People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 25

June 23, 2013


The Spectre of Austerity


          Prabhat Patnaik


A STUDY based on IMF data and IMF projections for 181 countries conducted at the Initiative for Policy Dialogue, Columbia University, New York, by Isabel Ortiz and Matthew Cummins, has some remarkable findings. It focuses on four periods: the pre-crisis period 2005-07; phase one of the crisis covering 2008-09 which saw fiscal expansion in the form of stimulus packages adopted by several countries, including, on a modest scale, by the US itself; phase two of the crisis covering 2010-12 which saw the onset of fiscal contraction all over the world; and phase three of the crisis covering 2013-15 (based on IMF projections) which is seeing an intensification of fiscal contraction.


It finds that 68 developing countries and 26 high-income countries are projected by the IMF to cut government expenditure as a proportion of GDP over the period 2013-15; and the average contraction in government expenditure as a proportion of GDP over this period is 3.7 per cent for these developing countries, compared to 2.2 per cent for these high-income countries. Austerity which will be affecting 5.8 billion people, or 80 per cent of the population of the world, in 2013, is projected to affect 6.3 billion people, or 90 per cent of the population of the world, by 2015.




The study also looks at the measures through which austerity is sought to be imposed. In 100 countries these measures take the form of elimination or reduction of subsidies, including on food products, agriculture and fuel; in 80 countries they take the form of rationalising and further targeting of safety nets; in 86 countries they take the form of “pension reform”, in 37 countries of “healthcare reforms”, and in 32 countries of “labour flexibilisation” (which has the inevitable effect of reducing wage and salary payments by the government). What is striking about the study is that “austerity” is being imposed on such a massive scale even on third world countries, and not just on crisis-hit European or advanced country economies.


Austerity on this scale being imposed on the global economy as a whole would appear bizarre at first sight. The world economy is reeling under a crisis which has entailed massive unemployment and whose basic cause is a deficiency of aggregate demand. This is the time when governments should be expanding demand, since private expenditure continues to remain suppressed in the wake of the collapse of the housing bubble and of the burgeoning credit-financed consumption expenditure. Why should governments at this very juncture be adopting austerity measures, which can only accentuate the crisis and which inevitably will do so?


Austerity, it should be noted, will have not only a direct effect on aggregate demand, through cuts in government expenditure, but also an indirect one: since the cuts in government expenditure take the form everywhere of reducing fiscal support for the poor and the working people, their bargaining capacity goes down, which also entails a reduction (compared to what it would otherwise have been) of their wages; and this has a further demand-reducing effect. In other words, a reduction in the fiscal support for the working people not only hurts them directly, but also has the additional effect of causing a shift in distribution of income between wages and profits in favour of the latter. And both these phenomena have a demand contracting effect, which will only aggravate the crisis. Why then are governments pursuing austerity at this time, when the crisis requires the pursuit of precisely the opposite policy?


The proximate answer to this question is quite straightforward. Finance capital has always been opposed to fiscal deficits, whence its advocacy of the so-called “policy of sound finance” which holds that budgets must be balanced. (Its contemporary incarnation states that budgets can provide for a fiscal deficit of no more than 3 per cent of GDP). And since it also opposes, together with all other segments of capital, larger taxation by the government, lest such taxation falls on its own massive earnings, it has traditionally opposed larger government expenditure (except when such expenditure constitutes direct transfers to itself).


Even when John Maynard Keynes had proposed larger government expenditure, financed by a fiscal deficit, as a means of overcoming unemployment in Britain in 1929 itself, the City of London which is the seat of British finance capital had opposed it vehemently. So, there is nothing new about the current opposition of finance to government expenditure and its preference for fiscal “austerity”.


What is new however is the fact that the capacity of the State to overrule the opposition of finance to larger government expenditure has disappeared. And this is because while the State remains a nation-State, finance capital now is international, moving from one country to another “at the drop of a hat”. No single State, therefore, which is drawn into this vortex of globalised capital flows, can oppose the whims of finance; for if it did then finance would lose “confidence” in that economy and move elsewhere, causing an acute financial crisis for it.


Had there been a world State capable of confronting globalised finance, things could conceivably have been different, in the sense that such a State could have pursued Keynesian demand-management policies for overcoming the crisis, and enlarging employment. Likewise if even the existing nation-States could have come together to initiate a coordinated policy of demand stimulation, and hence acted as a surrogate world-State, things might have been different. But such is not the case: even in Europe there can be no agreement about coordinating policy because of German insistence on policies which meet the approval of finance capital. It is not surprising therefore that the writ of finance, which wants austerity, is now running over the world as a whole, even in the midst of a crisis which will only get aggravated by it.




The deeper question however is the following: why does finance oppose State intervention for stimulating demand even in the midst of a crisis? Every theoretical argument that is advanced against such stimulation is flawed, even though accepted by several economists (who generally toe the line of finance capital because they know which way their bread is buttered). In fact, Joan Robinson had called the argument for the perennial pursuit of “sound finance” (including even in the midst of a recession) the “humbug of finance”. It has no legitimate theoretical basis; it is only “humbug”, spread by finance to buttress its predilection. This however brings us back to the question: why this predilection?


Michael Kalecki had answered this question by emphasizing that any abandonment of the doctrine of “sound finance” undermines the social legitimacy and hence the power of the capitalists. If governments can directly intervene to increase employment in the economy then the need for stimulating capitalists’ “animal spirits”, for boosting their “state of confidence” through all kinds of blandishments, disappears, which may even encourage people to ask the question: why do we need a bunch of capitalists at all? And the segment of capitalists which is most vulnerable to this danger of erosion of social legitimacy is that segment, namely the financiers, whom Keynes himself had characterised as “functionless investors” and who play no role whatsoever in organising production or effecting technological progress. Finance capital therefore invariably constitutes the most vehement opponent of State intervention in demand management, a condition for which is the abandonment of the doctrine of “sound finance”.


But this Kaleckian argument itself needs to be located within a more general perception which the capitalists have, namely that the only way of overcoming a crisis in a capitalist economy, which, it is taken for granted, constitutes the best of all possible economic universes, is by strengthening the position of the capitalists at the expense of the working people. In fact the crisis itself is either not recognised at all as a crisis, but only as a temporary aberration; or, if recognised at all, it is attributed to the phenomenon of “higher than warranted wages” being paid to the workers. It is never recognised as an inevitable outcome of the anarchy of the capitalist system, as a phenomenon that is immanent in capitalism.


It is suggested that the capitalist system if allowed to function smoothly, i.e., with complete wage and price flexibility, which means enforcing wage-cuts if there is unemployment, will never experience any involuntary unemployment. If there is involuntary unemployment, which itself is often doubted (some American economists have even been at pains to argue that the massive unemployment of the 1930s was all voluntary!), then the only possible reason for it must be that such flexibility is lacking, and in particular that wages are “too high”. And if wages are to be brought down, then fiscal support for the workers, which improves their standard of living (constituting a social wage) and hence their bargaining strength and resistance to downward wage revision, becomes an impediment. Austerity, involving a curtailment in such fiscal support, then becomes a panacea for overcoming the crisis, rather than something that aggravates the crisis.


To be sure, certain kinds of government expenditure which do not entail such fiscal support but which do directly benefit the corporate-financial interests, even without entailing subsidies or transfers to them, may be welcomed by them. Chief among these is military expenditure, and starting from the 1930s itself finance capital has not been opposed to larger government military expenditure, which also has the added “advantage” of not undermining the social legitimacy of capitalists (since it can always be passed off as being necessary in the “nation’s interest”). But in a situation like the present one, where there is no occasion for any competitive military build up, the scope for increasing such expenditure is limited. The opposition to fiscal support for the working people therefore takes the form of opposition to government expenditure as such.


But, it may be asked, do capitalists themselves believe that the system has no immanent tendency towards crises? What capitalists individually believe however is beside the point. The view that capitalism has no immanent tendency towards crises is only an extension of the “commodity fetishism” that characterises  perceptions about the system.


Marx had traced “commodity fetishism” to the fact that “a definite social relation between men …assumes, in their eyes, the fantastic form of a relation between things.” Now, Say’s Law, which denies the possibility of over-production crises, does so because it sees not the “social relation between men” but only “a relation between things” or use-values; and things which are use-values cannot possibly be over-produced. If the seller cannot sell what he has produced then he can always use it for himself; ergo, there can never be any generalised over-production. The insistence on austerity is an aspect of this commodity fetishism.