The crisis of capitalism that followed the Great War was, for some people of means, an acute and terrifying development.
Once workers stormed the stage of history with ideas for an alternative society, the defense of capitalism took on novel and more powerful forms. Guardians of capitalism went back to the drawing board to refurbish the old order, and their manufacture of austerity became their main weapon. Austerity consisted of a twofold process, at once material and ideological. Or better, it consisted of a twofold strategy: coercion and consensus.
The coercion of workers was clear in the motto of austerity that was formulated at two pivotal international financial conferences, in Brussels (1920) and in Genoa (1922): “work more, consume less.” The capitalist states and their economic experts secured capital accumulation through policies that imposed the “proper” (i.e., class-appropriate) behavior on the majority of their citizens. The three forms of austerity policies—fiscal, monetary, and industrial—worked in unison to disarm the working classes and exert downward pressure on wages.
The operation of this austerity trinity and its material unfolding as a strategy for economic coercion is illustrated in the italicized text below. This illustration stresses the mechanisms through which fiscal, monetary, and industrial austerity mutually reinforce one another, revealing the overall mechanics of coercion under austerity.
fiscal austerity → monetary austerity
Fiscal austerity takes the form of budget cuts, especially welfare cuts, and regressive taxation (i.e., tax policy that takes a greater proportion of money from people who have less of it). Both reforms allow the transfer of resources from the majority of citizens to the minority—the saving-investing classes—so as to secure property relations and greater capital formation. Meanwhile, budget cuts also curtail inflation through two main mechanisms. First, the reduction and consolidation of public debt diminishes the liquidity in the economy, since debt-holders can no longer use maturing bonds as means of payment. Second, budget cuts reduce aggregate demand: the general public has less disposable income, and the state itself is investing less. Less demand for goods and capital means that internal prices are kept down. Moreover, such stifling of aggregate demand also increases the foreign value of the currency by discouraging imports and thereby improving the balance of trade (i.e., ensuring that exports exceed imports). Indeed, the foreign value of a currency is favorable if the balance of trade of a country is favorable.
monetary austerity → fiscal austerity
Monetary austerity (or monetary deflation, described above) entails a curtailment of credit in the economy, and it primarily coincides with a rise in interest rates. This so-called “dear money” policy, in which money is harder to come by, increases the cost to the government of borrowing money, and thus limits its expansionary projects. In twentieth-century history, the limit to state expenditure becomes more entrenched once the gold standard is reestablished (for Britain this occurred in 1925): in order to maintain gold parity, the avoidance of capital flight takes precedence; hence, fiscal policy has to prioritize retaining capital in its economy. It does so by minimizing government expenditure and creating a capital-friendly environment via lower taxation on capital.
industrial austerity → monetary austerity
Industrial austerity refers to an imposition of industrial peace, i.e., non-contested, hierarchical relations of production. Such “peace” is of course the basis of capital accumulation, as it enables some to secure property rights, wage relations, and monetary stability in the long run. Industrial austerity also guarantees expedient monetary deflation—which makes assets on hand more valuable. In fact, successful revaluation (i.e., an increase of the value of money) crucially requires downward price adjustments, particularly labor prices (i.e., lower wages), in order to cut the costs of production. This is because lower production costs keep commodity prices low, thus boosting international competitiveness at a moment when a country is seeking to improve its exchange rates through greater exports. Thus, lower production costs are ever more essential to compensate for a loss of competitiveness once the currency is revalued so as to not lose foreign market share. If the state has enough coercive powers, as the Italian Fascist state did, it can intervene directly to curtail nominal wages through legal action, thus securing immediate downward price adjustments and ensuring the competitiveness needed to achieve the gold standard. Of course, even in less authoritarian societies, such as Britain, restrictive labor laws may limit the legitimacy of industrial manipulations, for example through a criminalization of solidarity strikes. Industrial peace and wage repression are also important to attract capital and avoid its flight, another prerogative for gold convertibility. Low wages also decrease consumption demand, which in turn decreases imports and thus has a positive effect on the exchange rate that favors revaluation.
monetary austerity → industrial austerity
Dear-money policy means that the economy will slow down because borrowing becomes costlier and investors are disincentivized. Once deflation kicks in and prices decline, pessimistic expectations regarding future profits reduce investments further. Less investment means less employment. Higher unemployment not only reduces workers’ wages, it also ensures “industrial peace” by killing the political leverage and militancy of labor.
industrial austerity → fiscal austerity
A weak and docile working class is one whose pressuring action for social measures, progressive taxation, and other redistributive policies is subordinated to the austere priorities of shifting resources, which favor the saver-investor classes. Unions forgo radical proposals and practices that challenge private property and are willing to engage in collaboration toward increasing the efficiency of production in the name of a national cause.
fiscal austerity → industrial austerity
Budget cuts mean curtailment of public works and of public employment more generally, leading to an enlargement of the reserve army of labor (the pool of people wanting to work), which jeopardizes unions’ bargaining power, depresses wages, and increases competition between workers.
The circular blueprint we have just detailed makes an important point in the story and history of austerity. Upon closer inspection, governments’ austere fixations on balancing budgets and curbing inflation serve the main goal of making sure capital (as a social relation) is indisputable, and that its pillars of wage relations and private property remain strong. For example, the main achievement of fiscal and monetary austerity was identical to that of industrial austerity: the subjugation of the working class to the impersonal laws of the market. Indeed, all three forms of austerity served to recreate the divide between economics and politics that war collectivism had temporarily suspended. Once the state stepped down as an economic actor (and as an employer), wage relations would again be subjected to impersonal market pressures. Austerity ensured and facilitated this retreat to the norm.
Here emerges a core argument of my new book, The Capital Order: How Economists Invented Austerity and Paved the Way to Fascism: the main objective of austerity was the depoliticization of the economic—or, the reinstallation of a divide between politics and the economy—after the wartime political landscape had dissolved it. In practice, the reinstallation of this divide took three forms.
Depoliticization refers to the state’s backing off of economic pursuits, which in turn allowed for (1) relations of production (owners versus labor) to revert to the command of impersonal market forces—while also suffocating any political contestation of such wage relations, or of private property. There was more to depoliticization, however. The book shows that depoliticization also meant (2) exempting economic decisions from democratic scrutiny, especially by establishing and protecting “independent” economic institutions; and (3) promoting a concept of economic theory as “objective” and “neutral” and thereby transcending class relations—the sort of omniscience that was the foundation for one of austerity’s ends: building consensus.
These three conventions were mutually supportive. Cultivating a notion of economic objectivity (3), for example, first required the rehabilitation of the rule of the impersonal laws of the market (1). This, particularly in a moment of high contestation, could only be achieved through their unchecked governance (2).
Hence, austerity found its primary ally in technocracy: a belief in the power of economists as guardians of an indisputable science. The Capital Order explores the consolidation of this powerful austerity-technocracy partnership. It introduces the reader to two international financial conferences, at Brussels (1920) and Genoa (1922), that contemporary scholars have largely disregarded. But the reality is that these two events were pivotal in securing the longevity of capitalism as a socioeconomic system.
Economic experts—in their high position within the state apparatus—constructed consensus through economic models that excluded capital (as a social relation of production) as a variable; instead it became a given. By embedding hierarchical social relations within their equation, these neoclassical models also replaced the concept of exploitation as the basis of profit with an idea of “market freedom”; labor is no longer the central motor of the economic machine, it is a choice or calling. Meanwhile it is the entrepreneur’s capacity to save and invest that drives the economy (note the vernacular switch from “capitalist” to “entrepreneur,” which connotes a sense of individual achievement). Indeed, these models do not envisage class conflicts between the capitalists and the workers, but rather postulate a society of individuals who can all potentially save (and invest) their money (that is, if they act virtuously) and whose interests harmonize with those of the other members of society. In this way, technocrats counteracted any critique regarding vertical relations of production and justified capitalism as a system that benefits society as a whole. The austerity economists conflated the good of the whole with the good of the capitalist class. They postulated the national interest as congruent with the interest of private capitalism. These beliefs imbue austerity today, as then.
Austerity—both in its material form as a coercive policy and in its theoretical form as a consensus-building set of theories—repudiated the workers’ revolutionary wartime and postwar gains. These practical and theoretical alternatives were the gravest enemy to the capitalist system, an enemy that originators of the austerity doctrine were determined to defeat. In fact, austerity smashes the methodological/institutional foundations of worker alternatives. Austerity a) re-naturalizes the capitalist pillars of private property and wage relations; b) denies the political and economic agency of workers; c) vindicates the priority of top-down economic science; and d) reasserts the divide between the economic and the political.
This austere view of the social world is also reflected in its liberal thought-leaders’ support of the Italian Fascist regime. Indeed, the liberal establishment was convinced that Mussolini’s dictatorship was the only solution to force the austerity pill upon the “turbulent” Italian people. Fascist political methods to achieve economic success, however gruesome, could be largely tolerated thanks to their accompanying conviction that the economic and the political were two separate domains. Economic experts played no minor role in consolidating Mussolini’s rule.
Those who conceived austerity as a policy in the interwar years had, as the book reveals, both motives and political endgame. What was presented then and now—the rehabilitation of capital accumulation as a means to save the hungry masses—has time and again delivered on its true purpose: to facilitate permanent and structural extraction of resources from the many to the few.
One hundred years later, austerity’s workings have continued to shape our society and have constantly protected capitalism from potential democratic threats.
In her essay “What Is Authority?” the twentieth-century political theorist Hannah Arendt wrote: “The search for the best form of government reveals itself to be the search for the best government for philosophers”—the people doing the search—“which turns out to be the governments in which philosophers have become the rulers of the city.”1
The process is very much the same for austere economic experts imposing their wills on transitional economies since the 1920s: at the very moment their supposedly pure knowledge of transcendent economic ideas is applied to governing the real world, it quickly becomes clear that economic ideas are not really transcendent after all. Such economists may refute the suggestion of an agenda in these moments. Still, their keenly political interventions reveal them—no matter how they may want the story to be told—as inescapably party to a struggle to preserve capital order: seemingly the only form of social order they can conceive of.
The austerity impulse is present even where it appears otherwise. So far in the twenty-first century, two financial crises have been met with economic responses labeled “Keynesian” for their decisions to spend rather than cut. But some old habits don’t die. After 2008, governments took care to save financial institutions first, thereby draining resources from the public in the years that followed. The rationale for such activities perfectly matched those that we have encountered in this book: a shift of resources from the many to the few.
Austerity is a political project arising out of the need to preserve capitalist class relations of domination.
The same austerity pattern emerged during the response to COVID-19. Public resources were lavishly spent to fund financial institutions and large-scale corporations, while the public majority was left with meager crumbs. In the US, the CARES Act of April 2020 allocated $790 billion as loans and guarantees to large businesses and tax breaks—an unprecedented amount. Meanwhile the funds allocated for the 160 million American households that qualified for direct payments was less than a third of that.2 Amid mounting unemployment—the global shortfall in employment increased by 144 million jobs in 20203—downward pressure on wages grows and the prospects for private profits are revived. Inequality reached unprecedented new highs during the pandemic, and in June 2021 the International Labour Organization reported that “relative to 2019, an estimated additional 108 million workers [globally] are now extremely or moderately poor, meaning that they and their family members are having to live on less than US$3.20 per day in purchasing power parity terms.”4 An analysis from the Institute for Policy Studies around the same time showed that between March 2020 and March 2021 the world’s 2,365 billionaires enjoyed a $4 trillion boost to their wealth, increasing their fortunes by 54 percent.5 As austerity takes more sophisticated forms, it remains a boon for a predictable few.
Soaring public deficits that have mounted due to COVID-19 will call for harsher austerity in the near future. In February 2021, the Harvard economist Lawrence Summers, speaking at Princeton University about the inflationary risks of the Biden administration’s proposal to issue a cash stimulus to the American public, told the audience “there is no compelling economic case for a stimulus.”6 If governments were to provide households with “more than what they need,” those households’ spending would throw off the delicate stasis of the economy: “the spending propensity out of [middle-class households] would be far greater than the spending propensity economists usually estimate from wealth which is driven by fluctuations in the stock market.”7 Spending by people who shouldn’t spend, Summers warns, would cause inflationary harm to the economy of the wealthy.
Summers’s fears and predictions echo the scoldings that have defined austerity for a century. These ideas are neither wrong nor irrational, per se. They are merely the expression of a very clear worldview, one whose global primacy is maintained by a century-long project in economic austerity. It is grounded firmly in the most dismal parts of the dismal science, those that keep people entrenched within a status quo.
As of October 2022, mounting inflation around the globe is escalating labor unrest; to this, like clockwork, our governing economic institutions are reacting with soaring interest rate hikes. FED chair Jerome Powell, along with other heads of central banks and monetary policymakers, struck ominous tones in warning the public that “pain” will be necessary—even desirable—in order to get the global economy back on its feet. Increases in the costs of borrowing induce firms to forgo productive investment, thus triggering layoffs. Indeed, experts today are factoring in a rise in US unemployment to at least 4.1 percent in 2024, with Larry Summers telling us that “We need five years of unemployment above 5% to contain inflation.” The message is explicit: a higher unemployment rate and cuts in social benefits are the keys to halting inflation and restoring a “healthier” labor market—i.e., one where workers want to work, but don’t demand so much money for it.
The technical jargon and the notion of “pain” mask an unpleasant truth about modern economies: in order for them to run smoothly, they require an underclass of workers who make little and consume even less. The current moment, like earlier moments in history, reflects the profoundly political nature of economic policies—and, ultimately, the bruising nature of our economic system.
Contrary to what the proponents of austerity would have us think, however, the socioeconomic system we live in is not inevitable, nor is it to be grudgingly accepted as the only way forward. Austerity is 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. It can thus be subverted through collective counteraction. The study of its logic and purpose is a first step in that direction.
Reprinted with permission from The Capital Order: How Economists Invented Austerity and Paved the Way to Fascism by Clara E. Mattei, published by the University of Chicago Press. © 2022 by The University of Chicago. All rights reserved.
- Arendt, Hannah. “What Is Authority?” In Between Past and Future: Eight Exercises in Political Thought. New York: Viking Press, 1961, p. 114. ↩
- See breakdown of the $2.3 trillion in: “A Breakdown of the CARES Act,” J. P. Morgan, April 14, 2020, https://www.jpmorgan.com/insights/research/ cares-act. ↩
- The ILO’s World Employment and Social Outlook Trends 2021, p. 12 (https://www.ilo.org/wcmsp5/groups/public/—dgreports/—dcomm/—publ/documents/publication/wcms_795453.pdf). The report further reads: “Projected employment in 2021, however, will still fall short of its pre-crisis level. In addition, it is likely that there will be fewer jobs than would have been created in the absence of the pandemic. Taking this for- gone employment growth into account, the crisis-induced global shortfall in jobs is projected to stand at 75 million in 2021 and at 23 million in 2022 (see the figure below). The corresponding shortfall in working hours in 2021 amounts to 3.5 per cent—equivalent to 100 million full-time jobs.” ↩
- The 2021 ILO report tells us that “global labour income, which does not in- clude government transfers and benefits, was US$3.7 trillion (8.3 per cent) lower in 2020 than it would have been in the absence of the pandemic.
For the first two quarters of 2021, this shortfall amounts to a reduction in global labour income of 5.3 per cent, or US$1.3 trillion” (“World Employ- ment and Social Outlook Trends,” 12). Moreover, the World Bank estimates that in 2020 an additional 78 million people were living in extreme poverty, defined as households with a per capita income of less than US$1.90 per day in PPP terms (Lakner et al. 2021). ↩
- The combined wealth of these billionaires rose from $8.04 trillion to
$12.39 trillion between March 18, 2020, and March 18, 2021. In that year there were 179 more billionaires (see Collins and Ocampo 2021). For a more general perspective on this trend, see Zucman (2019). ↩
- Interview for Bloomberg Wall Street Week, March 5, 2021, min. 55. ↩
- “A Conversation with Lawrence H. Summers and Paul Krugman,” Princeton Bendheim Center for Finance, video recording, February 12, 2021, minute 45, https://www.youtube.com/watch?v=EbZ3_LZxs54&t=121s. ↩