Book Review: Austerity: The history of a dangerous idea

On 300 dense pages the Scottish political economist Mark Blyth delivers a ringing battle cry to change course – or else.

With the economy back on a growth trajectory and unemployment beginning to fall across the euro zone, politicians and economists rejoice that their harsh austerity measures have worked. Political economist Mark Blyth begs to differ. In his book Austerity – The History of a Dangerous Idea, Blyth sets out to explain to experts and laymen alike why not only our policy response to the financial crisis was misguided, but also that our underlying convictions about why the economy tanked in the first place – and who’s to blame for that – have been fundamentally wrong.

Not by accident that a scholar – Blyth is professor of International Political Economy at Brown University – as opposed to an economist versed in econometrics, took on this Herculean task. The topic requires a broad view and while other economists refine their mathematical models of market systems, political economists and economic historians have taken up the slack of explaining how society works.

It is a critique echoing throughout the book: Economists fail to adjust their models for changing circumstances, even when faced with mounting evidence that the models just don’t work. Blyth calls that the fallacy of composition. Instead, and that’s the recurring tragedy, they often insist ever more forcefully, the more the reality diverges from behaving as in their models. And politicians follow suit.

The dismal idea

Blyth takles austerity on two fronts. First he deals with its intellectual his-tory, the history of economic thought since Adam Smith, compellingly told in the space of two chapters. The basic message is clear: Liberal economic models of all stripes have a built-in skepticism of government and a penchant for thriftiness. Their policies, thus, work just fine in good times, but fail miserably when the economy crashes. They claim that tax cuts and austerity measures restore confidence. Experience tells otherwise.

Furthermore, austerity is more often a morality play (austerity as a penance) rather than hard economics. The neoliberal turn in the 1970s, championing a low-tax, light-regulation, minimal state, monetarism and public choice theory, compounded these tendencies.

In theory, economic and societal interaction was reduced to a mere maximization of self-interest, be it money, votes or influence. In the neoliberal world, the common good does not exist and in fact, democracy itself, as an expression of the population’s wishes, becomes the problem. The only answer, again, is austerity.

His second assault, more accessible and concrete, deals with austerity’s history. Here Blyth, the political economist, has all flags flying. We follow how countries from the U.S. to France and Great Britain devastated their economies in the interwar period by adhering to strict budget cuts while their populations sank into poverty. Reading the implications of austerity for Germany and Japan is excruciating, while references to current policies in the euro zone are genuinely worrying.

What is in it and how to get out

Thus Blyth details the dangers of austerity, especially in times of high unemployment, deflation and huge inequality. He also offers a short but concise idea of how to change course – raise taxes, regulate the banks and make central banks responsible for the people’s needs again, not only to those of a hard currency.

First published in 2013, the book has been overtaken somewhat by events. The euro zone, is now growing again, albeit slowly, and fiscal policy has become more expansionary. These developments, however, only prove the point of the book – that growth has finally returned, exactly in the moment when austerity eased off.

And if Blyth is right, we could have done a lot better.

Austerity: The History of a Dangerous Idea