TELOSscope: The Telos Press Blog

Age of Austerity?


The ongoing debate about budget deficits, public debt, and the case for or against austerity reflects old ideological disagreements that ignore the new realities of late-modern capitalism. Both left and right rehash virtually the same arguments since Reagan and Thatcher, but lack the imagination for genuinely fresh ideas and transformative policies.

In the red corner, there are “deficit hawks” like the Harvard historian and Financial Times columnist Niall Ferguson, who warn that the United States faces a Greek-style meltdown unless it starts cutting the federal budget deficit immediately. In the blue corner, there are “deficit doves” like the Princeton economist and New York Times columnist Paul Krugman, who contend that budget cuts now will plunge the U.S. economy into a double-dip recession and a prolonged period of deflation.

The hawks accuse the doves of underestimating the mountain of debt and overestimating the multiplier effect of government spending. The doves accuse the hawks of understating the risk of killing off the recovery and overstating the prospect of a strong recovery led by the private sector. Both are right about each other, but wrong about austerity.

The real question is not whether private or public debt is preferable or sustainable but what sort of society we want to live in and how to invest in activities with genuine value beyond short-term financial profit—health care, education, science, housing, the environment, culture, and the arts. While hawks and doves wrangle over big government vs. the free market, the neglected issue is the autonomy of civil society and the social bonds of reciprocal trust and mutual help upon which both vibrant democracies and market economies depend.

By focusing on debt, both hawks and doves ignore the option of partial debt forgiveness, coupled with a gradual conversion of debt into equity (more about that later). Otherwise, we treat debt as something equivalent to credit, when in reality the value of assets determines the value of liabilities. Instead of fueling the death spiral of debt deflation, what is required is to reconnect finance to the real economy.

The trouble is that both hawks and doves view money as separate from real things—with intrinsic value, power, and agency. That is economically questionable and culturally idolatrous.

Economically, debt takes on a life of its own and becomes parasitical on assets: for example, when the credit bubble that had been building up since 2001 finally burst in 2007–08, collective market panic dragged down the value of real estate or other physical resources against which all credit must ultimately be secured.

Culturally, the task is to reconfigure the link between the material value and immaterial worth of all things, and to re-establish the symbolic, cosmic, and even religious significance of things in relation to human and natural life.


At present, virtually all our economic problems stem from the misconceived predominance of debt over equity. Since the global credit bubble burst in 2007–08, both the private and the corporate sector have had to deleverage, cutting back on borrowing and spending in order to pay off outstanding debt or build up savings. This, coupled with a crisis of confidence in markets, has created a deficiency in aggregate demand—a lack of overall spending, chief of all productive investment and sustained consumption that can close the output gap (the difference between actual production and potential capacity), now standing at over 4% in the United States and the United Kingdom and at similar levels in other leading economies.

In a way that is reminiscent of debates between Friedmanite monetarists and Keynesian interventionists in the 1970s and 1980s, the “deficit hawks” want to reply on monetary expansion in order to kick-start private investment and consumer expenditure—whereas the “deficit doves” argue for continued fiscal stimulus to boost aggregate demand via government spending. As such, the hawks bank on unbridled free-market capitalism, while the doves yearn for statist solutions to secure the recovery.

The fundamental error common to these two positions is to see the central state and the free market as opposed. But the widely held belief that the left protects the state against the market while the right privileges the market over the state is economically false and ideologically naïve. Just as the left now views the market as the most efficient delivery mechanism for private wealth and public welfare, so the right has always relied on the state to secure the property rights of the affluent and to turn small proprietors into cheap wage laborers by stripping them of their land and traditional networks of support.

This ideological ambivalence masks a more fundamental collusion of state and market to the detriment of civil society. The state enforces a single standardized legal framework that enables the market to extend contractual and monetary relations into virtually all areas of life. In so doing, both state and market reduce nature, human labor, and social ties to commodities whose value is priced exclusively by the iron law of demand and supply.

By disembedding politics and economics from the social bonds of civic institutions, the modern central state and the unbridled “free market” replace older notions of virtue and character formation around a shared (though contested) ethos with abstract, formal, universal standards—state-enforced individual rights and market-imposed monetary exchange value.

By contrast, most human societies over time and across space have been based neither on a social contract nor on commercial values but instead on some form of gift-exchange. The life of households, communities, and intermediary institutions has always tended to be governed by principles and practices of reciprocity and mutuality as part of “economies of gift-exchange.” Both the economy and politics were seen as penultimate, embedded in human and social relations and also governed by civic virtues of sympathy and fraternity.

Pace Adam Smith, man is not a predominantly self-interested homo œconomicus in pursuit of material wealth—a pursuit that is regulated by vague, pre-rational moral sentiments of benevolence and “fellow-feeling.” Instead, man really is a “political animal” in search of mutual social recognition through the exercise of virtues embodied in civic practices and the exchange of gifts. “Economies of gift-exchange” contrast strongly with the mechanical application of abstract values to all things and the trading of pure commodities in terms of exchange value (rather than intrinsic worth and use value).


Linked to the shift from “economies of gift exchange” to social contracts and commercial republics is the increasing formalization of politics and the growing financialization of the real economy. Both are the product of an ever greater abstraction from the real world. Political representation is grounded in popular sovereignty but ends up representing mass opinion and desires to the masses in an endless spectacle.

Likewise, the surplus value based on capital accumulation (on which capitalism depends for its cycles of expansion and contraction) is itself the product of separating finance from the everyday economy composed of agriculture, manufacturing, and industry. By making money out of money without any regard for the underlying physical assets against which all financial investment must ultimately be secured, finance privileges abstract value over the worth that is intrinsic to things and added by labor and ingenuity.

The link between financial abstraction from the material world and its necessary reconnection with the real economy constitutes a dialectic that is entirely internal to the logic of late-modern capitalism.

But given that the nominal value of capital must be reinvested in real material processes, the living universe is supplanted by a virtual reality that is grounded in a vacuous generality—the capitalist fetishization of idealized commodities and the notion that the worth of material objects lies in their status as exchangeable commodities instead of being somehow both intrinsic to things and added to them by human hands.

Like all ideologies and political economies, capitalism is predicated on an ontology that makes philosophical and theological claims about the nature of the shared world we inhabit. More than any other economic systems, free-market capitalism weakens real relations among actually existing things because it privileges discrete, individual objects at the expense of the social, cultural, and religious structures and arrangements that bind them together.

By separating materiality from symbolic meaning and subjecting everything to standards of abstract value, the capitalist mode of production and exchange subordinates the sanctity of nature and human life to the secular sacrality of the free market and the sovereign central state that have colluded from the outset of the modern age.

For just as the market requires state support to extend contractual proprietary relations and nominal exchange into ever more areas of public and private life, so the state needs the market to expand its powers of surveillance and enforcement to hitherto self-regulating organizations of civil society, as Michel Foucault, Paul Piccone, and Christopher Lasch all recognized.

For this reason, the birth of capitalism in early modern Europe is inextricably intertwined with the rise of the national state that subsumed civic culture and civil society under the central authority of the sovereign ruler—a constellation that still characterizes our late-modern condition.


Economically, our present predicament can be summed up as an excess of debt and a dearth of capital. Politically, party politics and corporate business collude at the expense of the common good that they purport to represent and uphold. Socially, advanced economies are characterized by a growing polarization between rich and poor and a deepening divide between old elites and new classes, on the one hand, and the populace, on the other hand. Taken together, state and market power subordinates the actors, institutions, and practices of civil society.

Pragmatic centrists and tea-party militants claim to speak for the people and to “get things done,” but this purported pragmatism hides a shared ideology of economic liberalism that has failed so spectacularly. Indeed, the dominant language of “personal freedom” and “individual choice” legitimates the extension of free-market mechanisms (aided and abetted by the regulatory state) into virtually all areas of socio-economic and cultural life—including education, health, the family, and sex. Today’s scale and intensity of commodified labor and social relations is beyond Marx’s worst fears.

Moreover, older civic virtues of justice, mutuality, and reciprocity have been sidelined and supplanted by the new economic values of “fairness” and “aspiration.” Worse, these “progressive” values represent a new cozy consensus that endorses the logic of capitalist democracy, which tends toward an ever-greater centralization of power, concentration of wealth, and financial abstraction from the real economy and the shared natural world on which we all depend.

Ideologically, neither the left nor the right has fully repudiated the shared neo-liberal consensus that prevailed for most of the post-Cold War period. The left has bailed out global finance without reforming it, while the right has slashed public spending on which the private sector depends. Both have relied on central banks printing money to buy up the toxic debts of banks and corporations. But neither has helped individuals or households restructure their debt and thereby avoid personal bankruptcy and home foreclosures. Left and right argue over fiscal sustainability, but neither has developed a credible growth strategy that reduces public debt while also promoting the creation of private employment.

By not breaking up banks “too-big-to-fail” and creating incentives linking finance to productive investment, both left and right are propping up a system that privatizes profits, nationalizes losses, and socializes systemic risk. Neither has so far launched a genuine redistribution of power and a re-balancing of wealth in favor of citizens, communities, intermediary associations, and small businesses.

Both left and right are scaling back statist welfarism, but ignore concrete proposals to institute asset-based welfare. As a result, benefits and other entitlements provide little more than income redistribution at the margin and some meager compensation for the proletarianization and de-professionalization of the workforce that is denied mutual self-organization as part of corporate guilds.

With widening asset and income inequality, the polarization and fragmentation of society will continue to proceed apace. This endangers the social bonds of trust and reciprocity that are indispensable to functioning democracies and market economies.

Crucially, stagnant or declining real wages in advanced economies like the United States, the United Kingdom, and even Germany reduced the purchasing power of lower- and middle-income families at a time when the rise in the cost of living by far outstripped official inflation rates of 2% per annum. The fall in purchasing power not only exacerbated inequality but also generated a growing demand for consumer credit and home mortgages that could only be met by new financial vehicles speculating on asset inflation instead of monitoring the ability to repay debt. Thus, credit-fueled and debt-leveraged consumption and speculation supplanted income-based saving and investment. Thus, the global credit crunch has revealed fundamental fault lines that neither left nor right nor East nor West have sought to address.


So what is to be done? To avoid a double-dip recession and a protracted period of deflation, three radical reforms are required. First, linking private profit to social benefits from the outset, such that each investment automatically benefits the community. For example, being granted a license to set up new businesses would be conditional on a long-term involvement in local regeneration, social housing, green technology, or educational projects. In this way, charitable giving is integral to investment—rather than an optional give-away by billionaires who are generous with their personal fortune but otherwise defend the current capitalist system.

Second, turning more existing businesses into enterprises that are partly owned by the employees, thereby giving workers a stake-holding rather than merely a wage. Coupled with the creation of strong, free guilds, both prices and wages could once more be a matter of communal discernment and proper negotiation—instead of being left to the impersonal forces of the transnational market that is accountable to no one.

Third, transforming debt into equity (private, corporate, and public debt), such that the economy can escape the looming death spiral of debt deflation. Concrete examples include mandatory debt-to-equity swaps (instead of the dodgy credit default swaps) or converting defaulted residential and commercial mortgages into equity-sharing instruments.

One could even consider diversifying sovereign debt by offering not only old-style government bonds but also warrants based on the growth of national output, so that economic growth benefits both the government and those who commit their trusted savings to the state.

Twenty years after the collapse of state communism, the ongoing crisis of “free-market” capitalism, which has plunged Europe into the worst economic turmoil since the Great Depression of 1929–32, provides a unique opportunity to chart an alternative path. Now that the dominant orthodoxy of right-wing economic liberalism and left-wing social liberalism has been shown to be intellectually dead and morally bankrupt, both left and right must look to genuinely fresh ideas and transformative policies to address the real problems, such as the financialization of the economy, the global imbalances between deficit and surplus countries, or the polarization between rich and poor. The party-political debate on austerity is largely a sideshow.

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