Power & Prejudice: The Politics of Austerity (Part 2)

by Mark Blyth, Tom Mills

The author of 'Austerity: The History of a Dangerous Idea', discusses the political-economic history of Germany and the power of ideas.

First published: 16 August, 2013 | Category: Activism, Economy, Europe, History, Politics

Despite its evident failures, austerity remains the dominant political paradigm of our time.  In the second of an in-depth two part interview, NLP’s Tom Mills speaks to Mark Blyth, Professor of International Political Economy at Brown University in the United States and the author of Austerity: The History of a Dangerous Idea, about the political-economic history of Germany and the power of ideas.

Germany seems to be at the centre of this whole story.  What are the particular historical circumstances which make Germany so committed to austerity?  I think there’s a bit of a misunderstanding in Britain that Germany is this great social democratic country.  As I understand it neoliberalism and austerity have quite deep roots in German intellectual culture.

Absolutely.  The best way to think about Germany is to forget about the European economy and think about Japan.  After Japan was hit by the Americans with Commodore Perry and the Black Ships in the 1870s they took their best and brightest and sent them all over the world.  And one of the places they sent them to, quite reasonably, was Germany.  Think about the following names: BASF, Siemens, Daimler.  These firms have been around for over one hundred years.  They have survived World War I, World War II, in some cases partition, reunification and communism for god’s sake.  Now think about the keiretsu and zaibatsu in Japan.  They got this model from the Germans.

Germany wasn’t even a country in 1840; it was just a bunch of crappy principalities.  Then it became unified, decided to industrialise, and by the 1890s it was becoming the second industrial power in the world, with faster growth than the United States at that point.  It was set to take over Britain as the dominant power.

And this was under Bismarck right?

Yes.  Under Bismarck there was what was called ‘the marriage of iron and rye’.  Liberal ideas had been very, very popular.  Then the stock market crashed, wiping out 70% of its value.  This came on the heels of the 1871 war with France and the final unification of the country.  So Bismarck and his friends put the industrialists of the Ruhr in touch with the Prussians in the north.  The Prussians provided the agricultural exports which are very, very cheap because they had a very repressive labour regime.  Then the foreign exchange earned from these exports was put into state backed banks which the government sets up, and then funnelled to the industrial regions. 

This whole thing was predicated upon credit from exports subsidizing catch up industrialization. But the thing about exports is that your source of demand lies externally to your economy.  Jump forward 100 years and Keynesianism never made much sense to the Germans.  If you are an economy that doesn’t consume much and lives by exports, then you basically compress your wages to survive, as they have done for the past ten years – the real reason for the German export success of the moment is that they haven’t given their industrial workers a real wage rise in over a decade. 

Now why do they have a welfare state?  They have a welfare state thanks to the Americans.  At the end of World War II the only guys left standing with any kind of economic respectability were called the ordoliberals.  They believed in markets and rules. It was all about the state setting competition rules and getting good products to export.  But they didn’t want a welfare state.  They introduced price liberalisation in the late 1940s and it looked like everything was going well.  But then in 1950-1 the Korean War kicks off and American spending moves out of Germany and goes over to East Asia.  GDP starts to decline and unemployment starts to rise.  And the German liberals want budget cuts and austerity but General Lucius Clay says, ‘No you’re not, you’re going to build a God damn welfare state.’

The other thing was that the political conditions changed because of partition.  The East Germans were the Protestant majority and they were taken out of the equation.  So the conservatives were mainly Catholic southern conservatives who always had a more organic conception of society and were much more receptive to the idea of a particular type of male breadwinner welfare state.  And that’s what the Germans ended up with.

This is a unique configuration of institutions that had been the model for the developmental states of East Asia and elsewhere.  And it’s nothing at all like the rest of Europe.  The problem is that it’s just not big enough and doesn’t consume enough to solve all the problems of the Eurozone.  What the Germans created with the French through the expansion of the EU – which Mrs Thatcher was very happy with because it weakened the power of the French and the Germans – was something way bigger than any of them could control, an over-levered and semi-toxic banking system; and in a credit crisis that’s the worst thing you could possibly have.

I’d like to discuss what social movements can do about austerity and what the alternatives are.  But first of all I wanted to ask you about the focus of your book.  The book is about the idea rather than the practice of austerity, although you deal with both.  We’ve discussed the relationship between the idea and practice a bit already, but I wonder if you can comment on how you see this relationship more generally.

Sure.  I grew up under Thatcherism and one thing about Thatcher that always struck me was the policy of selling council houses.  What were they trying to do there?  They were trying to turn people into Tories, to change their identity and their perception of who they are.  So Thatcherism, to me, was always concerned with ideas.  And ideas are not determined axiomatically by your position in the class system.  It’s not as if your material environment telegraphs into your head what you should think.  People only have ideas about what their interests are.  It’s entirely possible that people can care more about flag burning and gay rights than they do about the macro economy.   A lot of working-class people have very right wing ideas.  The Conservatives would never be in office if it weren’t for working class votes.  The left has always struggled to explain this because of the baggage of historical materialism which holds that people should think according to their position in the class structure.  So you’re left with this hole in your theory which is filled with ideas like false consciousness, hegemony and so on.  But if you only really have ideas about what your interests are, then these can be fluid.  One of my favourite moments for this was in 2008 when there was an op-ed in the Financial Times by Alan Greenspan where he talked about the possibility, indeed the possible desirability, of nationalising banking systems.  So there’s a moment when the shit hits the fan when your conception of what your interests are can be shifted, and that implies malleability.  Unfortunately that opening was not pressed forth.

This brings us to the second question, about social movements and so on.  There’s a wonderful book by a guy called David Priestland, a historian at Oxford, called Merchant, Soldier, Sage: A History of the World in Three Castes.  It’s a very simple argument.  It says that any given time under capitalism there are three groups of people and each had has a distinct ideology.  The merchant class, investors, have their own way of looking at the world.  The military caste has their way of looking at the world.  And then there’s the sage caste, the technocrats.

This sounds a bit like Michael Mann’s notion of ideological, military and economic power.

Yes, indeed he draws from Mann.  If you look at the back of the book he talks about where he draws from him.  But he puts a much more agent-centred focus on it.  In the 1920s, what you have?  You have the complete failure of the military caste in World War I, they are utterly discredited.  Their ideas about order and national prestige; forget it.  So what happens is the merchants get in charge and everything seems to be going fine, but it’s all based on credit.  Then after the crash there’s the fascist reaction, which is the military again with a particular group of right-wing sages with the merchants in a subordinate position.  Then after the Second World War there’s the Cold War which is based on a kind of centre-left sages in alliance with the military.

I think it’s a lovely way of thinking about power and ideas.  The categories of thought, the way that the world is conceptualised by these different sage orders, communities of intellectuals, epistemic communities, whatever you want to call them, set parameters on the way that we see public policy.  So to close I’ll give you a good example of this.  You remember the Phillips curve, the whole thing about unemployment and inflation, the trade-off?

Sure, as championed by Milton Friedman.

Well before that.  It was developed by a guy called a Phillips. He was a New Zealander, and because of that basically no one paid any attention to him.  Then some American called Paul Samuelson, a bit more famous, looked into his results and found this stable trade off between unemployment and inflation.  It seemed to imply that if you had too much unemployment you can always pay for it with a bit of inflation and if you have too much inflation you can always pay for it with a bit of unemployment.  That became the story of the ‘60s and ‘70s.  Then Milton Friedman comes along and says, ‘yeah but this breaks down.’  And the reason it breaks down is that people adapt their expectations to inflation and what you end up with is this long run curve that goes vertical.  That is very important for public policy because what it says is there’s no way the government can in the long run affect the rate of unemployment, it can only push inflation up more and more so why try?  It’s a futility argument and it’s the jeopardy argument at the same time.

Now I teach the stuff every year and I have two slides.  The first slide I use is the data from Britain in the 1970s that Milton Friedman used to calibrate this model, to prove it is right.  It only has nine data points, I mean Jesus Christ it’s ridiculous – nine data points for a whole macro theory.  But it does show this pretty nice pattern and we’ve been teaching this stuff ever since in every macroeconomics class.  But the next slide I show is the data from Britain from 1992 to 2007.  It’s based on twice as much data and it’s horizontal.  So what does that mean?  It means basically that the model is completely wrong empirically.  It means that in fact you can have pretty much any level of unemployment you want and a constant rate of inflation, which is actually the world we live in now. 

So what is the first function of economic knowledge?  It’s prejudice.  It teaches you to think about the world in a certain way so that your bottom line response is: no you can’t do that because of the Phillips curve.  Government action is pointless and will only produce more inflation. 

So what’s the point of that model?  It is to make you think the world works in a certain way so don’t even try and think something else.  That’s why ideas are fundamentally important and until you can challenge and change ideas any social movement is trapped within the frame of reference of the ideas at the moment.  The most important challenge facing social movements – whether those movements take the form of unions, political parties, and I don’t think you can do without those ultimately – is to challenge and change the terms of debate.  Because until you do that, you don’t have the freedom of movement to act.  You’ve got to be able to change the debate, because then, and this is what Thatcher did so effectively, once you change the parameters of the debate, everyone else is wrong footed and you get to play.


This is the second of a two part interview.  The first part is available here.

Tom Mills is a researcher and PhD candidate at the University of Bath and a co-editor of New Left Project. 

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