Austerity Is an Antidemocratic Strategy to Boost Capital

Austerity policies have their roots in efforts by economic elites to crush working-class power after WWI and redistribute income upward. To reverse austerity, democratic control over economic policymaking is essential.

International leaders gather at one of the League of Nations conferences after WWI that established the groundwork for austerity politics. (Bettmann / Getty Images)

One of Karl Marx’s most penetrating insights was that a network of mechanisms embedded in the logic of capitalism not only fuel the system’s transformative dynamism but also undermine its cohesion. These internal contradictions operate across every dimension of the socioeconomic landscape, including its ideological characteristics and political institutions. In their relentless pursuit of profits, capitalist enterprises constantly strive to reduce their labor costs through wage suppression and mechanization. But reductions in the buying power of workers erode the primary source of demand for the products those enterprises must sell in order to realize profits.

Capitalism gave rise to a value system that teaches us to find meaning in our work; yet millions are employed in low-paying, soul-crushing jobs. And while modern capitalism promises — and is indeed fully capable of providing — broad-based prosperity, the system, via the state, routinely promotes and enforces austerity policies aimed at compelling people to work harder for lower pay and less job security. Output per worker increases year by year because of improvements in technology, but the austerity evangelists insist that if we want capitalism to continue to bestow its blessings on humanity, workers must accept lower living standards and the social safety net needs to be dismantled.

In The Capital Order, Clara Mattei brings to light the fascinating story of how austerity became a crucial weapon of class warfare. In this major contribution to the political and intellectual history of modern capitalism, Mattei traces the roots of neoliberalism to the political reaction against the militant working-class movements that emerged in Europe after World War I.

Modern warfare requires the mobilization of labor and capital on an enormous scale. During the Great War, national governments took control of their economies to ensure that the material requirements of the war would be met. Wages, work hours, and prices were regulated; production targets were imposed on manufacturers; strikes were criminalized, and shirking was penalized by conscription and deployment to the front; private property was requisitioned; key industries were nationalized. The aim of these policies was to ensure maximum production for the war effort without triggering a disruptive backlash from either the working class or the owners of capital.

But these massive wartime interventions exposed an inconvenient fact. Economic forces never operate independently of society’s political dynamics. If the state could mold the economy to serve the needs of war, in peacetime it could mold it to promote the well-being of those whose sweat, muscles, and brains are the basis of national prosperity. The war had demonstrated “the profoundly political nature of the capitalist economy.” When the war ended, workers, who had toiled and bled for their country, wanted a fairer share of the income their labor was generating; they wanted the right to unionize; and they wanted better working conditions, decent housing, and an effective social safety net.

In Britain and Italy, workers were organized, had suffrage rights, and, by 1919, were making demands on employers and the state for a revision of the social contract. This threat to the prerogatives of capital, Mattei argues, provoked a reaction in the form of a comprehensive set of state-imposed austerity policies aimed at pounding the working class into a state of docility. In addition to repelling the existential menace of working-class militancy, these policies would establish lasting mechanisms for channeling income and wealth upward from workers to capitalists.

Mattei describes these developments splendidly in the early chapters of her book. She has done an impressive amount of archival research and has skillfully mined the published literature of the interwar period. The fruit of these labors is a rich and insightful account of a pivotal moment in capitalism’s history.

She calls our attention to a pair of international conferences that were convened shortly after the end of the Great War to discuss the financial and economic challenges that confronted the combatant European nations. The League of Nations sponsored a conference in Brussels in 1920; another conference took place in Genoa in 1922 under the auspices of the Supreme Council of the Allies. Historians have generally regarded these conferences as failures because the participating delegates were unable to arrive at a concrete agreement for managing the problems posed by war debt and globally disordered balance of payments accounts. Mattei argues instead that the two conferences established the framework of the austerity agenda adopted throughout the capitalist world in subsequent decades: “The two conferences reunited the European establishment under the flag of technocracy to construct and implement austerity. Technocrats were rising as the new protectors of capitalism — and their sermon was heard loud and clear across the continent.”

The austerity gospel held that economic growth was driven not by the productive activity and spending of workers but by the virtuous abstinence of capitalists, whose savings were transformed into capital accumulation by the invisible hand of the market. National prosperity therefore required the redistribution of income away from workers and toward capitalists. Workers’ demands for higher wages and fewer hours had to be resisted. Public spending on health care, education, and social services had to be sharply curtailed because it drew financial resources away from capital accumulation. Government budgets needed to be balanced, and monetary policy needed to be tightened. The rhetoric adopted to support this agenda was at times alarmist; one of the documents issued by the Brussels conference contains this dire warning: “Any country which does not contrive as soon as possible to attain the execution of these principles is doomed beyond hope of recovery.”

Mattei identifies three kinds of austerity policies: fiscal austerity, monetary austerity, and industrial austerity — the “austerity trinity.” Fiscal austerity involves reducing government spending, particularly on programs aimed at providing social services and income support to working-class people; regressive taxation, aimed at buttressing the after-tax incomes of the propertied classes, is also part of the fiscal austerity mix. Monetary austerity entails restricting access to liquidity and credit when labor markets get tight and wages start to rise. Instead of letting the market adjust the price of labor in response to worker-friendly market conditions, the austerity credo requires that workers get knocked back into line by a state-generated recession.

Fiscal discipline and monetary restraint are what normally come to mind when we think of austerity. But Mattei reminds us that industrial austerity is an important part of the arsenal of the capitalist state. Industrial austerity is the weakening or abolition of laws and institutions that protect the interests of workers: right-to-work laws, lax enforcement of fair hiring rules, legislative impediments to the formation of labor unions, tolerance of noncompete clauses in labor contracts, and so forth. Cuts to unemployment benefits weaken the bargaining position of unemployed people relative to employers by reducing the amount of time an unemployed person can take to find a good job; such cuts would fall under the headings of both fiscal and industrial austerity. In the jargon of modern economics, industrial austerity is often characterized as enhancing “labor market flexibility.” A major aim of all austerity regimes is to break the back of organized labor, to neuter it and render it incapable of protecting workers.

A substantial portion of the book is devoted to detailed examinations of how austerity was implemented in Britain and Italy. Mattei shows that in both countries the enforcement of austerity was achieved by removing economic policymaking from democratic control. But the precise method by which democracy was sabotaged differed. In Britain, responsibility for economic decision-making was transferred to the Treasury and the Bank of England, institutions that were insulated from electoral accountability. The two institutions coordinated their activity closely to advance the austerity agenda.

In Italy, the Fascist government that came to power in 1922 imposed austerity largely by decree, and eliminated resistance through electoral fraud, disenfranchisement of the electorate, the imprisonment of political opponents, the suppression of press freedoms, and physical brutality — including political assassinations. Mattei’s point is that, notwithstanding their radical differences in approach, both countries relied upon antidemocratic strategies to execute their austerity agendas in the interwar period. She paints a vivid picture of the policies that were implemented and of the human wreckage they caused.

Mattei has unearthed a great deal of disturbing evidence regarding the state of mind of the advocates of austerity during the interwar period. One of the key players, the Italian economist Maffeo Pantaleoni, denounced workers as “violent, dishonest, and blackmailers of government” (in Mattei’s words) for threatening to strike; he contended that “wages were much higher than [workers’] marginal productivity”; and he endorsed the violent suppression of dissent, including the execution of communist leaders. The casualness with which British monetary economist Ralph G. Hawtrey and Treasury officials Basil Blackett and Otto Niemeyer — the three main architects of Britain’s austerity regime — discussed the suffering that austerity would inflict on working people is shocking in its callousness.

The Italian liberal economist and statesman Luigi Einaudi was never a Fascist and never held any position in a Fascist government; he was opposed to the political authoritarianism of Mussolini’s regime. But he was supportive of the austerity policies that the regime imposed, and he was willing to make his peace with authoritarianism for the sake of what he believed to be sound economic policy. British commentators expressed perfunctory disapproval of Mussolini’s brutality, but for the most part they were prepared to tolerate it as long as he put Italy’s economic affairs in order.

Austerity removes economic policymaking from democratic control and places it in the hands of technocrats or experts. A recurring theme in The Capital Order is the pernicious role of technocrats in the austerity project. “Austerity,” Mattei writes, “found its primary ally in technocracy — a belief in the power of economists as guardians of an indisputable science.” (She is, for example, highly critical of central bank independence, a principle that originated in Britain’s austerity initiative of the 1920s.) Her wariness appears to owe something to the liberatory philosophy of Antonio Gramsci, whose Ordine Nuovo movement

stood fast on the idea that any approach to knowledge was inherently, deeply political, since the lens through which one looks at the world may foreclose or open spaces for imagination and thus establish if and what alternatives . . . are viable. While the predominant lens to interpret the world foreclosed imagination and nurtured acceptance of the capitalist order, the emancipatory lens opened up possibilities to envisage a different society.

Mattei’s discussion of Gramsci and his circle is one of the highlights of the book. From a Gramscian perspective, technocrats and experts enforce a top-down conception of knowledge that, Mattei contends, inevitably serves the interests of the prevailing power structure.

There is no doubt a good deal of truth in this. Expertise is, in a certain sense, a bourgeois concept, a by-product of the ideological imperative to organize our lives and activities in a rational way. But it is difficult to see how any complex industrial society, including a socialist society, could do without technocrats. Think of the multitude of issues that the modern state must address: housing policy, trash removal, public health and sanitation, education, policing, the administration of justice, national defense, public transportation, airline safety, disaster relief. The list is endless. None of these issues can be managed effectively without experts who have reasonable latitude to exercise their judgment in the service of the common good. Admittedly, the common good is a slippery concept, but well-functioning polities manage to settle on some version of it that most of their inhabitants find acceptable. A well-functioning polity can also design institutions that ensure the democratic accountability of its technocrats.

In one respect, Mattei’s account could have done with a bit more nuance. Mainstream economics is not intrinsically reactionary. Some of the economists and officials discussed in her book merit scorn. Pantaleoni in particular comes across as an ideologue — and a nasty piece of work to boot. The Treasury officials Blackett and Niemeyer were middling economic thinkers at best, and they embraced their roles as “hired prizefighters of the bourgeoisie,” as Marx would put it. Others like Hawtrey, Einaudi, A. C. Pigou, and Gustav Cassel, whatever their ideological commitments (Pigou was a Fabian socialist), were trying to cope with an unprecedentedly difficult set of policy problems.

The Great War left the economies of Europe damaged and heavily indebted. The global financial system was one national default away from Armageddon. Austerity wasn’t the answer, but the economists can be forgiven for thinking the cataclysmic dissolution of capitalism would be disastrous for everyone. Cassel recognized the need for debt forgiveness in some cases, a view hardly consistent with a rigid commitment to austerity. Hawtrey urged the Federal Reserve to intervene aggressively to counteract the deflation that accompanied the Great Depression; a technocrat he may have been, but he was not an austerity ideologue.

John Maynard Keynes takes some lumps from Mattei because he paid little analytical attention to the exploitative nature of the wage relation — and perhaps also because his vision of the good society assigned a central role to technocrats. But he was no champion of austerity. Aside from mentioning it briefly in a footnote, Mattei doesn’t say anything about the famous Macmillan Committee, whose 1931 report, largely written by Keynes, was in effect an argument against full-on austerity.

There is more work to be done on the origins of modern austerity policy. But that work will certainly have to take as its starting point Clara Mattei’s illuminating and provocative book.

About the Author

Gary Mongiovi is a professor of economics at St John’s University in Queens, New York.