Just Finished Reading: Austerity – The Great Failure by Florian Schui (FP: 2014)

It’s pretty clear to me, and more so after the debacle of 2008, that most politicians as well as a fair few economists don’t understand how actual economies work. Delving a little more into the morass of economic thought I can see why. Few of their theories have more than a passing relationship with reality, history or human behaviour. So it should come as no great surprise that the response to the Crash of 2008 – caused we should remember by the banks and financial institutions that are supposedly at the cutting edge of economic efficiency and effectiveness – was Austerity. That same Austerity that was so effective after the Crash of 1929, that same Austerity that prolonged and deepened an already deep recession and helped create the Great Depression. I do wonder if we’d still be there without a World War to pull us out of it.

The logic of Austerity has long confused me. The problem, it seems, is the lack of consumer spending, consumer ‘confidence’ and business investment. I won’t even start of the stupidity of an entire economic system based on people like me going out and buying a fridge. Anyway, in bad economic times people quite naturally worry about their future so are much less likely to spend money on ‘big ticket’ items and, instead, concentrate on the basics (like food) and will put money aside (if they have any) to help them through if things go South. So what do governments do? Cut back on spending wherever they can and try to balance their budgets. One thing they usually do is play with Interest Rates. But here’s the problem with that approach – if you increase interest rates to encourage saving that it puts business off borrowing money so they can’t invest as easily. If you decrease interest rates you might increase borrowing/investment but people won’t save as much (if anything) so there will be less money available to invest.

Of course businesses want to maintain their profits in a recession – as much as they can – and the easiest way to reduce costs is to sack people and then get the remainders’ to produce more for the same wage – essentially exploiting your workforce with the threat of unemployment. But the workers you made unemployed now can’t afford to buy your products (at least not to the same level) so you need to cut back further. Governments will pay your unemployed enough – generally – to get by on but in order to afford that they need to raise taxes, cut back elsewhere or both. With less money in the economy and more fear of losing jobs businesses cut back and we go down another level until, eventually, we hit bottom and, generally, bump along it until something happens to get things going again – like a world war. Austerity really doesn’t work – although there are enough politicians and economists who will tell you that it does or at least it should. They just don’t often use economic reasoning to justify it. This is what this fascinating and thoughtful book is all about – essentially debunking the (usually) non-economic arguments for the Austerity policy of the day.

Starting with the ancient Greeks (naturally) the author made an obvious statement that practically stopped me in my tracks. Their early arguments for not pursuing excessive wealth or commodities – like the latest iSaddle with the improved bevelled edges – came from a time of essentially zero economic growth. Arguments from the dawn of Capitalism and the fabled Protestant Work Ethic relied on simplicity and lack of ostentation in order not to offend God by crude displays of wealth. Later arguments from the likes of Hayek postulated that active engagement with the myth of the Free Market inevitably leads to Totalitarianism based on his experiences in Austria between the world wars. Later still the Club of Rome used environmental arguments about the runaway growth of populations (Malthus has never been far from people’s minds despite the fact that we continue to feed our growing populations in most places most of the time) and resource depletion. Here, I freely admit, I have much more sympathy with reducing the lust for growth that has driven the capitalist west for the last few hundred years. But even here growth can be managed if correctly without the wholesale slamming on of the breaks.

Although I certainly don’t agree with every argument the author presents I think he does make a very valid argument overall against the idea of Austerity as a credible answer to the present (or future) economic crises. Time and again, both locally and globally, austerity when enacted has both extended and deepened economic depressions and recessions. It’s time we found another way. Definitely recommended for anyone arguing against the austerity toolset.