However, this is not simply a book about the banking disasters of 2007–08, and it would be a mistake to regard it as such. It is a book that locates arguments for austerity within long-standing debates about the need to cut services in economically straitened times. It raises fundamental ethical and political questions about the relationship between the economic policies that financial interests champion and the political duties of the citizens of countries who ultimately must bear the costs of any failings of such policies.

The mention of morality and economic policy in the same sentence might strike some as odd, but closer study of the history of how we interpret economic events reveals a strongly normative component in much of this analysis, and here the GFC is no exception. In commentary after commentary on the crisis in the political and economic pages of mainstream media, one finds highly moralised discussions of foolhardy investment, state profligacy, lazy Southern Europeans, and individual greed. Blyth suggests that the dominant discourse among such commentary is one that lays the blame for the GFC firmly at the feet of the state. In this anti-statist discourse, what we have before us in Europe is a problem of ‘Sovereign Debt’ – that is (roughly) debt taken on by a national government in a foreign currency in order to finance economic growth – and the solution to such a problem is to cut government spending. Blyth has a very different moral tale to tell. A Keynesian political economist, Blyth blames private banks for the crisis and proffers highly detailed arguments as to why austerity has not – and will not – save the economies of Western Europe.

However, Blyth’s view is not the current orthodoxy in Europe as governments engage in massive reductions in state spending. Blyth expresses outrage at the manner in which a private sector banking crisis was rechristened by political and financial élites as a crisis of the sovereign debt in a mere matter of months. He argues that any narrative that locates ‘wasteful spending by government prior to the crisis in 2007 as the cause of the crisis is more than just simply wrong: it is disingenuous and partisan’. In one rather purple passage, he suggests that claims that the debt was generated by an out-of-control public sphere was the greatest ‘bait and switch’ in modern history. Hyperbole to one side, if Blyth is correct in his more general analysis, it is a remarkable fact that for many commentators it is the public sector and feckless southern workers who are blamed for the ongoing economic woes in Europe.

The subtitle of the book refers to austerity as a ‘dangerous idea’, and Blyth has a number of reasons for thinking thus. In the first place, cutting state expenditures to encourage growth does not work. Blyth closely examines its implementation and makes the remarkable claim that it has never worked: ‘Austerity has been applied with exceptional vigor during the ongoing European financial crisis, and it has produced exactly the same failures one would expect if its previous intellectual and natural histories had been investigated.’

Protests on Austurvöllur because of the Icelandic economic crisis, 2008 (photographed by Haukur Þorgeirsson)

In pursuit of this claim, he explores a large number of contemporary and historical examples. One particularly fascinating example concerns the respective economic fates of Ireland and Iceland. When the banks collapsed in the Republic of Ireland, the government bailed them out and subsequently implemented the austerity policies advocated by the IMF and the EU. Despite cutting twenty-four billion euros from their budget between 2008 and 2012, debt remains at 108.5 per cent of GDP. Iceland, by way of contrast, could not afford to bail out its banks, and the government decided to let institutional creditors shoulder the cost of the collapse rather than the taxpayers; and Iceland is apparently doing far better than much of the Eurozone. If austerity does not produce growth, why have governments continued to pursue it? Blyth suggests that the reason is, in part, the felt need to ensure that room can be found on the public balance sheet to ‘backstop’ if further bailouts are required.

Like many political economists, Blyth is just as interested in explaining why individuals spout certain economic arguments as he is in exploring whether or not they are intellectually coherent. Accordingly, nearly half of the book involves an analysis of the prehistory of austerity. The book contains quite extensive analyses of the economic implications of the political philosophies of Adam Smith, John Locke, and David Hume. Ultimately, though, the primary intellectual origins of the thinking that led to the crisis is said to be a generation of economic thinkers ‘who only ever saw markets as good and the state as bad’. According to such theorists, markets only fail when the state interferes with their operation; finance should be allowed therefore to self-regulate. Blyth suggests that this gave rise to an irresponsible over-emphasis of the laissez-faire principle and an over-reliance on the rationality of market actors. Just as Keynes warned eighty years ago, the rational expectations of sophisticated investors turned out to be short-sighted and bubble-chasing. Blyth also notes that it would be a mistake to imagine that markets naturally arise once the state withdraws from any arena: instead, markets only exist through the state. Here he follows in the steps of Karl Polanyi’s canonical work The Great Transformation (1944), a book that has clearly influenced Blyth’s thinking.

‘Why should ordinary citizens pay increased taxes and suffer reduced services to cover the misadventures of private financial institutions?’

Blyth’s final conclusion is that austerity remains a dangerous idea because, despite all the evidence that it does not work, the proponents of austerity continue with their commitment to it. Moreover, the antagonism towards so-called state profligacy fails to acknowledge where the debt came from in the first instance – namely, from private banking failures. This obviously raises important issues of justice to which Blyth adverts but does not really explore. Why should ordinary citizens pay increased taxes and suffer reduced services to cover the misadventures of private financial institutions? It is odd that Blyth does not say more about this. It must also be said that his discussion of the role of Germany in the current austerity régime of Europe at times appears confused. Blyth refers to the German financial system as a form of ‘ordoliberalism’, but it is difficult to understand what he means when he uses the term and, further, how it differs from ordinary liberalism.

Those criticisms to one side, this is a significant book with much to teach us. It is sometimes hard for Australians – insulated as we have been from the full effects of the crisis – to appreciate how the GFC has devastated considerable parts of European society. We hear reports from afar of the rise of a fascist party in Greece and of fifty-per-cent levels of unemployment of the young in Spain, but we remain largely untouched. Why should we care about these issues?

To think in this way would be to miss the larger political questions being asked within this book about whether state spending on welfare should be more restricted and whether financial activity should be more heavily regulated. It is not as if we are immune from these concerns. Whether or not one agrees with Blyth’s analysis – many will not, and many will take exception to the irreverent tone of the book – the questions the book raises are ones that should not be left merely to economists and public policy makers. They should be part of our general public discourse. Blyth is to be congratulated for bringing ideas from the nineteenth century discipline of political economy into the twenty-first.