Austerity: An Economy of Words? Pt. 2

Written by Keith Hart

The originality of Keynes

Commerce waxed and waned throughout the agrarian era, until the market became the
dominant principle of industrial capitalism. Within a framework of agriculture, exchange still
commanded much theoretical attention. Economy eventually became identified with
markets which from the eighteenth century were accepted as being central to society. In
The Wealth of Nations (1776), Adam Smith located the motor of development in the division
of labour. He could not yet envisage a breakthrough to industrial capitalism nor the
consolidation of Britain’s overseas empire. In all agrarian civilizations power came from the
landed property of an aristocratic military caste who feared that money and markets could
undermine their control over society. Smith, however, preferred many small decisions based
on self-interest to top down economic leadership, however well-meaning: ‘It is not from the
benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from
their regard to their own interest’ ([1776] 1961: 26–7). He stood conventional wisdom on its
head by claiming that a ‘propensity to truck and barter’ was part of human nature and that
markets were the most reliable way of increasing ‘the wealth of nations’.

So, austerity was the default slogan of conservative rulers for two millennia or more and
domestic self-sufficiency was the norm. Those who lived from money and markets were
relegated to the margins. Jane Austen, reflecting the hegemony of domestic economy
among the rural gentry, writes of one of her characters in Mansfield Park (1814) that she
was a poor ‘economist’, unable to manage the servants effectively. Now the age-old
struggle between landed power and money peaked in a polarised conflict between the two
sides, the ‘bourgeois revolution’, to which ‘political economy’ gave theoretical expression.
This was won by capitalists based in industrial production. By the mid-nineteenth century,
however, they discovered that they could not control the burgeoning urban population
spawned by their revolution. In the 1860s – in the US, Russia, Britain, Japan, Italy, Germany
and France – a new regime took over based on an alliance between capitalists and the
military aristocracy. The dominant social form of the twentieth century, national capitalism,
grew out of this synthesis of big money and landed power. Austerity, when needed, now
combined traditional conservatism and serving the money-making interest. It became a
hybrid of its bipolar predecessor.

Two world wars bracketed the global economic crisis of the 1930s known as The Great
Depression. Maynard Keynes attributed the economic problem to the persistence of
attitudes held by his Victorian parents, attitudes that still ruled the British Treasury. The
empire’s success was credited to the prudence of middle class consumers whose savings,
invested in government bonds (consols), swelled the national capital fund. But the solution
to endemic market failure, he believed, was more liquidity, even if this meant printing
worthless money. His simple mantra, in Essays in Persuasion (1931) written between 1919
and 1931, was ‘Spend, Don’t Save’. If austerity conserved the wealth of a few, Keynes
intended to expand popular spending power as much as possible.

Accordingly, he focused on changes in money’s value over time, inflation and deflation. Who
gains and who loses when money appreciates or depreciates? In this way he could identify
the classes and interests involved. The main beneficiaries of deflation are creditors, notably
the banks, who have a keen interest in keeping up the value of their money. Two classes
lose out from inflation – savers ranging from owners of capital to pensioners with annuities
see the value of their assets and incomes eroded. The two sides have seen big swings in
their fortunes since 1945, culminating in the current dominance of creditors. Keynes died in
1945, but the decades following the war saw the wholesale emergence of developmental
states in the industrial West, the Stalinist bloc and post-colonial regions, variously inspired
by him. For the first and only time in history, governments sought to increase the disposable
incomes and public services available to working people. The world economy boomed until
the watershed of the 1970s. It was a world revolution and we are the victims of the
counterrevolution it provoked.

The roots of austerity now: words and power

David Graeber writes about the passivity of the British when confronted with economic
policies favouring the rich.2 The universities, the National Health Service and other public
assets are being undermined “in the name of an economic doctrine—austerity, the
imperative need for fiscal discipline—that no one genuinely believes in and whose results
pretty much everyone deplores (including prime minister David Cameron), in response to an
existential crisis that does not exist”. The hard times and rationing of World War Two and its
aftermath were “the last time Britons acted with a genuine common purpose”. Yet there
“has been virtually no public debate on austerity itself”. “Phrases designed in think tanks
and focus groups (‘free markets’, ‘wealth creators’, ‘personal responsibility’, ‘shared
sacrifice’) are repeated like incantations until it all seems to be such unthinking common
sense that no one even asks what the resulting picture has to do with social reality.”

In 2014 Bank of England economists, exhausted by the contortions demanded by their job,
“issued a statement, ‘Money creation in the modern economy’, that effectively destroyed
the entire theoretical basis for austerity. Money, they said, is actually created by private
banks making loans. Without debt there would be no money…Politicians continued
preaching their morality tales of the evils of debt exactly as they had before”. Even the IMF
urged the British government to lay off, to no effect.

The United Kingdom is only 300 years old and decentralizing forces are growing stronger,
not least in Scotland. All sorts of pent-up regionalisms will drive a new politics. The ruling
consensus ferociously disparages any challenge to London’s dominance. Speculation aside,
however, if the case for austerity is so weak, on what does its credibility rest? Do our
historical excursions offer any clues? Can we reveal the sources of power behind the
smokescreen of words?

The British imagine austerity today as reflected the 1940s, the last time the country had a
positive sense of itself. The current malaise comes from the loss of being world number one.
Acceptance of this loss is endlessly deferred. Something always turns up to postpone the
reckoning: the world language is English (thanks to the American empire); the internet
boosts our language and global significance; economics is dominated by English-speakers. A
distorted version of national consciousness is thus projected onto the world. The ‘special
relationship’ with the United States is a joke — the Americans did everything they could to
undermine the British Empire, including the decision to starve post-war Britain. Even the
French, not otherwise noted for their humility, have lost this pretension of owning a world
language.I have suggested that Roman ‘austerity’ is akin to Greek ‘economy’. Both focus on
saving, prudence and thrift in a world where luxuries threaten to undermine the traditional
virtues. Both were driven by class conflict, elevating aristocratic wealth above plebeian
purchasing power. Austerity today is promoted, in the name of free markets by
conservatives whose main wealth is monetary. Since Reagan and Thatcher’s neoliberal
counter-revolution against the developmental states of the post-war period,
encouragement of popular spending by the state must lead to inflation a threat to ruling
class dominance and to money stored as capital and credit. After the crash of 20008, vast
sums of tax payers’ money were made available to the banks through “quantitive easing” to
make good the collapse of credit, but in general they invested them in asset markets and did
not lend it on to the consumer credit market. In English both the popular and professional
registers of the language of economy reinforce each other ‘naturally’. Maybe this is one way
that spurious discourses acquire credibility.

In the meantime, the European Union staggers from one crisis to the next. The euro was
founded on several massive mistakes, the main one being the idea that politics was
unnecessary for free market money. There was also inadequate provision for fiscal
institutions and huge trade imbalances between members were ignored. The long credit
boom concealed these deficiencies, only for them to resurface in the financial crisis. Some
Europeans claimed that this crisis was limited to Britain and the US. The Italian finance
minister joked that his country would be spared, since its bank managers didn’t speak
English. So a systematic response was delayed in Europe. In 2006-7 the French and German
banks bought subprime mortgage bonds when “the big short” (Lewis 2010) was underway
and they invested recklessly in loans to Southern Europe, leaving them horribly exposed to
bad debts when the crash came. The US has made its banks clean up their ‘toxic assets’, but
in Europe the banks and their protectors hoped that losses would magically disappear if

The European Commission (EC), with the European Central Bank (ECB) and the International
Monetary Fund (IMF) — none of them elected bodies — formed a ‘troika’ to direct the
vulnerable countries of southern Europe. Devaluation of the currency is the quickest and
least divisive way of liquidating debt. But the Eurozone countries are yoked to a fixed
exchange rate mechanism and their only options were deflation and default. Coercive
measures were imposed by the troika on Portugal, Greece and elsewhere. The resulting
‘democratic deficit’ of the new corporate regime has become glaringly obvious. When the
ECB governor, Mario Draghi, promised in 2012 to support the euro to the hilt and said “it
would be enough,” interest rates on the sovereign bonds of some beleaguered Southern
countries tumbled dramatically and the Eurozone crisis went quiet for a couple of years. But
not permanently. The ‘economy of words’ sometimes works, but only temporarily. But what
made Draghi’s statement effective then? Which interests shaped the policy and why? A
cultural analysis cannot provide answers.

Although comparison with the 1930s is commonplace these days, 1914 is a better historical
analogy for our times. We can still learn much from Keynes’s writing in the interwar years
and from the postwar decades that bear his name. Who benefits most from deflation?
People with lots of money. Why have interest rates been maintained near zero for so long?
Because those who would conserve their money’s value control the decision-making bodies.
For a while after the financial crisis, it seemed that the Keynesian system had been
resurrected – the state was again the lender of last resort and public works programs were
proposed as a way of boosting family incomes. But all the money went to the banks who
then refused to lend it on, thereby fueling another boom in asset markets that did nothing
for jobs and family incomes. Their minions in the media and politics never questioned the
austerity dogma.

The full brutality of Europe’s post-crash neoliberal economy was exposed by negotiations
over Greece’s right to stay in the euro during summer 2015. The Greeks, led by Yanis
Varoufakis, invoked platitudes guaranteed to endear their European masters. Everyone
knew that the Germans had the decisive say. At one point the ECB showed its hand by
forcing the closure of the Greek banks. Bloodcurdling threats came out of Northern Europe.
Senior EC officials behaved like feudal barons insulted by peasants who didn’t know their
place. The final terms of settlement were wildly implausible and humiliating to the Greeks.
The Eurozone’s problems are permanent, to say nothing of terrorists, refugees and Europe’s
disappearing share of the world’s population.

Passivity in the face of a cruel and unequal economic regime does not mean that people
have internalized austerity politics. Folk memories of the first half of the twentieth century
are still vivid: the slaughter of the First World War, the mass unemployment of the interwar
years, the bombing of cities, the starvation diet of the late forties. The last half-century has
seen massive improvements in the standard of living of what used to be the rich countries.
It is not perverse to believe that some cuts now could help to stave off a return to those
extreme times, to save an economy that teeters on oblivion. Maybe at an unconscious level
people are waiting for the upheavals when European dominance finally gives way to a new
world order. Meanwhile, socialists like Jeremy Corbyn and Bernie Sanders reveal the cracks
in the austerity paradigm. Before long the alliance of government and business to repress
popular economic interests will not be protected by an economy of words.

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