The lie at the heart of austerity just makes inequality worse

Is austerity broken? Andrew _ B, CC BY

“We are all in this together” has been one of George Osborne’s mantras. And it worked. Substantial parts of the public remain convinced that a noble, collective belt tightening was and remains the right response to the economic crisis. The evidence instead is that austerity has damaged economic performance and sharpened inequity in the process.

The popularity of austerity policies is associated more with their moral appeal than cool economic reasoning. Slogans like the Chancellor of the Exchequer’s evoke notions of altruism and communal solidarity. The idea that we need to close ranks in the face of adversity echoes some of the most influential moral and religious teachings on which western societies rest.

Even those who do not normally subscribe to economic policies put forward by conservative chancellors seem attracted by the way austerity embodies a rejection of the logic of economic efficiency. And who would not sympathise with similar views? After all, western societies have already reached unprecedented levels of wealth. Surely, the true challenge of today is to distribute wealth more equally rather than blindly chasing after more prosperity? Steadily increasing economic inequality is already undermining democratic ideals and social stability in many western countries.

The problem is that today’s austerity policies are failing to bring us any closer to a solution. The politics of frugality have now been tried virtually everywhere in the west and it is becoming clear that the burden mainly falls on those earning low and average incomes. No tendency to greater social justice is emerging from the practice of austerity. This is neither a temporary phenomenon nor is it an accidental effect. If we look at the theoretical underpinning of austerity policies it becomes clear that it is one of their principal objectives to put an end to attempts to create greater equality.

More or less?

In a speech at the Lord Mayor’s Banquet last year, David Cameron called for austerity to become a way of life. “We need to do more with less. Not just now, but permanently,” he said.

This endorsement of a permanently smaller state was an implicit admission that the objective of austerity is not to improve economic performance. Given the cyclical nature of economic growth, any policy that aims to maximise growth would have to be anti-cyclical. The one-size-fits all policies proposed by the prime minister make it clear that the maximisation of growth in the short and medium term is not a priority.

Rather, the objectives Cameron outlined are part of a long-term evolutionary outlook: global competition between nations makes it necessary for Britain to react flexibly and adapt to challenges quicker and more successfully than other nations. The best way to make sure that the full creative potential of society is unleashed is to have as small a state as possible. Only then can individual initiative and creativity thrive in the way necessary to get ahead of the international competition.

The objective here is not to maximise growth over the next couple of quarters or years. Rather, it is to put society on a superior evolutionary pathway that will lead to better results in the very long-term.

Take a Hayek

With this kind of reasoning Cameron is taking a page out of the tradition of the evolutionary liberalism of Wilhelm von Humboldt and Friedrich von Hayek. They wrote in very different historical contexts but their main concern was strikingly similar: individuals and societies can only fully develop their potentials if liberty is the primary political principle.

Both saw the state as the biggest obstacle to achieving a free, dynamic society. No matter how well intended, attempts by a government to guarantee the moral, social or economic welfare of their citizens were bound to lead to disaster. Inevitably, such interventions produced a degree of similarity in the conditions of different citizens. This homogeneity would clash with the diverse talents and capacities of individuals and stifle their development. Attempts to increase equality were therefore anathema to both.

Humboldt’s comments on attempts to produce economic equality were damning. However, the growth of welfare states in the 19th and 20th centuries meant this issue was much more prominent in Hayek’s writings. Hayek did not oppose welfare provision out of a lack of compassion. He was familiar with the suffering inflicted by social insecurity. His biographer Lanny Ebenstein tells us Hayek only stopped worrying about his economic prospects in old age when he was appointed to a tenured position at the University of Freiburg that came with a generous state pension.

However, as a matter of principle Hayek was opposed to welfare provisions because they distort the feedback mechanisms that individuals can use to take important decisions. Individuals constantly need to take economic decisions and the information available to them is often sketchy at best. And while they are bound to go wrong in many cases, the economy provides them with a degree of guidance through the fluctuations of relative prices. High prices indicate that society values a product or service, low prices reflect the opposite. To read these signs correctly is particularly important when individuals take their most important decisions such as which profession to embrace or to which problems to apply their talents and capacities.

Ideally, wages and profits should help to guide individual talent and effort where it is most needed. However, welfare provisions and labour regulations distort this system. Unemployment benefits, minimum wages or public pensions may lead to greater equality. But they blur the information that the price system provides. Individuals are misguided in their economic decisions and there is nothing to prevent society and economy from entering evolutionary dead-ends.

The connection between the theory of evolutionary liberalism and the practice of austerity are direct. Welfare cuts and labour market deregulation are nearly always part of austerity programmes that have been implemented from London to Athens. At the same time, public education systems are weakened by funding cuts while structural changes are implemented that help private providers expand. If institutions and regulations that have been central to reducing inequality in the past are weakened or destroyed by austerity this is not accidental. This is the very purpose of austerity programmes.