Heterodox Challenges in Economics by Sergio Cesaratto

I never thought that I would describe an economics book as “a delightful read”, but “Heterodox Challenges in Economics” by Sergio Cesaratto is exactly that. It is well written, often entertaining and humorous, and explains a great deal about political economy, which is then applied in an analysis of the economic difficulties of the EU and euro zone. Cesaratto’s passion for teaching – he is Professor of European Monetary and Fiscal Policy at he University of Siena – shapes the narrative. The book was published in 2020 and includes the beginnings of the COVID crisis, in other words is very up to date.  

This is a book about political economy, not just economics. The relevance of the material is made clear with examples from current and historical events, even from daily life. Whereas the book begins with economic questions – what exactly is heterodox economics – as it progresses it delves ever deeper into the effects of economics on our lives and its political elements. The question of social justice is a thread woven through the entirety of the book. Its focus is on Europe. For those of you who have lost oversight of euro-zone and EU economic policy, this book explains it systematically and perspicuously, which is quite an accomplishment as the EU is designed so that no one but the EU and the financial elite are supposed to comprehend it. Thus this book provides the necessary tools to understand the current crisis that the EU and euro zone has plunged itself into.

The book is accessible and useful for a broad audience, reaching from the layperson interested in politics and economics to students of economics in their bachelor and master studies. That is not to say that there are not a few passages where things become a bit more technical and demand a good deal of concentration. This was especially true when dealing with the work of the late economist and fellow Italian Piero Sraffa, to whom Cesaratto has an intellectual genealogical relationship (the economist Pierangelo Garegnani was Sraffa’s favourite pupil and later Cesaratto’s professor). Cesaratto has kindly banned the truly technical sections to the appendices and these can simply be passed over. This does not apply to all the appendices. The last appendix, “The Strange Case of Target”, is a true tour de force on what is considered to be an arcane subject, and has caused much (often uninformed) partisan discussion, whereby Cesaratto takes a very straightforward and objective position.

From the first page Cesaratto sets down a marker: “The central theme of economics is income distribution”. His is primarily a sociopolitical approach and not the world of mathematical equations. As might be expected in a book on political economy the author begins with Adam Smith, David Ricardo, and Karl Marx. As already mentioned, Sraffa, relatively unknown, also plays a major role. The first question raised is how is income distribution determined? How can it be influenced? As one can imagine, this is not an empirical science, but a social and ideological battlefield.

Cesaratto uses three lengthy chapters to introduce the main schools of thought in economics: the marginalist approach (neo-classical, often referred to as neo-liberal), the surplus approach (progressive), and the work of John Maynard Keynes, which is closer to the surplus approach. Cesaratto explains the historical evolution of these competing approaches, their premises, argumentations, and their weaknesses. Yes, there are some formulas in these chapters, but they are well introduced and explained so that they are accessible to the non-economist. If you persevere and get through these, you have a good basis in the future for much of the discussion about political economy.

In Chapter 5 Cesaratto moves on to the practical world of banking and money, as well as current accounts. This is paramount to understanding the creation of money and capital movement, so crucial to comprehending debt and debt crises. It also reveals the basis of the failings of the euro system. He also addresses the question of nations leaving the euro and re-establishing a national currency.

With this preparation Cesaratto turns to the practical world with a passion. Chapter 6 has the title “Dying of Europe?” Cesaratto was one of the early critics of the euro, especially the damage it has wrought through German monetary mercantilism. He demonstrates this with the example of Italy, a nation he knows well: it is truly an excellent example of the failure of the euro. Nor does he portray Italy as a victim solely of the common currency, but also of the failure of the nation’s political class. In the end, here too it comes down to income distribution. The purpose of the euro and EU’s Maastricht Treaty was via laws to cement inequality and the rule of a capitalist oligarchy over the working class. This was even hailed by the Italian political class as a victory, the notorious vinco esterno, external restraint, whereby the Italian political class could repress the wage demands of Italian workers and deconstruct the nation’s welfare state, even introducing austerity, which has caused so much destruction in Italy. Pointing to the laws and rules of the euro and the EU, they could claim they had no choice, as these bound their hands with regard to fiscal policy. This is a process that has occurred not just in Italy, but throughout the EU. The egregious failure of the EU nations during the current pandemic is just a further example of the consequences of these policies.

From early on Cesaratto has been extremely critical of the role of Germany in creating and intentionally maintaining the state of crisis that the EU finds itself in for over a decade now. Since the creation of the euro Germany, interestingly against EU rules, compressed real wages, letting the other EU nations “flourish”, resulting in increased wages and massive private debt in most EU nations. This gave Germany a double advantage: not only could it produce much more cheaply than other EU nations who balanced productivity and wage growth as was foreseen in the EU rules, Germany also enjoyed a cheap euro because of the weaker nations in the group. Had the Germans continued in this manner, the euro and probably the EU would not exist today.

In fact both were on the verge of collapse in 2011 when Mario Draghi (Chapter 7 “Count Draghila”) was named as head of the European Central Bank. In the German plan the European Central Bank was to be a clone of the monetarist Bundesbank, keeping the spendthrift Southern European nations from stealing German treasure and enforcing German policy discipline. In 2011 the euro stood at the brink and German dogmatism seemed set on pushing it over the edge.

It is not that Germany is a rule abiding nation, as Cesaratto explains, it simply breaks them when it is to its advantage, and demands their enforcement when it is to its advantage. This may be great for Germany, but deleterious for most other EU nations. What Draghi did was simply pretend he was following the rules, constantly making up new ones, totally in contradiction to the old, to save the euro zone, which meant saving Spain and Italy (Greece was too small and did not matter and therefore was damned to a penitentiary existence as a colony of Germany). While the German ideologues screamed just that, everyone else pretended all was legal and the European Court of Justice had enough sense to play along. Draghi may have saved the day, but he did not solve the inherent structural problems of the euro. Thus the ECB and euro zone are in a permanent state of pretend and extend.

In the same Chapter 7 Cesaratto goes into the topics of quantitative easing (QE) and Target2. These two are usually treated as extremely complex, but are well explained by the author in a very simple manner, much of which is thanks to the preceding systematic structure of the book. As mentioned above he does an even more thorough job of explaining Target2 in the following Appendix 2.

And just when one thinks one has a solid point of criticism of the author and his book – the absence of the issue of climate change – one turns a few more pages to discover the Epilogue. This begins with another of the ubiquitous questions by one of the fictional students: “Prof, in this book you talk about economic growth and social justice, but you never talk about the environment, and yet a better society is impossible without safeguarding the environment.” Which Cesaratto duly answers.

So if you wish to have a truly solid introduction to political economy, to really understand the current crises in the EU and euro zone, and have an enjoyable read (yes, parts of chapters 2, 3, and 4 may not be light comedy), this is your opportunity, so grasp it. They don’t come better than this.