Reviewing Clara Mattei's The Capital Order (2nd part)
Austerity, as Clara Mattei points out in her book The Capital Order, was the
norm in 20th century economic history – “a mainstay of modern capitalism”, as
she phrases it. But it wasn’t omnipresent. Perhaps, therefore, if we want to
plan a prison break from the shackles of 21st century perma-austerity we should
look at the anomalies.
The first, in terms of chronology, is Franklin Delano
Roosevelt and the American response to the Great Depression of the 1930s. All
the tenets of austerity were upended. Interest rates were slashed (the opposite
of the ‘Dear Money’ policy of the 1920s), massive public spending projects were
launched, and trade unions – negating Mattei’s 3rd austerity principle,
industrial austerity – were liberated to begin a mass recruiting drive. The
results were so positive that Roosevelt’s place as the most revered US President
in history remains unshaken despite the principles behind his policies being
totally rejected by officialdom. Mass unemployment was countered, and the
rudiments of a welfare state laid down. Before 1936 nothing – including old age
pensions – existed. Thus, in complete contradiction to today’s economic wisdom,
FDR massively ramped up government spending in the midst of an economic
downturn. Though it has to be said, economic depression did return in 1938 and
was not decisively outrun until the Second World War.
Hitler and anti-austerity
If Roosevelt’s was the humanitarian response to the Great Depression, what
happened in Europe was the opposite. But Hitler, though his aims were thoroughly
malign, also upset the austerity applecart. Specifically, he rejected both (1)
fiscal austerity (2) monetary austerity. The Nazis, through public works schemes
and rearmament, successfully reduced unemployment in Germany from six million in
1932 to less than one million four years later. As I said in ‘The Nazis and capitalism: the reign of the unorthodox’:
Nazi economic policy – cutting taxes,
spending money and instituting public works schemes – could in fact be described
as Keynesian except that it was before Keynes. He most certainly existed at the
time but his most important work – The General Theory of Employment, Interest
and Money – wasn’t published until 1936. As economist Joan Robinson put it,
“Hitler had already found how to cure unemployment before Keynes had finished
explaining why it occurred”.
In fact, in this case, the people who – in the
subtitle of Mattei’s book – ‘paved the way to Fascism’ were not the Nazis but
the conventional politicians who preceded them. German Chancellor Heinrich
Brüning of the (appropriately named) Centre party cut public spending by 15% in
two years in response to economic depression, becoming affectionately known as
‘the hunger Chancellor’ and prompting the Nazis to successfully campaign on an
‘anti-austerity platform’.
Only in one sense did the Nazis remain faithful to
the original Fascist/austerity template. They ruthlessly destroyed independent
trade unions and left-wing parties and carried out a programme of privatisation
(they called it ‘reprivatisation’) in sectors such as banking, steel, and
railways. That is, the Nazis were zealous proponents of (3) industrial
austerity. This is not surprising. Hitler was bankrolled by leading German
industrialists and the very first thing he did when he got into power – as a
junior partner in a coalition with conservatives – was to smash the Left and the
trade unions and put the leaders of the movement in concentration camps.
So
despite Mussolini coming into power extolling ‘thrift’ and ‘discipline’ and
promising to cut ‘out of control’ public spending (or ‘fiscal lewdness’ as one
of his advisers hilariously called it), and Hitler doing the opposite, they had
an awful lot in common. They knew that the first and overriding priority of
Fascism is to destroy the Left, an endeavour to which they were faultlessly
obedient.
However, despite the ‘austerity trinity’ being transgressed in
important ways in the 1930s, the cataclysm was not avoided. The world was still
plunged into the most destructive conflict in its history in 1939-45. What would
have happened if America had succumbed to Fascism, rather than charting a
relatively humanitarian route through the travails of the Great Depression,
probably doesn’t bear thinking about. But it is undoubtedly the case that the
contradictions of capitalism, playing out in the form of the Great Depression,
created convulsions that no amount of deviation from the tenets of orthodox
economics could constrain.
Impure economics
In the aftermath of the Second World
War, the ‘pure economic’ austerity medicine of the early 1920s was thoroughly
discredited, seen as ‘paving the way’ – to use Mattei’s words – to economic
disaster and to Fascism and its attendant horrors. One result was that the
stillborn reforms of the immediate post-First War World period in Britain became
a reality. A National Health Service was created and a huge programme of public
housing was instituted, lasting, in fact, several decades and pursued by
governments of both the Left and Right.
If anyone claimed that, as with today’s
deafening chorus, that ‘there’s no money left’, no-one was listening. In a
landscape of bombed out cities and massively in debt, the British government
nationalised important sectors of the economy (which to be fair doesn’t actually cost anything), abolished the means-tested welfare of the ’30s, introduced free
health-care and rebuilt infrastructure. The maxim of the later Keynes* –
‘anything we can actually do we can afford’ – was taken to heart.
In this
endeavour they were helped, as with Roosevelt in America, by a willingness to
tax the rich and corporations properly. This was a break with (1) fiscal
austerity which holds that only regressive taxes hitting ordinary people, such
as VAT, should rise. Taxes affecting investors and ‘wealth creators’ should be
minimized. Trade unions were also seen as important social partners, and left
free to negotiate the best deal for their members, a refutation of (3)
industrial austerity. And real interest rates (interest rates taking account of
inflation) were also kept low, contradicting the principle of (2) monetary
austerity; a policy known as ‘financial repression’.
Judged by prevailing
notions of monetary wisdom circulating today, one might think that the results
would be economically calamitous. But they were anything but. In Britain, the US
and Europe, economic growth hit heights not seen before – or since – in thehistory of capitalism. Just by the criteria of performance alone, non-austerity
beats austerity hands down. Which does beg the question of why the latter has
been so enthusiastically adopted by elites (maybe they’ve got something other
than economic performance at the front of their minds)?
We need to be careful,
though, to not succumb to a simplistic view of history and convict the austerity
that followed in the 1980s for the crime of brutally slaying the non- or
anti-austerity of the post-war period. The Keynesian consensus fell apart all by
itself. In 1974, the first real recession of the post-war era struck, ushering
in a period known as ‘stagflation’ – economic stagnation (and higher
unemployment) combined with inflation. In fact, we’ve been suffering from a
similarly malign cocktail in the last few years
Return to the mumbling twenties
The 1920s’ style austerity of Thatcher and Reagan was a response to the problems
of non-austerity – in particular inflation, control over which was used to
justify all manner of brutal policies – but it didn’t cause those problems. In
fact, a left-wing alternative to the palpable problems of the 1970s, aside from
the convenient myths, did appear. Harold Wilson’s Labour party won the 1974
election on the basis of a programme that aspired to a “fundamental and
irreversible shift in the balance of poor and wealth in favour of working
people”, although that never materialised. The Left alternative in Britain was
actually led by dissident government minister Tony Benn (interestingly exactly
the same age as Margaret Thatcher) who advocated greater state intervention,
economic democracy and action against poverty. But, in a pre-echo of what
happened to Jeremy Corbyn just recently, the English Left was outgunned by the
English Right.
A plausible argument can be made that all our economic problems
have their roots in the travails of the 1970s which presaged the end of the
post-war boom and have never been resolved. Nonetheless those problems sparked a
full throated reaction from the powerful in the form of Mattei’s austerity
trinity, the ripples from which are still dominating our lives today.
On both
sides of the Atlantic the first years of the 1980s were like a re-run of the
early 1920s, only more so. All the elements of Mattei’s three-pronged austerity
arsenal were deployed, with particular emphasis on (2) and (3), monetary and
industrial austerity. Interest rates rose to above 17% for a prolonged period –
in America this was known as the ‘Volcker shock’ after the chairman of the
Federal Reserve, Paul Volcker. The result was unemployment and the decimation of
industries where trade unions had traditionally been strong. This was seen as a
‘price worth paying’. Especially in Britain, deindustrialization, 4 million
strong dole queues, and the dominance of finance followed.
The conventional
wisdom is that the Thatcherite/Reaganite medicine ‘worked’, after which the
economy prospered. Chancellor Rachel Reeves, unsurprisingly, mimicked this
argument before the 2024 election, saying she wanted to deliver ‘a decade of
national renewal’ – like Thatcher. However, barring feeling the effects of an
ephemeral world-wide boom in the mid-80s, Thatcher (and Reagan) did very little
renewing. Their legacy is tepid economic growth though mushrooming debt, both
personal and corporate.
However, the medicine ‘stuck’ in a way it didn’t 60
years before. For example, the dominance of (1) fiscal austerity can be seen in
the fiscal rules that Rachel Reeves is so determined not to contravene. Their
precepts – that government debt should not exceed 3% of GDP – have their origin
in the preparations for the creation of the euro and are the reason the first
austerity variant has been pursued so zealously in Europe as well as in Britain.
They also illustrate that the desire of the 1920s’ austerians to spread the
gospel – English Treasury officials took the ‘good news’ to India and Brazil for
example – remains just as potent though it has been far more successful the
second time around.
The echoes from the ’20s are all around us. Welfare now is
highly conditional. Disabled claimants now have to prove their incapacity for
work to private companies. Hundreds, possibly thousands, of claimants have diedas a consequence of the Work Capability Assessment. This has a chilling effect
on possible strike action and general disobedience to, in the title of Mattei’s
book, ‘the capital order’. By contrast, the welfare state rolled out in the
aftermath of World War Two and then extended in the decades that followed,
though not generous, was not means-tested (in other words it was universal) and
came with far less conditionality.
Since the 1980s, the British elite has also
favoured regressive taxes on consumption at the expense of taxes on the wealthy
and companies. VAT stood at 8% before Margaret Thatcher came to power. Now it is
21%. Duties on popular ‘vices’ like beer and tobacco – ‘the bad habits of the
British people’ as one of Thatcher’s chancellors Nigel Lawson dubbed them – have
also been prodigiously and regularly hiked. Corporation tax, meanwhile, has gone in the other direction. In 1981, it reached 51%. It is now 25% though it was as
low as 19% a year ago. This mirrors exactly the predilections of the original
British and Italian austerians of a century ago.
Bad austerians
But though it
may seem like we are living permanently amidst the economic presumptions of the
1920s (unknowingly awaiting our Great Depression?), that is not quite accurate.
Though few have noticed, our elites have happily transgressed the common sense
of the original austerians. One of Mattei’s trinity is (2) Monetary Austerity,
which involves hiking interest rates, known a century ago as the policy of ‘Dear
Money’. As noted above, in the early 1980s Britain and America experienced
Monetary Austerity with a vengeance.
But the official reaction to the financial
crisis of 2008 involved precisely the opposite approach. Interest rates were
slashed all over the world – for years in Britain they were lower than at any
time in the 400 year history of the Bank of England. Certain reckless people –
i.e. banks – needed to be saved and this was no time for dogmatism. Hence we
had, not Dear, but Cheap (as chips) money. As American economist Michael Hudson
has said a zero interest rate policy “was designed to bail out the banks that
were insolvent after 2008 and 2009 … by flooding the economy with credit”. It’s
enough to make Ralph Hawtrey or Alberto De Stefano – two stellar cast members of
the first austerity tour – turn in their graves.
Of course, post-Covid interest
rates are high (or higher) now. The conviction among the world’s central bankers
is that after a decade of rock bottom rates, the economy can now ‘take it’.
Whether that’s true is a moot point. There have been contained banking crises
and a major part of the economy – private equity – bases its whole businessmodel on being in debt and so is particularly susceptible to high interest
rates.
But the point is no-one wants rates to stay high (Monetary Austerity)
because the damage is so palpable. In Britain, house prices have risen by over
1,000% since the early ’80s and, as result, the rise in interest rates has
seriously inconvenienced mortgage holders whose mortgages are now so much more
expensive. This is a prime reason for the unprecedented collapse in Conservative
party support in Britain. Unlike in the 1920s and 1980s, Monetary austerity is
impacting people that elites don’t want to alienate.
By contrast, the thirst
among elites for (1) Fiscal Austerity is seemingly unquenchable. In 2010 and
again in 2015 George Osborne ordered swingeing cuts to government departments
and the dose is likely to be repeated by Rachel Reeves. Revealingly, the only
time the British elite lost its yen for spending cuts – when Johnson’s
Chancellor Rishi Sunak promised “a decisive end to austerity” in 2020 – the
implacably anti-austerity Jeremy Corbyn was still leader of the Labour party
(and his successor Sir Kier was making anti-austerity noises).
The Liz Truss
debacle, or ‘bloodless coup’ as one writer has called it, was caused by ‘the
markets’ taking fright at not merely tax cuts but two-year subsidies for heating
bills based on deficit spending. Thus, (1) fiscal austerity, taking the form of
cuts to the Winter Fuel Allowance for example, were effectively ordained by
Mattei’s technocrats who essentially run society, all appearances to the
contrary notwithstanding.
Don’t stop shopping
The mantra of 1920s’ austerity, as
Mattei illustrates time and again, was ‘consume less and produce more’. This was
achieved, at the expense of inducing a recession, by a careful combination of
the austerity trinity – fiscal, monetary, and industrial. And in this mix
monetary austerity was absolutely essential.
In contrast, modern, primarily
fiscal, austerity may have the effect of reducing wage levels – we are still in
the midst of the biggest stagnation of wages in Britain since Napoleonic times –
but the forlorn hope is that people will still consume at the cost of getting
more and more in debt, or that their wealth will be boosted by rising house
prices. In other words, consumer spending, which accounts for around 2/3rds ofGDP, is now so fundamental to the economy that nobody wants to kill the goose
that lays the, admittedly a lot less golden, egg. Aggregate demand, irrelevant
to 1920s’ policymakers but crucial to post-war Keynesians, is still important
though concocted in a different way. The mantra is now ‘produce more and carry
on consuming, somehow’. Some have called this policy – which would have been
utterly mystifying to the original austerians – privatised Keynesianism.
There
is another way in which the situation of the 1920s is vastly different from the
one we are now faced with. That concerns the capital of Mattei’s ‘capital
order’. Capital is money held by those at the top of society who invest it in
order to make more money, thus replenishing, or growing, the original stock.
This is in contrast to money for consumption which just instantly disappears the
moment it is spent. As Mattei relates, the austerians of the 1920s were
perpetually anxious about the scarcity of capital, dissipated in the destruction
of the Great War. In their minds, other people – the working class conveniently
– would have to make sacrifices so that capital could be accumulated. As a
famous economist of the age, Arthur Pigou, said in The Times: “The country is in
tremendous need for new capital. It is imperative, therefore, that people should
save. Cheap money does not encourage them to do this. Dear money does.”
We are
now confronted by the diametrically opposite problem. Rather than scarcity,
there is now an abundance, if not a glut, of capital. In 2010, American Private
Equity company, Bain Capital, estimated that global capital amounted to a
massive $600 trillion, ten times bigger than global GDP, and predicted that
figure would rise to $900 trillion by 2020. In the past, and certainly the
1920s, apologists for capitalism always resorted to the defence that the system,
whatever its drawbacks and exploitative nature, produced things people needed
and added value using the finite and scarce resource of capital.
But in the 21st
century the relationship has been reversed. Rather than capitalism producing
things needed by society, society is tasked with generating profit opportunities
for the ever-expanding mass of capital. In past decades, and especially so in
Mattei’s 1920s, capitalism had to tussle with rivals to establish its dominance.
Now it towers over society like some movie monster emerged from the deep.
This
can be seen in the way Britain’s ‘Labour’ government is trying to enlist capital
to bolster, and profit from, its investment plans. Private house-builders are to
build new homes, banks are to finance the green transition and carbon storage,
and pension funds will ‘fire up the UK economy’, by investing in infrastructure.
In the past, the state would have taken this role. Not anymore.
I’ve written
before about how we live under a system of ‘bastardised Thatcherism’. Thatcher
came to power promising a laissez faire approach and initially ‘failing’
industries were privatised and the money supply controlled through a policy of
monetarism. Pretty soon, however, the Conservatives began contracting out state
monopolies for the private sector to deliver and presiding over a huge system of
subsidies to favoured corporations.
Likewise, austerity has become tainted.
Parts (1) and (2) – fiscal and industrial austerity are as potent as ever. The
governing class is addicted to continually paring back state provision, to
privatisation, and to finding new ways to stop strikes. But (3) – monetary
austerity – ‘the queen of all austerity policies in the UK’ in Mattei’s words,
is subject to more inhibitions, with the fear of doing permanent damage to the
lifeblood of the economy, consumerism, lurking in the background. But though,
just like Thatcherism, austerity has been bastardised, the bastards are sitting
secure in the saddle and that was always the point.
*As Mattei reveals Keynes
went through something of an intellectual conversion. In 1920 he was a ‘Dear
Money’ man, in fact writing to the Chancellor of Exchequer to urge that interest
rates be hiked to a higher level than even the government could get away with.
By the 1930s, he was advocating the opposite. Maybe the facts changed.
