate has evolved in two millennia or so.

An idea grounded in moral arguments

Schui traces the emergence of the idea of austerity back to the moral thought of Aristotle: “To each according to his place in society”. This makes sense when considering the context of a zero-growth economy: if the size of the cake always remains the same, the desire of a peasant to consume as much as a noble implies that the latter must reduce his consumption. The ensuing social unrest would endanger the political and social stability of the city. Thus, moderation in the appetites was instrumental in preserving the political order. Early Christendom added a powerful religious precept: “you cannot serve both God and money”. Notwithstanding the attempt by St. Thomas Aquinas to reconcile economic wealth and individual salvation, pauperism became the common-sense moral position in the West.

Austerity was increasingly challenged when the economy emancipated itself from religion. Mandeville was one of the first theorists to understand the fallacy of composition behind the idea of austerity. From his perspective, when frugality reigns, the wealth of a community dries up. To demonstrate this argument, he imagined a hive inhabited by a breed of bees obsessed with material wealth. Those bees, acting out of self-interest, all together made the community prosperous: luxury created employment, envy stimulated industry and vanity promoted trade. Hence, the subtitle of The Fable of the Bees (1714): “Private Vices, Public Benefits”.

The moral argument made a comeback several years later with Adam Smith. Mandeville’s account ignored how the capital originated. Smith, in his The Wealth of Nations (1776) focused on the attitudes of the Scottish middle class, which was the only class with sufficient wealth to save part of it and with the business acumen to invest it in profitable activities. Max Weber delved further into the motives of the original accumulation. Protestants, faithful to the doctrines of Calvin, lived a life distant from the excesses described by Mandeville. The impulse to save and to search for future profit came from their religious beliefs—a vulgarised interpretation of the predestination doctrine. Be it the Protestant ethics or the prudence of the Scots, both Smith and Weber intuited that parsimony, and not industry, was at the heart of the extraordinary economic development of modern Europe. Or was it?

On the liberal side of the debate on austerity, the first to notice a problem in Smith’s argument was John Mackinnon Robertson in his book entitled The Fallacy of Savings (1892). Similarly to Mandeville, he argued that if everyone saves, the result would be economic stagnation. But the biggest problem—Robertson was a prudent Scot himself—was that, as an effect of the stagnation, global savings would go down. Two episodes made this argument salient: the return to the gold standard by the UK in the 1920s and the anti-labour stance of the German government right after the 1929 crisis. Both these austerity policies failed. In the case of Germany, the policy resulted in a high level of unemployment, low economic growth and ultimately it led “directly (…) to Adolf Hitler’s rise to power”.

According to Schui, the current austerity belongs to “an intellectual tradition (…) closer to the premodern thinkers”, as its arguments are best understood in moral terms rather than with respect to economic efficiency.

John Maynard Keynes elaborated his General Theory (1936) in which he explained why austerity was failing in the face of the Great Depression. He started from disputing its basic rationale—the nexus between savings and investments. According to the neoclassical economy, if savings were sufficient, interests on loans would be lowered, thus allowing for a higher level of credit-financed investments. This in turn would lead to economic growth. But austerity was failing. To explain why, Keynes investigated the intuition of Robertson. Neoclassical economists saw low interest as a prize for savings. What if interest was instead a reward for not hoarding? In times of insecurity, people tend to prefer liquidity. When they do not put their savings under the mattress, they keep them safe in their bank accounts. To convince people to invest, banks have to offer high interest despite the amount of savings; however, when interest is too high, it is rational for an entrepreneur not to resort to credit. Investments stagnate while unemployment level remains high. As consumption is reduced, the economy declines. What to do then? According to Keynes, the government has to create investment opportunities to restore consumer confidence. Starting in 1933, Keynesian policies were applied in many Western countries. Once again the tables were turned, this time in favour of austerity opponents.

At the time, few spoke against Keynes. In 1932, Friedrich Hayek was one of them. Concerned with the evolutionary structure of the market, he predicted a “crowding-out” of private loans as a consequence of excessive public investments: savers, attracted by higher interest rates, would invest their money in public bonds rather than in private ventures. He also advanced a moral argument: in The Road to Serfdom (1944), Hayek directly linked government intervention in the economy with the rise of fascism in Europe. Since economic planning means controlling the means to all ends, the state, in controlling the economy, would determine which ends are to be served. This would eventually lead to a totalitarian state. Hayek’s neoliberalism has gained momentum since the mid-seventies, when the Keynesian economics failed to explain the combination of stagnation and high inflation. Neoliberalism became the new economic paradigm. Whereas the state always has to be small, in times of crisis additional cuts are suggested. Hence, in neo-liberal thinking, austerity became the bitter medicine that would allow the economy to grow. According to Schui, the current austerity belongs to “an intellectual tradition (…) closer to the premodern thinkers”, as its arguments are best understood in moral terms rather than with respect to economic efficiency.

A analysis with some limits

Austerity: The Great Failure is structured according to a dichotomy contrasting moral and economic arguments in favour of or against austerity. This scheme is crucial for the identification of a continuity in the debate that stretches from ancient to contemporary times. The “great failure” of the title refers to the absence of “convincing economic arguments for austerity policies”. Moreover, the author argues that moral arguments are not compelling in this regard. However, it should be noted that his analysis appears to be incomplete, given that he does not consider how the debate has evolved over the last forty years. Recently, the idea of “expansionary austerity” has emerged as an alternative to Keynesianism. In a crisis, by applying spending cuts, consumers’ expectations improve and this would allow economic growth in the short run. Those ideas have proven particularly influential during the current crisis. Also, Friedman’s monetarism is not considered. According to the scholar Mark Blyth (2013), this doctrine, which is based on the role that supplies of money have in producing economic downswings, managed to successfully offer a macroeconomic explanation alternate to Keynesianism. Finally, the author does not explore ordoliberalism. Considering its role in the current EU debt crisis, it is an absence that it is hard to justify.

Despite these limits, Austerity: The Great Failure is a well-written polemic. Its argument about the moral nature of austerity is convincing. Nonetheless, the best service this book does is to tell us that the debate on austerity is not settled yet. For those in search of alternative solutions to austerity, it is a good reminder.

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Also published on Medium.