Michael Hudson and Chris Hedges: The Real World Cost of Turning Classical Economics Upside Down

Yves here. You are getting a big dose of Michael Hudson this week because he had interviews that were made weeks apart released in a tight timeframe. Several readers have already flagged this talk, and Hudson is in top form, and also covers a wide range of issues in a comparatively short time frame.

Today’s episode is from a teleSUR interview with Chris Hedges that focuses on one of Hudson’s favorite themes: the way that central messages of classical economics have been airbrushed out of the current economic orthodoxy, or worse, turned on their head. Classical economics was concerned with eradicating the vestiges of feudalism, which led to concerns about deadweight costs like rent extraction as well as distortions caused by monopolies and oligopolies. While it does not come up in this talk, another concern of classical economics was the productive use of lending. Classical economists favored usury ceilings because lenders otherwise would fund speculation (in those days, gambling by the rich) as opposed to funding commerce.

CHRIS HEDGES: Hi, I’m Chris Hedges. Welcome to Days of Revolt. Today in a two-part series we’re going to be discussing a great Ponzi scheme that not only defines not only the U.S. but the global economy, how we got there, in the first segment, and secondly, where we’re going. And with me to discuss this issue is the economist Michael Hudson, author of Killing the Host: How Financial Parasites and Debt Destroy the Global Economy, a professor of economics who worked for many years on Wall Street, where you don’t succeed if you don’t grasp Marx’s dictum that capitalism is about exploitation. And he is also, I should mention, the godson of Leon Trotsky. Welcome Michael.

MICHAEL HUDSON: Thank you. Good to be here.

HEDGES: I want to open this discussion by reading a passage from your book, which I admire very much, which I think gets to the core of what you discuss. You write, “Adam Smith long ago remarked that profits often are highest in nations going fastest to ruin.” There are many ways to create economic suicide on a national level. The major way through history has been through indebting the economy. Debt always expands to reach a point where it cannot be paid by a large swathe of the economy. This is the point where austerity is imposed and ownership of wealth polarizes between the one percent and the ninety-nine percent. Today is not the first time this has occurred in history. But it is the first time that running into debt has occurred deliberately. Applauded. As if most debters can get rich by borrowing, not reduced to a condition of debt peonage.

So let’s start with classical economics, who certainly understood this. They were reacting of course to feudalism. And what happened to the study of economics so that it became gamed by ideologues?

HUDSON: Well, the essence of classical economics is to reform industrial capitalism, to streamline it, and to free the European economies from the legacy of feudalism. And the legacy of feudalism, where the landlords that were extracting land-rent, and living as a class that took income without producing anything. And the banks, which were not funding industry; the leading industrialists from James Watt, with his steam engine, to the railroads–.

HEDGES: From your book you make the point that banks almost never funded industry.

HUDSON: That’s the point. That they never had. And by the time you got to Marx, later in the 19th century, you had a whole discussion, largely in Germany, over “how do we make banks do something they did not do under feudalism?” Right now we’re having the economic surplus being drained by the landlords and drained by the bond holders.
Adam Smith was very much against colonialism because that lead to wars, because that led to public debt. And he said the solution to prevent this financial class of bond holders burdening down the economy by imposing more and more taxes on consumer goods every time they went to war was to finance wars on a pay-as-you-go basis. Instead of borrowing you’d tax the people then he thought that if everybody felt the burden of war, in the form of paying taxes, then they’d be against it. Well, it took all of the 19th century to fight for democracy and to extend the vote so that instead of the landlords controlling the parliament and the law making and the tax system through the House of Lords, you’d extend the vote to labor, to women, to everybody on the theory that society as a whole would vote in its self-interest, and that it would vote for the 99% and not for the 1%.

And so by the time Marx wrote in the 1870s he could already see what was happening in Germany, that the German banks were trying to make money, in conjunction with the government, by lending to heavy industry, largely to the military-industrial complex.

HEDGES: This was Bismark’s kind of social, I don’t know what we’d call it, it was a form of capitalist socialism.

HUDSON: They called it State Capitalism–.

HEDGES: State Capitalism.

HUDSON: And there was a long discussion by Engels, saying, wait a minute. State Socialism whereas State Capitalism isn’t what we mean by socialism. And there are two kinds of state-oriented–.

HEDGES: I’m going to interject I mean there was a kind of brilliance behind Bismarck’s policy because–.

HUDSON: –Sure.

HEDGES: –he created pension funds, he provided health benefits, and he directed banking towards industry; towards the industrialization of Germany, which as you point out, was very different in Britain and the United States.

HUDSON: Well, the German banking was so successful that by the time World War I broke out, there were discussions in the English journals saying, we’re worried that Germany and the Axis powers are going to win because their banks are more suited to fund industry, and without industry you can’t have really a military. Whereas the British banks only lend for foreign trade, they’d lend for speculation, and the stock market is a hit-and-run operation; they want a quick in-and-out to make the profits, whereas the German banks don’t insist that their clients pay as much dividends. The German banks own stocks as well as bonds, and there’s much more of a partnership.

And that’s what most of the 19th century imagined was going to happen. That the world was on the way to socializing banking. Towards moving capitalism beyond the feudal level and getting rid of the landlord class, getting rid of the rent, getting rid of interest and really it was going to be labor and capital, profits and wages, with the profits being reinvested in more capital and you’d have an expansion of technology. And around the early twentieth century, most futurists imagined that we’d be living in a leisure economy by now.

HEDGES: Including Karl Marx.

HUDSON: That’s right, yeah. Ten-hour work week. And to Marx, socialism was just the reformed state of capitalism at the time.

HEDGES: Isn’t what happened in large part because of the defeat of Germany in World War I? But also, because we took the understanding of economists like Adam Smith and maybe Keynes, and, I don’t know who you would blame for this, whether it’s [Ricard] or others, and we created a fictitious economic form or economic theory that erased rentier or rent-derived interest-derived capitalism and countered it as a productive force within the economy. Perhaps you can address that.

HUDSON: Well, here’s what happened. Marx sort of traumatized classical economics by taking the concepts of Adam Smith and John Stewart Mill and the others, and pushing them to the logical conclusion. He said that the progressive capitalism, people called Ricardian socialists like John Stewart Mill, said okay, we want to tax away the land or nationalize it, we want to have the government take over the heavy industry and build infrastructure to provide low-cost basic services. This was traumatizing the landlord class and the one percent. And they fought back.

Now, none of the classical economists could even imagine, how on earth can the feudal interests, these great vested interests that had all this money, actually fight back and succeed. They thought the future was going to belong to capital and labor. And around the late 19th century, certainly in America, you had people like John Bates Clark come out with a completely different theory. The whole classical economics, what made Adam Smith and the physiocrats and John Stewart Mill.

HEDGES: Physiocrats are, you’ve tried to explain, are the French, these enlightened French economists.

HUDSON: The common denominator among all of the classical economists was the distinction between earned income and unearned income. And the unearned income was rent and interest. The earned income were wages and profits. Well, John Bates Clark came and said, there’s no such thing as unearned income. The landlord actually earns the money by taking all this effort to provide a house and land to renters, and the banks that provide credit. Their interest–every kind of income is, everybody earns their income. So everybody who accumulates wealth, by definition, according to his formulas, get rich by adding to what is now called gross domestic product.

HEDGES: And I think one of the points you make in your book which I liked was that in almost all cases, those who had the capacity to make money parasitically off interest and rent had either, if you go back to the origins, looted and seized the land by force, or inherited it.

HUDSON: That’s correct. In other words, the unearned income. Well, the result of this sort of anti-classical revolution that you had just before World War I was that today almost all of the economic growth in the last decade has gone to the 1%. It’s gone to Wall Street, real estate–.

HEDGES: But you blame this on what you call junk economics.

HUDSON: Well, the junk economics is the anti-classical reaction.

HEDGES: And explain a little bit how, in essence, that’s a fictitious form of measuring the economy.

HUDSON: Well, suppose you have a crook, and you’re taking, you’re going to the bank. I went to a, a block away we had a Chase Manhattan bank, and I used to bank there. I took out money from the bank, and as I was going out, two pickpocket–one pushed me over and the other grabbed the money, and ran out. Just–I was ten feet from the teller. The guard stood there, and saw it, and actually asked for the money back. And said, look, I was robbed in your bank, right in front. And they said, well, you know, we don’t arm our guards because if they shot one of the people, the thief could sue us and we don’t want to do that. We’ll just give you money back.

Well, imagine if you count all of this crime, all the money that’s taken, as an addition to GDP. Because now the crook has provided the service of not pushing me down or not stabbing me. Or suppose somebody’s held up at an ATM machine, your money or your life. Okay, here’s the money. The crook has given you the choice of your life. In a way that’s how the gross national product accounts are put up. You have Wall Street extracting money from the economy. You have landlords extracting–.

HEDGES: And there–let’s go back. They’re extracting money from the economy by debt peonage. By raising–.

HUDSON: By not playing a productive role, basically.

HEDGES: Right. So it’s credit card interest, mortgage interest, car loans, student loans, that’s how they make their funds.

HUDSON: That’s right. So they don’t, money is not a factor of production. But in order to have access to credit, in order to get the money, in order to get an education, you have to pay the banks. And at New York University here, for instance, they have Citibank, I think Citibank people were on the board of directors at NYU. You get the students, when they come here, to start at the local bank. And once you are in a bank and have monthly funds taken out of your account for electric, utilities, or whatever, it’s very hard to change.

So basically you have what the classical economists called the rentier class. The class that lives on economic rents. Landlords, monopolists charging more, and the banks. So that if you have a pharmaceutical company such that raises the rate of drug from $12 a shot to $200, that’s all of a sudden, their profits go up. Their increased price for the drug is created, is counted in the national income accounts, as if the economy is producing more. So all of this presumed economic growth that has all been taken by the 1% in the last ten years, and people say the economy is growing. But the economy isn’t growing–.

HEDGES: Because it’s not reinvested.

HUDSON: That’s right. It’s not–it’s not production, it’s not consumption. The wealth of the 1% is obtained by essentially lending money to the 99% and then charging interest on it, and recycling this interest at an exponentially growing rate.

HEDGES: And why is it important, as I think you point out in your book, that economic theory counts this rentier income as productive income? Explain why that’s important.

HUDSON: If you’re a rentier, then you want to say that, hey, I earned my income by–.

HEDGES: We’re talking about Goldman Sachs, by the way.

HUDSON: Yeah, Goldman Sachs.

HEDGES: Is perfect.

HUDSON: Yes. The head of Goldman Sachs came out and said, Goldman Sachs workers are the most productive in the world. That’s why they’re paid what they are. And the concept of productivity in America is the income divided by the labor. So if you’re Goldman Sachs and you pay yourself $20 million a year in salary and bonuses, you’re considered to have added $20 million to GDP, and that’s enormously productive. So we’re talking with tautology. We’re talking with circular reasoning here.

So the issue is whether Goldman Sachs, Wall Street, predatory pharmaceutical firms, actually add a product or whether they’re just exploiting other people. And that’s why I called my book Parasitism, because the parasite, people think of the parasite as simply taking money, taking blood out of the host, or taking money out of the economy. But in nature, it’s much more complicated. The parasite can’t simply come in and take something. First of all, it needs to numb. It has an enzyme that numbs the host so the host doesn’t even realize the parasite’s there. And then the parasites have another enzyme that makes the host–it takes over the host’s brain. And it makes the host imagine that the parasite is part of the body, that actually part of itself, to be protected.

Well, that’s basically what Wall Street has done. It’s made, it depicts itself as part of the economy. Not as a wrapping around it. Not as external to it. But actually is the part that’s helping the body grow, and that actually is responsible for most of the growth, when in fact it’s the parasite that is taking over the growth.
So the result is an inversion of classical economics. It turns Adam Smith upside down. It says what the classical economists said was unproductive, parasitism, actually is the real economy, and the parasites are labor and industry, that get in the way of what the parasite wants, which is to reproduce itself, not help the host, the labor and capital [inaud.].

HEDGES: And then the classical economists like Adam Smith were quite clear that unless that rentier income, you know, the money made by things like hedge funds, was heavily taxed, and put back into the economy, the economy would ultimately go into a kind of tailspin. And I think the example of that, which you point out in your book, is what’s happened in terms of large corporations with stock dividends and buybacks. And maybe you can explain that.

HUDSON: There’s an idea in sort of superficial textbooks and the public media that if companies make a large profit, that somehow they make it by being productive. And with–.

HEDGES: Which is still in textbooks, isn’t it?

HUDSON: Yes. And also that if a stock price goes up, you’re just capitalizing the profits. And the stock price reflects the productive role of the company. But that’s not what’s been happening in the last ten years. Just in the last two years, 92 percent of corporate profits in America have been spent either on buying back their own stock, or in paying out as dividends to raise the price of the stock.

HEDGES: And explain why they do this.

HUDSON: About 15 years ago at Harvard, a professor called [Jemson] said, the way to ensure that corporations that are run most efficiently is to make the managers increase the price of the stock. So if you give the managers stock options, and you pay them not according to, you know, how much they’re producing or making the company bigger, or expanding production, but the price of the stock, then you’ll have the corporation run efficiently, financial style.

So the corporate managers find there are two ways that they can increase the price of the stock. The first thing is to cut back long-term investment, and use the money instead to buy their own stock. Just–and when you buy your own stock, that means you’re not putting the money into capital formation. You’re not building new factories. You’re not hiring more labor. You can actually increase the stock price by firing labor.

HEDGES: [Inaud.] temporarily.

HUDSON: Temporarily. By using the income from the past just to buy the stock, fire the labor force if you can, work it more intensively. Pay it out as dividends. And that basically is the corporate raiders model. You use the money to pay off the junk bond holders at high interest. And of course, this gets the company in such trouble after a while, because there is no new investment, markets shrink, that you then go to the labor unions and say, gee, this company’s really near bankruptcy, and we don’t really want to have to fire you.

And the way that you can keep your job is if we just downgrade your pensions, and instead of giving you what we promised, the defined benefit pension, it’s a defined contribution. You know what you pay every month, but you don’t know what’s going to come out at all. So you wipe out the pension funds, push it on to the government, the pension benefit guarantee corporation, and all of a sudden you use the money you were going to pay for pensions to pay stock dividends. And then push it up, and then the whole thing turns down. And it’s hollowed out. And you shrink and you collapse. But by that time, the managers will all have left the company. They will have taken their bonuses and salaries and run.

HEDGES: I want to read this quote from your book, written by David Harvey, in A Brief History of Neoliberalism, and have you comment on it.

“The main substantive achievement of neoliberalism has been to redistribute rather than to generate wealth and income. Accumulation by dispossession. I mean the commodification and privatization of land, and the forceful expulsion of peasant populations, conversion of various forms of property rights, common collective state, et cetera, into exclusive, private property rights. Suppression of rights to the commons. Colonial, neocolonial, and the imperial processes of appropriation of assets, including natural resources. And usury. The national debt, and most devastating at all, the use of the credit system as a radical means of accumulation by dispossession. To this list of mechanisms, we may now add a raft of techniques such as the extraction of rents from patents, and intellectual property rights, and the diminuition or erasure of various forms of common property rights, such as state pensions, paid vacations, and access to education, healthcare, one through a generation or more of class struggle. The proposal to privatize all state pension rights, pioneered in Chile under the [dictatorship] is, for example, one of the cherished objectives of the Republicans in the US.”

This explains the kid of denouement, or the final end result where, which you speak about in your book, is in essence allowing what you call the rentier or the speculative class to cannibalize the entire society until it collapses.

HUDSON: Well, a property right is not a factor in production. Look at what happened in Chicago, the city where I grew up. Chicago didn’t want to have to raise the taxes on real estate, especially on all of the expensive commercial real estate there. So the budget ran up a deficit. They needed money to pay the bond holders. And so they sold off the parking rights to have meters, you know, along the curbs, for the Chicago streets. Well, the result is that they sold to Goldman Sachs 75 years of the right to put up parking meters. So now, the cost of living and doing business in Chicago was raised by having to pay off the parking meters. If Chicago is going to have a parade or something, and block off the traffic, Chicago has to pay Goldman Sachs what it would have made if there wouldn’t have been closed off for a parade. And all of a sudden it’s much more expensive to live in Chicago because of this.

But this added expense of having to pay parking rights to Goldman Sachs to pay out interest to its bond holders is countering this increase in GDP, because you’ve now created more product by charging more. If you sell off a road, a government or local road, and you put up a toll booth and make it into a toll road, all of a sudden GDP goes up. If you go to war abroad, and you spend more money on the military, the military-industrial complex, all this is countered as increased production. None of this is really part of the production system of the capital and labor building more and more factories, and producing more things that people need to live, and to do business. All of this is overhead. But there’s no distinction between wealth and overhead.

And failing to draw that distinction means that the host doesn’t realize that there is a parasite there. The host economy, the industrial economy, doesn’t realize what the industrialists realize from the 19th century: that if you want to be an efficient economy and be low-priced, and sell, under-sell competitors, you have to cut your price by having the public sector provide roads freely. Medical care freely. Education freely. If you charge for all of these then you get to the point that the economy is in, U.S. economy, is in today. Where if American workers, who work for factories, were to get all of their consumer goods for nothing. All of their food, transportation, clothing, furniture, everything for nothing, they still couldn’t compete with Asians or other producers, because they have to pay up to 40%, 43% of their income for rent or mortgage interests, 10% or more of their income for student loans, credit card debt, 15% of their paycheck is automatic withholding to pay social security, to cut taxes on the rich or to pay for medical care.

So Americans, you built into the economy all of this overhead. And there’s no distinction between growth and overhead, and it’s all made America so high-priced that we’re priced out of the market, regardless of what trade policy we have.

HEDGES: And we should add that under this predatory form of economics you game the system. So you privatize pension funds, you force them into the stock market, an overinflated stock market. But because of the way companies are, go public, it’s the hedge fund managers who profit. And it’s those citizens whose retirement savings are tied to the stock market who lose. And maybe we can just conclude by talking about how the system is fixed, not only in terms of burdening the citizen with debt peonage, but by then forcing them into the market to fleece them again.

HUDSON: Well, we talk about an innovation economy as if that makes money. Let’s–suppose you have an innovation, and a company goes public. They go to Goldman Sachs and other companies, Wall Street investment banks, to underwrite the stock. They say, we’re going to issue the stock, say, at $40 a share. What’s considered a successful float is immediately Goldman and the others will go to their insiders, and they’ll say, you know, well, you’ll buy this stock, you’ll guarantee it’ll go up. A successful flotation doubles the price in one day, so that at the end of the day the stock’s selling for $80.

HEDGES: They have the option to buy it before anyone else, knowing that by the end of the day it’ll be inflated, and then they sell it off.

HUDSON: That’s exactly right.

HEDGES: And so the pension funds come in and buy it at an inflated price, and then it goes back down.

HUDSON: It may go back down, or it may be that the company just was shortchanged from the very beginning. And here the important thing is that the Wall Street underwriting firm, and the speculators that come in, that it rounds up, get more in a single day than all the years it took to put the company together. The company gets 40%. These people get also $40. Other people get $40.

So basically you have the financial sector ending up with much more of the gains. And the name of the game if you’re on Wall Street isn’t profits. It’s capital gains. And that’s something that wasn’t even a part of classical economics. They didn’t anticipate that the price of assets would go up for any other reason than earning more money and capitalizing on income. And actually, what you have in the last 50 years, really since World War II, has been asset price inflation, that most families have, middle-class families, have gotten the wealth that they’ve got since 1945 not really by saving what they’ve earned by working, but by the price of their house going up. They’ve benefited by the price of the house. And they think that that’s somehow made them rich.

And the reason the price of the house has gone up is that a house is worth whatever a bank is going to lend against it. And if banks made easier and easier credit, lower down payments, then you’re going to have a financial bubble. And so now, you have, indeed, real estate having gone up as high as it can, I don’t think it’ll take more than 40% of somebody’s income to buy it. But now, if you, imagine if you’re joining the labor force. You’re not going to be able to buy a house at today’s prices, putting down a little bit of your money, and then somehow end up getting rich just on the house investment. All of this money you pay the bank is now going to be subtracted from the amount of money that you have to spend on goods and services.

So we’ve turned the post-war economy that made America prosperous and rich, we’ve turned it inside out, and somehow the most people believe that you could get rich by going into debt to borrow something that’s going to rise in price. And you can’t get rich, ultimately, in going into debt. In the end, the creditors always win, and that’s why every society since Sumer and Babylonia have had to either cancel the debts, or you come to a society like Rome that didn’t cancel the debts, and then you have a dark age. Everything collapses.

HEDGES: And that’s the topic of our second discussion, which is where we’re headed. Thank you, Michael.

And thank you for watching Days of Revolt.

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  1. pretzelattack

    ah so the clintons added 120 million or whatever to the economy by taking fees from banks. a grateful america genuflects.

  2. keith

    I thought the Adam Smith quote in Michael Hudson’s book was amazing.

    What clearer demonstration of his words and how they are the polar opposite of how he is portrayed today.

    Adam Smith:

    “The Labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.”

    I make a lot of comments on different online websites; Left, Right, neutral.

    It is a good way to find the flaws in your arguments and occasionally get pointed in the right direction.

    The Guardian is a left wing newspaper in the UK, whatever Left means these days?

    The modern Left in the UK seems like the modern Left in the US, they are possessed of a religious zeal and convinced they are on the side of good with no idea how right wing they really are.

    The paper and its readers can see nothing wrong with BTL, Buy to Let, being a landlord and taking the “earned” income of generation rent as “unearned” income for themselves.

    I use the quote framed as:

    Adam Smith, hero of the Right

    To hopefully punch through their perception of what Left means.

    I can but try.

    1. Jacob

      Karl Marx, a PhD. philosopher, got much of his information for his writings from Smith and Ricardo, as well as from other famous philosophers, such as Hegel. Ironically, Marx is a scapegoat for anti-communist right-wingers, but like I mentioned, he synthesized much of his work by getting ideas from his philosopher predecessors. Right-wingers never call Adam Smith or David Ricardo communists or even leftists, yet some of their writings appear to be “Marxist.” In his day, the landed gentry considered Adam Smith to be a radical.

    2. RicRadio

      I have for some period of time suspected that The Guardian is a rag of a political colour polar opposite to how it is commonly regarded, a fraud I suppose. Your ‘punch through’ with appropriate framing is, I judge, apt.

      Your surname is not Richards by any chance? He can spot BS a mile off, too.

  3. Andrew Anderson

    Then why are the banks privileged by government?

    Why can’t we, for example, all have inherently risk-free accounts at the central bank and abolish government-provided deposit insurance?

    We can’t stop usury or even credit creation for the rich but we can surely stop subsidizing them.

  4. jared3

    ALL economics is “junk economics.” Economics is mental masturbation for the intellectually challenged.

  5. cnchal

    The other day, Mr Hudson mentioned this.

    MH: The financial sector is a rentier sector – external to the “real” economy of production and consumption, and therefore a form of overhead. As overhead, it should be a subtrahend from GDP.

    I wonder if subtrahend wasn’t a misspelling of subtracted, which is what I think was meant.

    My own sense is that all military spending should be subtracted from GDP, as it’s a dead weight loss to society.

    From this post.

    But this added expense of having to pay parking rights to Goldman Sachs to pay out interest to its bond holders is countering this increase in GDP, because you’ve now created more product by charging more. If you sell off a road, a government or local road, and you put up a toll booth and make it into a toll road, all of a sudden GDP goes up. If you go to war abroad, and you spend more money on the military, the military-industrial complex, all this is countered as increased production. None of this is really part of the production system of the capital and labor building more and more factories, and producing more things that people need to live, and to do business. All of this is overhead. But there’s no distinction between wealth and overhead.

    If one subtracts the overhead from GDP, we are left with a hole.

      1. cnchal

        Thanks. That is awesome.

        A word that I thought was internet translation gobbeldygook actually exists, and funnily enough means exactly the same thing as the substitute word.

        Looking at Mr Hudson’s statement of As overhead, it should be a subtrahend from GDP. again, one realizes that 99% of “our leadership” is overhead, the military and police forces are overhead, the judiciary is overhead, the government itself is overhead, the administrators in the sick perpetuation system are overhead, the corporate executives are overhead. Everywhere one looks, overhead is taking the spoils of production for themselves, leaving a constantly declining share of prosperity for the little people.

        In other words, the bullshit jawb holders are overhead.

        When one subtracts all this overhead from GDP, we are left with an even bigger hole than I thought possible, and now a more vicious overhead, the central banksters themselves, have thrown negative interest rates into the ever growing negative GDP hole.

        How can the little people shuck these parasites?

  6. Steven

    Debt always expands to reach a point where it cannot be paid by a large swathe of the economy. … Today is not the first time this has occurred in history. But it is the first time that running into debt has occurred deliberately.

    Take a look at Hudson’s “Super Imperialism”. It may be a mistake to say the US “Empire of Debt” (the title of a book by Bonner and Wiggin) was deliberately created. I believe Hudson argues that national solvency and Bretton Woods were broken by the rampant militarism of post WWII US foreign policy. (The US business model of planned obsolescence and institutionalized waste didn’t help.) But, once broken, the rest of the world’s 1% was unable or unwilling to put the brakes on the rampant money creation of the US ‘financial-congressional-military-industrial complex’. (“Its our money but your problem.”)

    Hudson has written elsewhere “The product of Wall Street is debt.” It shouldn’t come as such a huge surprise that a country which now pays its way in the world by exporting debt would support its bankers and financiers. Wall Street is apparently indifferent to who holds that debt. So ‘who needs American workers?’ Anyone old enough to remember all that talk of a ‘Leisure Society’? The point is these changes where people were going to have to figure out something to do with their lives other than exist as “laboring cattle” have been in the wind for a long time. The much vaunted post-industrial service economy that was supposed to keep them employed turns out to have been a MILITARY services economy. And their labor is too expensive, at least politically, to be used for even that.

    1. OpenThePodBayDoorsHAL

      And so America becomes “The Empire of Chaos” (Escobar’s term) because war is the central feature of the American operating system, it must generate chaos and fear or else even the drug-addled populace will start to notice that there’s not much reason for all that hardware and all those bases (so far only Trump has dared speak this truth about NATO).
      The vampire neo-liberal/colonial model used to extract their blood from faraway places (the British in India, the US in Brazil, etc) but then they started working their way closer and closer to the host, consuming Ireland, Portugal, Greece, then they had to move to home soil (subprime, Chicago parking meters).
      And Hudson doesn’t really say enough about including non-financial corporations into the FIRE economy, but with 92% of profits going to buybacks, dividends, and other financial engineering you would need to include the treasurers and CFOs of most of the SP 500 in the FIRE definition.

  7. steelhead23

    A major contributor to the broad acceptance of debt peonage is marketing. I recall that when looking for a house that met our needs about 20 years ago, our real estate agent kept insisting we could afford more house and would generate more wealth by buying a larger house and riding the appreciation wave. Debt allows consumers to enjoy a higher standard of living (if you call wasting your time with electronic gizmos, living), the folks who actually live within their means (small house, used cars, etc.) are broadly considered losers, the peons in our debt-crazed culture. And, by the way, who wouldn’t wish to join the rentier class – to live off the toil of others. So, the argument that one can become rich (a rentier) by incurring ever-larger debts, is easy to sell. Problem is, we demonize the poor workers while lionizing the rentiers. I wish that would change, but that seems as likely as Jill Stein in the Oval Office. Nice piece – and I will read the book.

  8. susan the other

    NC posted an interview directly from der Spiegel and in German a while back in which Hudson told the story of his boyhood in Minnesota (?) where his family were Trotskyites and he listened to their conversations (with his visiting godfather), etc. He added the amazing detail that the ax that was used to kill Trotsky was stolen from his aunt’s house (wasn’t sure if I had read it right it was so curious). It makes sense that Hudson has a fine sense of dialectics too from his upbringing. When he talks about studying music (yesterday’s post) and understanding that dissonance between two lesser notes can be resolved by going to a higher note, or something like that, sounded just like dialectics, no? And the insight that it was in reaction to Bismarck’s partnership with industry and banking and the willingness of private banks to partner in business, etc. that Britain and the US began to rationalize unproductive wealth, making it the tautology it now is, just to preserve the political power of the elite. Reframing their unearned income as part of the GDP is the policy that commodified money itself and gave banks the monopoly.

    1. OpenThePodBayDoorsHAL

      I’m reading “Hell’s Cartel” about IG Farben and WWII and he discusses how German captains of industry were raised with a traditional “Christian charity” mindset towards workers. They felt a real sense of responsibility for worker welfare and provided housing, thought hard about wages, and provided the first corporate health care. It was a compact: in return workers knew they were supposed to work hard, be diligent, and be loyal.

      1. susan the other

        It is interesting that since WW2 this insight about German paternalism has boiled down to an opposition to both nationalism and socialism. So the issue remains as confused as ever. And society is returning, by default, to feudalism.

    2. Synoia

      Trotsky was stolen from his aunt’s house

      Trotsky left Russia as a exile, and traveled to Mexico, where he was shot on Stalin’s orders.

      1. susan the other

        Trotsky was killed (i’ve read) after a secret agreement between Stalin and FDR in which Stalin agreed to “communism in one country” and not to promote unrest in the US and FDR gave him the go ahead to kill Trotsky in Mexico… who was then killed with an ax to the head as he stood to greet his killer. Everyone knew T. was marked and it seems the Federales just let it happen.

  9. Jim in SC

    I agree with Michael Hudson about one thing: ‘if American workers, who work for factories, were to get all of their consumer goods for nothing. All of their food, transportation, clothing, furniture, everything for nothing, they still couldn’t compete with Asians or other producers, because they have to pay up to 40%, 43% of their income for rent or mortgage interests, 10% or more of their income for student loans, credit card debt, 15% of their paycheck is automatic withholding to pay social security, to cut taxes on the rich or to pay for medical care.’

    Leaving the ‘cut taxes on the rich’ part aside, I think it is true that Americans have to pay way too much for housing, education, and health care. Those three areas are deeply influenced by government policy. If we had the same dispensation of housing, education, and health care as we had in 1970, no one would be complaining about wealth or income inequality, because there would be, as it were, a chicken in every pot. Should we blame the 1% or blame the government for driving up the prices of these essentials?

    1. Paul Tioxon

      The government doesn’t do real estate appraisals, banks order these. The AMA sets the supply of doctors and the prices or wages.
      Education is hardly the spend thrift government forcing its away on the serfs. In Philadelphia, the University of Pennsylvania, minus its hospital operation, has a $5bil annual budget. The entire city of Philadelphia has a budget of just about $4bil/yr. Penn is a private Ivy League school that sets its own prices well above that of public education. The thesis that the government controls prices in a capitalist social order is a lie.

      1. Jim in SC

        Government provides the student loans, and the regulatory framework that schools must abide by. What’s the difference between 1970 and today, regulation wise?

        1. Paul Tioxon

          Pricing is a function of the market. In order to be priced, a commodity must be identified as a supply to meet an effective demand, someone must want to pay for it. Government regulation, in the case of college pricing, whether public or private, is carried out in a not for profit manner. You may want to buy a degree for yourself or loved ones, but you must meet admission requirements. The university pre-dates capitalism and the process of commodification and hence pricing. University education, public or private today, is priced not as function of profit making, or student loans or some other market force, it is driven by the cost to operate and not as a profitable enterprise that makes money.

          So, today, the regulations that cover universities first start with the fact of education at an advanced level as determined by associations outside of the government and the government does not allow business enterprises to misrepresent themselves as advance degree granting institutions of higher learning, such as the fraudulent Trump University or other such scams which simple employ the word university in their advertisements.

          While there are for profit colleges and universities, it has traditionally been the case that non profit or not for profit status is a hall mark of educational organizations. Most colleges and universities operate on such a basis. They are recognized by the IRS as tax exempt as result of not being money makers and also having a socially beneficial contribution.

          To expand, these types of organizations do not go to capital markets, they have fund raisers, they beg for donations and appeal to the tax deduction accrued by donors for making such generous gifts. So, most of the regulations, have to do with maintaining the universities as non profit entities. As far as student loans go, almost all of the loans to students have been nationalized, so the government would be regulating itself in that regard. The nationalization of the student loans is the big difference between 1970 and today. Also, the need for getting a loan at all with the contributions for state run university systems being cut back by state and federal governments.

          1. Jim in SC

            In 1980, tuition $100.00 a semester to attend our local technical college for a semester. $100.00 in 1980 is $288.00 today, according to the BLS. Tuition at the local technical college today is $2300.00 a semester, or almost ten times more than it would have been had tuition grown no faster than the CPI. You think this is solely the result of reduced state support?

            I think, rather, that it is the result of an incredible growth in administrative staff and salaries, some of which was a response to government mandates. The teachers still aren’t paid much.

  10. kevinearick

    “The portraits impose upon us with all the contradictions of their double personality: We are filled with a sense of their authority and our horror. Holding this autopsy in mind, how much they do suggest anatomical dissecting, if only on the dissecting table of his [picasso] perception” … the divide and conquer regime most voluntarily engage with mindless gossip … “[H]istorians are forgers.”

    feudalism never left; it has just been more carefully hidden, with RE bigotry by the so-engaged majority, in The American Dream/Nightmare.

  11. Chauncey Gardiner

    Appreciated Michael Hudson’s comments about corporations’ share buybacks. Just would add that according to an article last year in Bloomberg, corporate stock buybacks typically increase the company’s stock price, and do so without tax consequences for stockholders — unless they sell and must then pay more in short-term capital gains tax. This is different from dividend payments, which are taxed as ordinary income in the year they’re received. So, in addition to a tax deduction for interest payments on funds borrowed to fund corporate stock buybacks, it seems support for corporate share buybacks through favorable tax treatment is public policy.

  12. SomeCallMeTim

    The enjoyment of Hudson’s clarity and a better education in economics than I got in college is offset by the dread and foreboding of his message.

    Thanks Yves, I guess.

  13. Cry Shop

    Andy Grove

    The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars—fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability—and stability—we may have taken for granted.

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