Photo: Buchanan speaking at the Hilton hotel in Rotterdam, in 1985.
By Bram Mellink and Merijn Oudenampsen
Now that the first wave of the corona epidemic is slowly dying down, an economic crisis of historic proportions is making itself felt. On the European continent, the crisis has rekindled old tensions between the north and the south. The dominant European crisis narrative depicts it as a confrontation between the frugal Protestant north and the profligate Catholic south. Especially in the north, these age-old cultural tropes are widely popular and have helped to legitimize harsh austerity policies. Exemplary of this development is the Netherlands, a country that takes pride in its Protestant background and strict philosophy on public spending. As the leader of the so-called frugal four, the coalition of EU-countries favoring strict budgeting rules, the Netherlands has played a prominent role on the European stage as enforcer of austerity. The Dutch insistence on frugality however, is not an age-old artefact of the country’s Protestant heritage. In reality, it is a much more recent phenomenon, a product of the breakthrough of neoliberalism and public choice theory during the 1980s. The European Monetary Union was built on the lessons of the 1980s, in particular the rejection of Keynesian deficit-financing. Presently, the fallout of the corona-epidemic calls into question that entire legacy.
Introduction
As a result of the economic fallout of the corona-epidemic, European politics is again in turmoil. In these past months, European leaders and finance ministers (gathered in the Eurogroup) have been busy negotiating a European recovery plan. In the process, the Netherlands has made a name for itself, by lecturing the hardest hit southern European countries about their lack of financial reserves. And by staunchly opposing the allocation of funds to deal with the crisis. Lecturing the south has by now become a Dutch tradition of sorts. In the aftermath of the eurocrisis, Eurogroup president Jeroen Dijsselbloem caused controversy with his comments about southern Europeans wasting their money on alcohol and women. He later apologized by referring to his strict Calvinist background. Presently, it is the ‘blunt-spoken’ Protestant finance minister Wopke Hoekstra who has come under fire for similar insensitivities. In the Netherlands itself however, their strict stance can count on a broad popular appeal. On Dutch social media, thousands of angry comments have poured in about happy-go-lucky Italians threatening to get away with Dutch hard-earned savings. It has become the overarching cultural narrative of the eurocrisis, depicted as a tug of war between the Protestant frugality of the north and the Catholic profligacy of the south. The Dutch, like the Germans, have a ‘cultural aversion to debt,’ the Economist concluded.
A recurring reference in this debate is Max Weber’s sociological classic The Protestant Ethic and the Spirit of Capitalism. Weber argued that the Protestant emphasis on a thrifty lifestyle and a strict work ethic, facilitated the rise of modern capitalism. Especially in the Calvinist tradition, hard work and frugality gave evidence of God’s favour. The Netherlands, with its longstanding Calvinist tradition, is often described as an illustration of Weber’s thesis. Protestant frugality would then explain the current Dutch intransigence. It happens to pleasantly conform to the Dutch self-image as an affluent, hardworking and thrifty people. However, Weber’s essay on the Protestant ethic is a theory of secularization and rationalization. It describes how modern capitalism eventually produced its own secular ethos, while what remained of the Protestant ethic was reduced to ‘the ghost of dead religious beliefs’. Since the Netherlands has indeed become highly secularized, Weber would give little credence to the Calvinist upbringing of Dutch finance ministers as the source of the government’s strict budgeting views. Perhaps more importantly, when we look at the individual level, where Weber sought the source of the Protestant ethic, the Dutch are not that thrifty and hardworking at all. The country has one of the world’s highest household debt burdens and one of the shortest working weeks. The frugality that the Netherlands preaches in relation to public finances is in no way apparent in the personal sphere.
The Dutch insistence on frugality in public finance does not stem from an age-old Protestant tradition. It is a much more recent phenomenon. Back in the sixties and seventies, the Dutch government still had some very different ideas about government debt and budget deficits. According to the then dominant Keynesian view, in times of crisis the government had to engage in debt-financing in order to stimulate the economy. The Dutch turn to frugality can be traced back to the resolute rejection of Keynesian economic policy in the 1980s. It formed part of the international breakthrough of neoliberalism, which made government spending part of the problem, rather than the solution.
An important intellectual influence in that shift was American public choice theory. It portrayed the state as a greedy glutton, which had to be subjected to a strict diet. This vision informed a range of initiatives to bind government expenditures to strict norms and targets. The Dutch ministry of finance, a bulwark of conservative fiscal views, played a central role in this process. In the 1980s, it managed to make its conservative fiscal philosophy the cornerstone of Dutch economic policy-making. In that same period, informed by the same concerns, the ministry had an important hand in shaping the architecture of the European Monetary Union. The hope was that an independent European Central Bank, and strict budgetary norms enforced by Brussels, would strengthen the position of the finance ministry and help it in its struggle against public profligacy.
I
Illustrative of the 1980s counter-revolution in economic policy is a visit of the American economist James Buchanan to the Netherlands in 1985. Buchanan achieved international fame as one of the founders of public choice theory. In the 1980s, he was at the pinnacle of his influence, reflected in his reception of the Nobel Memorial Prize in Economics in 1986. Particular to public choice theory is that it takes the tools of neoclassical economics and applies these to the public sector. As is well known, the neoclassical economists base their models on the homo economicus: they assume that in the marketplace, individual behavior is motivated by rational self-interest. Public choice theory further expands that logic, and assumes that in the political sphere, people also behave as homo economicus. Politicians, civil servants and voters are not driven by lofty ideals or some sort of public ethos, but pursue their rationally conceived self-interest.
While this self-interested behavior pans out well in the marketplace, it makes politics a severely dysfunctional system. Public choice theory portrays the political sphere as a domain of perverse incentives, where everyone is out to get something, to the detriment of the public purse. Voters have little incentive to inform themselves properly about politics, since the impact of their vote is negligible; pressure groups of organized minorities decide the fate of elections; politicians try to please them by spending as much as possible while bureaucrats continuously lobby to expand the funding of their departments. The democratic system had a natural tendency to overspend. With this analysis at hand, Buchanan spoke out against ‘public profligacy’, the ‘myopic hedonism’ and the shortsighted satisfactions made possible by ‘Keynesian apologetics’ – because all the trouble has started with the pro-spending ideas of John Maynard Keynes. The solution of public choice economists, was to actively constrain policy-making through strict norms for taxes and spending.
While Buchanan presented public choice as an objective science (or, in economist talk: a positive theory), the tradition had a barely concealed ideological dimension. Because Buchanan argued that decisions on taxes and public budgeting should be taken unanimously, redistribution was a no go, unless the rich voluntarily agreed to pay more taxes. Put roughly, Buchanan was an inverted Piketty: he took a stand against higher taxes and against redistribution. Together with famous allies such as Friedrich Hayek and Milton Friedman, he served as one of the intellectual figureheads of the neoliberal movement. Like Hayek and Friedman, he served a stint as president of the Mont Pèlerin Society, an influential international network of free market advocates. And he was closely involved with a range of of British and American neoliberal think tanks, such as the Institute of Economic Affairs, the American Enterprise Institute and the libertarian Cato Institute. At the same time, he had close organisational links with the Koch brothers, the famed oil barons that made a name for themselves as financiers of the Republican Party.
In his 1985 lecture in the Netherlands, Buchanan sought to address a weakness in his argument. If government had an inherent tendency to overspend, why was it that only the 1960s and 1970s saw such an increase in government largesse? Buchanan now complemented his model of the homo economicus with a theory of moral sentiments. In earlier times, Buchanan explained, traditional morality ensured thrift and prudence. Families that were economical and disciplined with their money were rewarded for this. They surfaced naturally in the process of selection. As a result of societal evolution, the same standards came to determine the policy of governments: the household ledger became the dominant metaphor for public finances. In this way, a Victorian morality emerged in monetary and fiscal matters, and public debt became seen as sinful. Much to the lament of Buchanan, this state of affairs did not last. The economist John Maynard Keynes had eroded Victorian morality with his newfound economic theories in the 1930s. In the absence of traditional morality constraining the homo economicus, governments had begun living large, threatening the very existence of the capitalist order.
In a way, this was Weber turned on his head. According to Weber, the religiously inspired pursuit of wealth that spawned modern capitalism had only been a temporary influence. Weber referred to it as a ‘light cloak, which can be thrown aside at any moment’. Once the capitalist system had become fully grown, it started producing its own secular capitalist ethos. The ‘light cloak’ of religious morality had been replaced by ‘a shell as hard as steel’, better known as ‘the iron cage’. Victorious capitalism no longer needed the support of religion; it had become morally self-sustaining.
Buchanan in contrast, did not believe in Weber’s thesis that modern capitalism had become morally self-sustaining. In similar fashion as the sociologist Daniel Bell in his classic The Cultural Contradictions of Capitalism, Buchanan saw traditional morality as a necessary precondition for the system’s stability. This morality still had the quality of ‘a light cloak’, to use Weber’s metaphor. And that cloak had even been unbuttoned when Keynes undermined the Victorian ethos of thrift and prudence. Buchanan told his Dutch audience that there was once again a need to moralise about public debt, to regain the traditional vision of debt as sinful. At the same time, Buchanan was skeptical that Victorian morality – the product of centuries of spontaneous evolution – could be resuscitated at will. Lacking a public ethos of self-restraint that imposed discipline at the individual level, Buchanan proposed strict budgetary norms to restore societal self-restraint at the collective level. In this way, at least provisionally, the light cloak could be buttoned up.
II
The ideas of Buchanan could count on a warm reception in the Netherlands. The Dutch government at the time, led by the Christian Democrat Ruud Lubbers, tried to reduce the budget deficit by implementing rather drastic austerity measures. Buchanan lecture at the university of Rotterdam, was followed by a public debate at the Rotterdam Hilton hotel, sponsored by the American oil company Texaco. Under the watchful eye of a select group of politicians, journalists, ambassadors, bank directors and entrepreneurs, Buchanan debated the leftist Dutch sociologist Abram de Swaan. There was a telling intervention by Rudolf de Korte, the upcoming Minister of Economic Affairs: ‘The government has decided that packages of cigarettes should carry the warning “Dangerous for your health”. Would it not be advisable that politicians were provided with a warning too: “This man is dangerous for the government budget?” It was a rebuke to the social democrat leader Joop Den Uyl, also present in the audience. The take-home message of the debate was clear: the progressive tide of the 1970s had run its course; the government no longer offered solutions; it had become part of the problem.
Buchanan’s visit was organized by the Department of Monetary Studies at Rotterdam University. In the 1970s and 1980s, the department achieved notoriety as a small but influential stronghold of free market advocacy, inspired above all by Milton Friedman. The economists at the department – Pieter Korteweg and Eduard Bomhoff – bombarded the Dutch press with opinion pieces critical of the Keynesian policies of that time. As a result, Korteweg was soon dubbed “the Dutch Friedman”, while in the left-wing press, the Rotterdam economists were dismissed as “Friedmaniacs”. Despite these misgivings, the political tide favored free market ideas. In 1981, Korteweg became the senior civil servant of the Dutch Ministry of Finance. He was one of the leading figures behind the Dutch turn to austerity. And American public choice theory became an important intellectual pillar of those policies.
A striking illustration is a lecture in the late eighties by the Dutch minister of finance, Onno Ruding. It bore the title Government Debt as a Moral Burden and could have easily been written by Buchanan. In the lecture, Ruding gave a succinct summary of public choice theory: Dutch citizens did not understand that more government spending also meant more taxes, since taxes were passed on to future generations via rising government debt. ‘Vote maximizing politicians’ capitalized on this ignorance and tried to buy voter’s allegiance by increasing social spending. Meanwhile ‘interest groups, pressure groups and advisory councils’ were lobbying constantly to further increase expenditures. The result was a massive budget deficit. The growing public debt, Ruding concluded, was above all an ideological problem, ‘the result of excessive expectations and aspirations in relation to government.’
Ruding’s lecture was a direct attack on the Keynesian policies of the 1970s, which were based on the idea that budget deficits were permitted in a time of crisis. The central idea of Keynesian conjunctural policy was that running a deficit in an economic crisis was a preferable option to cutting spending. Austerity only deepened the crisis and as a result, reduced government revenues further. ‘The boom, not the slump, is the right time for austerity at the Treasury,’ Keynes famously contended. But in the 1970s, there were a series of special circumstances that made the Keynesian recipes ineffective. Due to a combination of high inflation, economic stagnation, and (from 1980 onwards) rising interest rates, deficit-spending lost its appeal.
The justified conclusion that a Keynesian conjunctural policy did not work under specific circumstances led to a much more general rejection in the 1980s: by definition, government stimulus in times of crisis does not work. Keynesian policy was firmly set aside. At the Ministry of Finance, Pieter Korteweg made sure to delete any reference to the word ‘conjuncture’ from the text of the Budget Memorandum. Public choice theory added an even more cynical twist to the story. According to public choice theory, politicians that pursued Keynesian policies had acted in bad faith. They weren’t really all that interested in safeguarding the economy. Politicians were naturally inclined to empty the nation’s coffers, because they were under the influence of pressure groups and were more concerned with their election than with the public interest. The lessons thus learned from the 1970s, was that it is necessary to continuously discipline spendthrift politicians. In the Netherlands, public choice became a permanent part of the academic discipline of Public Finance, where many of the senior policymakers are trained who work at the Dutch ministries.
III
If we want to understand why public choice caught on in the Netherlands, we have to go a little bit further back in time. Public choice theory originated in the United States in the fifties and sixties as a variant of the rational choice theory. The American economists that founded public choice theory, such as Kenneth Arrow (1951), Anthony Downs (1957) and James Buchanan (1962), published their key books in that period. Their work emerged in response to the post-war tradition of welfare economics, which was focused on understanding market failures. The observation that the market was bad at supplying all kinds of public goods in areas such as security, health, infrastructure and well-being, provided a broad mandate for government intervention. Welfare economics thus provided the intellectual basis of the post-war expansion of the welfare state.
In response to this economic science of market failure, public choice economists developed what Buchanan called a ‘theory of government failure’. Welfare economics had shown that the market was bad at performing certain functions properly, but they had implicitly assumed that the government could pick up the slacks. With their pessimistic analysis of government, public choice economists challenged the post-war consensus that expansion of government intervention was desirable. Not all public choice economists – like Buchanan – were card-carrying neoliberals. But because of its skepticism towards government and its admiration for the market mechanism, public choice had a natural affinity with neoliberal economists such as Friedrich Hayek and Milton Friedman, who started to achieve recognition in those same years.
The Netherlands had its own little-known version of public choice theory, which also emerged in the 1950s and 1960s. Leading Dutch economists were associated with this tradition and would largely determine the policymaking perspective on government spending. One of the early pioneers was Willem Drees jr., the son of postwar prime minister Willem Drees. Father and son were known as Calvinist social democrats, an adjective that referred above all to their modesty, strict work ethic and austere views on public finance. Professionally however, they expressed these views not in biblical prose but rather in the more worldly language of economics. The young Drees had worked in the United States for the newly established International Monetary Fund in the late 1940s. There he became acquainted with rational choice theory, ideas that had just begun circulating among American policy makers. Upon his return, Drees Jr. devoted his dissertation to the role of societal pressure groups in increasing government spending, a central theme of public choice theory.
In the 1950s, Drees jr. rose rapidly within the ranks of the ministry of finance. For a civil servant, he had remarkably outspoken views. In the eyes of the young Drees, the Netherlands owed its post-war economic recovery to a sober, market-oriented policy, with low wages and minimal social services. In the middle of the 1960s, he believed this legacy had steadily been undermined: wages rose too fast and the welfare state became too extensive. From the 1960s onwards, Keynesian ideas were becoming dominant in Dutch policymaking. As Director of the Budget at the finance ministry, Drees jr. publicly resisted this trend. In newspaper interviews, he warned that ministers and parliamentarians had been captured by societal pressure groups, above all the trade unions and civil society organisations. Pleas by politicians for higher social benefits were unsubtly disqualified by Drees as ‘claptrap’ and ‘gibberish.’
Under Drees jr., the ministry of finance became more politicized and outspoken; it publicly turned against the expansion of the Dutch welfare state. In a controversial 1965 speech, Drees jr. stated that the minister of finance was ‘virtually the taxpayer’s only friend, because he is the one who constantly tries to curb spending.’ The ministry, he clarified in 1969, took ‘a frontline position’ and ‘fights against groups who want (too much) money from the treasury’. As part of that struggle, he proposed the creation of a ‘pressure group against increased government spending’. He soon turned his words into action. Together with Cornelis Goedhart, a leading economist and founder of the discipline of Public Finance in the Netherlands, Drees jr. created an influential think tank that served as a watch dog against rising public spending. Like Drees jr., Goedhart believed in small government. He warned as early as 1963 that public spending (then about 35% of GDP, against 60% in 1980) was approaching a ‘fatal limit’ since it undermined the work ethic. Goedhart considered the market mechanism superior to the budget mechanism, and connected the expansion of the public sector to the efforts of ‘passionate minorities’, while taxpayers had to foot the bill.
A year later, Drees jr. en Goedhart joined DS’70, a right-wing splitoff from the social democrat party. Drees jr. became the party’s leader. He advocated a return to the sober style of social democracy of the 1950s: ‘we want to look like the social democrats then, sober, austere, hard-working. We are a Victorian party, without talk of drugs and sex, but with discipline, strictness and dedication.’ DS ’70 turned against the ‘pleasure-seeking qualities’ of the swinging sixties. The secular youth culture of that time, was for them a powerful symbol of the dangers of an expansive welfare state. Mirroring Buchanan, the plea for strict budgeting rules became connected with nostalgia for a lost traditional morality. While the electoral success of DS ’70 was short-lived, the balanced-budget conservatism of Drees and Goedhart would lay an important ideological basis for the austerity policies of the 1980s.
IV
An initial impetus for the turn to austerity was given in 1973 by Lense Koopmans, a professor of public finance who had worked at the ministry under the young Drees. In his 1973 inaugural lecture Controlling Public Spending, Koopmans combined the ideas of public choice theorists James Buchanan and William Niskanen with those of Drees jr. The speech was dry but alarmistic. According to Koopmans, state spending was out of control. State spending was now at 40% of GDP, the oil crisis had not yet begun and the leftist Den Uyl government (1973-1977) had only just been installed, but for Koopmans the problem lay much deeper. He believed the self-interest of ministers, parliamentarians, and civil servants drove them to increase spending, further encouraged by all kinds of pressure groups. As a result, the size of government had begun to expand inexorably.
The public choice analysis of the crisis of the 1970s did not focus on the worldwide recession, nor the process of deindustrialisation, with the accompanying mass unemployment that massively drove up social spending. It saw the core of the problem as the democratic system itself, that inherently tended towards overspending. This cynical vision of politics elevated the ministry of finance to the solitary guardian of the public interest. Koopmans wanted to turn the tide by centralizing the decision-making process and decisively strengthening the position of the ministry of finance. Two years later, he was appointed Deputy Director-General of the National Budget, where he continued his plea from the inside.
In 1980, after the second oil crisis and the Volcker-shock in the United States that send interest rates through the roof, public finances in the Netherlands were in a state of an acute emergency. The high interest rates paid on government debt made debt-financing an impossibility and austerity a political necessity. Together with Goedhart and (former) senior civil servants at the finance ministry, Koopmans wrote the report Controlling Public Spending, published by the think tank of the right-wing liberal party (VVD) in 1980. On the basis of public choice theory, they made a series of proposals to strengthen the position of the ministry of finance in relation to parliament and the other ministries. There had to be a strict deficit norm, decided upon by an expert committee from the finance ministry. Another bureaucratic expert committee led by the ministry of finance identified possibilities for cutbacks and privatizations. Koopmans and others argued that it should become a permanent taskforce, with other departments excluded from its operations. Furthermore, the government policy statement had to be binding, with ministers agreeing in advance to the budget allocated to them. The senior civil servants weren’t granted all of their wishes, but from the eighties onwards, the finance ministry became by far the most powerful ministry.
In this way, public choice theory facilitated an interpretation of the crisis that blamed politics and democracy for overspending, and offered as the solution the depoliticization of economic policy through technocratic expert rule. One way of placing economic decision making at one step removed from the messy realm of democratic politics, was through European institutions. The Dutch finance ministry in the 1980s presided over the preparation of the European Common Market and the European Monetary Union. Brussels and Frankfurt were seen as instruments that strengthened the position of the ministry. As Onno Ruding stated at the end of his term in 1989: ‘When we have an economic and monetary union, a country like the Netherlands can no longer freely stir up the budget deficit to its own satisfaction. Brussel will enforce what is and what isn’t allowed. Some will deplore the loss of that freedom. I don’t, I applaud it. Of course it strengthens the position of the ministry of finance. You can use Brussel to make ministers and parliament toe the budgetary line.’ For the ministry, the euro was first and foremost about disciplining unruly Dutch politics, before it came to be seen as a way to discipline the south.
Presently, with the corona-epidemic and interest rates close to zero, the orthodoxy that emerged in the aftermath of the 1980s has become unbound. Whatever will emerge in the future, certain is that the Dutch ministry of finance will take up a ‘front position’, in the ‘fight against groups who want (too much) money from the treasury’.