‘The economic consequences of austerity’ By Amartya Sen ( Nobel Prize winner economist)

The Greek crisis is a battle between believers of Austerity measures, led by Germany, and those who think it will worsen the problems rather than improving it. Ironically Germany once was victim of austerity measures and was relieved by forgiving of the debt by European nations, including Greek. The article below is interesting read on the current headline news on Greek.(f.sheikh)

On 5 June 1919, John Maynard Keynes wrote to the prime minister of Britain, David Lloyd George, “I ought to let you know that on Saturday I am slipping away from this scene of nightmare. I can do no more good here.” Thus ended Keynes’s role as the official representative of the British Treasury at the Paris Peace Conference. It liberated Keynes from complicity in the Treaty of Versailles (to be signed later that month), which he detested.

Why did Keynes dislike a treaty that ended the state of war between Germany and the Allied Powers (surely a good thing)?

Keynes was not, of course, complaining about the end of the world war, nor 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 imposed austerity. Austerity is a subject of much contemporary interest in Europe – I would like to add the word “unfortunately” somewhere in the sentence. Actually, the book that Keynes wrote attacking the treaty, The Economic Consequences of the Peace, was very substantially about the economic consequences of “imposed austerity”. Germany had lost the battle already, and the treaty was about what the defeated enemy would be required to do, including what it should have to pay to the victors. The terms of this Carthaginian peace, as Keynes saw it (recollecting the Roman treatment of the ­defeated Carthage following the Punic wars), included the imposition of an unrealistically huge burden of reparation on Germany – a task that Germany could not carry out without ruining its economy. As the terms also had the effect of fostering animosity between the victors and the vanquished and, in addition, would economically do no good to the rest of Europe, Keynes had nothing but contempt for the decision of the victorious four (Britain, France, Italy and the United States) to demand something from Germany that was hurtful for the vanquished and unhelpful for all.

The high-minded moral rhetoric in favour of the harsh imposition of austerity on Germany that Keynes complained about came particularly from Lord Cunliffe and Lord Sumner, representing Britain on the Reparation Commission, whom Keynes liked to call “the Heavenly Twins”. In his ­parting letter to Lloyd George, Keynes added, “I leave the Twins to gloat over the devastation of Europe.” Grand rhetoric on the necessity of imposing austerity, to remove economic and moral impropriety in Greece and elsewhere, may come more frequently these days from Berlin itself, with the changed role of Germany in today’s world. But the unfavourable consequences that Keynes feared would follow from severe – and in his judgement unreasoned – imposition of austerity remain relevant today (with an altered geography of the morally upright discipliner and the errant to be disciplined).

Aside from Keynes’s fear of economic ruin of a country, in this case Germany, through the merciless scheduling of demanded payments, he also analysed the bad consequences on other countries in Europe of the economic collapse of one of their partners. The thesis of economic interdependence, which Keynes would pursue more fully later (including in his most famous book, The General Theory of Employment, Interest and Money, to be published in 1936), makes an early appearance in this book, in the context of his critique of the Versailles Treaty.

“An inefficient, unemployed, disorganised Europe faces us,” says Keynes, “torn by internal strife and international hate, fighting, starving, pillaging, and lying.” If some of these problems are visible in Europe today (as I believe to some extent they are), we have to ask: why is this so? After all, 2015 is not really anything like 1919, and yet why do the same words, taken quite out of context, look as if there is a fitting context for at least a part of them right now?

If austerity is as counterproductive as Keynes thought, how come it seems to deliver electoral victories, at least in Britain? Indeed, what truth is there in the explanatory statement in the Financial Times, aired shortly after the Conservative victory in the general election, and coming from a leading historian, Niall Ferguson (who, I should explain, is a close friend – our friendship seems to thrive on our persistent disagreement): “Labour should blame Keynes for their election defeat.” For full article click link;


7 thoughts on “‘The economic consequences of austerity’ By Amartya Sen ( Nobel Prize winner economist)

  1. I have extremely little knowledge of economical and financial concepts.
    But I found this posting very interesting and informative.
    Amartya Sen is a great social intellectual – Noble Prize winner in Economics and professor at Harvard – great intellectual achievements.

    Really I cannot comment on this article because I do not have the intellectual capacity to understand financial concepts.
    But I can share with you what I learnt.

    This article is about implementing austerity measures to fix a financial/economic problem – at present the prime example is Greece.

    Amartya Sen gives a panoramic view of economic and political history of Europe for about 100 years – from first world war to present.
    Establishment of NHS (National Health System/Services) in UK after WW1.
    Amartya Sen also mentioned the recent economic meltdown of economic system of the world and how it was saved/averted.

    He also mentioned the importance of discussion of economic/political issues before the decisions are made by the politicians rather than after – comprehensive participatory democracy, not only voting but debating the issues by public.

    I also learnt Hindutva linkage with BJP.

    He also mentioned about institutional reforms in Europe, retirement age, vacation time, working hours etc. etc.
    I was also intrigued that he used the word “epistemology’ in his discussion of political and economic issues.

    Economic justice and economic opportunity are relevant concepts.
    Economic justice has been discussed since antiquity.
    Economic opportunity is a modern concept which became a possibility after industrial revolution – during last two hundred years.

    It is an important article which I need to read multiple times.


    • Unlike Noor sahib,I have no desire to read Mr. Sen’s article again. Even the first time my attention span dwindled after the first 2-3 pages of his very long article. In those first pages though he seems to advise against the rest of eurozone imposing somewhat harsh austerity measures on Greece. To me that idea is comparable to me having a swimming pool installed in my backyard (which apparently almost all Greeks have) using my credit card, since I don’t have the money at hand. This I do knowing that I do not have the ability to ever pay even the minimum amount due every month. Six months after non payment I then ask of the credit card company to loan me the money to pay for the amount already owed, leaving me with a larger monthly payment. To continue with that example would it be unfair for the credit card company to ask me to cut back on my discretionary expenses? No. It would cause me temporary hardship but it would make me learn to live within my means.

      Another example to back my argument. When your child misbehaves and you have to punish him/her, there are short term “problems”; the parent feels guilty of meting out a punishment, the child is mad at receiving the punishment. But in the long term a lesson is learned(in most cases). Greece deserves to have the austerity measures dictated to it. Long term gains always should trump short term pain (in most cases).


  2. I agree with Shoeb that Greece was spending the money as if it was free and should be the first to blame for the current crisis. However the picture is more complex and there are other players who contributed to this crisis. In the above example of the pool, what if the lender/credit card company knew that the borrower( Greece) has no ability to pay back and lent the money anyway because it was getting higher interest rates. It is more like subprime lending mess we have in USA. It is interesting to look at the background and see how complex the problem is.
    When Euro union and Euro currency started, the rich nations , like Germany and France, has low interest rates as compared to Greece, Portugal, Ireland and Spain. The banks from these rich countries lent large some money at much higher interest rates to these nations who did not have ability to pay back and banks did not care as long as they were getting higher interest rates.
    When the crisis hit about four years ago, these banks in Germany and Paris were in trouble and would have led to economic crisis in Europe especially in Germany and France. IMF and EU central Bank lent money to Greece to pay back the loans of these Banks. Now the Germany and French banks are saved and the loan is shifted to EU Bank and IMF. One can appreciate how smart play the Germany and France played to save their own banks and shifted the burden to central monetary organizations, run by the tax payers money, without holding their own banks responsible for any risk.

    Now how to resolve this crisis. There are two ways. When we had crisis in USA due to subprime mortgage, not much different than what is happening in Europe, The Federal Reserve and US treasury loosened the money restrictions and increased government spending to stimulate economy. It worked and we gradually came out of recession.Even though it increases the Government debt in the beginning, but with improved economy the debt has reduced to half now by increased tax revenues. We do not hear Republicans complaining about national debt any more.

    The Europe went the opposite. It argued that because they have large debt, the governments should reduce spending and save more. Mr. Sen is arguing that this approach does not work, because if Government cuts spending during downturn, it will make economy worse because there will be more layoffs and people will have less money to spend. Mr. Sen argues that take the example of USA, which increased government spending, it created more jobs and helped boost economy and hence reduce debt by increased tax revenues.

    Mr. Sen is suggesting USA like ( Keynesian) approach for Greece. He is suggesting that forcing Greece to reduce spending by austerity measure at this juncture will be counter productive.Greece was under austerity measures for five years, its economy shrank 25% and is under more debt than five years ago. It did not work before and will not work again.

    Debt forgiveness, although is like rewarding bad behavior, but sometime it is necessary to bring a country out of economic disaster, like Germany was forgiven debt after WWII, and Greece was one of the country who forgave the German debt.

  3. Thanks to Dr. Sheikh for making the complicated trail of money clearer. I understand in the end they’ll do the practical thing. To add another wrinkle to this complexity is that the businesses of the other European nations do not want Greece to default or leave the Eurozone; they are worried about their businesses hurting, especially if by a domino effect Spain & Portugal go the same route. These businesses are pressuring their govt. to keep Greece afloat, even the though their public is sick of Greece.

    And this mess is somewhat different than our own subprime mess. The borrowers in the subprime mess were in most cases unsophisticated individuals. The leadership of Greece can’t be considered to be that unsophisticated (one would hope).

    Anyway, I think none of would care much about this issue except that it is affecting our own investments.

  4. After WWII, Liberalism–freedom of money making–helped rebuild West Germany and promoted Capitalism. Cold War and the fear of socialist economy, kept Capitalism disciplined and accountable wherever liberal democracy was in power. After the fall of Communism, the capitalist societies feeling free from the fear of socialistic economic system, have fallen victim to corruption. Today, the world needs a new economic system, because capitalism is also going to fail, unless it is reformed. What we see in Greece is the beginning of collapsing capitalism. Chinese, anticipating this, have established a new bank posing a challenge to World Bank and IMF. . . Mirza

  5. Shoeb Sahib is right about irresponsible Greece for enjoying pay raises on the expense of lenders and Fayyaz Sahib is also right that lenders became greedy like subprime lenders to make money from a dying enterprise and finally Mirza Sahib has brought up the capitalism itself in question. Capitalism defeated communism/socialism because of the incentive of making money in capitalism and without incentive no system is going to replace capitalism. I doubt though that the New Development Bank that BRIC wants to establish is in anticipation of collapse of capitalism – it is, in fact an example of competition in the system of capitalism. Like USA’s self interest in IMF and World Bank, this new bank will be in the interest of China. Competition is good, hence this new bank will make IMF less strict in imposing and dictating the policies of the borrowing nations but there should be no doubt that this is extension of capitalism and not replacement.


  6. The respondents in this discussion and anyone else interested should read the Time magazine article “Greece Tempts the Fates” in the issue with Elizabeth Warren on the cover. It shows how Greece got to where it is now. Events since the time of publication of the above issue have shown that the other European countries were not going to take any more of Greece’s irresponsible habits.

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