Imposing harsh economic austerity on a nation is like giving people rat poison, according to the Indian Nobel Prize-winning economist Professor Amartya Sen.
His weekend speech, called The Economic Consequences of Austerity, was delivered at the Charleston literary festival in East Sussex. It was a tribute to the leading economist of his day, John Maynard Keynes, who wrote a book in 1919, called The Economic Consequences of the Peace.
Charleston, in the village of Firle, near Lewes, was the house which became a gathering point for the “Bloomsbury set”, which included writers, painters and free spirits who affected a Bohemian life – Vanessa Bell, Duncan Grant, Clive Bell, David Garnett, Virginia and Leonard Woolf, EM Forster, Lytton Strachey and Roger Fry.
It was at Charleston, with its idyllic setting and walled garden, that Keynes wrote his book.
“Keynes was not, of course, complaining about the end of the world war, or about the need for a treaty to end it, but about the terms of the treaty – and in particular the suffering and the economic turmoil forced on the defeated enemy, the Germans, through austerity,” remarked Sen.
“Austerity is a subject of much contemporary interest in Europe – I would like to add the word ‘unfortunately’ somewhere in the sentence,” he said. “Actually, the book Keynes wrote attacking the treaty… was very substantially about ‘the economic consequences of imposed austerity’.”
He was not making a political point on behalf of the Labour party but merely stating – as Keynes had done nearly a century ago when opposing the harsh terms imposed on a vanquished Germany in the 1919 Treaty of Versailles – that austerity could prove counterproductive.
Sen was named the winner of the first Charleston-EFG John Maynard Keynes Prize, which “recognises an individual of any nationality of exceptional and interdisciplinary talents in the spirit of John Maynard Keynes’s work, life and legacy”.
Dame Liz Forgan, the chair of the judging committee, declared that the reason why Sen is “the perfect first recipient of this prize is that he has applied that theoretical work to some of the most urgent and pressing challenges affecting the lives of human beings. And he shares with Keynes the real achievement of making the lives of people better because of the power of his thinking. People with enormous brains who also have enormous hearts are rare and precious commodities.”
The prize is worth £7,500 and can be used to commission a work of art. Sen said: “Some thought which has been growing in my mind is to get someone, possibly in India, to do (a painting of) my ancestral house (in Santiniketan) because I am very loyal to it – it is called Pratichi.”
He accepted there was a need for economic reform in Europe today, but added: “It is as if a person asks for an antibiotic for his fever, and is given a mixed tablet with antibiotic and rat poison. You cannot have the antibiotic without also having the rat poison.
“We were, in effect, being told that if you want economic reform, then you must also have, along with it, economic austerity, although there is absolutely no reason whatsoever why the two must be put together as a chemical compound.”
Commenting on the British general election, Sen wondered: “Could the British voters, then, have missed the real story?”
“There are two distinct issues here,” said Sen, whose address was warmly received, even though a large part of his essentially middle-class audience had probably voted Tory.
“First, even if we want to reduce public debt quickly, austerity is not a particularly effective way of achieving this – which the European and British experiences confirm,” he continued. “For that we need economic growth, and austerity, as Keynes noted, is essentially anti-growth.
“Second, what is also important is that while panic may be easy to generate, the existence of panic does not show there is reason for panic. No less importantly, the public has not always been scared stiff by the size of the public debt.”
He explained: “The public debt to GDP ratio was very considerably larger in Britain in every year for two decades, from the mid-1940s to the mid-60s, than it has been any time since the crisis of 2008.
“And yet there was no panic then – when Britain was confidently establishing the welfare state – in contrast with the confused anxiety, not to mention the orchestrated fear that seems to run down the spine of the terrorised British today, making austerity look like a fitting response.”
According to the Nobel Laureate, “Keynes ushered in the basic understanding that demand is important as a determinant of economic activity, and that expanding, rather than cutting, public expenditure may do a much better job of expanding employment and activity in an economy with unused capacity and idle labour. Austerity could do little since a reduction of public expenditure adds to the inadequacy of private incomes and market demands, thereby tending to put even more people out of work.”
In marked contrast, “the huge deficits after the Second World War were easily tamed with fast economic growth in the post-war years,” he said. “Something similar happened during the eight years of Bill Clinton’s presidency of the United States, when Clinton began with a huge deficit and ended with none, thanks largely to rapid economic growth.
“But the real – and strong – case for institutional reform has to be distinguished from an imagined case for indiscriminate austerity, which does not do anything to change a system while hugely inflicting pain,” the economist said.
After Sen’s question and answer session, a woman called in a commanding patrician voice: “I would like to congratulate Charleston for inviting this marvellous man to give this talk. Please can we have a copy of it or something because we need to spread this knowledge and understanding as far as possible?”