Book Review - Austerity: The Great Failure

In Austerity: The Great Failure (2014, Yale University Press), Florian Schui examines the history of thought on the subject of austerity. In it, he looks at the wider definition of austerity, which is the abstention from consumption, and not the narrow definition related to fiscal policy which is how the term is currently being used in economic debates. He argues that the argumentation in favour of austerity policies rely on the moral and political tendencies that come from that wider definition of austerity. That is, if austerity is good for households, it is good for governments.


The book covers a very long history, and the text does not attempt to give citations for every point he makes. Instead, he offers citations for direct quotes, and he has a bibliography which covers the references he indirectly draws from. This format puts the text midway between a popular treatment and a more dense academic style. Correspondingly, it could be used as an introduction to a history of this aspect of economic thought.

Book Description

The main text is 189 pages, and also contains 12 pages of end notes and bibliography. The main chapters are:

1. Austere ideas for austere societies: from Aristotle to Aquinas.
2. Austerity v. reason: from Mandeville to Voltaire
3. Austerity for capitalism: from Smith to Weber.
4. Austerity for stability: from the Great War to the next.
5. Austerity can wait: Keynes.
6. Austerity for the state: Hayek
7. Austerity for the planet: green ideas of consumption.
8. Is greed good?

The author, Florian Schui, recently started working at the University of St Gallen in Switzerland after working at the University of Cambridge and Royal Holloway, The University of London. His research interests are in the history of political and economic thought, and economic history.

Summary

As the chapter titles indicate, the book looks at the evolution of the thinking about austerity from Aristotle to the present. Given the historical scope involved, he is forced to look at a number of influential thinkers. I have only limited knowledge of economic thought from before the twentieth century, and so I am not in a good position to judge the parts of the text dealing with earlier history.

It was only relatively recently that the economy was singled out as a topic of study. To what extent it attracted intellectual attention, it was only in the context of politics. Economies generally grew relatively slowly, and were often driven by the agricultural cycle.

Early philosophers (such as Aristotle) emphasised the importance of the moderation of consumption. Therefore, personal austerity was viewed as being an important component of "the good life". Of course, austerity was relative. The rich (typically landowners) were expected to consume more, as befits their station (and one may note that Aristotle himself was of considerable means). Christianity, which spread as a religion amongst slaves and the internal proletariat (using Toynbee's formulation) of Roman society, put an increased emphasis on personal austerity.   

One can note that the bias towards the moderation of appetites was widespread amongst both Eastern and Western mystics and philosophers. Although I am not an expert, my impression is that the schools of thought that are associated with excess - for example, Hedonism - only gained those associations by slander spread by competing groups. In any event, our knowledge of the classical period was filtered by the fact that books only survived if they were transcribed by ascetics in monasteries. If some contemporary politician had espoused a convincing justification for the "Whoever dies with the most toys wins" philosophy, that justification was not likely to survive in written form.

Once economics broke off as a separate discipline, the question of how to maximise growth arose. There arose the awareness that consumption was the objective of economic activity, and that the strongest economies were those that engaged in foreign trade. That trade was mainly what were initially luxury goods, such as spices.An intellectual defence of consumption had to be made against the existing bias towards asceticism.

One famous example was Mandeville's poem of 1705 - The Fable of the Bees, which had the alternative title - 'private vices, publick benefits'. In this, he describes a colony of bees that are individually 'immoral' in their actions, yet are industrious in aggregate. But then the bees turned to follow the current views on morality, and their economy collapses due to a lack of consumption.

As time passed and capitalist societies had a greater need of fixed investment, economists came to the rescue of thrift, as they argued that economies would only grow if savings were available. In the book, Schui discusses the thoughts of Adam Smith and Max Weber on this matter; the view was that societies needed to cultivate a moral, thrifty middle class that would provide the savings needed to power a growing economy.

This viewpoint survives to this day in the moralistic posturing around the Savings = Investment identity.  The argument that increasing personal financial savings is virtuous is rather convenient for the finance industry, and so it keeps this particular bit of mythology alive.

This moralistic background merged into more modern economic debates in the Twentieth Century. I will discuss those areas of debate in the following sections.

In addition to recounting the history of thought, the book has a number of interesting historical stories and anecdotes. I discovered that I had bad timing for publishing this review. I should have published it earlier, to coincide with World Savings Day, which is October 31st. Funnily enough, the holiday is celebrated in various German-speaking countries, but has not made a big impact in the English-speaking world. Apparently, civic celebrations that are not endorsed by retailers do not make much of an impression around here.

The Interwar Era

The chapter 'Austerity for stability' provides an introductory history of the period after the First World War. In that period, policy makers launched 'austerity drives' in order to allow the countries to return to pre-war Gold parities. These policy makers were the intellectual forefathers of the Euro area policy makers who are deflating their economies in order to preserve parity with the euro in their domestic economies.

Since the people who upheld the Gold Standard were not exactly thinking, this chapter is weighted towards economic history than economic thought. From my point of view, the treatment of the topic is good, but it must be recognised that there is considerable controversy around the topic of the Gold Standard. You would need a larger treatment, such as Eichengreen's Golden Fetters, to get a better grasp of everything that was going on at that time.

Keynes - Austerity Can Wait

Keynes created an analytical framework which showed that thrift by individuals could be self-defeating as a result of the fall in money incomes. The book covers the history of this idea, which pre-dated Keynes. However, the earlier authors lacked the formal framework justify this view, and so they were ignored by economic orthodoxy.

The history of Keynes' thought is reasonable, but it is difficult to cover all of his contributions within a single chapter. For modern readers who know little about Keynes, the description may be somewhat surprising. Keynes is viewed by some as some form of communist, whereas he would probably be classified as some version of "Big Government Conservative" or "paleo-conservative" in the modern American political spectrum.

The key contribution of Keynes within the narrative of the book is that it was possible to increase consumption and production with government intervention. Therefore, austerity in personal consumption was not needed. But he also discusses the views of Keynes about the long term. Keynes argued that increasing productivity would make it possible to provide the necessities of life with only a limited number of hours in the work week, and so it would be necessary to adapt society so that it can take proper advantage of increased leisure time. His extrapolated his experience as a member of the English privileged classes, and hoped his preferences would be adopted by the increasingly idle middle classes.

Effectively, this meant a return to personal austerity, at least with regards to optional consumption goods.

My main concern with that chapter is that I view the arguments about personal austerity as being archaic. It makes sense to focus on 'the fallacy of thrift' if you want to cover the history of Keynes' views, but it does not reflect the emphasis of more modern 'Post-Keynesian' thinking.  In hypothetical barter economies on desert islands, personal savings are needed to allow for investment. But in our present system of money manager capitalism, savings and investment decisions have been delegated to professional corporate managers. And since investment is essentially self-financing in aggregate, there is no need to encourage thrift by individuals. The preferred framework of the management of personal savings revolves around questions of equity and the habits societies want to encourage, but the effect on growth rates in aggregate are negligible.

Hayek And Austerity For The State

Schui takes Friedrich Hayek as the examplar of modern libertarian "conservative" thought. He summarises Hayek's views as follows. Although government intervention could possible raise growth rates and hence consumption, doing so infringes upon the liberty of citizens. Instead, governments ought to be minimal so as to maximise the personal liberties. To update to current economic controversies, one could say that "secular stagnation" could be brought to an end by muscular fiscal policy, but that would be a bad idea as the bigger government would endanger freedoms.

My concern about this chapter is how representative Hayek is of modern "conservative" thought. His views fit within a respectable branch of Western political philosophy. But I would argue that Ayn Rand's Atlas Shrugged - which rejects a good portion of Western thinking about ethics - captures the spirit of modern libertarianism much better. If the state offends job creators, prosperity for all will diminish. Inflation is hated because of the Cantillon Effect - the initial recipients of newly created money (banks and government) get to spend it before the price level rises for everyone else. Unlike Schui's representation of Hayek's thought, government intervention is argued to cause a lower standard of living for all. In other words, they are not accepting austerity in exchange for greater liberty.

Additionally, the thinking that has lead to austerity in fiscal policies is probably not libertarian. It is a reversion to "sound money" finance, which dominated thinking up until the 1930s. The discredited theory that growth rates would be depressed if the debt-to-GDP ratio rises above 90% was a major justification of these policies. In other words, fiscal austerity was supposed to allow for greater private consumption, and so it does not neatly fit into his description.

Green Austerity

He also describes "Green" (environmentalist) thought, although he has the difficulty of not being able to analyse a single individual's point of view. The argument he presents is that Green views are just a new justification for personal austerity, except that concern about the planet replaces the original classical moral preference for moderation.

From a North American standpoint, I am unsure about this description. Unlike Europe, organised Green parties have been largely politically futile. But at the same time, "green consumption" has become an extremely dominant force in marketing. One could argue that all that has happened is that "sustainable consumption" is just moving to replace "non-environmentally aware" consumption. But the objective remains the same - consume as much as possible, and in a way to mark social position.

And as someone in the Peak Oil camp, this chapter was the most problematic from an analytical standpoint. He relies heavily upon the analysis of Bjørn Lomborg, writer of 'The Skeptical Environmentalist'. Bjørn's theory can be summarised in the same way as the Poincaré Recurrence Theorem - if it happened once, it will happen again. Because humanity has had growing supplies of energy available for a couple of hundred years, we assume that this trend will continue, as a result of technology.

He repeats a claim that it would be "enough to cover a small part of the Sahara Desert with solar panels in order to provide for the total consumption of energy". I have no interest in tracking down how far off reality that statement is; all I can point to is the fact that renewable energy sources are a tiny percentage of total global energy supplies, and no projection has that changing any time soon. Although the Earth receives a great deal of energy from the Sun, it is too diffuse to do much useful work with it. The amount of solar energy that is usable for anything other than background heat is much smaller than the notional energy that arrives as a result of the laws of thermodynamics. In reality, global oil production has peaked, and total energy supply is only rising because natural gas has not yet hit its peak. The reason that the "limits to growth" are not biting is because the developed countries have essentially stopped growing.

Has Austerity Failed?

In conclusion, he argues that the traditional arguments in favour of austerity have failed. Abstinence does not lead to greater economic growth. But he argues that societies need to look beyond economic growth, and hence most mainstream economic theory,

I have no objections to his conclusions. But if we return to the questions around "austerity" as applied to fiscal policy, the debate is more technical, and we have to focus on narrower questions about growth and the distribution of resources. Blowing up your economy on the theory that poorer people are more moral is not a credible policy stance.

To summarise my review, the book is an interesting take on a strand of thinking within the history of economic thought, but it is not immediately aimed at the current debate around fiscal austerity.

Finally, the book is available at Amazon.com: Austerity: The Great Failure (affiliate link).

 (c) Brian Romanchuk 2014