When Clement Met Margaret – the unholy alliance of the 1950s and the 1980s

It’s the worst of both worlds. A glance at 20^th century economic history indicates that the noxious right-wing consensus currently ruling the roost in this country is intent on the nightmarish combination of post-WW2 military Keynesianism (state spending on arms manufacturers) with 1920s/1980s austerity which shuffles the tax burden onto ordinary people and lets the rich get away with murder.

In order to appease Trump, Sir Kier Starmer has promised to spend an extra £32 billion a year on defence (taking spending on weapons to at least 3.5% of GDP) ostensibly on the absurd notion of protecting the country from Vladimir Putin menacing British streets. And absent any willingness to tax the billionaires, this can only come from renewed austerity and increased taxation on most people.

The image of post-war decades in this country (and Europe) is bathed in the sepia-tinted light of the birth of welfare states and health services. Out of the rubble of World War Two, Britain created the National Health Service and instituted a mass council house building programme, two things that clearly cost a lot of money. This can be designated social Keynesianism (state spending that benefits people).

However, this memory is selective. At the same time, after falling immediately after the Second World War, military spending hit 11.2% of GDP around the time of the Korean War in the early ’50s. It subsequently dropped but still remained comparatively high, holding steady at over 5% of the GDP in the 1970s.  This can be designated military Keynesianism (state spending on weapons). Hitler and later Ronald Reagan were quite taken with the concept.

Bear in mind that 5% of GDP is what Trump and Nato want military spending to be.

In truth, the post-war years saw the creation of both a welfare and a warfare state. “After the Second World War, Britons built not only a new Jerusalem but a new Sparta,” writes historian David Edgerton in The Rise and Fall of the British Nation. “Though no longer one of the greatest powers, in the 1950s the United Kingdom was militarized to an unprecedented peacetime degree.”

Into the 1960s and ’70s, he notes, the “warfare state” consumed more than the health or education budget.

Now we are told, in the midst of what is undeniably a much richer country, that we must choose warfare over welfare. Not we have a genuine welfare state nowadays anyway. After years of ever greater conditionality rules being attached to it, it is more properly classed a punishment state.

But what is interesting about the post-war years is not only that a balancing act between welfare and warfare was achieved but that it was done without imposing unbearable levels of taxation on ordinary people. The lower middle class enjoyed an effective tax rate far lower than today (before the increase in military spending hits), whilst large and essential ‘consumer’ items, such as houses, were much more affordable.

How was this possible, let alone actualised? The answer lies in three decades of robust economic growth (the best in the history of capitalism) which permitted rising public spending – part of which was diverted to military purposes – and the paying off of war debts. But this package, benign in certain respects, was enabled by much heavier taxation of the wealthy, encapsulated in the Beatles’ song ‘Taxman’, an embittered two and half minute whinge about paying 92.6% supertax. In fairness to its author, George Harrison objected to paying tax so governments could find new ways to bomb people and in that he was, at least partially, justified.

Socially speaking, however, the post-war years were a conscious repudiation of the policies of the 1920s and ’30s. As shown by Clara Mattei in The Capital Order in many countries, Britain and Italy for example, this involved swingeing cuts to public spending (that had risen in the aftermath of World War One), coupled with reducing direct taxation on the rich and increasing indirect taxation of consumption, especially duties on working class pleasures such as tobacco, beer and spirits. In Britain corporation tax, only created in 1920, was abolished four years later and would only return after 1945.

By then this economic cocktail was thoroughly discredited. It had contributed to and exacerbated the economic depression of the 1930s, laying the foundations for the worst conflict in human history, the Second World War.

But the dawn of the 1980s was long enough for amnesia to have set in. Thatcher in Britain and Reagan in America set about rehabilitating the economic prescriptions of the 1920s. Public spending was held down, mass privatisation inaugurated, and taxation precepts turned upside down. Direct, progressive, taxes on the rich were slashed while consumption taxes – regressive because everyone pays the same – were hiked. For example, corporation tax was 51% in 1981 and it is now at less than half that level (and recently has been even lower). VAT has gone in the opposite direction. It stood at 8% in 1979 and has since nearly trebled.

There is admittedly one significant difference. Whereas the austerity mongers of the 1920s were unconcerned about the effects of their policies on mass consumption, since the 1980s our political overlords have been far less complacent. A four-decades long house price boom, the huge expansion of personal debt, frequently low interest rates, and the introduction of tax credits have attempted to compensate for the fact that wages have not risen as they did in the post-war decades and in recent years have flatlined.

Some have called this privatised Keynesianism – a third kind of economic policy named after someone who died in 1946.

But the point is that, in conspicuous contrast to their predecessors of the 1920s, Thatcherism and Reaganism had the necessary stickiness. They stayed around. So much so that the current ‘Labour’ government in Britain is, in essential respects, Thatcherite. It is committed to deregulation, not increasing tax on the wealthy and keeping utilities like water and electricity in private hands. Any similarity to the Clement Attlee government of 1945-51 is purely rhetorical.

Except, though, in one respect. It is intent on repeating the trick of post-war military Keynesianism which, in addition to the creation of the NHS and nationalisation, the Attlee government eventually succumbed to, especially with Britain’s involvement in the Korean war in 1950. In response to this, defence spending doubled.

The post-war decision to increase weapons spending was not painless. It involved introducing charges for some NHS services which sparked a bitter controversy and much soul-searching about the meaning of democratic socialism.  But the conversion happened without sacrificing the core of the post-war settlement. The Conservatives – in power from 1951 – continued the huge council house building programme and the welfare state was expanded in the 1960s and ’70s.  Government policies tended towards increasing equality.

However, that was then. Thanks to the incredible shelf-life of Thatcherism, we don’t live in the same country anymore. As a result, something has to give – if you want to spend an extra £32 billion on the military, the money will have to be re-allocated from elsewhere and augmented from increasing taxation even more on moderate earners.

This process is already in the works.  In addition to slashing support for new claimants for disability benefit, the government is merging the Work Capability Assessment (for Universal Credit) into the assessment for Personal Independence Payments.  It is estimated that over 600,000 chronically ill and disabled people will lose their means of support as a result.

Plans to raise the state pension age to 70 are cut from the same cloth.

As socialist economist Michael Burke has said, “the funding for the war drive can only be generated by much harsher austerity, harsher even than in 2010.”

More and more, the decades following World War Two appear a unique aberration in the history of capitalism, precipitated by a uniquely destructive conflagration that was the deadliest in history.

Rather the norm is austerity, low taxation of the rich and corporations, unending hostility towards trade unions, and military aggressiveness.

Politically we are reverting to type too. The Second World War alliance against Nazism of a ‘communist’ country and western capitalist states only came about as a last resort after the latter had exhausted all other possibilities. Previously, and for years, British and French elites had wanted to enlist the Nazis as a “bulwark against Communism”, giving them a “free hand” to attack the Soviet Union. Even after the outbreak of the Second World War (during the seven-month “phoney war”), Britain and France still plotted an attack on the Soviets.

The preference for the far right has clear echoes today. Despite growing public disquiet at the genocide, the British government is still supporting the Fascist Israeli government and the West finds de facto support to Fascist thugs in Ukraine aligns with its geopolitical ambitions.

Is there an alternative to this witches’ brew? I want to explore those possibilities in a later post.

A Rough Economic History of the Last Century (with a lot left out)

 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.

Expert Fascists: The Untold Story of the Spirit of Our Age

“History is a nightmare from which I am trying to escape,” someone said once. In the case of austerity, the nightmare has lasted for more than a century and the alarm isn’t about to jolt us into reality. “Outside, perhaps, of the less than three booming decades that followed World War II," Clara E Mattei notes soberingly in the introduction of her fine book The Capital Order, “austerity has been a mainstay of modern capitalism”.

Even the words are the same. In 1920, upholding the urgent need for countries to “pay their way” through spending cuts and individual abstinence, Lord Robert Chalmers, former permanent secretary at the Treasury, warned of the necessity of “painful” choices. In 2024, as an autumn budget featuring spending cuts of £1bn per department and tax rises looms, Sir Kier Starmer, PM of something called the ‘Labour’ party, has told us to steel ourselves for the “painful” decisions that must be made.

And just as in the 1920s, the promised sunlit uplands – the better times which this perpetual medicine is supposed to give way to – never appear. We must, says Starmer, “accept short-term pain for long-term good”. But we have been hearing that message for 14 years. Britain has been subject to austerity – of the fiscal kind – since 2010. And we (or the governing classes) are still making the same mistake. Maybe, as Mattei suggests, it’s not a mistake.

The Capital Order is about the origins of the creed of austerity. In the aftermath of the First World War, when the public wanted a “land fit for heroes” and the workers’ movement was on the march after decades of subservience, the wise, grey men in the shadows of power realised that something had to be done. The pressure of “excessive” demands on government had to be eased and workers, who were not only pressing for wage rises but questioning the immutability of the rule of capitalists over industry (‘the capital order’ of the book’s title), needed to know their place again.

Without drastic change and a remoulding of public opinion, the result would be ‘socialism’ or, in the worst nightmare of all, workers’ control and Bolshevism.

In Britain, the spirit of the age was trending in this catastrophic direction. Strikes were rampant and ‘reconstructionists’ from the elite, inspired by what had been possible during the war after laissez-faire had been discarded, were hatching plans for a free national health service and huge house-building programme (financed in part by local councils through non-profit making building guilds). It is fascinating to discover that the bulk of the reforming programme of the Attlee government after the Second World War was actually drafted in 1918-20 before being brutally scotched.

In Italy, as Mattei elucidates, things were even more serious. The workers’ movement was reaching the peak of its power – factories were seized and occupied during the long hot summer of 1920. The government stood by, helpless, and revolution seemed just a matter of time.

But at this point in both countries economists and bankers decisively entered the stage of history. On their advice, politicians implemented ruthless austerity. In Britain, savage spending cuts (the ‘Geddes Axe’) were forced through, and a policy of high interest rates, which caused a recession and mass unemployment, imposed in the face of protests. By 1922, wage levels were a third of what they had been in 1920, and 20% cuts in government spending were forced through. Confronted with the situation, workers went into survival mode and the strike wave evaporated.

The Italian ‘solution’ was even more extreme – Fascism. Mussolini marched on Rome and the supine Parliament granted full powers to his minister of finance, the liberal economist Alberto de Stefani, and his team of mainly non-Fascist advisors.  Free to follow their hearts’ desires, they implemented drastic reductions in welfare spending, abolished short-lived experiments in progressive taxation on the rich and corporations, and privatised state-run enterprises such as telecommunications. Coupled with Mussolini’s brutal physical destruction of the Left and workers’ organizations, the economy was pacified and profit-making made a safe endeavour again – though at the cost of wage levels, which sank like a stone, and political and economic freedom.

I must quibble here with the subtitle of the book – How Economists Invented Austerity and Paved the Way to Fascism. In Italy, they didn’t pave the way to Fascism; they were Fascism.

But regardless, what Mattei has done here is a wonderful example of historical revisionism (which is usually tainted by being associated with holocaust denial). It tells you things you very likely did not know and corrects the oversights of the historical ‘canon’ – a narrative which views the 1920s as a well-meaning period blind to the pain to come as a result of the Great Depression and the “low, dishonest decade” to follow. This book changes the way you view the past and thus the present.

Based on the experience of the last decade or so in Britain and Europe, most people tend to view austerity in terms of budget cuts and (regressive) tax rises. But, as Mattei points out, this is just one prong of the “austerity trinity”.

Fiscal austerity (1) is often accompanied by (2) monetary austerity which entails large rises in interest rates – the cost of holding debt – ostensibly to combat inflation but at the cost of driving the economy into recession. In the 1920s, this was known as the “dear money” policy – “the queen of all austerity policies in Britain” according to Mattei.  Dear Money was inaugurated in 1921 (when interest rates were raised to 7%) and lasted for more than a decade. It was still the official response to the Wall Street Crash of 1929 and predictably only made things worse. But the most brutal example of monetary austerity in the West took place at the beginning of the 1980s on both sides of the Atlantic, when interest rates were hiked to above 17%. The result was recession, mass unemployment (reaching 4 million for a decade in Britain), and the taming of organized labour. Again these results were not an unfortunate mistake. And the lady wasn’t for turning.

The last leg of austerity is (3) industrial austerity, which involves privatisation and crushing organized labour and the right to strike. Both, as Mattei details, were an integral part of Fascist austerity in 1920s’ Italy which literally destroyed (physically) the workers’ movement, enshrining a period of ‘industrial peace’. Industrial austerity was zealously resuscitated by Margaret Thatcher in the 1980s leading to a world-wide revolution in economic ‘common sense’, shaping the economic landscape we now take for granted. Nowadays in Europe, if you displease the economic overlords of the European Central Bank, you will be compelled to swallow the medicine of both fiscal and industrial austerity – budget cuts, privatisation, and laws against striking.

But if the economic history of the 20^th and 21^st century has, in the main, been one of austerity, the three horsemen of the austerity trinity have not always been paraded at the same time. Depending on the circumstances, different aspects have been stressed while others have been ignored – or in fact seriously transgressed.  This discordant record, dependent on the needs of the time as defined by technocrats shielded from democratic accountability, reveals – as we will see in part two – a lot about our current economic predicament.

Money, money everywhere and not a drop to drink

Water, wealth uncreation and turning the means of life into financial assets

The scandal of Thames Water – £14 billion in debt and seemingly incapable of fixing leaks or avoiding untreated sewage being pumped into rivers – says so much about our allegedly democratic political system.

The Conservatives, naturally, want renationalisation – should it become unavoidable – to be a strictly temporary stop-gap before, as with insolvent banks after the 2008 crisis, water is returned to the good hands of the private sector.

But the other team, Labour, are also against permanent nationalisation. In fact, together with the water industry, they are racking their brains to come up with plausible alternatives to it.

Such an absurd situation, at a time when large pluralities of voters, including Conservative ones, want the water ‘industry’ to be taken back into public hands, is perhaps more understandable in the light of the last New Labour government’s intimate ties to the water companies.

Ruth Kelly, for example, former cabinet minister under both Blair and Brown, is head of Water UK, the trade association for the water companies and naturally regards nationalisation as anathema. Angela Smith, former Labour MP and one of the founders of (Don’t) Change UK, vehemently opposed Labour’s previous policy, under Corbyn, of renationalising water. She was quietly readmitted to the Labour party last year. Ian Pearson, former New Labour environment minister is a non-exec director of Thames Water, the UK’s biggest water company, which also employed the ex-Labour cabinet minister and one time Trotskyist, Gus Macdonald, as its  European advisor between 2006 and 2016.

Such an elite consensus is symptomatic of the British oligarchy which masquerades, less and less convincingly with every month that goes by, as a model democracy. The Conservatives are obviously in favour of the continuation of privately-run water – it was Thatcher who privatised it in 1989. But the opposition Labour party is so well ensconced in the (fraying) order of things, that it is just as ideologically opposed to a change in the status quo. Notwithstanding obvious errors like the Brexit referendum, which released so many exorcised ghosts from the closet, British ‘democracy’ is about persuading the public to acquiesce in a state of affairs they dislike more and more as time passes.

But if the water ‘industry’ illustrates the hollowness of democratic decision-making, it also exposes something fundamentally rotten in the way we approach our economy as a whole. The water companies are, it has been reported, collectively in debt to the tune of £65 billion, up from nothing when they were privatised. “The staggering combined debt pile built up by the UK’s 12 water companies means that huge swathes of cash are being spent on interest payments,” fumed the Daily Mail a few weeks’ ago, “money that could be spent cleaning up polluted rivers or fixing leaky pipes.”

But no-one seems to ask why they are in debt. It can’t have been to fund infrastructure investment as the sewage-tainted rivers and seas and unplugged leaks wouldn’t exist if the infrastructure was properly maintained, let alone upgraded. The real reason is both more prosaic and depressing. Deliberately placing companies in debt, in order to extract money from them, is a core part of the strategy of their immensely wealthy owners.

The technical term for this is a ‘leveraged buyout’. The idea goes back to the 1960s but really only took off in the 1980s and ’90s. One American writer on “asset-manager capitalism” describes it thus:

[Traders realized] they could buy a company with borrowed money, using the company’s assets as collateral for the loan. They then transferred the debt to the company, which in effect had to pay for its own hijacking, and eventually sold it for a tidy profit.

The root of Thames Water’s debt affliction stems from the time it was bought by Australian asset manager Macquarie in exactly such a leveraged buyout in 2006. According to Money Week magazine, “by the time it was sold again in 2017 its debt had ballooned from £3.4bn to £10.8bn”.

Incidentally, Macquarie’s interest in the UK’s Water ‘industry’ has not abated. In 2021 it completed a “debt investment” in Anglian Water and acquired a majority stake in Southern Water.

According to American economist Michael Hudson, asset managers and ‘activist shareholders’ now look upon companies generally as “cash cows”. Rather than “plowing [sic] profits back into the corporation to expand the business by new long-term investment, research and development,” he argues, “the company is urged to pay out its earnings as dividends and buy back its stock to bid up its price.”

Share buybacks, illegal until the Thatcher and Reagan eras, have become routine for corporations. Among UK water companies, the owners of South West Water and Yorkshire Water have both initiated share buybacks. The effect of a firm buying back some of its own shares is to reduce their overall number, thus increasing the earnings per share that shareholders receive. However, there is a cost. The money used could have been deployed to invest in the business or, in the case of water companies, modernise infrastructure or reduce bills. According to one critique, “By systematically draining capital from America’s public companies, the habit … corrupts the underpinnings of corporate capitalism itself.”

Politicians aside, many British people are outraged that these predatory capitalist practices are being used to degrade a vital public service such as water provision, without which life would be unbearably hard. But the uncomfortable fact is that such predatory practices are degrading capitalism as well.

The peril of damaging the delicate flower of ‘wealth creation’ is invariably raised whenever the idea of public ownership or more regulation or taxation is mooted. Sir Keir of Starmer-land, leader of something called ‘the Labour party’, says that ‘wealth creation’ and economic growth must happen first if money is to become available for public services.  But today’s financial managers, in the water industry or elsewhere, aren’t doing anything to create wealth. Instead, by stopping infrastructure or capital investment from occurring, they’re destroying it – to no-one’s benefit but their own.

And this is before the fact that they invariably avoid paying any tax on their ‘wealth creating’ activities is brought into the equation. Because water firms – and many other companies – are drowning in debt, they pay very little tax on their “special dividend payments”. Thames Water, for example, admits it doesn’t currently pay any corporation tax “because of the Government’s Capital Allowances scheme and the impact of our interest costs”.

We have been lulled into accepting the fiction that wealth creation is synonymous with rich people doing whatever it takes to become even richer – that a high share price is a sign of economic vigour  – when, in reality, their labyrinthine money-making schemes can be its utter antithesis.

Arguments contesting the duplicitous concept of wealth creation have generally taken the form of arguing that other people – workers, entrepreneurs or consumers – are doing the real work of creating wealth. The owners, by contrast, do very little, apart from becoming legally entitled to receive it after it has been generated. This is what Marxists call (surplus) value. But even one takes the highly dubious wealth creation ruse at purely face value, it involves the creation of jobs and products or services by someone. How are we to react if, in fact, no value is being created, besides the ‘wealth effect’, the translation of capital gains made in the stock market into luxury consumption?

At this point someone will be sure to pipe up about pension funds. They loom large among the investors in water companies (and electricity firms), either as clients of the private equity investment firms that own them, or as partners in consortia that run water companies directly. For example, the Universities Superannuation Scheme (for academics in the UK) and the Ontario Municipal Employees Retirement System both own large stakes in Thames Water.

But pension funds are as desperate for ‘yield’ as anyone else, in order to pay for the pensions of current and future retirees. They illustrate the absurd quid pro quo we have got ourselves into – that we must accept sewage being pumped into rivers and seas, and bills that keep rising while tax is avoided, in order to ensure barely adequate occupational pensions for thousands of ordinary people.

This is not a choice we should be forced to make. As should be obvious since the financial crisis, the stock market is not, despite superficial appearances and the best efforts of governments through ‘quantitative easing’, an eternally bountiful cash cow – either for money managers or pension funds. The old pension system in the UK – a better basic pension and an occupational (SERPS) scheme – both based on the pay-as-you-go principle offered more stability than endlessly trying to squeeze as much as possible from unwilling companies or privatised utilities that neglect their primary functions in favour of making money.

Still there is something archetypal about water. Along with energy, health services, ports, nursing homes, waste management, car parks, telecommunications etc., it is a real asset with a guaranteed cash flow that makes it irresistibly attractive to asset managers. This is, according to one author, “a society in which the key physical systems supporting social life and its reproduction—so-called ‘real assets’—are increasingly owned by institutional investors [pension funds, insurance companies, university endowments] specifically through the mediation of dedicated asset managers [the plunderers] and their investment funds.”

However, it seems peculiarly odious that water, so basic to the preservation of life, is treated in this manner. One of the first things acts of a Corbyn-led Labour government would have been to renationalise water, while his successor is brainstorming ways to head off the threat of that common sense option being taken. Nothing else illustrates quite so starkly which side they are on.

 

Addendum: Last week ITV broadcast a programme called 'Dirty Water – what went wrong', an investigation into why there were more than 300,000 sewage spills in England & Wales last year. But the programme shied away from the real reason things have gone horribly wrong – privatisation. Specifically a system in which asset managers buy water companies by placing them in debt and then get them to pay for the privilege of being bought out – in the process sacrificing the basic function they are supposed to have, which is to ensure clean water. The programme suggested that bills would have to rise to pay for the investment in infrastructure that will have to take place to avoid the mass contamination of water in the future. But bills have already increased by 40% in real terms since privatisation, with the result of sewage being pumped into rivers & seas across the country. So where has all the money gone?  You don't need me to tell you.

The experience of England is not unique. In the book Our Lives in their Portfolios, author Brett Christophers relates how private equity companies have acquired water systems across cities in America with the result that bills have skyrocketed while the systems themselves have been left in a terrible state. In England & Wales all but three of the water companies in England & Wales have been removed from the stock market by private equity firms.

The incidents are not exceptions, says Christophers. "Rather, they are the more or less inevitable upshot of core features of the model by which asset-managers society operates. They are, in short, a feature not a bug".

I look forward to a TV programme about that.