The brutal class logic of austerity

The age of austerity is clearly not over as capitalist politicians of all persuasions compete to manage economic crisis in the interest of the capitalist class. PAUL KERSHAW reviews a book that places economic austerity in its historical and political context.

The Capital Order: How Economists Invented Austerity and Paved the Way for Fascism

By Clara E Mattei

Published by the University of Chicago Press, 2022

There were 335,000 deaths in the UK attributable to government austerity policies between 2012 and 2019 according to a recent Glasgow University study. Austerity policies were supposed to result in improved growth and reduced debt. In fact, by 2019 public debt was higher than in 2012. That was before the pandemic, and debt has of course risen further since then. The growth rate in 2019 was identical to 2011 at 1.5% – so no transformation in growth. Despite the terrible pain inflicted by austerity it has plainly not achieved its declared goals.

Nevertheless, the Tories continue with the programme. Although the Starmer and the Labour leadership shy away from using the actual word, they are also using the arguments of austerity to justify scaling back spending commitments. For example, dropping their commitment to free higher education.

This recently published book by Clara E Mattei has attracted considerable attention from left economists. Martin Wolf, chief economic commentator of the Financial Times, named it as one of his economic books of the year. It traces the development of economics as a supposedly neutral and unchallengeable science and the origins of austerity. Discussion around this book can help in the process of debating a programme and arming the workers’ movement for the fight against austerity.

In her opening arguments, Mattei takes issue with another widely read book on austerity, which reflects the reformist left-Keynesian ideas common on the left of the workers movement today; Mark Blyth’s Austerity: The History of a Dangerous Idea. Writing in 2013, after the global financial crash, he showed how what started as private sector debt problems were rechristened as ‘the Debt’ supposedly generated by ‘out of control’ public spending. This idea was used to justify bailing out the banks by the state and cutting other spending.

He shows that, throughout history, austerity policies have rarely, if ever, achieved their declared aims, and traces the compulsion to return repeatedly to austerity back to the ideas of classical liberal thinkers such as John Locke and Adam Smith. The capitalists, and their thinkers, have a contradictory attitude to the state; it is needed for capitalist relations and to keep the ‘lower orders’ in place, but they resent paying for it. They have a ‘can’t live with the state, can’t live without it’ position, as Blyth puts it. The result is a form of insanity, where failed policies of ‘cutting the state’ are repeatedly tried and fail.

George Osborne, Britain’s austerity chancellor from 2010-16, cited a well-known paper by Harvard economists Carmen Reinhard and Kenneth Rogoff to justify brutal cuts, as did politicians internationally. Using apparently authoritative figures, and seemingly neutral science, it claimed to show that a government debt to GDP ratio of over 90% resulted in low growth – so cuts were essential to growth. But a few years later another set of economists identified three fundamental errors, including a basic spreadsheet error. When the data errors were corrected, they showed a higher growth rate associated with more debt! But of course, politicians did not change course because of this. It is easy to see why the dogged adherence to austerity can be seen as insanity.

Political economy

Blyth argued that spending should not be cut in a recession, and set out some reforms such as increased regulation and taxes on finance, along with increased spending. His analysis and programme would be broadly in line with much of the non-Marxist left at this stage. But Mattei argues that austerity should not be seen as a set of technical economic policies but rather as “a political project arising out of the need to preserve capitalist class relations of domination. It is the outcome of collective action to foreclose any alternatives to capitalism”. Viewed in this way there is method in the madness.

She defines austerity as a ‘trinity’ of spending cuts, monetary policy and industrial policy. Economists tend to concentrate on total spending, but she argues that this fails to capture the class forces at play. It is necessary to look not only at the amount of spending but where spending is directed. For example, if military budgets are going up at the expense of welfare expenditures, that is austerity. Regressive taxation, supposedly to incentivise the investor and entrepreneur, also forms part of the picture. It can reduce the total tax take and undermines the claims that ‘balancing the books’ comes first. In monetary policy, raising interest rates plays an important role, as at present, increasing unemployment. The fear of unemployment helps to depress wage struggles. Industrial austerity in the form of deregulation of employment, anti-union measures and privatisation further undermine workers.

The birth of modern austerity economics is traced to the revolutionary period after world war one when the continued existence of capitalism was challenged. The war effort meant extensive nationalisation and state direction. Concentrating on the examples of Britain and Italy, Mattei describes how during the first world war the state was increasingly drawn into economic matters that had previously been seen as subject to the ‘natural’ functioning of the market. Production for use rather than simply the requirements of the market became common. This meant a politicisation of the economic arena in which the ‘hidden hand of the market’ no longer seemed inevitable. When capitalist strategists feared that state intervention during the recent pandemic could be a ‘back door to socialism’, they feared elements of a comparable phenomenon.

In later years, many of the participants in these events have tried to obscure the revolutionary potential of the situation. In Britain, GDH Cole wrote in the 1950s: “I have tried to make plain that there was no point at all at which there was any possibility of a British revolution”. As Mattei points out, this was a departure from what he said at the time. In 1919, for example, Cole wrote: “I do sincerely believe that the present economic order is breaking down, and that its definite collapse is a matter not of decades, but of years”. He commented that what had held capitalism together was the belief that the system was inevitable, and this belief was collapsing.

Revolutionary movements

In both Britain and Italy workers’ struggles developed a revolutionary dimension during and after the war as the example of revolution in Russia resonated around the world and terrified the ruling classes. This pushed them initially to seek to placate their own working classes with significant reforms. What Mattei terms a ‘reconstructionist’ trend within the capitalist establishment proposed quite major reforms such as public housing schemes, healthcare, free education, and state support for childcare, under the enormous pressure from the working class.

But mobilised workers moved on from industrial battles to formulate their own demands for fundamental change. Mattei provides interesting, detailed material about workers’ struggles in Britain and Italy. Their demands were distinct from and more far-reaching than the ‘reconstructionist’ trend, posing the question of workers’ control and an end to the rule of capital. Economic struggles moved swiftly to become political. In Britain workers stopped the Jolly George cargo ship being loaded with arms to fight the Russian revolution. Italian soldiers and workers in the city of Ancona took control of the military barracks and refused to depart for Albania, then under Italian occupation.

During the ‘red years’ of 1918 to 1920 the rate of exploitation fell in both countries. The rate of exploitation is the ratio of the total amount of unpaid labour (surplus value) to the total amount of wages paid (the value of labour power). Massive workers’ struggles increased the share of production going to the workers. Nominal wages quadrupled in Britain and quintupled in Italy. In Italy the wage share grew from 35% in 1918 to 55% in 1922. In Britain it rose from 67% in the war years to 78% in 1921.

Economic backlash

Initially the capitalists had little alternative to conciliation, but economists played a key role in preparing a much harsher response. Using detailed archival evidence Mattei shows how in both countries a rise in what was known as ‘pure economics’, as opposed to classical political economy, was used to justify massive cuts in public spending. While much of the economists’ writing claimed to be above politics, she finds telling quotes which reveal a contempt for workers. The economists’ time had arrived as the capitalist class moved to austerity.

This approach to economics, now known as neo-classical economics, became dominant in the economics profession and remains dominant today. It entailed a move away from recognising labour as the source of value, as Marx and the classical economists had done, to a theory which avoids the question of value and focuses attention on private savers and investors. In this way class is excluded from the foundations of economic analysis.

Mattei explains that the now-dominant view centres on an “idealised caricature of an economic being: the rational saver”. This has a dual result: creating an illusion that anyone could be a rational saver provided they work hard enough, and secondly devaluing workers who were no longer understood in the theory as producers, but as social liabilities based on their inability to practice virtuous economic behaviours. As Mattei comments, it is “exceedingly challenging for people to save money they don’t have”.

The archives show the influence of economist Ralph Hawtree on UK policy and of the Bocconi school of economists in Italy. Hawtree was also influential for the later Chicago school of economists associated with ‘monetarist’ attacks on workers in the 1970s – the governments of Margaret Thatcher in Britain, Ronald Reagan in the US, and Pinochet in Chile, for example. But he was also an influence on the economist John Maynard Keynes.

The ‘Geddes Axe’ of 1921 reflected the victory of Hawtree and cut 20% from government spending. Mattei comments that it is a telling indicator of austerity’s actual objectives that, “the axe gashed the British population even though Britain had already attained a primary surplus the year before”. In that year unemployment skyrocketed from 2% to 11.3%. Naturally, the number of strikes declined in subsequent years.

While Britain was the home of an empire with well-established political institutions, Italy was much poorer and less well-developed. The brutal economic measures were rammed through in Britain while retaining formal democratic norms, but in Italy Mussolini’s fascist regime used direct state repression along with similar economic measures against the working class. The repression does not seem to have bothered Italy’s liberal economists too much; they welcomed Mussolini’s successful introduction of austerity, as did British diplomats and economists. The liberal economist Luigi Einaudi concentrated his fire on the labour theory of value asking in the capitalist newspaper Il Corriere della Sera, “how much would be produced if the savers did not produce capital? The answer: nothing. Without capital labour produces zero”. Einaudi became the second president of post-fascist Italy, in 1948.

Lessons for today

The Capital Order concentrates on historical analysis but makes it quite clear that its lessons are relevant to present day austerity. Economists generally hide behind the apparently neutral language of ‘pure economics’, and the focus of the book is exposing that brutal class war is at the root of their approach.

There are occasional exceptions. Alan Budd, from 1979-1981 a top UK Treasury civil servant under Margaret Thatcher, blurted out that: “The Thatcher government never believed for a moment that [monetarism] was the correct way to bring down inflation [though this is what it claimed]. They did however see that this would be a very good way to raise unemployment. And raising unemployment was an extremely desirable way of reducing the strength of the working classes… [This] has allowed the capitalists to make high profits ever since”.

Currently, the Bank of England justifies its contribution to austerity in terms of supposed economic science, lecturing workers that they will have to take real-terms pay cuts to stop inflation and ignoring the distributional implications. Meanwhile, Unite the Union has provided detailed evidence of profiteering driving inflation. Average profit margins increased from 5.7% in the first half of 2019 to 10.7% in the first half of 2022.

Keynes is not a major protagonist in this book, but Mattei does note that he fully supported the austerity of the 1920s. He went as far as advocating even higher interest rates. It is true that at that time he had not developed all his ideas around the need for higher public spending in some periods that lead to many in the labour movement citing him in support of pro-worker policies. But when asked about the period much later, in the 1940s, he still maintained his support for austerity in the twenties. He shared the fear of the ruling class that capitalism would be overthrown, and was clear that he did not support workers’ struggles.

Mattei argues that the ideas of capitalist economics have become so entrenched that even left parties are led to adopt austerity. In interviews about the book she has pointed out that in the 1970s, at a time when the wage share had gone up and workers were again demanding a break from capitalism, Enrico Berlinguer, the ‘Eurocommunist’ leader of the Italian Communist Party, reintroduced the idea of austerity in political discourse. A parallel process developed in Britain in the 1970s when Labour introduced public spending cuts.

Mass workers’ parties did not move to the right simply because of a mistaken economic theory, but ‘pure economics’ is used to justify the turn to the right, to portray austerity as an inevitability. A political economy based on a class analysis can play a role in combating a move to the right.

Today there is a growing debate about what has been called in the Unite trade union a ‘workers’ economy’. Mattei’s book does not make programmatic proposals and its concentration on economic ideas rather than the role of parties could lead to a false impression of inevitability. But it can illustrate the need for the workers’ movement to base itself on a class analysis, on Marxist political economy rather than resting on economic experts who are really covert capitalist ideologues.

Keynesian economists view austerity as a tool for managing the economy which can be shown to be faulty. But austerity emerges from this account as inseparable from modern capitalism. A key method by which capital protects itself from challenge. It is not a realistic approach to attempt to defeat austerity by reasoned arguments and reforms that leave capitalist relations in place. The capitalists are not open to persuasion, austerity has a brutal class logic from their point of view. Capitalism offers ever more austerity; the workers’ movement needs a socialist programme that breaks with the capital order.