Austerity. the History of a Dangerous Idea

Review of Mark Blyth, Austerity. The History of a Dangerous Idea, New York: Oxford University Press, 2013, 304 pp., hb, $16.95, ISBN 9780199828302Austerity has stormed back into fashion after the most dramatic financial meltdown in our recent history. Countries in Europe have led the charge in the implementation of austere policies. Portugal, Ireland, Italy, Greece and Spain are the usual suspects, but also other countries, such as Romania, Estonia, Bulgaria, Latvia and Lithuania (REBLL), have adopted austerity as their creed, with the support of the International Monetary Fund, the European Central Bank and the European Commission. These types of policies have also found their intellectual support in the seminal work of Carmen Reinhart and Kenneth Rogoff [1]. These Harvard economists argued back in 2010 that countries with a high debt to GDP ratio will have reduced growth rates. European leaders and policymakers, as well as U.S senators have used Reinhart and Rogoff as ammunition to encourage expenditure cuts and increase taxes.In his new book on this contentious terrain, Mark Blyth carries out a thorough analysis of the origins and evolution of the idea of austerity while delivering a devastating critique of its record. The author provides the intellectual and practical background of this fiscal policy template and shows how it has gained significance both in the United States and in Europe.In the first part of the book, the author analyzes the reasons marshaled by those arguing that the world needs to be austere. Blyth explores, in two different chapters, the causes and consequences of the post-Lehman crisis in America and in Europe. At this point it is clear that, although governments have been pointed at as being the culprits of the crises, the real blame lays on the private sector. The banking sector had to be bailed out in both continents and this eventually led to higher public debt and austerity, especially in Europe.The second part of the book is devoted to what Blyth calls the intellectual and history of austerity. First the author traces austerity back to John Locke, David Hume and Adam Smith, passing through the British New Liberalism of the early 20th century, American liquidationism in the late 20s, German ordoliberalism of the midcentury postwar period and, second through the role of the Austrian School of economics in American thinking, Friedman's monetarism, the Washington Consensus and the IMF's monetary model. Through this examination of the intellectual history Blyth shows how austerity gained its pied-a-terre both in America and Europe.Chapter 4 focuses on what Blyth calls the prehistory of austerity (1692-1942). The analysis in this chapter centers on the role of the market and the state. Markets were seen as an antidote to the inefficiency of states, he argues, pointing that Locke and Hume granted the state a minimal role, while Smith acknowledged the importance of the state but worried about the cost of maintaining it. The chapter ends with the twentieth century debate between Keynes and Schumpeter. The story moves forward in Chapter 5 as the author describes how austerity found a home in Germany's ordoliberalism and in Austria's distinct school of liberal economics. Blyth then depicts how austerity was put forth as a set of ideas through the Washington Consensus.Finally, chapter 6 is devoted to what the author calls the natural history of austerity. Here he takes the work of the so-called Boys as reference: founders of a school of public finance started at Bocconi University in Milan and then spread to economics departments in United States and Britain. Blyth convincingly demonstrates how most of the cases shown as supporting the argument that austerity is expansionary (Ireland, Denmark and Australia) are dubious at best and how those conditions are not present in today's Europe. …