The Thinking Behind Western Austerity

Can fiscal consolidation be done well? Given we live in an age of austerity, this seems like a question that applies to us all. The paper below offers a fantastic insight into the thinking behind most Western austerity packages. I’d thoroughly recommend this paper to anyone with an interest in the practical results of austerity.


Two of my best friends study Physics. They regularly complain about the credibility and accuracy of ‘pop-science’. On more than one occasion they’ve asked me whether ‘pop-economics’ annoyed me, but I’ve never really been able to think of any examples of ‘pop-economics’. Honestly, I didn’t really think it existed. But, its just hit me. Pop-economics is just politics.

“Based on pre-tax and pre-transfer market income (excluding nontaxable fringe benefits such as health insurance but including realized capital gains) per family reported on tax returns, the share of total annual income received by the top 1 percent has more than doubled from 9 percent in 1976 to 20 percent in 2011 (Piketty and Saez, 2003, and the World Top Incomes Database). There have been rises for other top shares, but these have been much smaller: during the same period, the share of the group from 95th to 99th percentile rose only by 3 percentage points. The rise in the share of the top 1 percent has had a noticeable effect on overall income inequality in the United States (Atkinson, Piketty, and Saez 2011, Section 2.2)”.


(Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty, and Emmanuel Saez, 2013, The Top 1 Percent in International and Historical Perspective, Journal of Economic Perspectives, 27(3): p.4).

The Neoclassical View Of The Firm

Since the rise of Margret Thatcher in the late 70s/early 80s, UK macroeconomic policy can safely be described as Neoclassical. Following the 2008 Financial Crisis, serious questions were asked about the continuing validity of Neoclassical macroeconomic policy. This was met with a resurgence in Keynesian economic thought, dubbed ‘Post-Keynesianism’. I’m going to focus on one simple, but fundamental, difference between the two; the structure of the firm.

To understand the how the firm behaves in these opposing economic ideologies, one must first understand the principle of Methodological Individualism. The philosophical proposition of Methodological Individualism (one which both Post-Keynesian and Neoclassical economics subscribe too) argues that microeconomics dictates macroeconomics, in so much that all aggregate events are rooted in individual behavior.

Neoclassical economics assumes that ‘the firm’ tends to be both small and owner-managed and thus, macroeconomic policy should be tailored to these small firms. Post-Keynesian economics argues ‘the firm’ is large and often in the form of an oligopolist (think of the major UK supermarkets), thus macroeconomic policy should be tailored around large firms.

The neoclassical nature of UK macroeconomic policy over the past 30 years certainly suggests that the economy was/is rooted around the small firm. But, is this assumption suitable for the current UK economy? Based purely on observation I would argue that it isn’t. I’m struggling to think of a UK market that isn’t centered around a core oligopoly of firms (that are neither small nor owner-managed) that dominate the neoclassical firms, to the extent that the major market influence lies with the oligopolists. And in this sense I agree with the Post-Keynesians. The actual answer obviously requires a much more in depth study of the UK economy, but I certainly think Post-Keynesianism (at least in theory) provides a case in favour of reassessing the basic fundamentals of UK macroeconomic policy. This being said, I would not class myself as a Post-Keynesian.

The Continuation Of Economic Sanctions Against Russia

Russia certainly seems unwavering in its actions in the Eastern Ukraine. It directly violated Ukrainian sovereignty through the annexation of The Crimea, and has continued to destabilise the region by allegedly arming anti government rebels. In light of the recent events involving Malaysian Airlines MH17, The West is considering a new wave of economic sanctions. Below is a video from The Financial Times discussing both the plausibility and effectiveness of further sanctions.