On Political Books

March/ April 2013 Slaves of Defunct Economists

Why politicians pursue austerity policies that never work.

By Henry Farrell

Austerity: The History of a Dangerous Idea
by Mark Blyth
Oxford University Press, 304 pp.

On January 25, the British statistics office announced that the United Kingdom’s economy had shrunk by 0.3 percent in the last quarter of 2012. After enduring two recessions in the last four years, Britain is now well on its way into a third. The pain has been compounded by a succession of austerity budgets, in which Britain’s Conservative-led government has tried to hack away at spending. Repeated rounds of cuts have battered the British economy. However, Britain’s chief economic policymaker, Chancellor of the Exchequer George Osborne, wants still more pain. He is pushing the government to identify £10 billion more in cuts this year.

This makes no economic sense. Olivier Blanchard, chief economist at the International Monetary Fund, has pleaded for Britain to start focusing on growth rather than fiscal virtue, claiming that “we’ve never been passionate about austerity.” It doesn’t make any political sense, either. Voters like vague proposals for “reducing government waste” in the abstract, but hate cuts to programs that they care about. Why do so many members of the political elite disagree with Blanchard in their visceral passion for austerity? Why do they keep on pushing for pain when it threatens economic ruin and hurts their election chances?

Mark Blyth’s new book, Austerity: The History of a Dangerous Idea, gives us some important clues. Many books have been published in the last few years explaining why some economic ideas (the efficient markets hypothesis; the Black-Scholes option pricing model) are dangerous. Blyth, a professor of international political economy at Brown University (and a friend of mine), explains why a blind fixation on austerity is one of these terrible ideas. However, his book does two additional things that other books in this genre do not. First, it asks why bad economic ideas, like austerity, have such powerful consequences. Economists themselves do not think that ideas are powerful, and their models usually assume that people are motivated by straightforward self-interest rather than complicated notions. Second, it asks why these ideas keep on coming back. Every time governments have experimented with austerity, it has led to disaster, and yet a couple of decades later, their successors try again, with equally dismal consequences.

Blyth cares about bad ideas because they have profound consequences. We do not live in the tidy, ordered universe depicted by economists’ models. Instead, our world is crazy and chaotic. We try to control this world through imposing our economic ideas on it, and sometimes can indeed create self-fulfilling prophecies that work for a while. For a couple of decades, it looked as though markets really were efficient, in the way that economists claimed they were. As long as everyone believed in the underlying idea of underlying markets, and believed that everyone else believed in this idea too, they could sustain the fiction, and ignore inconvenient anomalies. However, sooner or later (and more likely sooner than later), these anomalies explode, generating chaos until a new set of ideas emerges, creating another short-lived island of stability.

This means that ideas are fundamentally important. The world does not come with an instruction sheet, but ideas can make it seem as if it does. They tell you which things to care about, and which to ignore; which policies to implement, and which to ridicule. This was true before the economic crisis. Everyone from the center left to the center right believed that weakly regulated markets worked as advertised, right up to the moment when they didn’t. It is equally true in the aftermath, as boosters of neoliberalism have moved with remarkable alacrity from one set of bad ideas to another.

After the initial shock wore off, American neoliberals interpreted the economic crisis as a morality tale about the need to reduce government debt by ending entitlements and hacking away at out-of-control government spending. Their European counterparts used Greece’s travails to tell another morality tale—one about the dire consequences of dishonesty and political corruption. As Blyth argues, by interpreting the problem as one of government failures, they sedulously overlooked the bad behavior of the private sector and made taxpayers liable for banks’ morally hazardous behavior.

These twin mythologies of austerity reinforced each other. American Republicans took up dubious academic claims and turned them into a variety of economic know-nothingism. During the presidential debates, Mitt Romney warned that Barack Obama was turning America into a second Greece. European politicians, for their part, took comfort from the arguments of U.S.-based economists and commentators such as Kenneth Rogoff, who argued against economic stimulus.

The consequences for American politics were bad enough: without austerianism, the Obama administration might have gotten a proper second stimulus through. In Europe, however, the impact of austerity has been crippling. Some countries have had austerity imposed upon them, by European Union officials who were apparently convinced that austerity would increase business confidence and help these countries pull themselves by their own bootstraps out of the quagmire. Others, like the United Kingdom, have embraced it voluntarily. None of them have had a happy experience. The countries held up as examples of the benefits of austerity, such as Ireland and Latvia, have in fact suffered brutally. For sure, things would have been even worse if rich countries such as Germany had not helped. However, the conditions accompanying this assistance have led to an explosion of anger and resentment. Austerity— especially austerity imposed at the demand of foreigners—is not a vote winner.

Given all of this, why did politicians ever think that austerity was a good idea in the first place? They should have known that it hadn’t worked in the past. Every few decades, politicians implement austerity programs in response to some economic shock, and every time, it is a disaster—from the gold standard crunches of the nineteenth century to the idiotic response of German Social Democrats to the Great Depression. And then, after a couple of decades, politicians begin to forget how bad it was. Blyth doesn’t have a complete explanation for this peculiar form of recurring amnesia. He does, however, have the beginnings of an intellectual history.

Blyth argues that austerity had its beginnings in the inability of classical liberal theorists like David Hume, Adam Smith, and John Locke to think straight about the state’s role in the economy. While their intellectual heirs recognized that economic crises happened, they thought of them as an inevitable hangover from previous economic exuberance. All that the state could do was balance the budget, and perhaps even raise taxes, to restore economic confidence. Under this theory, austerity was something like the apocryphal vomitorium at Roman feasts, allowing the economy to purge itself between successive bouts of overindulgence.

Henry Farrell is an associate professor of political science and international affairs at George Washington University.


  • smartalek on March 07, 2013 12:17 PM:

    You know that old line about not assuming malice behind what could be explained by incompetence?
    This appears to be the opposite.
    If Farrell's summary of Blyth's argument is accurate (and there are indications here that it might have left out key elements), then Blyth may not be paying sufficient attention to the possibility that some of the pol's may be -- and many of their Wall St and other financial-sector owner-operators surely are -- not mistaken, but deliberately and aggressively lying through their teeth.
    The financiers have different stakes than everyone else, including other actors in the private sector.
    And they've made it painfully and repeatedly obvious that they don't care what happens to anyone else, to "their" countries (do they even have any, at this point?), or to the world as a whole, as long as their loan payments arrive in full and on time.
    It's the ultimate, and apparently inevitable, expression of the socialization of costs, and the privatization of profits.

  • smartalek on March 07, 2013 12:31 PM:

    My bad.
    That should have read:
    "...as long as their loan payments arrive in full and on time and in currencies with values undiluted by devaluation or inflation."
    That one's especially important w/r/t "our" own Federal Reserve now, innit?
    Am I the only one who really pines for an "edit" button here?

  • Robert Waldmann on March 07, 2013 10:09 PM:

    You are unfair to German Social Democrats re the great depression. The Weimar Republic's response to the great depression was handled by Heinrich Bruning head of the Center (Catholic) party. He was a "presidential" chancellor which means he governed not through laws passed by the Reichstag but by presidential decress signed by Paul Hindenberg (who was also most definitely not a social democrat).

    Use the wikipedia http://en.wikipedia.org/wiki/Heinrich_Br%C3%BCning

  • Robert Waldmann on March 07, 2013 10:17 PM:

    Great post by the way. Also Huh ???

    "Keynes ... He doesnít know any better than I do where those ideas will come from" is an odd passage. I would tend to guess that the ideas we need might come from Keynes via Krugman. The case has been made. It makes sense. It is overwhelmingly supported by the data.

    You and Blythe are sure we need new ideas. Ideas which would have been new in 1776(although Smith was very firm on the need to regulate banks) but they aren't new any more.

    I mean do you reall think that the economy is too important for us to listen to Keynes, Krugman, Romer, and (belatedly) Summers and Blanchard ? What makes you say that ?

  • Kevin Donoghue on March 08, 2013 5:37 AM:

    Robert Waldmann: "I mean do you really think that the economy is too important for us to listen to Keynes, Krugman, Romer, and (belatedly) Summers and Blanchard?"

    Going by things Henry Farrell has written at Crooked Timber etc., I doubt that he means we should disregard Keynesian macroeconomics. The question is, given that Keynes wiped the floor with his opponents in the 1930s and Krugman does the same today, why aren't the Keynesians winning? If the point is not merely to interpret the world but to change it, we need to know how to dispose of zombie economics, or cockroach ideas as Krugman has taken to calling them. (I'm encouraged by the fact that he seems to have managed to get under the thick skin of the Eurocrats, judging by their outbursts on Twitter.)

    Kalecki warned that getting macroeconomics right wouldn't be enough. A situation of deficient demand can be just fine for some classes of people -- stock markets are doing very well right now, even though labour markets are in shit.

  • Brad S on March 11, 2013 11:17 AM:

    Dreck. "Austerity" is an invented term to replace "spending calibrated to normal revenues". If a country spends above 100% of revenue at a rate which exceeds even the supposed small percentage of "sustainable deficit", then eventually there will be some sort of reckoning of accounts. When spending has to fall back to "normal" revenue levels, and then fall a little bit further to cover past spending, then things are going to seem a little recessionary. The solution is not to try to artificially sustain unsustainably high spending levels indefinitely. Keynesian spending is suited to brief crisis intervals, not whatever level of program spending a country wishes to indulge on itself.

  • Mark Garrity on March 14, 2013 7:53 PM:

    Brad S. the US has spent above "spending calibrated to normal revenues" since Reagan promised that his massive tax cuts for the rich would bring prosperity to all. Since then we've seen the richest 1% acquire massive amounts of wealth while the middle class has sunk into debt along with the government. It's been the tale of the two Clauses ever since. When Republicans are in power they spend like drunken sailors. Under the last president Bush two unpaid for wars and a huge Medicare giveaway to the drug and insurance companies piggybacked on a drug benefit for seniors. As soon as they lost power Dick Cheney's proclamation that "Reagan taught us deficits don't matter" was no longer operative. To a man they all became spending hawks and I imagine they'll stay that way until the next Republican president comes along. Of course they can't kill off government programs they don't support like Medicare and Social Security by driving down the debt so they fight any and all tax increases that will close the gap. Again until, and only until they regain power when spending will (but not taxes) will go up again.

    The US government's costs to borrow are at historic lows. Not so much because our government is perfect or even good at it what it does but because the rest of the world looks even worse right now. We ought to be borrowing $200 billion a year to build desperately need infrastructure and alternative energy in this country. Putting people back to work paying taxes instead of collecting unemployment benefits would take care of the deficits in the short run and the long term debt bomb which is almost all waste in medical services, over $700 billion a year according to various studies can be dealt with by cost benefit analysis to see what works, what is useless, and what is worse is actually harmful. This isn't uncharted territory. Other industrialized nations spend half what we do per capita and get much better medical outcomes than we do. Obamacare has made a start but more needs to be done. Lots of people get this. Unfortunately not many in DC do.

  • js on April 11, 2013 7:00 PM:

    Austerity hardly reflects "mistaken" notions resulting from "amnesia," as smartalek notes. Why not forgo the intellectual cop-out and try evaluating the actual purpose austerity achieves without assuming that its advocates are mere fools.

    Austerity assures bondholders that the government is "serious" about reducing its debt. Moreover, it drives down the cost of labor. What is mysterious about this?