We are told that we need to live in an age of austerity since we have all lived beyond our means and now need to tighten our belts. This view conveniently forgets where all that debt came from: not from an orgy of government spending, but as the direct result of bailing out, recapitalizing, and adding liquidity to the broken banking system, writes Mark Blyth in Austerity: The History of a Dangerous Idea. The author has done a great service by describing the path to crisis in such an interesting way and also by putting current policies in the context of the battle of ideas, concludes Declan Jordan.
Austerity: The History of a Dangerous Idea. Mark Blyth. Oxford University Press. May 2013.
At times I wondered if it was a contradiction in terms to enjoy so much a book about austerity. This is an intelligent, well-written book that is recommended for anyone wishing to understand, in both practical and intellectual terms, how the global economy has found itself in crisis.
We have heard the common mantra “austerity is not working” so often that it has now become cliché. The most irksome element of that mantra, at least for this reviewer, is that so often it is not clear what austerity means and even what would it mean for austerity to ‘work’. This is why it is refreshing for Mark Blyth to offer his definition of austerity early in the book, when he says it is “a form of voluntary deflation in which the economy adjusts through the reduction of wages, prices and public spending to restore competitiveness, which is (supposedly) best achieved by cutting the state’s budget, debts and deficits” (p.2).
The author argues that austerity is a dangerous idea for three reasons: it can’t work in practice, it imposes a disproportionate burden on poorer households, and it ignores the fallacy of composition that says that all countries cannot be austere simultaneously.
The book is structured in three sections. In the first section, Blyth sets out the sources and consequences of the current economic crises. The chapters in this section consider the US and European experiences and contain an impressively clear and detailed but yet concise explanation of how we arrived in the current mess. It is among the best descriptions of our path to crisis that I have read and is highly recommended to anyone who wants to understand the current economic climate. The author pitches his argument perfectly, avoiding the ‘pop economics’ approach that patronises many readers, while also taking space to explain the more complex elements of banking and finance that resulted in the perfect storm experienced by western economies. Blyth convincingly argues that what has happened since 2007 is the “greatest bait and switch in modern history” (p. 73), as business leaders, bankers and European politicians have sold a private banking crisis to citizens as a sovereign crisis.
While the author convincingly shows that the roots of the problems facing the global economy lie in a banking crisis rather than a sovereign debt crisis, one small criticism is that I think he is too forgiving of the roles played by governments and their regulators. They were found wanting as the seeds of the crisis were planted (in financial institutions and speculative bubbles that appeared in many economies) and spent too long trying to understand the scale and sources of crises subsequently.
The second section of the book is a consideration of the intellectual bases of austerity and a fascinating description of previous historical attempts at austerity as a means to restore competiveness and economic growth. In this section the author conflates the austere approach with liberal economic policies that distrust the state and see a very limited role for it in regulating a market economy. Tracing a line from Locke, Hume and Smith to the Austrian School, Schumpeter and Friedman to the critical role played by economists at Milan’s Bocconi University, the author demonstrates the persistence of austerity policies, despite periods when they would appear to have been spent. The strongest element of this section is the ‘natural history’ of austerity, which considers several examples (some touchstone examples for proponents of austerity policies) and demonstrates that the role played by contractionary fiscal policies is overstated. The experiences of austerity in the US and UK in the 1920s and 1930s, and Denmark and Ireland in the 1980s, are considered in the context of the REBLL countries today (Romania, Estonia, Bulgaria, Latvia and Lithuania).
The third and final section is unfortunately the briefest. In the words of the author it provides a “conjecture in lieu of a conclusion” and considers what would have happened if governments had not embraced the austerity agenda and transformed a banking crisis into a sovereign debt crisis. Iceland’s experience is held up as a “positive lesson”. I suspect the author over-simplifies the Icelandic developments and whether they can be generalised. The Icelandic government protected its citizens from the full impact of the banking collapses, but only at the expense of foreign deposit holders who saw savings wiped out. Even in countries with a significant proportion of foreign deposit and bondholders this may not have been an option for states in a monetary union. The arguments for financial repression and Tobin taxes on financial transactions are well made and it is a pity there isn’t a longer treatment of these ideas.
This is not to take away at all from what is a fine book and one that is certain to become an important reference point for anyone studying this turbulent period. The author has done a great service by describing the path to crisis in such an interesting and lucid way and also by putting the current policies in the context of the battle of ideas. It would be wonderful to think that ministers for finance and economy around the world will bring a copy of the book on holidays with them. We could expect a fresh approach on their return if it were the case and the clear message from the book is that we require fresh thinking to allow our economies and societies renew themselves.
Declan Jordan is a Lecturer in Economics in University College Cork (UCC). He holds a PhD in Economics and his research interests include business innovation, regional development and competitiveness, economic growth, human capital and education. He also has substantial management and corporate experience gained prior to joining UCC. He blogs at www.declanjordan.net and tweets as @decjordan. Read more reviews by Declan.