Clara Mattei: Why is austerity so persistent in spite of its incapacity to achieve economic growth and balanced budgets?

In this interview with RevDem assistant editor Giancarlo Grignaschi, Clara Mattei – Assistant Professor in the Economics Department of The New School for Social Research – talks about her new book The Capital Order: How Economists Invented Austerity and Paved the Way to Fascism (University of Chicago Press, 2022). The manuscript explores the historical origins of austerity and its intellectual underpinnings in interwar Britain and Italy. During this interview, the author presents the main arguments of the book, the comparison between the two countries, the role of politics and the decline in electoral participation, the relationship between austerity and populism, and the recent problem of rising inflation.

Giancarlo Grignaschi: There is an important element of this book I would like to start with, namely the story of Gianfranco Mattei and your encouraging words about revolutions and revolutionaries. Would you share with us the story of your great-uncle? 

Clara Mattei: Yes, the book is dedicated to revolutionaries everywhere — past, present, future — with a specific recalling of the life of Gianfranco Mattei, my great uncle, who is a source of inspiration for me. He was a professor of chemistry already at the age of 27, and he made bombs against the Nazi-fascist occupation in Italy. He was working with his comrades — the partisan unit called GAP — when he was caught, incarcerated, and tortured for days. At that point, knowing that they would have given him some chemical substance to speak, he decided to give up his life by killing himself in jail in order not to betray his comrades in the resistance. 

His last words were very powerful. He wrote them on the back of a check for his parents: “Be strong, knowing that I was also”. These were the words of one of the many young Italians who participated in the resistance to defeat fascism in the hopes of a better future for all of us. I think we should all participate in some form of transformation of society, because our current society is certainly not what Gianfranco Mattei believed he was fighting for.

I believe that those who fought for the liberation of Italy had a sense that their action would have meant a real paradigm shift in terms of socioeconomic policy. In fact, this is not what we have seen. But, given that our economic system is not eternal, nor natural, we can still collaborate to change it.

This is why I wrote this book, to give my own contribution and to spur some critical thinking. 

One element we must necessarily clarify for the sake of this conversation is the definition of austerity. How is austerity conventionally understood/depicted and how does your understanding differ from the mainstream concept? Specifically, what is the austerity trinity? 

The inspiration to write this book came from a deep dissatisfaction towards the current nature of the economic debate around austerity. In fact,

austerity is understood by economists in a de-politicized sense. It’s looked at as a technical tool to manage the economy, which can be right or wrong according to whether it actually produces economic growth and debt curtailment or not. This discussion does no good in trying to understand why austerity is so resilient even in the face of the many recessions it has caused in the last century.

This is clearly also the case today, in which austerity is again rampant in the form of increases in interest rates and cuts in social spending. The question is: how is it that austerity is persistent when it’s never really capable of achieving its stated goals of economic growth and balanced budgets? Keynesians can only say that austerity is madness, but this theory is mistakenly applied nevertheless. In contrast, The Capital Order seeks to re-politicize the issue, in order to clarify that there is a lot of method behind that madness. 

The thesis is that austerity is crucial to uphold the fundamentals of the capitalist economy. If we want capitalism, we have to accept austerity, which implies that the majority of working people will suffer in order for the economy to keep strong.

Therefore, we need to stop looking at austerity exclusively as a tool, as a matter of cuts in the budget. Aggregate analysis does not grasp the actual logic of austerity, which implies a shifting of resources from the majority of the working people to the minority of savers/investors. Indeed, we cannot assess fiscal austerity by looking at state expenditure in general.

For instance, today there is a lot of money spent on war efforts and bank bailouts, yet very little money is spent on social expenditures – unemployment benefits, housing, healthcare, education, and so on. In other words, one should look specifically at where the state spends, and you will see that the state constantly spends away from the people. It impoverishes the majority by taking away some fundamental rights in schooling and housing in favor of paying creditors, notably financial institutions.

However, fiscal austerity is also – and importantly – about how the states bring in resources. Here the state is all about regressive taxation, which means that the brunt of taxation is upon the majority of citizens in favor of the minority: those who have less pay higher taxes, in relative terms, with respect to those who have more. For instance, taxation on consumption is a form of regressive taxation, because everyone pays the same taxes on oil, bread, and tobacco, notwithstanding their income. Also, cuts in corporate taxes and capital gains are all forms of regressive taxation benefitting big business.

Austerity is also “monetary” (increase in interest rates) and “industrial” (direct attacks on organized labor, labor deregulation, and privatizations).

In order to see the political logic of austerity, we need to look at how the austerity trinity of fiscal, monetary, and industrial policies work in unison and reinforce one another.

Indeed, all these three forms are aimed at the same outcome, namely weakening the workers and especially increasing precariousness and market-dependence in order to silence people into accepting the status quo. Importantly, the austerity trinity comes with a series of economic theories that justifies the policies. This is why my work looks at austerity not just as a trinity, but also as the economic models that back this trinity, a sort of praxis. Of course, the theory is the neoclassical framework which became dominant and diffused in the period I look at in this book – the early 1920s. 

Your argument unfolds along a comparison between two apparently different cases, namely Britain and Italy. Specifically, you say,

“At one end, Britain, a solid parliamentary democracy led by well-established institutions and orthodox Victorian values, was an empire whose centuries-long world economic-financial hegemony was now being contested by an ascendant United States. At the other end was Italy, an economically backward country that was reeling from fresh revolutionary surges and civil war. Italy lacked self-sufficiency and was highly dependent on foreign imports and capital” (Mattei 2022, p. 22).

Considering the historical period under examination, I believe some people may wonder why Germany – a country that clearly played a huge role in the making of the modern world – is not relevant to your argument. Is this related to the argument itself, to the comparative method, or to the accessibility of the sources? 

This is an important point. Perhaps, before explaining why not Germany, it is necessary to clarify why Italy and Britain. Indeed, this book seeks to show how austerity in its current modern form emerged after the First War World. This was the watershed after which calls for economic democracy arose very strongly.

The book begins with the Great War and the shock that the Great War produced upon capitalism. Everyone – from the bourgeoisie to the militant workers – had a common sentiment that the system as it had stood until that moment was not going to last for long.

In other words, there was a great sense of the possibility of overcoming capitalism, and especially its foundations in wage relations and private property over the means of production. Crucially, these challenges to capitalism were materializing not just in Eastern Europe and among the losers (including Germany), but at the very heart of Western capitalism, in countries that had won the war. Indeed, Italy and Britain were the allies and, as such, had supposedly reaped the benefit of the victory. Nevertheless, bureaucrats in the government and more radical groups promised to establish a system that was no longer based on production for profit, but rather on production for use, and would put at the center stage the producer with the concept of economic democracy as a necessary condition to political democracy. 

Thus, The Capital Order investigates – and tries to reconstruct – all the alternatives to capitalism that were conceived in the immediate aftermath of the War. Then,

the book looks at how austerity emerges as an activist counteroffensive, led by governments and the economists advising these governments as experts “above classes” and above the political fray.

These technocrats could portray themselves as having the authority of the neutral scientist who knew how the economy should work. Importantly, they acted very similarly in two very different contexts, namely Italy and Britain.

Indeed, the comparison is particularly important because it shows how supposedly very different socioeconomic contexts – a fascist state and a parliamentary democracy– yielded the same outcome. One can see that Mussolini and his economists were giving their citizens the same treatment that the experts at the British Treasury and at the British Central Bank were giving their citizens, which was again austerity in that threefold form: fiscal, monetary, and industrial. Moreover, a fascist state gained the support of the international liberal elites because of its capacity to implement austerity. This killed workers’ expectations for social change and re-entrenched capitalism as we still know it today.

I believe that the comparison of such stark differences between Britain and Italy is very revealing for us to understand what happens today. That said, of course, Germany was a very relevant example of how austerity was actually pushed and enforced upon those countries who had lost the war and thus found themselves in even more terrifying economic conditions. Indeed, after WWI Germany faced great economic hardship, and the League of Nations offered some money under very specific conditions — especially the implementation of austerity. This closely resembles what is happening today with the IMF imposing structural adjustments on Sri Lanka and other nations in economic difficulty.

The German case in the ‘20s would be a very interesting case study. I do not know the language. Given that this work requires sturdy archival research, I hope my work can inspire German scholars to look further into how austerity deeply shaped Germany in the 1920s. Moreover, scholars have already started to study how German austerity in the interwar years fostered Hitler’s electoral success, as he attracted the votes of the victims of austerity, namely disempowered workers who had lost their jobs and sense of social security (see for example Gregori Galofré-Vilà, et all, 2021)

You tell us that, in between the two World Wars, economic orthodoxy had two main enemies, namely 1) reconstructionist projects and 2) people’s revolutionary ambitions. Oversimplifying, I would say that the story starts during WWI, when both Britain and Italy were witnessing a massive state intervention to secure the proper capital accumulation to win the war – and they were doing so essentially by dictating production, determining prices, and controlling the labor market. In a sense, this public control of the resources lasted beyond WWI, notably in the post-war reconstruction, because governments understood there were collective needs to be met. Interestingly, such efforts did not alleviate workers’ demand for social redistribution but rather galvanized the workers.

I have two questions related to the above: 1) reconstructionist projects recall the so-called entrepreneurial state and industrial policy, which was recently studied by Marianna Mazzucato; considering the two different cases you analyze, what does your book tell us about the role of the State? 2) regarding the relation between an entrepreneurial state and people’s revolutionary ambitions, you describe “how political imagination toward the abolition of private property and wage relations moved from abstraction to reality” (Mattei 2022, p. 107); considering that state law is also a guarantor of private property, are the two enemies of capitalism also enemies to each other?

I believe that the study of the role of the state during the First World War and the tensions between the state, the capitalists, and the workers at all levels concretizes a number of theories of the state of Marxian nature: in general, the idea that the state is necessary for capitalist market economies to thrive. This idea holds true since the very origins of capitalism, with the state guaranteeing private property over the means of production and wage relations – through the enclosure of the Commons.

Indeed, the pillars of capitalism are not natural; they were actually constructed and then protected by the capitalist state.

However, there are certain moments in history in which the state steps beyond its normal limits. While under the 1800s laissez-faire capitalism, the state could be understood as neutral with respect to the market, in that it encased the market by protecting those pillars and not disturbing private business in production and distribution.

The First World War emergency prompted bureaucrats running the state to let go of their Smithian ideology of the efficiency of the invisible hand. Suddenly, it was clear that without the state stepping in as main producer and main employer, the rate of exploitation was not going to remain high enough to guarantee the productivity levels required to win the First World War. 

Thus, the War marked a massive breakdown of the ideology by which the market is ruled by impersonal forces. The workers realized that exploitation was very political, and that the state has ample space to maneuver in the economy. Immediately after the War, capitalist states moved to pacify their citizens through guarantees of social welfare and continued state employment – similar to Mariana Mazzucato’s idea of the entrepreneurial state.

However, there are important differences to be clarified: in Mariana’s work, which has more of a Keynesian imprint, there is a sense that economic priorities take precedence over political priorities, while the reforms occurring after the First World War were much more radical.

In their attempt to pacify the population, many enlightened state bureaucrats (the so-called “reconstructionists”) were willing to put political priorities such as public housing, universal schooling (for adults too), emancipatory projects for women, and child-rearing before economic necessity.

This is why this “reconstructionist” version of the state was seen as an enemy to capitalism, because it went against an important dictum of the system, namely that the state should foster greater profits and prioritize economic necessities. 

Interestingly, given this radicalized moment, many thought that this state was not enough. In other words, the reformist attempts had very non-reformist results. It actually pushed people to demand more and to overcome the very idea of a capitalist state together with the capitalist economy, given that this bond was built on oppressing workers as a precondition for economic growth.

I do agree with you that the varieties of enemies to capitalism operating in 1919-20 that The Capital Order studies did not necessarily agree with one another and were potentially antagonistic. That is why the book looks at the full spectrum of possibilities, from the idea of revolution through constitutional means all the way to the factory councils, which demanded a complete overthrow of the bourgeois state in favor of a new form of state. This was grounded on horizontal relations of production, as witnessed in the British shop stewards movement and l’Ordine Nuovo movement led by Gramsci and Togliatti in Italy. 

Talking about the threat to the “old order” in Italy, you argue that it “exploded […] in 1919–1920, where it reached a dimension second only to Soviet Russia and Soviet Hungary” (Mattei 2022, p. 133). I find very important that these struggles also embodied a methodological revolution, in that knowledge became a crucial element in the empowerment of workers. In particular, as a PhD candidate in Political Economy, I am fascinated by the fact that the main characters of these struggles sought “to bridge the divide between economics and politics” (Mattei 2022).

If you allow me to undertake a quantum leap, I would link the divide between economic and politics to a worrisome problem today, namely the ever-decreasing voter turnout – generally in democracies and particularly in Italy. Do you believe that the “shallow notion of political stability” established by austerity as a movement against the struggle for “economic democracy” has to do with this trend somehow?

Absolutely yes.

I would categorize the low turnout in elections as part of the “successes” of austerity. Austerity can completely de-democratize political and, primarily, economic decisions: people feel completely disenfranchised and separated from the possibility of having a voice in matters that really matter, such as where our money goes.

People feel disempowered, disillusioned, and ultimately give up participating in electoral processes, realizing that their voice does not matter anyway. 

The denunciation of bourgeois electoral democracy as a farce was something that was cardinal to the Ordine Nuovo movement and the methodological breakthrough it encouraged. Quoting Zino Zini, an intellectual who was running the schools for workers in Italy in 1919, the idea was that “one cannot be sovereign only on the day of elections and then be slave on any other day of life” (given that one has no possibility of controlling the conditions of one’s labor). This is the model of the bourgeois state by which you have a semblance of democracy, while deep down people are trapped in adverse conditions of underpaid labor and there are no alternatives to survive but to sell one’s own capacity to work for a meagre wage and very little rights.

The Ordine Nuovo, and the attempt to overcome capitalism, was based on the very idea that it is necessary to bridge the divide between the economic and the political in order to guarantee effective participation of the people in the political and economic sphere.

To that end, the political processes should be grounded upon participation in the workplace and in the collective decision-making on the most important issues to organize our society – namely decisions on production and distribution of resources. During the red years, 1919-1920, workers burst into the stage of history, demanding economic emancipation which was propelled by universal suffrage and substantiated by agency within the social relations of production. In this same moment, austerity had to react, and it reacted brutally by de-politicizing and de-democratizing the economic sphere. The austerity message meant “no, you people are ignorant and must leave important economic decisions in the hands of experts”. 

I believe what you mentioned about the present is exactly the result of this legacy of the long history of austerity, which in my view lasted more than hundred years. The success of disempowering people both materially and ideologically, and ultimately of separating them from what matters in their own lives, has reached very high peaks in the present moment. While after the First World War re-establishing the gold standard was important to keep people away from monetary decision making, today we have the equivalent of the Eurozone and the Euro, which constrain the space for Italian citizens to have a greater say in how we can use our resources. 

Two previous interviews at RevDem touched upon an issue that I find related to our conversation to some extent, namely this sort of polygamic relationship between democracy, neoliberalism, technocracy and populism (this being my personal opinion). In particular, Aldo Madariaga makes the provocation that neoliberalism may be the solution against a specific type of populism, which he calls “threatening”, but populism may be also be the “corrective” to the hollowing-out democracy – as Peter Mair describes in his book Ruling the Void. On a similar note, in an interview about financial nationalism, Dora Piroska points out that populists and financial nationalists both distrust technocracy; such distrust may end up redistributing the economic gains of global finance as well as enriching a privileged minority, depending on the institutional context.

I am mentioning this “polygamic relationship” because in chapter 5 of the book you describe the Brussels and Genoa Conferences as the consolidation of a powerful alliance between austerity and technocracy. Therefore, although austerity is not the product of the so-called neoliberal era, does it still play a role in the complex relationship between democracy, neoliberalism, technocracy, and populism?

This is a complex question. Populism is a contested concept, and most interpretations of populism are top-down, defined from the establishment point of view and thus instrumental to the cause of austerity, whose rhetoric considers people as ignorant and ultimately dangerous for their own sake. I follow the interpretation by Camila Vergara, who understands populism through a historical political economy lens, as a class-based and anti-oligarchic type of politics aimed at redistribution and greater popular participation. Vergara’s interpretation challenges the mainstream idea that any movement for social change is populist and potentially right-wing.

Populism has become a way for the experts in power to hide and to escape the responsibility for having impoverished and upset everyone who is not part of the elite. Indeed,

capitalism has losers and winners, and austerity experts are there to make sure that the winners are always the same, while losers are the majority.

Importantly, we should not view this dynamic as related exclusively to neoliberalism, for it has a much longer history. Focusing on neoliberalism gives a sense that one can revert back to a sort of humane capitalism that could ultimately be good for all. Conversely, we should stop idealizing our system and start acknowledging that the real issue lies with the foundations of this economic system that has been ruling our societies for much longer than the 1970s. Neoliberalism is just a more enhanced and exaggerated form of what is actually the norm under capitalism.

What I propose in my historical political economy book is that, if one wants to keep capitalism, one must keep austerity. Otherwise, a truly democratic way out of this system is likely to sprout from below. 

This book can also be read as a text on the history of economic thought. There is something I was frankly not expecting in the foreword: your thoughts on Keynes and him being to some extent involved with austerity. I found this both surprising and interesting. Could you expand on that and perhaps compare him to other economists who play a major role in your story?

The Capital Order has many provocative messages. One of them is exposing the parallel between a liberal society and a fascist society in terms of economic policies and the types of economic rhetoric backing them. The other one, which gets people even more upset, is to show how Keynes himself, in 1919-1920, was not really a critic of austerity at all. He was actually advocating for harsh deflation in order to avoid the complete collapse of bourgeois capitalist civilization. 

The story I tell sees Keynes as a personality in the background. However, what stand out are the many similarities between economic models – more than are normally stressed.

Indeed, similarly to the austerity experts of my book, Keynes’ economic model eliminates the centrality of the worker in the production process, and replaces the worker with the entrepreneur while endorsing the methodological individualism that hampers class analysis.

Of course, the book does not want to suggest that everyone is the same. On the contrary, it is very sensitive to the fact that the biggest challenge to the orthodoxy posed by Keynes was his rejection of Say’s law: savings do not equal investments. However, Keynes developed this critique later in the 1930s and, most importantly, this theoretical evolution did not challenge some fundamental similarities between the Keynesian framework and the austere framework, especially the urge to de-politicize the economic domain as a key solution to preserve the social order. Like his austere colleagues, Keynes is confident that economists are the guardians of classless truths, that they know what is good for the people and should be in charge of economic decisions on their behalf. This means that problems of poverty and unemployment — which deeply affect the concrete lives of people — are exempt from the political discourse and are understood as a technical issue to be addressed “in the expert realm of reason and reasonableness. Thus, the urge to depoliticize the economic domain persists as a key solution to preserve the social order.

Once the capitalist state is neutralized as a supra-historical institution in the hands of experts who can manage the economy for the good of the whole, the state is no longer viewed as the terrain of class struggle, but as the instrument of illuminated technocrats. It is fascinating to note that the very foundation to speak about a big break of Keynesianism with respect to austerity (i.e., the support of a greater role for the state as an economic actor) emerges from the same technocratic intuition: the pillars of capitalism have to be safeguarded, and people should accept the rule of experts.

I understand there is a relation between the modern form of austerity – born as a global technocratic project at the Brussels and Genoa Conferences – and the narrative praised by that project, whereby excessive consumption combined with unwillingness to work productively for a low wage were the causes of the crisis capitalism was undergoing. Therefore, “inflation and budget deficits, the two great evils of the time, were nothing more than symptoms of a much deeper ‘flaw’: individual behavior.” (Mattei 2022, p. 167). If I am not wrong, the archival research to write this book was conducted when inflation was not yet the problem it is today – not of the same magnitude. Indeed, you argue that austerity was the solution for a specific type of crisis of capitalism, and yet the book seems to speak also to the current times.

Towards the end of the book, you mention Michal Kalecki, who brilliantly argued that full employment is detrimental to capitalism in that the capitalist would lose the power to discipline the workers. Could you expand on the relationship between austerity and inflation and what the consequences are for the current historical moment?

I believe that the largely popular reception of the book, which has a quite radical thesis, is partly due to the incredible parallels between what happened after the First World War and what we are seeing in this very moment. Today in the United States and in Britain in particular, there is an increasing number of challenges to the very pillars of capitalism – especially wage relations. People are quitting their jobs, the great resignation is real, and it involves millions of workers: 46.6 million workers quit their jobs and in 2022, and 47 million workers quit their job in 2021. This is an average of 2.5% workers of the total labor force every month. 

These actions can be interpreted as a spontaneous rebellion against capital as the basic social relation grounding our society. They are combined with a big unionization drive occurring in the US, especially in the service sector – in places like Starbucks, Amazon, Chipotle, Peet’s Coffee, and so on. Workers are able to struggle and obtain wage increases because of a tight labor market. If ten years ago there were four people competing for one job opening, today there are two job openings for every unemployed person.

Therefore, the bargaining power has reversed in favor of labor, and inflation is triggering further demands of social redistribution. That is exactly why austerity is hitting again, and is hitting hard.

It is not a coincidence that experts at the FED and other central banks, many of whom are self-defined Keynesian, say bluntly that the remedy for inflation lies in higher interest rates that can “cool down” the labor market. Indeed, much like the austerity rhetoric circulating after WWI, workers are blamed for the price spiral due to the fact that wages have gone up too much. Thus, the “science” tells us that unemployment serves as the best disciplinary device to suppress wages and, of course, any demand for social change.

This resonates significantly with Michal Kalecki’s analysis, and it was actually explicitly stated by the current head of the US Treasury Department Janet Yellen who wrote this in a 1996 memo for the Fed chairman at the time, Alan Greenspan, another austerity hawk. Her words were clear: interest rates could be low only if the labor force was weak.

The type of historical analysis of The Capital Order, which brings to life what experts were doing 100 years ago, is illuminating because it helps pierce the veil of today’s technical language of mainstream economics and ultimately exposes its classist foundations.

The transcript was edited for length and clarity

In collaboration with Hannah Vos

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