[Photo credit: AFP via Getty Images]
By Diego Viana
Where capitalism goes, austerity invariably follows. This phenomenon has puzzled intellectuals for generations. Why does the dominant economic system consistently adopt reforms that seem to destabilize its very foundations?
Dr. Clara Mattei is a renowned scholar and professor of economics at the New School whose research tackles this question. Her latest book, The Capital Order: How Economists Invented Austerity and Paved the Way to Fascism, argues that austerity isn’t “a policy mistake” but is instead a core feature of capitalism.
Her analysis concentrates on Europe in the years immediately after World War I. Following the armistice, European workers had a rare moment of revolutionary fervor, spurred by the recognition that war governments were perfectly capable of managing the economy beyond the imperatives of profit.
Dr. Mattei argues that, from 1920 to 1927, austerity was instrumental in upholding European capitalism. It accomplished this via three tools: fiscal, monetary, and industrial policy. The trinity entails, respectively and roughly, cuts in social expenditures and regressive taxation, interest rate hikes, and labor suppression. Neoclassical economists like the United Kingdom’s Ralph Hawtrey and Italy’s Maffeo Pantaleoni worked hard to argue for these policies. Ultimately, though, implementation required the break from democracy and political violence that enabled Benito Mussolini’s fascist regime and the development of a fascist mindset which later spread across Europe.
Last month, Hampton Institute contributor and economic journalist Diego Viana interviewed Dr. Mattei about her thesis and worldview. Please enjoy the following transcript, which we have edited for clarity and length:
Diego Viana | Your book argues that austerity is central to the capitalist order. How do current mobilizations figure into this argument?
Clara Mattei | They make the book very topical! Look at the United States. People are mobilizing. And it's not just the strikes. Workers are questioning wage labor altogether. This happened after World War I, when the state politicized the economic realm by intervening in it as part of the war effort. And it’s happening, to a lesser extent of course, again today. Folks got a taste of life without exploited work during COVID when the government offered some social support. Why should they return to work in such horrible conditions now?
That’s where austerity enters the picture. It increases our dependence on markets. That’s typical and specific to capitalism. Most people only have rights if they have money in their pockets that they acquire through wage labor. By cutting social benefits and weakening workers' bargaining power, austerity seeks to ensure no alternative but to bend our necks and accept exploitative conditions.
DV | Nevertheless, mobilizing workers remains difficult due to precarity, reduced union density, etc. Is victory possible?
CM | Your analysis is accurate. It speaks to the “success” of austerity. A half century of hardcore measures has made labor precarious, with fewer union rights, less welfare, and more privatization. Interest rates are rising too, which limits ordinary people’s access to credit and produces more unemployment. Yet people are still mobilizing. True, unions are weaker now than they were after the Second World War — and definitely after the First. But our system is based on exploitation of the majority. So, whenever this majority mobilizes, it's a big deal.
This October the United Auto Workers secured a more generous and progressive wage structure following a 45-day strike. This victory is very serious. And it shows that — when push comes to shove — capital needs workers, who thereby have tremendous leverage to win demands. So — wherever they are — if workers withhold their labor, that frightens capital.
My book talks about the weapons of the State and its political and economic elites to wage class war against the people. But the book is also optimistic. It recognizes that class struggle is ongoing and workers can win. Indeed, capital as wealth requires capital as a social relation — namely, wage slavery. This means that, so long as we have capitalism, the fight continues. Of course, there have been historical moments when workers were in retreat. But I think now we’re seeing that austerity doesn't mean the death of workers. Austerity is a tool to keep workers in check. In that sense, it acknowledges their power.
DV | Many American economists believe recent stimulus plans mean the age of austerity is over. You push back against this by conceptualizing fiscal, monetary, and industrial policy as a trinity of tools to enforce austerity. Explain how that trinity operates in our current milieu.
CM | The trinity is operating at all levels. Hiking interest rate disciplines workers by “loosening” a tight labor market, which simply means increasing unemployment. And that is exactly what the Fed aims to do. They want unemployment to keep workers desperate enough to accept low wages. That's a really powerful weapon right now. Even if it hasn’t worked yet, it will. The recession is coming. The recession is a short-term cost for a much longer-term gain, which is stabilizing class relations.
DV | How about the fiscal side?
CM | I try to break from mainstream definitions of austerity. People equate it to budget cuts and tax increases. This means nothing. It’s the typical practice of economists to look at the aggregate, disregarding the class dynamics of who wins and loses. But this approach leads to mistaken conclusions — like the idea that austerity is behind us. The state is spending a lot of money, after all! The crucial point is that austerity does not mean “small government” but it means that the government is actively intervening in favor of the elites and to the detriment of the many.
So fiscal austerity is central, and Bidenonomics is a good example. The public budget expanded. But where did the money go? It went to war, the military-industrial complex, and energy companies to incentivize them to go green — and, of course, bank bailouts. The state is spending money but giving it to capital owners while structurally defunding social services. For me, fiscal austerity is about social expenditures — not state expenditures generally.
DV | So austerity is compatible with considerable state spending?
CM | Yes! The point is where the state spends. And it’s spending not on the people but the market. It’s commodifying basic services. Joe Biden has done nothing in terms of social redistribution. And his fellow Democrat, Eric Adams, the mayor of New York City, has just announced massive cuts to social spending, spurred also by the fact that interest rate hikes make it more expensive — especially for local governments — to borrow.
So, there, we see the connection. The elements of the trinity reinforce one another. Monetary austerity is reinforcing fiscal austerity. And then there’s the other side of fiscal austerity, which is not just about social expenditure cuts but also regressive taxation. Who is paying the taxes? Again, we’re seeing constant increases in consumption taxes and a total unwillingness to tax capital, profits, inheritance, or any form of wealth. This is very structural. And it’s not unique to the United States. In Italy, Prime Minister Georgia Meloni is doing the same. It's worldwide.
DV | The third element is industrial austerity, particularly in the form of repression.
CM | Biden’s administration can try to give the impression of being pro-labor but it's able to do very little to combat privatization and labor deregulation. It has actually even intervened in a quite cooperative way to block railway workers from striking to achieve better rights last winter. The wins today are coming from organized labor — not the administration.
In other countries, industrial austerity is more present than ever and unions are suffering. Work is getting increasingly precarious. Austerity is really about class — it is about the state’s management of the economy in favor of the elites.
DV | Beyond explaining austerity, you put it at the core of the capital order — the very structure of capitalism itself. Is this a renewal of Marxian economic thinking?
CM | Yes. My work aims to use Marxian methodology, which understands economic relations as inescapably political. This naturally leads to a complete rethinking of austerity. I want to help people realize that the relationship between capitalism and austerity is structural. And this means that the state is constantly intervening to weaken workers and protect capital. Analyzing how austerity works in real time totally confirms this.
Now more than ever, we must heed the most important insight of Karl Marx's critique of political economy. Marx described how economic growth is founded on capital as a social relation. The majority of people must sell their labor for a wage and this is not at all a natural feature Value creation under capitalism ultimately requires exploitation. While a lot of people — even on the Left — take capitalism for granted, capital is based on a specific social relation. That means it’s not only very political but also inherently fragile. This is why it needs constant protection. There are certain historical moments in history in which that fragility emerges.
DV | You describe a change after World War I in which the spontaneous austerity of Gilded Age capitalism had to become managed and coordinated, hence the Brussels and Genoa conferences. Is this the bedrock of later institutions like the Bretton Woods system or the G7, the World Economic Forum, the World Trade Organization?
CM | Exactly. And I think the book doesn’t do justice to the ways in which political institutions prior to the War were actively preserving austerity. There's plenty of literature showing how the gold standard was not a natural mechanism. It was actually quite politically encased. What I argue in the book is that austerity became visible after World War I.
Austerity is always latent in capitalism and emerges when the system is most contested. When its pillars shake, institutions coalesce to protect the capital order. That's why I focus on 1919 and the period right after World War I. It was a moment in which indeed there was a lot of demand for economic democracy.
In Britain, besides universal suffrage, people demanded a greater say in economic issues. They understood the pretext of balancing budgets was purely ideological and no longer tenable. During the War, states spent all the money they wanted. So people were asking for a post-war reconstruction in which resources were utilized in their favor rather than for profit making.
In these moments of political crisis, austerity refines its tools. Many institutions sprung into action in the early 1920s — especially independent central banks — to insulate monetary decisions from democratic intrusion. I focus on this period in the book. But my next project is to examine how austerity operated after World War II. So austerity could be an angle to rethink the history of capitalism in the 20th and 21st centuries.
DV | The book’s subtitle is about austerity paving the way to fascism. In the case of Italy, the opposite seems to have happened. Fascism paved the way for austerity. What do you make of that?
CM | A common idea is that fascism emerges as a reaction to austerity. But you’re right. In Italy, something different happened. The original fascism — Benito Mussolini's fascism — swept to power because of its capacity to implement austerity. Fascism and austerity needed one another. The authoritarian state was able to enforce austerity much more effectively than any democratic government. Unlike its liberal counterparts, it could intervene directly to repress wages, curtail strikes, and implement a whole slew of social cuts and privatization while jailing opposition. That’s why, as I describe in my book, neoclassical economists were very excited about Mussolini. He imposed their pure models on reality.
Mussolini was a response to the fact that, shortly before the March on Rome, there were full-blown factory occupations. Workers were gaining lots of rights and crumbling wage relations in favor of democratic management of industry via factory councils, of which Antonio Gramsci was a very important leader. The elite couldn’t have that. Fascism was a godsend. Montagu Norman, who was the governor of the Bank of England, said, “Fascism has surely brought order out of chaos… The Duce was the right man at a critical moment.”
Norman said this in 1926, when the regime had already shown what it meant to be a fascist regime — killings and all. But he liked that fascism was all about suppressing wages, defending private property and investment, and using the state to keep industrial peace to maximize profit above everything else.
DV | How do you see the link between fascism and austerity today?
CM | Today, a lot of fascist or authoritarian governments come to power promising no austerity. Indeed, people feel the economic violent impact of austerity on their daily lives and desire something different. However, because of austerity’s preeminence, people have lost class consciousness and believe they can trust bourgeois politicians — especially the lie that it's all the fault of migrants. So there's an inability to see what’s at stake, because class struggle is never discussed.
Italy today is emblematic. Citizens voted for Meloni’s far-right government because they promised change. However, there's complete continuity between the liberal technocratic governments of former prime ministers Mario Draghi and Mario Monti and the current one. Meloni's Minister of Finance is Giancarlo Giorgetti from Bocconi University — the same guy who was there with Draghi! And Meloni’s budget for the coming fiscal year is pure austerity. She’s defunding hospitals and schools, eliminating the subsidies for the poor called reddito di cittadinanza, expanding regressive taxation, and privatizing while pushing for further labor deregulation. It's the whole austerity trinity — except for monetary policy, which is managed by the European Central Bank. This is no shock. Historically, when it comes to managing the economy, liberals and fascists have been allies. That's still true. Their authoritarian tendencies may surface in different ways. But, ultimately, the two camps are pushing in the same direction.
DV | Since WWI, has anyone defeated the drive toward austerity?
CM | Not to my knowledge. While 1919 was a really exciting year both for the reformists, who passed many welfare initiatives, and the more radical workers’ councils, who called for workers’ self-governance, this did not last long. Even in revolutionary Russia, Vladimir Lenin’s New Economic Policy basically acceded to some form of austerity. The Soviets had little choice. To compete globally in a capitalist system, they had to deflate their economy. From the 1920s onward, it’s been quite austere all around.
DV | Couldn’t that ingrain a sense of powerlessness? Recall Fredric Jameson's formulation. “It's easier to imagine an end to the world than an end to capitalism.”
CM | I hope the message of the book is actually the opposite. The fact that we think there's no way forward outside of capitalism speaks to the “success” of austerity. If you break out of austerity, you're breaking out of capitalism. We need to think big, but this doesn't mean that it's impossible. There's a huge amount of movements going on even now as we speak that are about achieving independence from market forces. Look at La Via Campesina, a movement that unites farmers throughout the South of the globe to demand workers’ sovereignty in food production or the neighborhood councils in Chile that mobilize to organize resources democratically and had a big role in the Chilean constitutional process before it was tanked by their supposedly left-wing government. Organizations like these are rekindling democratic engagement in the production process and ecological sustainability.
Now more than ever, we must rethink what type of state we want. The capitalist state is clearly one that must do austerity. And this is also clear for other systems that had to compete in the global order. Even globalization is unnatural and politically constructed. But everything that's actively constructed can also be actively deconstructed if people participate. And this is why I think those on top are constantly concerned. They know that the system is fragile. Although they’ve used neoclassical economics to convince us it isn’t. But I believe in the power of workers to think bigger and defeat capitalist realism.
DV | Economists in the last decade have become smitten with cash transfers, basic incomes, taxing capital flows, etc. as antidotes to economic malaise. These proposals are mostly encased in the framework of neoclassical microeconomics and liberals seem excited about them.
CM | I think those proposals are quite naive. They assume you can have the best of all worlds — a sort of “fair capitalism.” I don't believe capitalism can be fair. In a capitalist economy, the state’s ability to redistribute is necessarily limited — especially politically. These economists fail to see that. Otherwise they’d understand that a livable universal basic income would be a revolutionary measure. Society would cease to be capitalist. Some neoclassical economists, especially those who work at the Federal Reserve and International Monetary Fund, are perfectly aware of this. That is why they often block such policies.
DV | Have you debated other economists who criticize austerity, but consider it merely a bug and not a feature of capitalism?
CM | It's hard to have these debates. Economists generally believe the political and economic realms should be separate. They think I’m not really doing economics because the discipline is ontologically founded on that separation. But that’s an artificial, ideological divide. It’s ideological in the sense that it perpetuates illusions which help foster consensus for the system. Even colleagues at the New School, whose economics department is amongst the most radical, separate politics and economics. The dominant creed is that doing economics has little to do with the actual social relations of production.
DV | After World War II came the Keynesian era of the welfare state and managed capitalism, where wages and capital returns grew at similar rates. Why didn't we see the wave of austerity and fascism that followed World War I?
CM | This is a very important question and is indeed the guiding one of my next book project with the University of Chicago Press. I can start providing a very preliminary answer. The revolutionary spirit of 1919 was not as palpable after World War II. Workers became more integrated in the capitalist state apparatus. This was the great success of Fordism — the system of mass production and consumption characteristic of “developed” economies. Fordism got workers to accept exploitation in return for somewhat higher wages and moderate social benefits. In moments when political upheaval is weaker, states can undertake more ambitious redistributive efforts without risking subverting the entire system. By contrast as I show in my book, after World War I, reconstructionists tried to appease the population through welfare reform. But, in moments of more heated challenge to the pillars of the system, they weren't successful. Rather, their reforms instilled in workers a greater sense of possibility. Getting something caused the majority of citizens to demand more — perhaps even an overthrow of the whole system. Why just accept the lengthening of the leash?
After World War II, the revolutionary surges weren’t as powerful. This enabled the reformist vision of giving a little without challenging capital accumulation as such. That’s their political project.
Consider the policies implemented after World War II. The term "austerity" was popularized by Britain’s Labour government in 1948. Why? Because they prioritized the inflationary threat. In the historical trade-off between inflation and full employment, they chose to tame inflation. This led to a huge wage freeze in 1964.
Policymakers in Britain, the United States, and Europe were always concerned with compressing wages to avoid diminishing profits and private investment. Monetary stability and international competitiveness were sacrosanct. Sure, profits were so high that real wages grew alongside them. But how much space was there for more structural distribution of resources?
All this makes you question the supposedly great divide between Keynesians and Hayekians that I intend to explore further. Neither John Maynard Keynes nor Friedrich Hayek theorized about exploitation or understood capitalism as the problem. That’s why Keynes sought to optimize the system rather than replace it with something better. Let’s not make the same mistake.
