Fascism, Liberalism, and the Invention of Austerity (1918-1922)

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Economist Clara Mattei discusses her book Capital Order: How the Economist Invented Austerity and Paved the Way to Fascism.

For more than a century, governments facing financial crisis have resorted to the economic policies of austerity—cuts to wages, fiscal spending, and public benefits—as a path to solvency. While these policies have been successful in appeasing creditors, they’ve had devastating effects on social and economic welfare in countries all over the world. Today, as austerity remains a favored policy among troubled states, an important question remains: What if solvency was never really the goal? 

Mattei traces modern austerity to its origins in interwar Britain and Italy, revealing how the threat of working-class power in the years after World War I animated a set of top-down economic policies that elevated owners, smothered workers, and imposed a rigid economic hierarchy across their societies. Where these policies “succeeded,” relatively speaking, was in their enrichment of certain parties, including employers and foreign-trade interests, who accumulated power and capital at the expense of labor. Here, Mattei argues, is where the true value of austerity can be observed: its insulation of entrenched privilege and its elimination of all alternatives to capitalism. 

Drawing on newly uncovered archival material from Britain and Italy, much of it translated for the first time, The Capital Order offers an essential new account of the rise of austerity—and of modern economics—at the levers of contemporary political power. 

Great Britain and Italy (from an interview with Nick Serpe, Dissent, 02/2023

I could have picked many other countries, because austerity was taking place in countries all over the world in the 1920s. But I chose these two countries specifically to juxtapose two settings that are seemingly different institutionally and ideologically. 

Britain was a rich old capitalist state in the 1920s; Italy was a comparatively young backwater. But when you look at the two in terms of how they wielded austerity and how they talked about doing so, the notion that liberalism and fascism are these profoundly different things starts to crumble. In both the liberal parliamentary democracy of Great Britain and under fascism in Italy, experts were using the power of macroeconomic dials for the same objective: to reconstitute the capital order.

In Britain, they used interest-rate hikes and slashes in social expenditures to induce a recession and increase unemployment. This completely curtailed the mobilizing capacity of workers. At the time, G.D.H. Cole, who a couple of years before was convinced that capitalism was on the verge of collapse, remarked, “The big working-class offensive had been successfully stalled off; and British capitalism, though threatened with economic adversity, felt itself once more safely in the saddle and well able to cope both industrially and politically with any attempt that might still be made from the Labour side to unseat it.”

Italy had the same policies—privatization, cuts in social expenditure, deflation—but it also more directly used the coercive hand of the state. The fascist state intervened to curtail wages by decree, and with the fascist labor charter, it also killed any non-fascist unions and made strikes illegal. So what in Britain was achieved by the impersonal laws of the market after inducing a recession, in Italy was mostly achieved by the state suppression of industrial mobilization. Italy didn’t need to induce a recession; the Italian economy actually grew from 1922 to 1925. It only really went into a recession when it tried to go back to the gold standard in 1926.

But the issue isn’t just parallels. The stories of twentieth-century liberalism and fascism also intersect: Mussolini would have never really solidified his rule without the consensus of the domestic and international liberal elite. For example, when it came to austerity, the liberal economist Luigi Einaudi—who became the first president of the republic after the fall of fascism—supported Mussolini’s economic measures for the whole of the 1920s, writing great things about him in the Economist.

It’s also important to recognize the anti-democratic, authoritarian thrust of austerity—including how it sometimes serves liberal ends. Part of Hawtrey’s argument in favor of an independent central bank was that it would never have to explain its actions, never regret, never apologize; it would prevent any democratic participation in economic decisions. This authoritarian inclination, shared across liberalism and fascism, can be seen whenever the capital system is breaking down.