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The Crisis With System: A History of Austerity

2008 was a turning point in contemporary history. On the one hand, China celebreated her economic rise during the Beijing Olympics; on the other, the West plunged into a disastrous financial crisis that is still far from over. The dilemma, which is as old as economics itself, was revived: what is the role of the state in the economy? And what is the best economic policy? 

When the financial crisis gave rise to the Euro crisis, the answer that most experts gave was that governments which had spent too much in the past now had to cut spending drastically. Furthermore, they had to privatise, liberalise, deregulate, and make the labour market more flexible.

The result of four years of austerity and budget consolidation in the countries hit by the 2008 crisis has been disastrous. After half a decade of spending cuts, the economies of Southern Europe have been devastated.
By October 2013, Greek unemployment figures reached 27.8%, and by the end of last year, GDP had shrunk by nearly 25% in five years (note 1, note 2). In Spain, the unemployment rate stands at around 26.7%. As far as Italy is concerned, the latest reports show a further worsening of the economic situation, with record unemployment rates:

[The] Italian Institute for Statistics (Istat) confirmed that unemployment has reached emergency levels, and 15.8% of Italians living in poverty. The overall jobless rate is 12.5%, the highest since 1977. But the new record contained in this report is the youth jobless rate, which rose to 41.2%, from 40.5% the previous month. Italy’s unemployment is an emergency for all of the EU.

Has austerity been a mistake? 

Well, not exactly. As I will try to show in this and the next post, austerity is a system. A system that has a long – but forgotten – history, which began in the 1970s and has continued, with methodical persistence, until today.
As David Harvey explained in a propheticbook published in 2005, from the 1970s onward neoliberal capitalism started to dominate public opinion and state policies. An alliance of economists (such as Milton Friedman), of business and finance lobbies, and of political parties like the Republicans in the US and the Conservatives in Britain, launched a year-long campaign aimed at bringing about a political and intellectual shift towards “free market”. 

They used academic institutions, government think-tanks and media, as platforms to propagate their ideology, to persuade the public that neoliberalism and capitalism were the same thing. Different points of view were defamed as backward and left-wing. 

It is important to note that the neoliberal claim to stand for freedom – as opposed to left-wing state control – is nothing more than an ideological trick. Neoliberalism wants to have an exclusive monopoly on the word “freedom”, because it suits propaganda and helps them brand their opponents as Communist tyrants. In reality, what neoliberalism really propagates is notfreedom, but market self-regulation. In practice, self-regulation results in a Darwinian struggle for the survival of the fittest, whereby everyone grabs as much as possible and those who are left behind are deemed ‘losers’. It is the idea that the weak deserve to go under, even if the weak are the majority of the population.

In a recent article, Nobel laureate Joseph Stiglitz has explained how the decline of the American middle-class and the impoverishment of parts of the population that used to be relatively well-off, affects the majority of the US people. He warns that the recent figures which show the US economy growing by around 4% should not be overestimated:
A disproportionate share of the jobs now being created are low-paying – so much so that median incomes (those in the middle) continue to decline. For most Americans, there is no recovery, with 95% of the gains going to the top 1%.

Even before the recession, American-style capitalism was not working for a large share of the population. The recession only made its rough edges more apparent. Median income (adjusted for inflation) is still lower than it was in 1989, almost a quarter-century ago; and median income for males is lower than it was four decades ago.

The ultimate aim of neoliberalism is to deregulate the market completely. Neoliberals argue that the market has a self-regulating power. It is assumed that the self-interest of the individual coincides with the self-interest of all other individuals. State regulations are unnecessary because, by pursuing one’s own economic self-interest, one serves the interests of all economic agents. 

In reality, this is a philosophical theory, rather than an economic theory based on evidence. Such “market harmony” does not exist, for it is easily observed that deregulated economic activities can lead to the emergence of groups of winners and losers, of an aristocracy of money and a decline of the middle class. A recent report by the Oxfrod-based international organisation Ofxfam has shown that the globe’s 85 richest people are as wealthy as poorest half of the world population. The evidence that a deregulated system are therefore manifold; evidence that markets have a self-regulating power which benefits the most, on the contrary, lacks any evidence.

Neoliberals blame the losers, and in this they prove their belief in a Darwinian worldview. If 1% of the people amass most wealth – so the logic of neoliberals – it is because they are better than others. Neoliberals do not admit any other interpretation of economic data. Therefore, they tend to have a totalitarian view which does not tolerate alternatives. The fact that deregulation has led to imbalances in the world economy, and to a 20th century-style capitalism in which poverty is widespread, is something that neoliberals do not acknowledge.
The history of austerity clearly shows the failures of neoliberal capitalism and of its ideological intransigence. But it also shows that through its masterful domination of universities, think-tanks, international organisations, through lobbyism and ideological fanaticism, neoliberalism has been able to depict its failures as a necessary evil on the road to future prosperity, which is constantly promised but which never materialises. The suffering of large sections of the population is justified in the name of abstract theories for whose rationality no evidence is given. In this respect, neoliberalism and communism have much in common.
 
In the next post, I will briefly examine three cases of how austerity was imposed, and how it was carried out according to a surprisingly similar blueprint: 1) the New York fiscal crisis of 1974-1975, 2) the Mexican crisis of the 1980s, 3) and the Asian crisis of 1997.

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