Michael Hudson: The Paradox of Financialized Industrialization

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By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is “KILLING THE HOST: How Financial Parasites and Debt Bondage Destroy the Global Economy.” Originally published at his website

These remarks were made at the World Congress on Marxism, 2015, at the School of Marxism, Peking University, October 10, 2015. The presentation was part of a debate with Bertell Ollman (NYU). I was honored to be made a permanent Guest Professor at China’s most prestigious university.

When I lectured here at the Marxist School six years ago, someone asked me whether Marx was right or wrong. I didn’t know how to answer this question at the time, because the answer is so complex. But at least today I can focus on his view of crises.

More than any other economist of his century, Marx tied together the three major kinds of crisis that were occurring. His Theories of Surplus Value explained the two main forms of crises his classical predecessors had pointed to, and which the bourgeois revolutions of 1848 were fought over. These crises were the result of survivals from Europe’s feudal epoch of landed aristocracy and banking fortunes.

Financially, Marx pointed to the tendency of debts to grow exponentially, independently of the economy’s ability to pay, and indeed faster than the economy itself. The rise in debt and accrual of interest was autonomous from the industrial capital and wage labor dynamics on which Volume I of Capital focused. Debts are self-expanding by purely mathematical rules – the “magic of compound interest.”

We can see in America and Europe how interest charges, stock buybacks, debt leveraging and other financial maneuverings eat into profits, deterring investment in plant and equipment by diverting revenue to economically empty financial operations. Marx called finance capital “imaginary” or “fictitious” to the extent that it does not stem from within the industrial economy, and because – in the end – its demands for payment cannot be met. Calling this financial accrual a “void form of capital.”[1] It was fictitious because it consisted of bonds, mortgages, bank loans and other rentier claims on the means of production and the flow of wages, profit and tangible capital investment.

The second factor leading to economic crisis was more long-term: Ricardian land rent. Landlords and monopolists levied an “ownership tax” on the economy by extracting rent as a result of privileges that (like interest) were independent of the mode of production. Land rent would rise as economies became larger and more prosperous. More and more of the economic surplus (profits and surplus value) would be diverted to owners of land, natural resources and monopolies. These forms of economic rent were the result of privileges that had no intrinsic value or cost of production. Ultimately, they would push up wage levels and leave no room for profit. Marx described this as Ricardo’s Armageddon.

These two contributing forces to crisis, Marx pointed out, were legacies of Europe’s feudal origins: landlords conquering the land and appropriating natural resources and infrastructure; and banks, which remained largely usurious and predatory, making war loans to governments and exploiting consumers in petty usury. Rent and interest were in large part the products of wars. As such, they were external to the means of production and its direct cost (that is, the value of products).

Most of all, of course, Marx pointed to the form of exploitation of wage labor by its employers. That did indeed stem from the capitalist production process. Bertell Ollman has just explained that dynamic so well that I need not repeat it here.

Today’s economic crisis in the West: financial and rent extraction, leading to debt deflation Bertell Ollman has described how Marx analyzed economic crisis stemming from the inability of wage labor to buy what it produces. That is the inner contradiction specific to industrial capitalism. As described in Volume I of Capital, employers seek to maximize profits by paying workers as little as possible. This leads to excessive exploitation of wage labor, causing underconsumption and a market glut.

I will focus here on the extent to which today’s financial crisis is largely independent of the industrial mode of production. As Marx noted in Volumes II and III of Capital and Theories of Surplus Value, banking and rent extraction are in many ways adverse to industrial capitalism.

Our debate is over how to analyze the crisis the Western economies are in today. To me, it is first and foremost a financial crisis. The banking crisis and indebtedness stems mainly from real estate mortgage loans – and also from the kind of massive fraud that Marx found characteristic of the high finance of his day, especially in canal and railroad financing.

So to answer the question that I was asked about whether Marx was right or wrong, Marx certainly provided the tools needed to analyze the crises that the industrial capitalist economies have been suffering for the past two hundred years.

But history has not worked out the way Marx expected. He expected every class to act in its own class interest. That is the only way to reasonably project the future. The historical task and destiny of industrial capitalism, Marx wrote in the Communist Manifesto, was to free society from the “excrescences” of interest and rent (mainly land and natural resource rent, along with monopoly rent) that industrial capitalism had inherited from medieval and even ancient society. These useless rentier charges on production are faux frais, costs that slow the accumulation of industrial capital. They do not stem from the production process, but are a legacy of the feudal warlords who conquered England and other European realms to found hereditary landed aristocracies. Financial overhead in the form of usury-capital is, to Marx, a legacy of the banking families that built up fortunes by war lending and usury.

Marx’s concept of national income differs radically from today’s National Income and Product Accounts (NIPA). Every Western economy measures “output” as Gross National Product (GNP). This accounting format includes the Finance, Insurance and Real Estate (FIRE) sector as part of the economy’s output. It does this because it treats rent and interest as “earnings,” on the same plane as wages and industrial profits – as if privatized finance, insurance and real estate are part of the production process. Marx treated them as external to it. Their income was not “earned,” but was “unearned.” This concept was shared by the Physiocrats, Adam Smith, John Stuart Mill and other major classical economists. Marx was simply pressing classical economics to its logical conclusion.

The interest of the rising class of industrial capitalists was to free economies from this legacy of feudalism, from the unnecessary faux frais of production – prices in excess of real cost-value. The destiny of industrial capitalism, Marx believed, was to rationalize economies by getting rid of the idle landlord and banking class – by socializing land, nationalizing natural resources and basic infrastructure, and industrializing the banking system – to fund industrial expansion instead of unproductive usury.

If capitalism had achieved this destiny, it would have been left primarily with the crisis between industrial employers and workers discussed in Volume I of Capital: exploiting wage labor to a point where labor could not buy its products. But at the same time, industrial capitalism would be preparing the way for socialism, because industrialists needed to conquer the political stranglehold of the landed aristocracy and the financial power of banking. It needed to promote democratic political reform to overcome the vested interests in control of Parliaments and hence the tax system. Labor’s organization and voting power would press its own self-interest and turn capitalism into socialism.

China has indeed exemplified this path. But it has not occurred in the West.
All three kinds of crisis that Marx described are occurring. But the West is now in a chronic depression – what has been called Debt Deflation. Instead of banking being industrialized as Marx expected, industry is being financialized. Instead of democracy freeing economies from land rent, natural resource rent and monopoly rent, the rentiers have fought back and taken control of Western governments, legal systems and tax policy. The result is that we are seeing a lapse back to the pre-capitalist problems that Marx described in Volumes II and III of Capital and Theories of Surplus Value.

This is where the debate between Bertell Ollman and myself centers. My focus is on finance and rent overwhelming industrial capitalism to impose a depression stemming from debt deflation. This over-indebtedness is making the labor/capital problem worse, by weakening labor’s political and economic position. To make matters worse, labor parties in the West no longer are fighting over economic issues, as they were prior to World War I.

My Differences with Ollman and Roemer: I Focus on Non-Production Costs
Bertell follows Marx in focusing on the production sector: hiring labor to produce products, but trying to get as much markup as possible – while underselling rivals. This is Marx’s great contribution to the analysis of capitalism and its mode of production – employing wage labor at a profit. I agree with this analysis.

However, my focus is on the causes of today’s crisis that are independent and autonomous from production: rentier claims for economic rent, for income without work – “empty” pricing without value. This focus on rent and interest is where I differ from that of Ollman, and also of course from that of Roemer. Any model of the crisis must tie together finance, real estate (and other rent-seeking) as well as industry and employment.

The rising debt overhead can be traced mathematically, as can the symbiosis of the Finance, Insurance and Real Estate (FIRE) sector. But the interactions are too complex to be made into a single economic “model.” I am especially worried that Roemer’s model might be followed here in China, because it overlooks the most dangerous tendencies threatening China today: Western financial practice and its pro-rentier tax policy.

China has spent the last half-century solving Marx’s “Volume I” problem: the relations between labor and its employers, recycling the economic surplus into new means of production to provide more output, higher living standards, and most obviously, more infrastructure (roads, railways, airlines) and housing.

But right now, it is experiencing financial problems from credit creation going into the stock market instead of into tangible capital formation and rising consumption standards. And of course, China has experienced a large real estate boom. Land prices are rising in China, much as they are in the West.

What would Marx have said about this? I think that he would have warned China not to relapse into the pre-capitalist problems of finance funding real estate – turning the rising land rent into interest – and into permitting housing prices to rise without taxing them away.

Soviet planning failed to take the rent-of-location into account when planning where to build housing and factories. But at least the Soviet era did not force labor or industry to pay interest or for rising housing prices. Government banks simply created credit where it was needed to expand the means of production, to build factories, machinery and equipment, homes and office buildings.

What worries me about the political consequences of Roemer’s model is that it focuses only on what Marx said about the production sector and employer-labor relations. It does not ask how “endowments” come into being – or how China has changed so radically in the past generation. It therefore neglects the danger of industrial capitalism lapsing back into a rent-and-interest economy. And by the same token, it underplays the threat to China and other socialist economies of adopting the West’s surviving pre-feudal practices of predatory Bubble Finance (debt leveraging to raise prices) and wealth in the form of land-rent charges.

These two dynamics – interest and rent – represent a privatization of banking and land that rightly are public utilities. Marx expected industrial capitalism to achieve this transition. Certainly socialist economies must achieve it!

China has no need of foreign bank credit – except to cover the cost of imports and the foreign-exchange cost of investment in other countries. But China’s foreign exchange reserves already are large enough to be basically independent of the U.S. dollar and euro. Meanwhile, the American and European economies are suffering from chronic debt deflation and depression that will reduce their ability to serve as markets – for their own producers as well as for China.

Today’s debt-wracked economies throw into question just what kind of crisis the capitalist countries are experiencing. Marx’s analysis provides the tools to analyze its financial, banking and rent-extraction problems. However, most Marxists still view the 2008 financial and junk mortgage crash as resulting ultimately from industrial employers squeezing wage labor. Finance capital is viewed as a derivative of this exploitation, not as the autonomous dynamic Marx described.

The costs of carrying the rising debt burden (interest, amortization and penalties) deflate the market for commodities by absorbing a growing wedge of disposable business and personal income. This leaves less to be spent on goods and services, causing gluts that lead to crises in which businesses scramble for money. Banks fail as bankruptcy spreads. By depleting markets, finance capital is antithetical to the expansion of profits and tangible physical capital investment.

Despite this sterility, finance capital has achieved dominance over industrial capital. Transfers of property from debtors to creditors – even privatizations of public assets and enterprises – are inevitable as the growth of financial claims surpasses the ability of productive power and earnings to keep pace. Foreclosures follow in the wake of crashes, enabling finance to take over industrial companies and even governments.

China has largely solved the “Volume I” problem – that of expanding its internal market for labor, investing the economic surplus in capital formation and rising living standards. It is confronted by Western economies that have failed to solve this problem, and also have failed to solve the “Volumes II and III” problem: finance and land rent. Yet few Western Marxists have applied his theories to the present downturn and its rentier problem. Following Marx, they view the task of solving this problem to be solved by industrial capitalism, starting with the bourgeois revolutions of 1848.

Already in 1847, Marx’s Poverty of Philosophy described the hatred that capitalists felt for landlords, whose hereditary rents siphoned off income to an idle class. Upon being sent copies of Henry George’s Progress and Poverty a generation later, in 1881, he wrote to John Swinton that taxing land rent was “a last attempt to save the capitalist regime.” He dismissed the book as falling under his 1847 critique of Proudhon: “We understand such economists as Mill, Cherbuliez, Hilditch and others demanding that rent should be handed over to the state to serve in place of taxes. That is a frank expression of the hatred the industrial capitalist bears towards the landed proprietor, who seems to him a useless thing, an excrescence upon the general body of bourgeois production.”[2]

As the program of industrial capital, the land tax movement stopped short of advocating labor’s rights and living standards. Marx criticized Proudhon and other critics of landlords by saying that once you get rid of rent (and usurious interest by banks), you will still have the problem of industrialists exploiting wage labor and trying to minimize their wages, drying up the market for the goods they produce. This is to be the “final” economic problem to be solved – presumably long after industrial capitalism has solved the rent and interest problems.

Industrial Capitalism has Failed to Free Economies from Rentier Interest and Rent Extraction

In retrospect, Marx was too optimistic about the future of industrial capitalism. As noted above, he viewed its historical mission as being to free society from rent and usurious interest. Today’s financial system has generated an overgrowth of credit, while high rents are pricing American labor out of world markets. Wages are stagnating, while the One Percent have monopolized the growth in wealth and income since 1980 – and are not investing in new means of production. So we still have the Volume II and III problems, not just a Volume I problem.

We are dealing with multiple organ failure.

Instead of funding new industrial capital formation, the stock and bond markets to transfer ownership of companies, real estate and infrastructure already in place. About 80 percent of bank credit is lent to buyers of real estate, inflating a mortgage bubble. Instead of taxing away the land’s rising rental and site value that John Stuart Mill described as what landlords make “in their sleep,” today’s economies leave rental income “free” to be pledged to banks. The result is that banks now play the role that landlords did in Marx’s day: obtaining for themselves the land’s rising rental value. This reverses the central thrust of classical political economy by keeping such rent away from government, along with natural resource and monopoly rents.

Industrial economies are being stifled by financial and other rentier dynamics. Rising mortgage debt, student loans, credit card debt, automobile debt and payday loans have made workers afraid to go on strike or even to protest working conditions. To the extent that wages do rise, they must be paid increasingly to creditors (and now to privatized health insurance and drug monopolies), not to buy the consumer goods they produce. Labor’s debt dependency thus aggravates the “Volume I” problem of labor’s inability to purchase the products it produces. To top matters, when workers seek to join the middle class “homeowner society” by purchasing their homes on mortgage instead of paying rent, the price entails locking themselves into debt serfdom.

Industrial companies profit from labor not only by employing it, but by lending to customers. General Motors made most of its profits for many years by its credit arm, GMAC (General Motors Acceptance Corp.), as did General Electric through its financial arm. Profits made by Macy’s and other retailers on their credit card lending sometimes accounted for their entire earnings.

This privatization of rents and their transformation into a flow of interest payments (shifting the tax burden onto wage income and corporate profits) represents a failure of industrial capitalism to free society from the legacies of feudalism. Marx expected industrial capitalism to act in its own self-interest by industrializing banking, as Germany was doing along the lines that the French reformer Saint-Simon had urged. However, industrial capitalism has failed to break free of pre-industrial usurious banking practice. And in the sphere of tax policy, it has not shifted taxes away from land and natural resource rent. It has inverted the classical reformers’ idea of “free markets” as being free from economic rent and predatory moneylending. The slogan now means economies free for the rentier class to extract interest and rent.

Mode of Production or Mode of Parasitism?

Instead of serving industrial capitalism, today’s financial sector is bleeding it to death. Instead of seeking profits by employing labor to produce goods at a markup, it doesn’t even want to hire labor or engage in the process of production and develop new markets. The epitome of this postindustrial economics is Enron: its’ managers wanted no capital at all – no employment, only traders at a desk (and crooked accountants).

Today’s characteristic mode of accumulating wealth is more by financial than industrial means: riding the wave of debt-financed asset-price inflation to reap “capital” gains. This seemed unlikely in Marx’s era of the gold standard. Yet today, most academic Marxists still concentrate on his “Volume I” crisis, neglecting finance capitalism’s failure to free economies from the rentier dynamics surviving from European feudalism and the colonial lands conquered by Europe.

Marxists who went into Wall Street have learned their lessons from Volumes II and III. But academic Marxism has not focused on the FIRE sector – Finance, Insurance and Real Estate. It is as if interest and rent extraction are secondary problems to the dynamics of wage labor.

The great question today is whether post-feudal rentier capitalism will stifle industrial capitalism instead of serving it. The aim of finance is not merely to exploit labor, but to conquer and appropriate industry, real estate and government. The result is a financial oligarchy, neither industrial capitalism nor a tendency to evolve into socialism.

Marx’s optimism that industrial capital would subordinate finance to serve its own needs
Having provided a compendium of historical citations describing how parasitic “usury capital” multiplied at compound interest, Marx announced in an optimistic Darwinian tone that the destiny of industrial capitalism was to mobilize finance capital to fund its economic expansion, rendering usury an obsolete vestige of the “ancient” mode of production. It is as if  “in the course of its evolution, industrial capital must therefore subjugate these forms and transform them into derived or special functions of itself.” Finance capital would be subordinated to the dynamics of industrial capital rather than growing to dominate it. “Where capitalist production has developed all its manifold forms and has become the dominant mode of production,” Marx concluded his draft notes for Theories of Surplus Value, “interest-bearing capital is dominated by industrial capital, and commercial capital becomes merely a form of industrial capital, derived from the circulation process.”[3]

Marx expected economies to act in their long-term interest to increase the means of production and avoid unproductive rentier income, underconsumption and debt deflation. Believing that every mode of production was shaped by the technological, political and social needs of economies to advance, he expected banking and finance to become subordinate to these dynamics. “There is no doubt,” he wrote, “that the credit system will serve as a powerful lever during the transition from the capitalist mode of production to the production by means of associated labor; but only as one element in connection with other great organic revolutions of the mode of production itself.”[4]

The financial problem would take care of itself as industrial capitalism mobilized savings productively, subordinating finance capital to serve its needs. This already was happening in Germany and France.

It seemed that the banking system’s role as allocator of credit would pave the way for a socialist organization of economies. Marx endorsed free trade on the ground that industrial capitalism would transform and modernize the world’s backward countries. Instead, it has brought Western rentier finance and privatization of the land and natural resources, and even brought the right to use these country’s currencies and financial systems as casinos. And in the advanced creditor nations, failure of the U.S. and European economies to recover from their 2008 financial crisis stems from leaving in place the reckless “junk mortgage” debts, whose carrying charges are absorbing income. Banks were saved instead of industrial economies, whose debts were left in place.

Irving Fisher coined the term debt deflation in 1933. He described it as occurring when debt service (interest and amortization) to pay banks and bondholders diverts income from being spent on consumer goods and new business investment.[5] Governments use their tax revenues to pay bondholders, cutting back public spending and infrastructure investment, education, health and other social welfare.

No observer of Marx’s epoch was so pessimistic as to expect finance capital to overpower industrial capitalism, engulfing economies as the world is seeing today. Discussing the 1857 financial crisis, Marx showed how unthinkable anything like the 2008-09 Bush-Obama bailout of financial speculators seemed to be in his day. “The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values.”[6]

Marx wrote this reductio ad absurdum not dreaming that it would become the Federal Reserve’s policy in autumn 2008. The U.S. Treasury paid off all of A.I.G.’s gambles and other counterparty “casino capitalist” losses at taxpayer expense, followed by the Federal Reserve buying junk mortgage packages at par.

Socialist Policy Regarding Financial and Tax Reform

Marx described the historical destiny of industrial capitalism as being to free economies from unproductive and predatory finance – from speculation, fraud and a diversion of income to pay interest without funding new means of production. On this logic, it should be the destiny of socialist economies to treat bank credit creation as a public function, to be used for public purposes – to increase prosperity and the means of production to give populations a better life. Socialist nations have freed their economies from the internal contradictions of industrial capitalism that stifle wage labor.

China has solved the “Volume I” problem. But it still must deal with the West’s unsolved “Volume II and III” problem of privatized finance, land rent and natural resource rent. Western economies seek to extend these neoliberal practices to use finance as a lever to pry away the economic surplus, to finance the transfer of property at interest, and to turn profits, rent, wages and other income into interest.

The failure to socialize banking (or even to complete its industrialization) has become the most glaring economic tragedy of Western industrial capitalism. It became the tragedy of post-Soviet Russia after 1991, letting its natural resources and industrial economy be financialized while failing to tax land and natural resource rent. The commanding heights were sold to domestic oligarchs and Western investors buying on credit with their own banks or in association with Western banks. This bank credit was simply created on computer keyboards. Such credit creation should be a public utility, but it has broken free from public regulation in the West. That credit is now reaching out to China and the post-Soviet economies as a means of appropriating their resources.

The eurozone seems incapable of saving itself from debt deflation, and the United States and Britain likewise are limping along as they de-industrialize. That is what leads them to hope that perhaps socialist China can save them – as long as it remains free of the financial disease. asset stripping and debt deflation. Western neoliberal economists claim that this financialization of erstwhile industrial capitalism is “progress,” and even the end of history. Yet having watched China grow while their economies have remained stagnant since 2008 (except for the One Percent), their hope is that socialist China’s market can save their financialized economies driven too deeply into debt to recover on their own.

Note: Marx described productive capital investment by the formula M–C–M´, signifying money (M) invested to produce commodities (C) that sell for yet more money (M´). But the growth of “usury capital” – government bond financing for war deficits, and consumer lending (mortgages, personal loans and credit card debt) – consist of the disembodied M–M´, making money simply from money in a sterile operation.


[1]  In Volume III of Capital (ch. xxx; Chicago 1909: p. 461) and Volume III of Theories of Surplus Value.

[2] Karl Marx, The Poverty of Philosophy [1847] (Moscow, Progress Publishers, n.d.): 155.

[3]  Karl Marx, Theories of Surplus Value III: 468

[4]  Capital III (Chicago, 1905), p. 713.

[5]  See Irving Fisher, “The Debt-Deflation Theory of the Great Depression,” Econometrica (1933), p. 342. Online at http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf. He used the term to refer to bankruptcies wiped out bank credit and spending power, and hence the ability of economies to invest and hire new workers. I provide a technical discussion in Killing the Host (ISLET 2015), chapter 11, and “Saving, Asset-Price Inflation and Debt Deflation,” in The Bubble and Beyond, ch. 11 (ISLET 2012), pp. 297-319.

[6]  Capital III (Moscow: Foreign Languages Publishing House, 1958), p. 479.

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  1. Larry

    An excellent piece as always from Hudson. I think he could update his example of the dream of a company with little to no capital expenses. The gig economy has produced companies valued in the multi-billion dollar range simply because they extract rent from productive activity without supporting said activity in any meaninful way. Doug Henwood made the excellent point that AirBnB is more valuable as a company than the Starwood group, which actually owns and operates over 1200 properties worldwide. Uber of course has an army of drivers that are not employees. Uber doesn’t own a car or pay a salary or any social security, becuase of course it doesn’t employ any drivers. All of this technology at the tip of our hands has just created new means for rentiers to suck value out of the economy, and we’re left to do nothing about it because it’s “progress”.


  2. cnchal

    China has spent the last half-century solving Marx’s “Volume I” problem: the relations between labor and its employers, recycling the economic surplus into new means of production to provide more output, higher living standards, and most obviously, more infrastructure (roads, railways, airlines) and housing.

    Bullshit. The business owners exploit their employees in China the same as everywhere else, perhaps even more so because they can get away with paying them a few dollars per day, never mind a few dollars per hour.

    Foxconn employees in China assembling Apple products work in a building with suicide prevention nets surrounding it. Chinese workers cannot form their own union and go on strike for better wages or working conditions, and if they try, will be shot by their government.

    1. JEHR

      Perhaps the Chinese worker today is far better off than the peasants who had to scratch out a living from the land. Today, the Chinese worker also has better living conditions and better wages even though they do not meet the standards of the West.

      1. cnchal

        Perhaps living in labor dormitories like stacked cord wood is a higher standard of living than scratching out a living from the land, but that is missing the point.

        Mr Hudson’s glowing description of China as having solved Marx’s “Volume I” problem is where I call bullshit.

        Chinese labor has no rights, at all. The economic surplus generated by that labor is recycled into empty concrete shells that serve as tokens of wealth, but it’s called “housing” and when you try try to use it as that and fit the space out, it loses “value”.

        These remarks were made at the World Congress on Marxism, 2015, at the School of Marxism, Peking University, October 10, 2015. The presentation was part of a debate with Bertell Ollman (NYU). I was honored to be made a permanent Guest Professor at China’s most prestigious university.

        His hosts must have been laughing their asses off at that smoke blowing from Mr Hudson.

        China has already been totally infected with the financialization disease. It just hasn’t grown to the gargantuan cancerous tumor size it has here, yet.

        1. Matt Usselmann

          “More than 23 million vehicles were sold in China last year, compared with an estimated 16.5 million in the US.” (BBC business report “China’s car sales growth halves in 2014”)

          That is 30 years after everyone in China only had a bicycle. VW sells 3.7 million cars in China, about 650,000 in the US.

          Exploitation of workers will still exist in China, but wages are rising quickly, it has built 10,000 miles of high speed railways over the last 30 years and 28 nuclear power stations. All infrastructure for the people, which is talked about here.

          This housing which you deride will probably be well sought after, the Chinese having had pretty cramped conditions in the past.

          1. cnchal

            “More than 23 million vehicles were sold in China last year . . .

            From your point of view, would it be better or worse if 28 million vehicles were sold in China next year?

            . . . VW sells 3.7 million cars in China . . .

            Were they diesels?

            . . . wages are rising quickly . . .

            To what? $10.00 per day? I wonder what the dormitory labor gets for working at Foxconn?

            . . . it has built 10,000 miles of high speed railways over the last 30 years and 28 nuclear power stations . . .

            What disasters lurk in all that hastily built infrastructure?

            They have poured so much concrete, either they are experts at it and their stuff will last a long time, or it was done so hastily and poorly that it will fall apart in ten years. Leaving concrete buildings unfinished and exposed to the elements isn’t conducive to them lasting a long time, even if the concrete job was done expertly, so I hope you are right about them being well sought after in the future, otherwise it’s a total loss.

        2. Carla

          “Chinese labor has no rights, at all.” And Western neo-liberals (mostly Americans, but not all) have only too gleefully exploited Chinese workers in the service of our own GREED. And I say “ours” because anyone in the stock market over the last 30 years has taken advantage of Chinese labor. It was just EASIER, because the economic returns from exploiting our own labor force were not as generous.

          1. Moneta

            The worst part is that the majority of the population does not even see this. When I make this observation I am quickly told how wrong I am. Apparently, the Chinese are ecstatic about these jobs because we are helping them out of their poverty.

    2. Will

      That seemed really strange to me too. As if inequality wasn’t a major issue in China as well, or as if they didn’t have tens of thousands of labor protests annually, fighting against police as well as other thugs.

      More importantly, I was disappointed in this line:

      “The failure to socialize banking (or even to complete its industrialization) has become the most glaring economic tragedy of Western industrial capitalism.”

      In a labor vs capital world with infinite resources and infinite capacity of the environment to absorb wastes, this may be true. It seems obvious that the greatest economic failure is the inability to escape the consumer economy and live within our means: without dependence on unsustainable fossil fuels, for example, or without appropriately handling (or avoiding the creation of) dangerous wastes.

      Even a beautiful socialist economy would collapse catastrophically without taking into account these other factors. Changing the framing of the article to include this would have made it much more complete:
      1) industrialists remove financiers’ roles
      2) workers remove industrialists’ roles
      3) laborers learn how to live within their physical (finite resources), social, and environmental means w/o industrial wars of choice. Marx forgot this one.

    3. Banana Breakfast

      Given the forum in which the speech was given, and his status as a foreign national, Hudson did not have the freedom in this case to state openly the obvious truth that China is no longer a socialist nation and has dismantled most of the socialist functions its government once provided.

    4. Vatch

      Foxconn employees in China assembling Apple products work in a building with suicide prevention nets surrounding it.

      Thank you. I didn’t have time to look at this article until a few minutes ago, and this was my first thought. I’m glad someone already pointed it out.

      Many people have also forgotten about the 45 million excess deaths during the extreme austerity imposed by the “Great Leap Forward” of 1958-1962. This has been described in some books, for example, Mao’s Great Famine: The History of China’s Most Devastating Catastrophe, 1958-1962, by Frank Dikotter.

  3. Just Ice

    “The failure to socialize banking (or even to complete its industrialization) has become the most glaring economic tragedy of Western industrial capitalism.” Dr. Michael Hudson

    But wasn’t the Soviet Union’s socialized banking a glaring failure of its system?

    How about we limit the public’s credit to the public good and not to any Sally, Tom or Dick with collateral or who is otherwise deemed able to repay? Then we won’t have the spectacle of the public’s credit being used to harm the public.

    As for the private sector, it can surely provide its own forms of money and credit without such privileges as a lender of last resort and government deposit insurance.

    Let’s end this perpetual battle over who get’s to create money and credit and concede we need both a government money supply and entirely private private money supplies.

  4. Robert

    Economic critique seems bogged down in some other people are greedy.

    Mr. Hudson is excellent as ever but this reading I can’t help think about the vast legal infrastructure which projects out the “rich’s” fear of loss. The I in FIRE seems to be the hidden hand in this. The 1% don’t just have the money, they are actively holding on to it for dear life. Until the insurance system is curbed in some sensible manner for all and the laws protecting the rich from loss are scaled back, economics is just comment on the results of the elite’s legal position to defend their loot.

    Imagine taking out insurance and legal positions for all your regular and expected life situations. It’s absurd for most of us, so we don’t consider it.


  5. Gaylord

    I think equally important to how wealth is distributed is how capital is invested — with an enormous segment devoted to the military (in all major countries, but esp in the US), which continues the war racket and exacerbates the conflict between the haves and have-nots. It’s easy to imagine how all those resources, if redirected toward life-sustaining goals, would eradicate poverty and bring peace, and would enable proper stewardship of the ecosystem. But the fundamental human fault of *greed* has instead sown the seeds of our species’ extinction.

  6. John Merryman

    While Hudson and Marx make valid points, I do think that to get through to the masses of people whom need to be informed, a far more concise argument has to be made.

    We treat money as a commodity, but it is a contract and when based on public debt, is a contract with he rest of society and as such is a public utility. Just like the roads.

    Money functions as a voucher system and nothing is more destructive to such a mechanism, than large surpluses of excess vouchers.

    We create this excess because we treat it as both medium of exchange and store of value. Consider that in the body, the medium of exchange is blood and the store of value is fat. Not only do we not want to create large stores of excess fat/value, but we especially don’t want it collecting in the blood stream.

    Since we treat it as such, the only way this system has of keeping the economy from drowning in surplus notational value is to borrow it back out and spend according to government whim.

    If the government were to tax it back out, then people would be far less inclined to try to store value as notational wealth. Most needs for savings are fairly predictable in general, if not in specificity. Such as housing, healthcare, retirement, child rearing, eduction, etc.

    So if people and communities were to invest directly into these needs and not try to store an abstraction, it would create more public spaces, stronger communities and a healthier environment, as tangible stores of value.

    Obviously the current regime wouldn’t accept this, but they are cooking their own golden goose. So a crisis should never be wasted. Disaster capitalism can work in reverse as well.

    For instance, there is a strong conservative impulse toward balanced budgets, to which liberalism feels threatened, because weaker members of society do often depend on the state for protection.

    Yet the system is actually designed to overspend, in order to create the government debt needed to keep the capitalist system functioning.

    To budget is to prioritize and only spend according to ability, but instead, the government puts these enormous bills together, adds enough extra to get sufficient votes and the president can only pass or veto. Which given the momentum created, is likely to be overridden.

    Now if they were to break these bills into their various items, have each legislator assign a percentage value to each one, reassemble them in order of preference, then have the president draw the line, it would quickly reduce spending, because there would be minimized constituency for items below the line. Also there would be stronger constituencies for items benefiting the most people.

    Then with banking as a public utility, financial value would be more public and likely to stay grounded in communal structures.

    This a model that is simple and clear enough that significant numbers of people could take the time to understand and endorse to other people, creating the sort of viral effect that long treatises will never have.

    1. Carla

      John Merryman, you make excellent points and I thank you for them.

      However, I must ask about this:

      “Now if they were to break these bills into their various items, have each legislator assign a percentage value to each one, reassemble them in order of preference, then have the president draw the line, it would quickly reduce spending, because there would be minimized constituency for items below the line. Also there would be stronger constituencies for items benefiting the most people.”

      That paragraph indicates that you believe U.S. legislators act on behalf of their “constituents” (citizens/voters, one would assume). But they do not. Do you live in this country? I am not being snide. It is abundantly clear to almost all Americans that very few legislators, at least at the state or federal level, act in the interest of constituents at all. Rather, with very few exceptions, they serve their owners, who after all, fund their campaigns.

  7. flora

    And in the sphere of tax policy, it has not shifted taxes away from land and natural resource rent. It has inverted the classical reformers’ idea of “free markets” as being free from economic rent and predatory moneylending. The slogan now means economies free for the rentier class to extract interest and rent.

    Great description of neoliberalism in historical context.

  8. Jim

    The great tragedy of our recent financial crisis was that the U.S. State blinked ( and reinforced the supposed “truth” ) that our private financial institutions were too big to fail.

    And where did most of the “left” (traditional and nontraditional) stand on this issue–reluctant agreement with the State–it was supposedly in the average guy’s interest to bail out the banks.

    Only it really wasn’t. Certainly neo-liberal austerity since then has documented this fact.

    So we appear stuck with theoretical frameworks that could’t visualize the ascendency and eventual dominance of the financial sector– nor do we presently have a theoretical framework capable of showing us a way out of our too big to fail catastrophe, which has only made the financial sector stronger and the average person more vulnerable.

  9. Just Ice

    “and predatory moneylending. “

    Was replacing predatory moneylending with government-enabled counterfeiting for the sake of the rich and other so-called worthy of the public’s credit really an improvement, ie. is counterfeiting the proper antidote to usury?

    1. Lambert Strether

      There’s no such thing as “government-enabled counterfeiting” by definition. This is a concocted winger talking point designed to connect directly to your lizard backbrain (not that there’s anything wrong with that). Please don’t use it.

      1. Just Ice

        Well, government does have a right to tax for the common good and that is NOT theft. But what do you call it when the government enables the banks, the rich and other so-called creditworthy to steal purchasing power from the poor and other non so-called creditworthy? Sound policy that is beneficial* to the common good? I call it legalized theft via purchasing power creation. And that’s not a far stretch from counterfeiting, is it?

        *Perhaps in the past but no longer since labor’s bargaining power has and is being destroyed via automation and outsourcing financed, at least to some extent, with their own legally confiscated purchasing power.

        1. Just Ice

          Adding that government has a right to tax even by inflation so that it is impossible* for the government to counterfeit its own fiat.

          *Yet price inflation is an important signal that a government may need to adjust its spending and taxation policies.

  10. dana

    Homo Sapiens is a species which needs to recognize that the resources it exploits are shared between each and every living life form on this planet, right down to the topsoil microbiome, which just so happens to be the source and means of sustenance for all life on this planet.

    There is endless talk and blah, blah, regarding the containment of uncontrollable, breakout corporate wealth extraction, banks, mechanisms of extortion, etc. While there’s no one in the world for whom I have greater admiration than Michael Hudson, I think that the discussion of what is plaguing the world, increasingly, today, needs to be brought back down to earth.

    Populations of the western industrialized world need to gain an understanding of what it is doing and inflicting on this planet, through widespread mind-controlled consumer habits – in other words, adhesion to wealth / resource extraction.

    Human lives are short lived. What is it that constitutes a ‘rewarding’ life, in sum?

    Recommended reading:

    The Elephant in the Room: Capitalism and Sustainable Development

  11. Michael Hudson

    I should indeed have said that China was ADDRESSING the “Volume I” problem. No economy will ever solve it, until there is full socialism.
    My purpose was different: It was to focus on China’s housing price inflation and the possible opening to banks (Vol. II and III problems). They are sending their best students to the US to study Mankiw’s economics. I’m trying to organize training in avoiding a real estate bubble and financial bubble, and too explain why US economics training does NOT prepare them to deal with the problems that are besetting the US and European economies subjected to financial austerity.
    I saw no poverty in Beijing. True, there are no labor unions, but that’s because China is still mainly rural and popular protests and demonstration are at the local level, not needing unions to coordinate whatever complaints they have.
    They are indeed concerned about environmental problems. (By the way, every day in Beijing was beautiful blue skies, in the 70s.) Most important of all, I was struck by the positive SPIRIT of all the young people and students I talked to. There is a visible excitement that they are creating their own society, and that it is very much a work in progress.

    1. Just Ice

      “There is a visible excitement that they are creating their own society,”

      Built on the same rotten foundation as ours? Government-subsidized private credit creation? The Chinese are going to discover what the West has missed since 1694 in making central banking work properly? I’d call those very long odds.

      Why not MyLessThanPrimeBeef’s idea of fiat distribution to the entire population – to be taxed and lent upward – rather than the usual supposed trickle-down from the so-called creditworthy to the rest of the population? If interest rates get too high then distribute more fiat. If price inflation gets too high then distribute less and/or tax more. What’s not to like? That the poor are automatically not forgotten?

      And I’d call it a very strange Mandate Of Heaven that the poor are to be oppressed by the rich via government privilege.

    2. Norb

      In my community, fellow citizens of Chinese decent also form a strong sub-community. While still being outstanding productive US citizens, their connection to family still in China is strong and they retain an amazing blend of dual cultural influences. A Chinese community center, open to all, has operated successfully for many years.

      While this is not unique to the Chinese, the passion and intensity stands out. I only became aware of this subculture when my daughter was invited to participate in badminton classes by some school friends. What stood out was the strong sense of community bond built on a foundation of academic training, music, sport, and cultural heritage.

      The sadness I often feel these days is that the positive spirit you speak of is slowly eroding in American culture.
      As common american citizens are actively converted into isolated individuals, it seems the only force uniting americans is the consumer society and war.

      I think the difference is that most americans have lost or given up on the notion of making a strong American community. Local community has been sacrificed in the name of corporate profits and individual efforts focus more on trying to become individually wealthy instead of being part of a healthy social group.

      Its one thing to believe you are building a society, it is another to spend your efforts extracting value from an existing one.

      As americans, I think we need to have a better understanding of the oath the protect the country from both foreign and DOMESTIC threats. To my experience, the last 30 some years have only been the domestic threat that has gone largely unchallenged.

    3. Vatch

      I saw no poverty in Beijing.

      Beijing has a population of more than 21 million people living in a region of 6.3 thousand square miles. I believe you when you say that you did not see any poverty, but that just means there’s little or no poverty in the portions of Beijing that are frequented by foreigners. If a tree falls in a forest, and there are no foreigners there to hear it, does it make a noise?

  12. Roland

    Under a hard-money regime, finance capital would be busted by its bubbles, so its relative standing to industrial capital would be moderated.

    But under a soft-money regime, more soft money is readily created to bail out finance capital, much more quickly and easily than industrial capital can be bailed out. Therefore, over a course of several bubble cycles, the relative standing of finance capital keeps improving, relative to industrial capital.

    1. Just Ice

      Fiat should be soft, ie. inexpensive else some private interest such as gold owners needlessly profits off the fiat creation and taxation authority of government. That scam is done with so let’s not look back longingly at hard fiat as some kind of solution. It isn’t and never was.

      What you are referring to is the nearly(?) unlimited elasticity of our money supply and that is a result of government privileges for the banks such as a fiat lender of last resort and government deposit insurance instead of a proper Postal Saving Service or equivalent* for the risk-free storage and transactions with the public’s fiat.

      *Or why can’t we all have free accounts at the Fed like the banks do? So that any loans we make to the banks would be voluntary instead of compelled as they are now**?

      **Because physical cash and the mattress is no real alternative to government-subsidized banks.

  13. two beers

    “The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values.”

    Oh, the irony.

  14. Shane Mage

    Michael Hudson is wrong about what Marx referred to as “faux frais”–the French term he used is what in English-language accounting is called “overhead costs,” deducted from “gross profit” to arrive at operating net profit, the bottom line. In Marx’s words, these are “unproductive but necessary (unproduktiver aber notwendig)” expenses corollary to capitalist production. Rent, Interest, and “Executive Compensation” are, from the standpoint of industrial capital, forms of looting, thefts from the one aim of industrial production, what Marx defined as “profit of enterprise.”

  15. Paul Tioxon

    “Marx described the historical destiny of industrial capitalism as being to free economies from unproductive and predatory finance…”: while Marx is an invaluable social scientist for sociology and economics, this phrase reveals some sort of mystical belief or misguided belief in some sort of natural law governing human behavior that can be revealed such as Newton discovered physical laws which governed matter. There is no destiny based upon phases of social, political or economic development. The misapplication of Darwin’s insight into development of animal species and how it shows where we came from is frequently used as some sort of metaphor or insight by current social scientists. You may have heard more recently as being on the right side of history. That there may be a wrong side. Certainly, we can reasonably analyze the consequences of policies and the actions of the decision makers in position of institutional power by virtue of the offices of power they occupy in the state or by the wealth they marshal from the commanding heights of capitalism. Various structural features of varying civilizations from the past do not easily compare like the structural features of animals from ages past that have similar features to our human structure.

    Political features from the feudal age are carried over by those in power as a new social order is created to preserve not the feudal characteristics but the individual people and their families capacity to rule over the new social order as the old one passes away. Industrialization created more material wealth for the largest portion of the populace than previous economic organization, but the battle over who would set the rules of the social order had not been determined as industrialization developed. The current political power in favor of the 1% is result of a fight to the death for political power, made over years and decades by individuals, in many cases, banding together in places such as the CFR, AEI, Brookings Institute who present a plan for political power domestically and internationally and work out detailed policy recommendations, most of which have been implemented. Countervailing organizations, such as labor unions, and various political movements, Feminism, Welfare Rights Organizations, Environmental NGOs and even AARP, etc, have simply been beat back by money, and superior institutional positions to capture the power of the state to diminish the power of the ballot box and its capacity to put into office different political policy choices that favor the public interest as a whole and not the enrichment of the special interests that as group constitute the Power Elite of the North Atlantic national group.

    The “logic” of economics alone will not provide the solution, but only a policy choice, even if a very good policy choice that can create an egalitarian distribution of the surplus value of the political economy as a whole. The policy choice to have industrial capitalism displace landlords and banking groups, to rid the process of turning anything into a commodity by means of financialization of the economy as a whole, is a fight to death over power, not money, which are not interchangeable. Control over the institutional powers of the state, the sovereign, can force by the rules of law and its court system, the polices that will serve only the pubic interest. A democratically controlled republic is the last best hope for political power of the great middle class of America and the rest of the developed world. We can’t count on iron laws of economics, internal logics of the structural features of the social order or much anything else other than ourselves as individuals joining with others to get what we want. The rentiers have dominated the state to make it serve its interests. The state, democratically controlled must place the market based economic mechanism under its service not the other way around. That can only be the result of political battles at the ballot box, in community pressure groups and other larger NGOs, such as Green Peace or Common Sense blog sites such as Naked Capitalism. There is no destiny involved. It is simply do or die.

    Here are 2 policies submitted for your approval:

    All males in America by their 18th birthday must by law, register with National Selective Service, the draft for the military. Yes, there is a volunteer army, but there is still a legal requirement to register. You can’t get federal money for college if you don’t. I propose they MUST also be registered to vote with the party of their choice with the default being an independent. Along with a High School Diploma, GED or any College degree, you MUST be registered to vote with the party of your choice and again, the default being an independent.

    Secondly, recognizing the destruction of capital in the stock buy backs, in order to spend money into the economy, The Social Security Trust Fund will be funded by the US Treasury an amount equal to at least the total amount in USDs of the total annual stock buy backs. Previous years buy backs will also be calculated in order to fund The Trust Fund, Medicare, Medicaid, etc. If they don’t want the money, I know people who do.

  16. Carla

    “Countervailing organizations, such as labor unions, and various political movements, Feminism, Welfare Rights Organizations, Environmental NGOs and even AARP, etc, have simply been beat back by money,”

    Look, what you call “countervailing organizations” have never shown the slightest interest in money, finance, or even banking (except of course AARP which is simply a sales arm of the insurance industry–cannot imagine why you included it in this list.)

    Consider Howard Zinn’s “The People’s History of the United States” — a superb book that has one gigantic blind spot: nowhere does it really address the most fundamental problem of our country: money creation at interest by the private sector: the debt money system enshrined by the creation of the Federal Reserve.

    Everyone says “follow the money.” But sometimes it seems like only the folks at Naked Capitalism do.

      1. Just Ice

        How many does it need? The Federal Reserve financed US involvement in WWI, for example. And THAT, some think, was a major cause of WWII, along with the Great Depression, another Fed caused event.

  17. Knute Rife

    Except that back in the hard money days, the rentiers simply moved the capital between the two classes at will for their own benefit. Union Pacific became land became Credit Mobelier, and back around again.

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