MIchael Hudson: The Democracy Collaborative

Yves here. Get a cup of coffee. This is meaty and very much worth your time.

Cross posted from Michael Hudson’s website

The Next System Project’s Adam Simpson sat down with renowned economist and economic historian Michael Hudson to discuss economic deceptions old and new. Michael Hudson is Distinguished Research Professor of Economics at the University of Missouri, Kansas City and a prolific writer about the global economy and predatory financial practices. Among his latest books are Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy and its follow-up J is for Junk Economics: A Guide to Reality in an Age of Deception.

The transcript below has been edited for clarity.

Adam Simpson: So, Michael, I’m really glad to talk to you today. First, I want to get to know a bit more about you before we dive into your new book. I’ve heard you referred to as a heterodox economist. What does that mean? How did you become heterodox?

Michael Hudson: “Heterodox” is a recent term coined mainly by the University of Missouri at Kansas City where I’m a professor along with Randall Wray and Stephanie Kelton and other members of the Modern Monetary Theory (MMT) school of thought. The term simply means not mainstream. We’re basically classical economists. We do what classical economics used to do, which is to distinguish between earned and unearned income. and between productive versus unproductive labor. And we see that banks create credit – which governments could create just as easily, along more socially and economically productive lines. We see budget deficits as providing the economy with money to fuel growth. That’s why Stephanie calls us “Deficit Owls” instead of the Republican and Clintonite Deficit Hawks who prefer commercial banks to provide the credit that the economy needs.

We look at how the economy, goods and services and labor, exists within the context of wealth and assets and debt. And this is how people looked at the economy before there was anti-classical reaction in the 1890’s. We look at how land ownership, banks and credit shape the framework within which the economy operates – at interest.

So we’re classical economists. Hyman Minsky was the main modern monetary theorist. Heterodox meant that he got his ideas largely from Marx. You can say classical political economy reached its logical conclusion with Marx. Capital was the last great work of classical economics, and showed where its logic was leading. Marx showed that capitalism itself was revolutionary. Capitalism was a continually self-transforming system. And so we’re looking at how the economy changes, not how it might settle at equilibrium without political change. It evolves, in what Marx called the laws of motion. So we’re putting the political back into what used to be political economy – before the “political” was stripped out a century ago and it moved toward today’s more tunnel-visioned “economics.”

Adam Simpson: Interesting. I also want to know about your own personal history. I didn’t know that was a deliberate term coined by the people who called themselves heterodox economists.

Michael Hudson: Others called ’em Commies!

Adam Simpson: Ha! But I’m wondering about your own personal trajectory into this field. I understand that ‘heterodox’ is not something unique to you within your family. I myself am actually the black sheep of a very far-right leaning household. But I understand that’s not your own background—you come from a family that’s always been engaged in activism and left politics. Is that correct?

Michael Hudson: I was born in Minneapolis. That was probably the only Trotskyist city in the world – the center of Trotskyism in the 1930’s. It was the only city where becoming a Trotskyist was a career advancement prospect. My father, Carlos Hudson, had graduated in 1929 from the University of Minnesota Business School with an MBA degree and wanted to become a millionaire. I think he wanted to go into mining in Latin America. Then the Depression came and he decided that capitalism wasn’t fair. He joined the Trotskyists, the Socialist Workers Party. And when Trotsky was exiled to Mexico, most of his bodyguards and co-workers came from Minneapolis.

That was really the center of organizing the Teamsters Union, highlighted by the great Minneapolis general strike in 1934. Charles Rumford Walker wrote American City about Minneapolis. There were Scandinavian radicals. Jewish radicals and others. The main opponents were the Stalinists. They sought to stop the Trotskyists from organizing the teamsters and other labor unions.

The upshot was the Smith Act trials of 1941. Most people think of the Smith Act as being used against the Communists after Word War II, but actually it was first used against the Trotskyists. The Communist Party urged the death penalty for the Smith Act, ostensibly for advocating the overthrow of the government by force and violence. The criterion for that was whether people had books by Lenin and Marx in their homes. So the act was called a “gag act.”

The Attorney General under Roosevelt, Francis Biddle, wrote in his autobiography that the one thing he was ashamed about was prosecuting the Trotskyists, because by no stretch of the imagination were they a threat to the government. As a matter of fact the Farmer-Labor governor of Minnesota, Floyd B. Olsen, called in the national guard after the police force broke up the marches and demonstrations by shooting strikers. The police were the ones using force and violence; the strikers were not. Olsen said that he hoped capitalism would go right to hell.

My father and the rest of the Minneapolis 17 were convicted the day before Pearl Harbor. That probably was lucky because the next day they might have got the death penalty. My father was in jail for a year with the others, said it was the happiest year of his life. He learned a lot of languages. They spent most of their time recruiting Jehovah’s Witnesses, who were also in federal prison for refusing to go fight in the war.

Adam Simpson: Enemies of the state!

Michael Hudson: Yeah. But when he got out we moved to Chicago. I grew up in the framework of many socialists who had moved there. They’d come to the house and tell stories, so I grew up sort of like an African griot, being told how they stormed the statehouse and about revolutionary strategy and tactics. Al Goldman also moved to Chicago. He was the attorney for the Minneapolis 17, and one of the defendants. He spent much of his life trying to find out who was behind the gang that killed Rosa Luxembourg and Karl Liebknecht. I knew members of the Third International when Lenin was in power, and they would tell me what the revolution was meant to be.

Adam Simpson: It seems like the kind of radical history of the United States you almost never hear. Almost a “heterodox” history of the United States, the notion of there being a town that so closely identified with Trotsky and other far-left movements.

Michael Hudson: Unfortunately, most radical histories have been written by former Stalinists. The one thing that held them all together even when they left Stalinism was their hatred of Trotskyists.

Adam Simpson: Well perhaps we won’t go back to Russia, but we will probably end up going back to even further to Sumer and other places. But I do want to get to your book, which is why I wanted to talk to you today.

Your book seems to me to be about challenging and clarifying the Orwellian language that’s deployed by mainstream economists. If I ask you “what does mainstream economics obscure,” in a certain sense I’m asking you “what does your book say,”—which is a bit absurd. But what ay are the key concepts that mainstream economics obscures?

Michael Hudson: I have a model of the economy, both in J is for Junk Economics and Killing the Host. I if you’re looking at how wealth is accumulated, people think of it in the way textbooks describe: as earning income and saving it up to get rich. That’s all most wage earners can do. But that’s not how it happens at the top of the pyramid.

Most wealth takes the form of capital gains. They’re inflated on credit, so it’s really asset price inflation that’s financed by debt leverage. Most of the gains end up being paid out as interest, so the bankers – that is, the bank owners and bondholders – end up with most of the rise in wealth.

If you’re a financial manager, you look at what’s called total returns. You add the capital gain to your current income. Most capital gains are obtained in the economy’s largest sector, which doesn’t appear in the academic curriculum: real estate, followed by oil and gas and other natural resource extraction. But to look at academic economics, it’s as if the whole economy is about making things – as if manufacturing hires labor to produce goods and services that everybody gets rich from, by being more productive. Savings are supposed to finance growth, increasing stock prices because profits go up from employing more labor to produce more goods and services.

But that’s not really what happens. Most money is made by financial engineering, not by industrial engineering. It’s made by what the classical economists called unearned income. 80% of bank loans are to the real estate sector. The more loans banks make to the real estate sector, the more their credit bids up real estate prices. People think that real estate goes up because population growth and people getting richer to afford paying more. But that’s not really why housing prices are rising.

The value of a home or commercial office building is worth whatever a bank is willing to lend against it. As banks loosen their lending standards, they lend more and more. The result is debt pyramiding – and this is true not only for real estate, but for the economy as a whole.

When I first bought a house in the 1960s, the rule of thumb was that banks would lend 75% to 80% of the value. The buyer had to have the 20% to 25% of as a down payment. And the mortgage could not absorb more than 25% of the buyer’s income. Also, the loan would be self-amortizing over the course of 30 years. So by the time you spent your working life to pay it off, at least you would have a house free and clear. But by 2008 these standards were loosened – to the point where mortgage loans were called junk mortgages. It was these looser lending standards that had been pushing up housing prices for many decades. By 2008 you didn’t need any down payment at all. Some banks even lent more than the property was worth, and even lent the down payment to help the new buyer fix up the house. The loans would only be to carry the interest charge, not to pay off the loan. Bankers don’t want loans paid off, they want interest. If you don’t pay the loan, you just keep paying more and more interest. At the end of 30 years you would still have the same mortgage balance – unless you kept borrowing more and more against the rising debt-inflated market price of the home.

People talk about the economists who “forecast the crisis of 2008.” The Financial Times cited me as one of the 12 economists, as if there were only 12 people in the world who knew that there was going to be a crisis (and only 3 with actual economic models, including my own). But the fact is, everybody on Wall Street knew. All the bankers knew. If you look at any of the newspapers from that time, they talked about “junk mortgages.” They talked about NINJA borrowers: No Income, No Job, No Assets. The FBI warned in 2004 that they saw the largest wave of financial fraud and banking fraud that ever occurred. So everybody knew it was fraudulent. But they thought they could get out in time.

The idea was, how do you get rich by real estate promotion? Back in the 1920’s, Thorstein Veblen wrote Absentee Ownership. He talked about how, if you want to understand the economy, you should look at small towns in America, whether it’s in the South or out west. The kind of towns that Hollywood would make movies about in the 1930’s had a crooked banker, a crooked politician and a crooked lawyer trying to hijack public roads to their property or get a railroad by their property all trying to use the public spending to increase the value of their own property so that they could then resell it to some suckers at a higher price. Veblen wrote about how it’s all about trying to find a bigger sucker to buy your property – hoping that they will be able to sell it to the proverbial greater fool.

Everybody knew the system had to end. But you never know just when it will end. Usually the trigger is discovery of a big fraud, or a bank making a bad loan or bet. In 2007I published a lead article in Harper’s forecasting this, showing a chart on why the Bubble Economy couldn’t go on for more than a year. And it didn’t. It ended just as everybody thought it would. If you look at the growth of debt compared to the growth in the ability to pay it, you see that many economies already have passed the point of intersection. At the point where debts can no longer be paid, you have a break in the chain of payments. That’s what causes a crash. In the 19th century nobody talked about business cycles, but about sudden crashes and slow recoveries.

Marx saw that there was a cycle. But like everybody else at the time he saw the business upswing ending in a crash. It’s like a ratchet effect. A curve rises like a Hokusai wave, and then there’s a quick crash. This is not a smooth sine curve cycle like Schumpeter depicted in Business Cycles. And it’s certainly not self-caring. The expansion leads to a crash because of over-indebtedness. Usually, crashes result from a fraud or insolvency, or somebody makes a bad bet for a big bank, or an environmental crisis causes a break in the chain of payments.

Adam Simpson: It’s interesting that you begin with real estate. When we talk about the FIRE sector versus the real economy, I think it’s odd for people to think of real estate, their house, as something that we wouldn’t consider as part of the “real economy.”

Michael Hudson: There are two ways of thinking about the economy. The school textbooks only talk about producing goods and services for wages and profits. They don’t talk about rent or unearned income. That’s what I mean by “unreal” – not grounded in production. And they don’t talk about interest either, or the framework of debt and property rights. There’s a lot of talk about what seems to be the circular flow between producers and consumers. That circular flow is called Say’s law. For example, Henry Ford said he paid his workers $5 a day so that they could afford to buy the cars that they produced. Workers are depicted as paying their wages to buy what they make.

All that seemed to make sense, but the economy of production is different from financial and property wealth. Who owns the assets, and who owes debts to whom? If you look at the economic framework in terms of assets and debt, you find that the 1% makes its money by holding the 99% in debt. Or at least, you could say that the 5% make its money by holding the 95% in debt.

The trick is to get other people in debt. How do you do that? You make them think that they can gain. They’re willing to borrow to buy a home, because they think that since 1945, the way that most American families have gotten rich – indeed, the way the middle class was created throughout most western countries – was by the increasing price of real estate they bought on credit. What they didn’t realize was that the price of real estate was being bid up in two ways. Number 1: By more bank lending, on easier terms. Number 2: By public infrastructure spending. Cities, states and federal governments built parks, museums, roads, railroads, water and sewer systems, and electric utilities. But this began to come to an end with Reagan and Thatcher in 1980. You have had a privatization of public infrastructure – goods that the public sector provided for free, saving people from having to pay monopoly prices.

Instead of financing public investment by progressive taxation, it was financed by borrowing. Banks got more and more aggressive and reckless in creating new credit, because they felt they were guaranteed against loss. That was the essence of financialization. Financial engineering replaced industrial engineering. What people thought was wealth turned out to be a rentier overhead.

This confusion between real tangible wealth and financial overhead claims on the economy was recognized already over 100 years ago by somebody who won a Nobel Prize: Frederick Soddy. But he won the Nobel Prize in chemistry. He wrote many books saying what people think of wealth— stocks and bonds, bank loans and property rights —are virtual wealth. They are financial claims on real wealth. A stock or bond is a claim on the income that real wealth can make. So it’s on the opposite side of the balance sheet from assets. It’s on the liabilities side.

Economists used to talk about land as a factor of production. But land rights are really a property claim, like a monopoly claim. It’s as if you’d say Walt Disney’s patents on Mickey Mouse or movies that Walt Disney makes are a factor of production. They’re really a property right to charge a monopoly price. The right to charge a monopoly price for a cable service isn’t really a factor of production. It’s extractive. It’s what economists call a zero-sum activity. So classical economics has a different idea of what national income is from today’s idea. A monopoly right is not an addition to national wealth or income just because monopolists make more. It’s a subtraction from the economy’s circular flow.

Think of the circular flow between producers and consumers. If wage earners have to spend more to obtain housing, or to pay a bank loan or education loans, they have less to spend on buying the goods and services they produce. They’re not paying to the producers of goods and services. They’re paying to the bankers or the real estate sector – the property sector. When you said the FIRE sector, that’s Finance, Insurance and Real Estate. For many years, national income economists and statisticians couldn’t even separate which income belonged to which, because they’re so symbiotic and interwoven.

This is not really part of the production economy or what people call the real economy. But the FIRE sector’s rent and interest are the first things you have to pay out of your paycheck. That’s more real – in the sense of being most pressing – than goods and services. So when a family gets its paycheck, the taxes and the bank credit card debt they owe, and either their rent or their mortgage payment, often are automatically taken out of their check or bank account right off the top. Out of what remains, the average American wage earner only has maybe 25 to 30% of their income available to actually spend on the goods and services they produce.

So there’s a diversion of this income to pay the FIRE sector – a sector that classical economists hoped to minimize. They wanted to get rid of the rentier class. They wanted to nationalize the land, or at least tax away its rent. They wanted the government to be the public creditor, or at least for banks to make productive loans, not finance corporate share buybacks, corporate takeovers, or lend just to inflate real estate prices and make home buyers take on higher and higher debt levels in order to obtain housing.

The economy’s been turned inside out, yet people don’t really realize it because the vocabulary they use has been turned into a kind of euphemism. You said Orwellian and it’s really Doublethink, using words to mean the opposite of what they used to mean. I wrote J is for Junk Economics largely to discuss misleading terminology. If you look underneath the vocabulary, you realize what’s really happening instead of accepting euphemisms like “earnings” instead of unearned rent. You can build up a different, less unrealistic picture of the economy.

Adam Simpson: One of the fascinating threads your book keeps raising is the fact that a lot of the deception that you point out in the modern economy is somewhat recent. There are references to Confucius and to Sumer in your book. What does your perspective of economic history and archeology tell you about the economic system we have today?

Michael Hudson: The remarkable thing is how stable economies grew from the takeoff in Mesopotamia in the fourth millennium BC all the way down to the first millennium. You didn’t have the classical usury problem polarizing society. Economies were still “anthropological” enough, still low-surplus and communalistic enough with the mutual-aid ethic that the acquisition of wealth was viewed as something improper if it was gained by exploitation. You had an increasing specialization of labor but you also had a cancellation of debts when they grew too high – at least, personal debts. You had a distinction in practice between productive and unproductive credit.

Every ruler of Hammurabi’s Babylonian dynasty, like the Sumerian rulers before them, started their rule by proclaiming a Clean Slate to cancel the debts. In Babylonian times this was called ‘andurarum.’ It’s a cognate to the Hebrew term deror, the word for the Jubilee Year. The new ruler would cancel the debts, free the debt bondservants and return anyone put in bondage to the creditor – including the house slave – to the original family owners. Also, they would return the self-support land that had been forfeited to creditors. But rulers wouldn’t return town houses, which were part of the surplus. They didn’t cancel commercial debts, which were silver debts. But they would cancel the barley debts to enable people to survive.

The reasons rulers did this was that if you let creditors make loans to cultivators and say “Now you have to work off your loan for us,” the cultivators would not be able to fulfill their duties of corvée labor. Taxes were paid in the form of labor, corvée service. That’s how from 11000 BC onwards, civilizations built their big monuments. Monuments like Stonehenge but even bigger, like Göbekli Tepe in Turkey to the Egyptian pyramids, Mesopotamian Ziggurats, and city walls. This basic cultural, military and economic infrastructure was built by public labor. The question is how did you get the people to work for this?

If people didn’t want to build these cultural monuments and defense works, they would have run away, as they did after about 1600 BC. But when archeologists dug up the remains of the labor camps for building the pyramids and the temples, they found they weren’t built by slave labor working for porridge rations. There was a lot of meat in the diet. There was a lot of beer at the parties. They arranged it as a socialization process, working on public projects during the time labor was not necessary for planting and harvesting. You find rulers depicted on iconographic, either on murals or on cylinder seals carrying baskets of earth on their head. Backbreaking work, but they got to party afterwards. Socialization and mixing.

In antiquity, you’d have revolutions pressing for Clean Slates. But you didn’t need a social revolution in the Bronze Age, because you had the central authority of the ruler larger than the private oligarchy that began to grow up (largely by making money through foreign trade, and then lending out their gains at interest). You were making money by privatization in the Bronze Age, for instance, by the temples which supplied beer to the beer women to sell to retail customers, who would run up a debt with them. But when the crops failed, these debts of drinkers and the ail women were annulled.

The same thing happened in Japan in its Medieval period. Sake was manufactured by the temples. And it was to the temples that most people ran up debts. There was a revolution against the temples as creditors in Japan. And in classical antiquity, in the 7th century BC, you had the most prosperous cities from Sparta to Corinth overthrow the oligarchies, redistribute the land and cancel the debts. But later, oligarchic historians called these populist leaders “tyrants.” But they were only tyrants because they threw out the oligarchy and redistributed the land.

After the 7th century, you didn’t have that anymore. Solon of Athens banned debt bondage in 594 BC. But by the 3rd century BC, you had the kings of Sparta—Aegis and Cleomenes, followed by Nabis—canceling the debts. The oligarchs called on Rome to fight against Sparta. They overthrew Sparta. From then on, you had the Roman oligarchy become the first society not to cancel personal debts. That meant that gradually, you had debtors reduced to permanent bondage, not merely temporarily, not merely 3 years as in the laws of Hammurabi, or 50 years in the periodic Jubilee Year in Israel. You had permanent bondage and economic polarization. That’s the same kind of debt peonage that you are seeing develop in today’s economies.

Today, families entering the labor force are going to have to spend all their life working off the debt they need to take on in order to get an education to get a job, as well the debt they need to buy a car to drive to the job, and the mortgage debt for the house they need to live in to avoid rents going up and up. They have to spend all their life merely to pay their creditors, not to live better with more goods and services. Unlike serfdom, today’s workers can live wherever they want. But wherever they live, they have to produce value not only for their employers but also for the bankers.

These bankers (and bondholders) are the main exploiters today. So finance capitalism is overwhelming industrial capitalism. Instead of industrial capitalism evolving into socialism as was expected, it is retrogressing back to neo-serfdom and neo-feudalism. This is mainly because of the inability to bring debt within the industrial capitalist system to evolve into a socialist economy. That is what neoliberalism is sponsoring by financialization and privatization.

The Inability to Make Debt Productive.

Adam Simpson: Two things I’m wondering about: Was there a political or social innovation that allowed oligarchs to avoid the threat of a revolution seeking to cancel debts? Was there a way that they found to negotiate society or a new economic innovation to make debt something that people weren’t demanding to erase? How were these oligarchs able to escape pressure for this demand?

Michael Hudson: Initially, armed force did the trick, making war on countries that cancelled debts. By Roman times, creditors simply murdered pro-debtor politicians, from the Gracchi after 133 BC onward (including Jesus in Judea). But in today’s world, creditors have had to change people’s perception, to make people think that they’re not being exploited. Around 1890 creditors and landlords sponsored an anti-classical reaction saying that there’s no such thing as economic rent, no such thing as a free lunch or unearned income. John Bates Clark in America, and the marginalists abroad, said that whatever anyone earns, they produce – by definition (that is, by circular reasoning). So if you’re a Goldman Sachs partner and earn $22 million a year, that’s considered adding to the economy’s GDP. People think, “Well, the rich really earn it. They’re much more productive than I am.”

If you believe this “meritocracy” patter talk, you’re not going to resent predatory wealth. You’re going to resent yourself. The oligarchy has made debtors and the middle class subject to a Stockholm Syndrome. They blame themselves. They think that “If only we can cut taxes on rich people like Donald Trump wants to do, they can have enough money to hire us and we’ll get richer.”

But that’s not what the rich do with their money. They don’t hire workers here. They get richer by taking over a company, firing the workers, downsizing it, wiping out the pension fund, and moving their production to non-unionized Indonesia, Vietnam or some other low-wage economy.

The economic textbooks don’t acknowledge this. They depict a parallel universe backed by Orwellian euphemistic economics to make people think that somehow they’re going to get rich by borrowing money to buy a home that may rise further in price. The dream is to be a Donald Trump in miniature, to make money on the home as a real estate investment. Make money in the stock market by turning their money over to financial managers like Citibank, Goldman Sachs or other companies that have paid tens of billions in fines for financial fraud. Now you have Donald Trump trying to get rid of Elizabeth Warren’s Consumer Financial Protection Agency. The Republican argument is that just like we have to give people the right to buy bad food, junk sodas and McDonald’s burgers, they have to have the right to buy financial products from Wall Street sharpies that are going to cheat them.

That’s now called a free market. But it’s not the kind of free market that Adam Smith and the classical “free market” economists had in mind. The rentier sector’s lobbyists have taken over peoples’ mind. This is what Killing the Host is all about. It’s the basic intellectual dynamic of parasitism. In nature, parasites don’t simply attach themselves to a host and suck out blood, or take the surplus in an economy. In order to do that, they have to numb the host. They need an anesthetic so that the host doesn’t realize it’s being bitten. Then, biological parasites in nature have an enzyme that they use to take over the brain. The brain of the host is tricked into thinking that the parasite is a part of its body, to be protected. That is what the parasitic sector, the FIRE sector, has done in modern economies. It makes Wall Street the planning center, not the elected government. That’s how the rentiers have taken over the economy.

But of course, the aims of financial planners are not the same as those of government planners. The financial aim is to strip assets, to make money in the short term, not to plan for the long term as governments are supposed to do. Taking long-term survival and sustainability of the economy into consideration is not done anymore. We’re entered the asset-stripping phase of finance capitalism.

Adam Simpson: So the financial sector becomes not just a parasite that’s leeching off blood, it becomes the master. This is how we get to the neo-feudalism argument, which is entertaining to me because I’m also aware of the Austrian economist Frederick Hayek, who claimed that the road to serfdom was intervention into the “free market” rather than letting predators bilk the public.

Michael Hudson: Hayek turned classical economics on its head. Adam Smith, John Stuart Mill and the other classical economists who are supposed to be icons of the free market meant a market free from land rent, monopoly rent and financial interest. But for Hayek, a free market meant one free for these rentiers. Free for landlords, bankers and monopolists. That’s why his group, the Von Misians in Austria, spent their time fighting against public spending and the “threat” of socialism. He said that socialism leads to fascism. But actually it’s his Chicago school that does this. It’s the “free market” Chicago Boys who led to fascism in Chile by overthrowing the government.

So Hayek called freedom fascism, and he called fascism freedom. The first thing that the Chicago boys did in Chile was to close every economics department. Because they realized that you can’t have a Hayek-style free market unless you’re willing to kill everybody who disagrees with you. They had to kill labor leaders and tens of thousands of intellectuals. They closed every economics department in the country except for the Catholic University where they taught. There was mass murder. If you’re not wiling to kill everybody who has a different idea than yourself, you cannot have Frederick Hayek’s free market. You cannot have Alan Greenspan or the Chicago School, you cannot have the economic freedom that is freedom for the rentiers and the FIRE sector to reduce the rest of the economy to serfdom.

Hayek’s saying that the way to create serfdom is to make people think that freedom is serfdom. So we’re back with Orwell: Freedom is slavery, war is peace. That is the Orwellian economics now taught by mainstream orthodoxy. You no longer have the history of economic thought being taught, as it was 50 years ago when I was getting my PhD. It’s been stripped out of the curriculum. If people really read what Adam Smith said after he traveled to France and met with the Physiocrats – and was convinced that there should be a land tax and that economies shouldn’t have free riders – you realize that what he said is the exact opposite of today’s ostensible free-market ideology. John Stuart Mill defined rent as what landlords make “in their sleep,” without working. These classical economists were on the road to socialism. Only half-way there, but on the road to it.

So the history of economic thought has been replaced by mathematics, to mathematize a fictitious parallel universe model. The result is what computer operators call Garbage In: Garbage Out (GIGO). You’re mathematizing something fictitious. If you look at the introductions to Paul Samuelson’s or Bill Vickery’s textbooks, they won the Nobel economics prize for writings that came right out and said that economics is not about reality. It’s about the internal consistency of assumptions. It’s to build a beautiful system that, if it really worked, would be so appealing that students will be willing to suspend disbelief. That is what a good science fiction writer would do. The trick is to make readers willing to accept the assumptions that they’re given at the outset. Free-market tunnel vision is simply about logical consistency of unrealistic assumptions.

These people appear as entries in my dictionary as “idiot savants.” They’re very smart in an abstract, autistic way, but they don’t know what to be smart about. They’re willing to use their smartness to be deceptive, to become financial lobbyists. Their work is then turned over to focus groups to find out what kind of rhetoric is best going to trick people into thinking that poverty is wealth. The aim is to convince people that they can get rich from going into debt to buy a house and become part of the middle class economic treadmill, and to believe what Ralph Nader made fun of: “Only the rich can save us.” If you can get people to believe that, you’ve won their hearts and minds

Adam Simpson: I want to move on to one of the issues people have been thinking about today: in light of this new political context, I want to ask you about the chapter in your book “K is for kleptocrat.” The new Trump administration has done a number of things that people are concerned about. With regard to the financial sector, they’ve rolled back the feeble regulations of Dodd-Frank. The Republican Congress is looking into an infrastructure project that largely looks to be a giveaway of public funds to the private sector. This is to say nothing of the president’s direct business interest, but I’m wondering what your reaction is to the new administration. Also, there’s this idea that the Trump administration represents something new.

I was wondering what you see that is new, versus what is more or less ‘business-as-usual’?

Michael Hudson: What’s new is that Trump said the emperor has no clothes. He said, “You think you’re getting rich under Obama? You haven’t got rich.” So when Hillary told her supporters to look and see how much better off you are today than when Obama was elected, she made herself look blind, referring only to the One Percent. All the growth in the American economy from 2008 to 2016 accrued only to 5% of the population – the richest. 95% of the population were worse off. Trump saw the obvious – which you would think that any member of the 95% would have seen. When Hillary tried to convince people they were better off, Trump simply said, “Let’s look at reality: You’re worse off.”

Voters thought that if he could see that they’re worse off, he must know how to cure it – instead of knowing how to make them even more worse off. People wanted prosperity and Trump said NATO’s obsolete. There’s no reason for us to maintain it—Russia’s not going to invade Europe. Why should they invade? There’s no way any European country is going to militarily invade another.

The new mode of warfare isn’t military anymore, it’s financial. Russia and China realize that the United States is dissipating its ability to conquer countries financially by spending its economic surplus on military and the FIRE sector. Trump realized that as a real estate developer, he’d been fighting banks all his life. There’s no love there for the banks.

So the neocons are out to get him. They’re saying it is treason to want peace instead of war. We need an enemy sufficient enough to justify giving all the surplus to the upper 5% and spending it on the military. If you don’t advocate doing that, you’re a traitor – to their fortunes. So they’re out to get rid of him.

Adam Simpson: As I understand it, he has promised to increase military spending even without perhaps the enemy that Hillary would have painted Russia to be.

Michael Hudson: On the one hand, he did say that. On the other hand he said look we’re not going to spend so much money on Air Force One, you’re overcharging it. We’re going to get rid of the F-35 fighter—it’s cost almost a trillion dollars. He said that is a waste. We’re going to get rid of the waste. But if you get rid of the waste and what’s not necessary, you’re going to have lower military spending. So I don’t see what Trump is going to spend more military money on.

The Democratic Party 50 or 60 years ago had labor union support, and claimed to support the working class. But now if you look at how the party’s been in the last 25 years – since the Clintons and Robert Rubin – it’s hyphenated. It’s gone for identity politics. And the identity politics you have is, for instance, the national association for women for Wall Street and the Cold War, you have the LGBTQ also led by a Wall Street neocon leader for the Cold War. So you’ve had women, LGBTQs, blacks, all led by neo-cons and neoliberals. But the one group you don’t have is wage earners. Workers. Hillary depicted them as homophobic racists. And if you’re a wage earner, a member of the working class, you’re a homophobic racist. That was the image she had, and that drove them into Donald Trump’s court.

So it was really Obama and Hillary that made Donald Trump their legacy.

Adam Simpson: This is a very big debate on the left right now, about intersectionality – about including people of color and different gender, sexual background, et cetera, while trying to maintain the class consciousness aspect. For instance, some wish to say “We won’t push on for trans rights, or we won’t push for women’s rights or whatever. We’re only going to focus on class as the key issue.” There’s a big part of the left that really pushes back against that notion.

I’m just wondering—and surely Hillary is not the candidate that could have done this—but isn’t there a way to have class consciousness as well as protect people of marginalized and abused communities?

Michael Hudson: Sure there’s a way. A lot depends on how the political party is going to be organized. There are two ways: One is to get popular support of voters in a democracy; the other is to get funding from big donors and fundraisers. The fundraisers are on Wall Street. The Democratic Party strategy – and you saw this by members running for the head of the Democratic National Committee on February 21 – they were saying the key to funding is television. Buying television time to control people’s minds takes big contributions of money. The money comes mainly from Wall Street, from the 1%. So if you’re dependent on the 1% to give the money to buy television time and to pay for focus groups, then the 1% surprisingly enough are only going to represent their own interest, not that of the 99%.

Once you have a strategy that the party is geared towards what candidates and platform can raise the most money for television from big contributors, you’re going to become the party of these big contributors. Of Wall Street. That’s why Bernie said, “Wwe don’t need the big contributors. We’re appealing to the small contributors.” Hillary replied, “Get out of the party. My backers don’t want you. We’d rather appeal to right-wing Republicans.” But the Republicans didn’t want her. So if you structure a party not around voters or what’s good for the 99%, but about what’s good for the 1%, then you’re never going to win elections. The 1% realize how to sterilize the 99% from having a thought that would actually help them, not the 1%. It’s by the Junk Economics of neo-liberalism.

You need a demagogue such as Obama to package this and makes it sound as if he’s favoring the people but actually turns over the economy to his campaign contributors on Wall Street. That’s what he did with the Treasury under Tim Geithner, and the Justice Department that has not thrown any crooked banker in jail. Obama said he’d do one thing, but actually did the opposite. That’s the secret for being a politician: to deliver your voting constituency to your campaign contributors. That’s what the Democratic Party is now all about.

Adam Simpson: Speaking of campaign contributors, I want to talk about the banking and financial institutions. One of the key questions that the Next System Project is investigating is about the relationship between the creation of debt, specifically between the financial sector and ecological harm. We’re wondering if there’s a relationship between the creation of money through creation of debt and this necessity of keep paying interest and causing ecological harm. In your mind, is there any connection between these?

Michael Hudson: Sure. Suppose you organize a public utility to be run on atomic power. You organize that in a private-sector way, designed to make money for the electric companies that invest in atomic power by borrowing from the banks and building interest charges into the rates they charge. If you’re going to make atomic power able to create a profit for stockholders and interest for the financiers, you have to cut costs. The easiest costs to cut are those of environmental protection, because they’re not enforced or even well written.

I knew many of the physicists who designed the atom bomb at the Manhattan Project. They felt pretty bad about having worked on the bomb. Many of them had gone into physics because they found it beautiful, and they found atomic power beautiful. They wanted to show that it could do something good and have a practical peacetime application. So after Hiroshima and Nagasaki they tried to turn their talents to developing nuclear power as a clean power. The problem was that the cost of doing this was so large that it couldn’t be done if you built in brakes. It’s like building cars without brakes. The cars would cost too much.

They couldn’t make atomic power provide energy at a competitive price, given the cost of disposing of the depleted uranium. You had a huge problem of disposing of uranium. You’ had to build atomic power plants without safeguards. Like Fukushima. Tepco, the Japanese electric utility owner, know it would cost a bit more money to bury the backup diesel generators below ground in case of a tsunami. Despite warnings, they chose to save money by making it above ground and simply hoped there would not be an earthquake until they’d left the company and collected their salaries and bonuses. They probably shouldn’t have built it near a earthquake fault. Once in a while there’s going to be a tsunami. But they were into making money in the short term, because that’s what the corporate financial mindset is. They built Fukushima deliberately unsafe, thinking that future generations would pay, not them.

When consultants and engineers told Tepco that the plant would be unsafe, the managers overruled them. They’re in business to make money for their stockholders. Milton Friedman said that the obligation of corporate managers is to make money for the stockholders, not society. So for them, Fukushima was a success. They made money all these years without having to spend the extra money it would have cost to build a plant and its backup generators safely.

Same thing with British Petroleum. It would’ve cost $2,000 extra to have put in safety valves in case of a blowout, to prevent the leak in the Gulf. Their managers decided to save $2,000 – having lobbied against environmental rules that Canada, for instance, insisted on. That was simply a business decision. The environment is not on their balance sheet. It’s what economists call an “external economy.” Important for society, but not for corporations and their investors.

Such external economic effects often are larger than the corporate balance sheet profits. But they don’t appear on the private sector’s balance sheets. So companies cut back to make more money, and compete with other companies to undersell them by not building safeguards. You can go right down the line, from the coal industry to all other polluters with working conditions that endanger workers. Their corporate balance sheets do not include the cost of environmental pollution.

Environmental costs that don’t appear on the balance sheet were recognized already in the 1840’s in the Untied States. What was to become the Department of Agriculture, embryonically within the Patent Office more than ten years before it was created under Lincoln, was promoted by protectionists in the North. They wanted to show the soil depletion that resulted from plantation agriculture such as the Southern slave states growing cotton and tobacco. They wanted to show that this depleted the land. They said, “You say you’re running a trade surplus in the South. But what you’re actually doing is depleting the land, so you have to continually move west. You had to have a war with the Indians and kill them. And now you’re pressing to move into Mexico and California, because you’re depleting the land. So you have to include environmental soil depletion in trade analysis.”

The South fought against this until the Republicans took over after Lincoln was elected. 100 years later the Department of Agriculture wanted to write a centenary volume about itself. So I wrote an article – which I include in America’s Protectionist Takeoff – about how the industrialists wanted to warn against environmental pollution. The farming interests, meaning the Slave Interest, the plantation interest, fought against it. I got a reply saying they didn’t want to publish my research because this is not the direction the Department was going. They were all into plantation exports abroad.

There’s a fight to exclude environmental considerations from national balance sheets. The theory is, if you don’t see the damage that’s being done, you won’t act politically to stop the damage. If it’s invisible, it won’t be regulated, and it also won’t be taxed.

Adam Simpson: Interesting. In your mind, given your background looking at the financial sector, what do you think needs to change to get us where the financial system functions in a rational, sustainable and ethical way? Does it start with J is for Junk Economics, a cultural mindset shift? And do you have an ethical model in mind?

Michael Hudson: It all has to go together. Certainly the way you think about the economy working – and the way you quantify it statistically – is going to shape your perception of what needs to be done. Just like I think you need a public option in health care (which is also something that Donald Trump said in his campaign speech; of course it’s the most efficient), you need a public option in banking. For instance, one of the most crooked banks for many years was Citigroup, which my colleague Bill Black at the University of Missouri at Kansas City said was basically a criminalized organization. (He used the term “criminogenic.”)

When it went broke in 2008 from fraudulent loans, Sheila Bair wanted to take it over for the Federal Deposit Insurance Corporation. of which she was the head. She was fought against by Obama backing Tim Geithner as Treasury Secretary. Citibank, the largest crook in the financial system, dominated the Treasury and the financial regulatory system. That’s an example of the parasite taking over the brain. The financial system lobbied to save the crooks at Citibank and keep the debts on the books. That was Obama’s most fateful act.

2008-09 was a historical economic turning point for America. The government should have written down the debts to the market price of the real estate, and set the carrying charge of home mortgage debt to the equivalent rental charge. That was long the definition of equilibrium in home mortgage lending. But the junk loans were left on the books to be foreclosed on, mainly by crooked junk foreclosers. Imagine if Sheila Bair could’ve taken over Citibank. You could have used it as a public option. You could have issued credit cards at cost instead of with the heavy monopoly fees as they now levy. You could have made loans for productive reasons instead of making corporate takeover loans and the kind of loans they’re making.

You could have stopped falsifying junk mortgages and stopped writing liars loans. The liars were led by Citibank and its representatives – which means by Bill Clinton’s former Treasury Secretary Robert Rubin, mentor to Geithner as Citigroup bagman. These were Obama’s main campaign donors and supporters. He was protecting the liars, and told them that his job was to stand between them and the mob with pitchforks wanting to lock them up. You could have created an honest banking system that would make loans to do what textbooks describe banks as doing: making productive loans that the debtor is able to pay, instead of loans that you know the debtor can’t pay and which you make in order either to sell to a sucker, to a pension fund here or a state bank in Germany, or simply to foreclose on property.

So the ethic would have been public banking, with a different lending philosophy from that of commercial banks. It would lend at much less expensive rates. It would not manage pension funds and savings by lending to corporate raters to end up downsizing and outsourcing the labor force, but to companies that actually want to expand employment. That is why you need a public option in banking.

Instead of withdrawing banking offices from low-income red-line areas, you could use post offices as public banks to provide basic check-cashing services, “vanilla” banking accounts and money transfer services at costs to areas that now are forced to engage in pay-day loans. Instead of these rip-offs, you would have an alternative. The payday lenders are funded by the big banks like Citibank and Chase-JP Morgan. It doesn’t have to be this way. You could have loans to finance economic growth, not for asset stripping.

Adam Simpson: The final question: You write about rent as it relates to land. I was curious – this is kind of my own personal self-indulgent question – but I’ve seen, for instance, Thomas Paine associated with ground rent and its obvious inequality, the notion that someone has a right to a piece of land that obviously no one can really “own.” He argues for distributing that to everyone in the form of a universal basic income. That seems to be a popular idea now, particularly in Silicon Valley as well as other places. I wanted to know your perspective on universal basic income.

Michael Hudson: I think it’s a misnomer. There’s no problem with giving more people enough income to live. Even archaic societies operated on the mutual-aid principle. There’s a lot of pressure for the Federal Reserve to create a trillion dollars by giving everybody an extra $500. Why are they willing to do that? Because most people would use the $500 to pay the banks – so the banks wouldn’t have to lose money and default as a result of their reckless and unproductive lending. The problem’s not only income, but what people have to spend it on. Paine didn’t talk about universal income, he talked about everybody should have the right to a place to live, a means of their own self-support. That’s independent from income. Once you economize and financialize it, you put in a distortion.

You don’t want to give people income to buy what really should be public goods and services outside of the market. You don’t want to give people more income simply to pay monopolistic public utilities for extortionate charges for water, sewer, electricity, cable TV and education. These are things that should be removed from the marketplace, not giving people the income to buy overpriced and monopolized real estate and infrastructure services that should be public in the first place.

Adam Simpson: I completely agree. That’s my criticism of this ongoing universal basic income debate. It might be a good idea if we solve a lot of other things first. One of them being financial parasites, because in my mind people talk about a trickle-down economy. I get a sense right now that we have what more or less amounts to a trickle-up economy. At the end of the day the rich are going to get theirs. The idea of providing universal basic income or a stimulus, eventually it’s going to work their way up to the top of the system.

Michael Hudson: The key to any such analysis is circular flow. If you give people income, what do they spend it on? As I said, people have to spend 75% of their income on things other than the goods and services they produce. You don’t want to give them services to bloat this FIRE sector that is sucking income upward to the 5%. You don’t want to give more people income just to pay higher rents and bank loans to the 5% at the top. You want to do the opposite.

This is why classical economics is so important. Look at the debate between Ricardo and Malthus. Ricardo was the lobbyist for the bankers, and Malthus was the lobbyist for the landlords. In the Napoleonic Wars, England had to grow its own food because Napoleon had a naval blockade that prevented England from importing its food. So more food was produced. After 1815 when peace came, they were going to have free trade in food. But the landlord complained that if you have free trade in food, you’ll have lower food prices. Agricultural land rents would come down, and landlords would lose the high valuation of their property. They want the Corn Laws to limit imports and keep food prices high.

America’s agricultural policy since the 1930’s is like Britain’s Corn Laws. Roosevelt’s protectionist agricultural policy echoed Malthus saying that you need to give more rents to the landlords, in the form of high-priced food – so that they could invest more income in capital to raise productivity. Malthus also asked the question, without the landlords who’s going to hire the butlers? Who’s going to hire the coachmen? And who will buy all the fine clothes to hire the tailors? Keynes loved Malthus for saying this. But Ricardo said, if you pay this luxurious class of landlords all this rent, you’re going to have to pay labor so much to pay for food that industrialists can’t afford to hire it to out-compete with France, Germany, and other industrialists.

So where’s the economic surplus going to go? Is it going to go to the landlords—who, by the way, when they bought their clothes usually bought imports from France and Germany, not from England? Or, are you going to invest the surplus productively? That debate is missing today, because they’ve expurgated it from the economics curriculum. There’s no economic rent, no national income analysis that looks at the economy as the 99% paying money to the FIRE sector that extracts 75% of the income all for finance, insurance and, real estate, and monopolies and government.

About one third of the GDP is monopoly rent. One third – which otherwise could take the form of rising living standards. A century ago there were futurists who were writing about the future, Simon Patten and others, they all thought we would have an economy of leisure by now. If you told anyone a century ago about the rise in productivity, they’d think that people would only have to work one or two days a week. There would be a lot of leisure time. But the opposite is happening. People are being squeezed, they’re having to work overtime. They’re struggling just to break even. They’re one paycheck away from missing a utility payment. They can’t afford to campaign for better working conditions, much less go on strike.

So if you think of the economy in terms of who gets the surplus and what they do with it, you can develop a logic that leads you to invest the surplus in ways that increase people’s standard of living and well-being. But post-classical economics says that there’s no such thing as a surplus. A surplus implies exploitation, and there’s no such thing as exploitation – as if we’re all working together. That’s not reality.

Adam Simpson: Well that’s all the questions I have for you today, Michael. I really appreciate you joining me today and talking about your new book, J is for Junk Economics.

Michael Hudson: Thank you for having me.

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  1. Dead Dog

    paraphrasing – people need to understand that house prices go up because lenders are willing to lend at the higher and higher prices (until they aren’t). RE bid up by easier bank lending and public interest spending falling away (privatization).

    Thank you MH, but you’ve spoiled your chance for the Nobel. Bad boy for speaking the truth

    1. RBHoughton

      The economists who get Nobels should really get Oscars. Michael Hudson is better than that.

  2. Jim Haygood

    ‘Since 1945, the way that most American families have gotten rich – indeed, the way the middle class was created throughout most western countries – was by the increasing price of real estate they bought on credit.’ — Michael Hudson

    Why is this? In 1945, government debt surpassed gold as the largest holding on the Federal Reserve’s balance sheet. Since then, the Consumer Price Index has increased by a factor of 13.5 times.

    With inflation raging — and the government sponsoring low-interest rate mortgages via Ginnie Mae, Fannie Mae and Freddie Mac — it’s no wonder the public went into financial engineering on a vast scale despite it being, as Hudson says, economically unproductive.

    Michael Hudson is quite right that in principle, there’s no reason why personal dwellings should increase in price, other than infrastructural improvements and population and job growth adding (or subtracting, in the case of the Rust Belt) value. But the money illusion of fiat currency inflation obscures this truth, creating the impression that real estate is a sound investment.

    While concurring with much of Michael Hudson’s analysis, I regret that he omits the destructive effect of an elastic currency. Irredeemable funny money will render many of his social goals impossible by making real economics and real value indiscernible amid the fog of Fed-created money illusion. Fiat currency is the engine driving the asset price inflation that enriches the 1 percent.

    1. jerry

      There is nothing destructive about fiat currency unless we (or the .1%) decide to do so. Right now, our economy is nowhere near full capacity, so inflation is not a problem. The Fed’s QE has nothing to do with the money supply, it just pulled bond yields down so people would jump into the stock market/ RE to keep the economy alive. Asset bubbles don’t correspond to an underlying currency inflation problem, as we found out 10 years ago and are still seeing today.

      1. craazyboy

        If you preface this with [NOT], all the way thru, you would be absolutely correct. Starting with fiat currency bought us our current Monarchy, which Michael H. seems to strongly hint at. It also pays for all the King’s men and all the King’s horses.

        I’d also like to see MMT take a laser beam to their Sectorial Balances and slice up sectors into micro industries – each having it’s own inflation index. Then we may be able to begin saying something intelligible about inflation, wages and employment. Maybe just jail some whole industries too and have them do chain gang work.

        Right now, the word “inflation” is so meaningless, it’s like…meaningless.

        Like in the book where the Space Aliens scheduled Sol System for demolition to make way for an Interstellar Super Highway To Nowhere. “Inflation” would be the demolition tool of choice. Seriously.

          1. Susan the other

            Fiat is the only thing that can feed growth and debt service because it is a vicious cycle. It’s the irrational foundation of everything. But without it things will collapse in a very nasty way, so we actually do need it until we can establish some stability. Some rational stability. Fiat is not the enemy, it is the way we have survived the enemy. So yes, inflation needs to be dissected right down to the synapses and there we will see the whole dynamic. No?

            1. craazyboy

              “Inflation” is Thor’s Hammer that economists and central bankers have selected as the thermometer up our collective butts, even tho Chinese butts are considered valid proxy for American butts, among many other big problems with the concept.

              Then, interest rate policy is the act of determining whether to swing the hammer up or down or maybe just jawbone it, no matter what it may hit or not hit.

              The concept needs work, methinks.

              P.S. I’m on roll, today.

              1. skippy

                Whats so “Natural” about an interest rate set by monetarists and quasi monetarists…. unless its set by dawgs chosen…

                Disheveled…. this might also help with the complete bastardization of some original authors works as intended…

        1. jerry

          Not sure I really understand your comment. Inflation is pretty straightforward. The inflation of wages has been flat since the 80’s, the inflation of real estate/rent/healthcare/education has skyrocketed.

          Maybe you can respond with less allusion to space aliens and king’s men and just use plain english?

        2. oh

          Well said! The measures of inflation are so tilted to make the government and the Fed look good. Besides, people don’t know how to distinguish wage inflation from price inflation. Industry and bank love price inflation without wage inflation.

          1. craazyboy

            Or asset inflation. Or rather we can distinguish it. Except Mr. Space Alien Magoo says he can’t. Then the Fed denies they have anything to do with it. Except they will get in a tizzy over asset deflation, then try and inflate it. But claim they are inflating prices, but not so much as to inflate a wage price spiral [individuals flapping their arms at work, until they lift and spiral upward, ever spiraling upward. But never mind how that ends! Volker!!] Unless they are professionals. Then it helps the macro wage growth number.

            It’s also important to make inflation expectations go either up or down slightly, but remain well anchored. This will result in a flat yield curve, stable prices, wise investment, and best of all, world peace.

            Janet Yellen knows this and has been doing it for a long time now.

    2. Katharine

      Regarding things that could reasonably cause house prices to rise, you left out simple inflation. In 1931, my grandparents took a trip and were scandalized by having to pay fifteen cents for an egg in a restaurant. Around the same time, the house my parents later bought sold for something over $3,000. To the extent that eggs have gone up, so might real estate without raising eyebrows. It’s the difference in increase, perhaps a couple of orders of magnitude, that needs more explanation.

    3. craazyboy

      Whew. The article was a mouthful. Explains why the book is necessary.

      One of the things that always annoyed me about econ was that the pundits always have much to say about all the wonderful things you can do with inflation and disappearing money, and the evils of hording money and, paradoxically, investing it in capitalism, but little about what mere mortals with a supposed lifetime of 80 years or so are supposed to do for saving up a stable “store of value” or more optimistically, “making your money work for you”, which is everyone’s goal eventually. Yes, yes, I know, Social Security, Medicare…
      but what if there is a problem with these things, or maybe you don’t want to wait all the way to 65 or 66.4 years old???

      I think this is where Marx hit a brick wall too, and went crickets on us.

      However, whenever someone says “Commie” and even later can work “Orwellian” into the conversation, I get interested and listen.

      Also, I think prior to 1913 we had very long periods of zero price inflation in goods and services – of basic things that we still buy today. When you factor in industrialization and productivity gains from going from horse and oxen to Cat Tractor and Boeing 787 you would be surprised if prices didn’t go down after a hundred or two years. But I think in the 1800s prices did stay stable for decades at a time. There were wars, embargoes and what they very accurately called “financial panics” back then. There was no Fed to bail the system out. So there were some periods of instability – but they weren’t due to monetary bubble blowing which has become so popular today.

      I’ll be quiet now so we can get the book and find out what happens next.

      1. Left in Wisconsin

        but little about what mere mortals with a supposed lifetime of 80 years or so are supposed to do for saving up a stable “store of value” or more optimistically, “making your money work for you”, which is everyone’s goal eventually. Yes, yes, I know, Social Security, Medicare…
        but what if there is a problem with these things, or maybe you don’t want to wait all the way to 65 or 66.4 years old???

        I think this is where Marx hit a brick wall too, and went crickets on us.

        Isn’t the problem here that the future is unpredictable and that there is no way for all individuals to save enough for every eventuality? Or, simpler, that it is hugely inefficient (in the wasteful sense) for each of us individually to try to save enough for our own dotage because none of us can predict what we will need (or want) so, as a result, the only solution is to hoard as much as possible – and as you say, then invest it in capitalism.

        This is where the hunter-gatherers had it all over us and our ‘productivity.’ (Well, except for the dying out and all.) Mutual assistance means we are all there for each other when we need to be, so that each of us doesn’t have to try to predict, and save for, every possible eventuality, or die trying.

        One might think with our big fat brains, and computers, and high productivity, that we could construct an efficient modern analogy to mutual assistance that would allow us to experience dotage in non-poverty. You know, provide us with some ‘social security.’ Here’s an idea: let’s ask Wall Street! After all, they have the biggest brains.

        1. jsn

          They didn’t die out, by and large they were enslaved or exterminated by “civilization”. Civilization is a pretty mixed bag, but even there networks of mutual support are what keep it going.

          We appear to be well on the way to liquidating ours.

        2. craazyboy

          “future is unpredictable”

          Yup. Governments come and go too. World Wars, natural disasters, and climate change on the way. I remember a Charles Stross novel where the main character invested a sizable sum in his stock portfolio, then went into hibernation for a hundred years or two. When he woke he found all the companies went bankrupt and his portfolio was worthless.

          It gets too depressing to think about things like this. Which is why we don’t. Live for today!

    4. djrichard

      What’s on the balance sheet (whether gold or Fed Gov treasuries) of the Federal Reserve doesn’t matter. Fractional reserve still works the same way.

      If you want to get off the fractional reserve system, let’s go to a true MMT where the Fed Gov takes over the fiat (spends it into existence instead of banks lending it into existence). And banks are limited to 100% reserve-based lending.

    5. Mel

      You downplay the deflationary aspect of inelastic gold. It was pointed out in Jessica Leppler’s The Many Panics of 1837. The crunch behind at least one of the panics was: Does the world employ people in the Caribbean Islands, or does the world employ people on the North American frontier? Because the world couldn’t do both. There wasn’t enough gold.

      1. craazyboy

        Tho gold induced deflation was completely unnecessary and conspiracy theorists of the day thought it was a banking conspiracy. There where many squabbles over making silver coin official.

        Weird how dumb Americans couldn’t think of silver when the Spanish had been the makers of the global silver currency ever since the 1400s. Silver mines in Mexico, S. America and even the Wild West too!

        Also, no was employed in the Caribbean because that’s where the world staged the slave trade prior to final importation to America and S. America too.

          1. craazyboy

            yeah, I can see the dotted lines connecting that way. Now that they stopped feeding the slaves, who is gonna pay to feed the free folk on a bunch of islands with no economy and the ships stopped coming by.

            1. Mel

              I haven’t fully figured out the economy side. I guess there was sugar, and always had been, and ships would come to buy the sugar. Yes, people had to be paid (for the first time) and pay meant money and money meant gold. People had to spend their pay, and spending meant retail/wholesale supply chains, and that needed money and …
              Funny how deep our fiat-currency attitudes get dug in. At the back of my mind there’s still this “but they could have done that without gold”. No, they couldn’t.

              1. craazyboy

                Yeah, seeing as how fractional reserve banking became widespread in the 1700s, at least. No one told Columbus there was no money either. Europe had plenty of bankers, they created bank notes, and gold was just the reserve requirement leveraged by 10X or whatever with bank notes. Euro guvs were getting in the biz of regulating the reserve requirement sometime in the 1700s, I believe. There still was plenty of silver coin too, courtesy of Spain.

                Then most islands in the Caribbean were still Euro colonies at that time. So it really was a Euro governance problem. I assume it was the Euro folks that freed the slaves in 1835 too. America didn’t do it till 1865!

    6. jsn

      Fiat money doesn’t kill people, bankers do.

      Tools are morally neutral, it is their users that lend them morality

    7. lyman alpha blob

      It does seem like ‘rich’ was a poor choice of words especially as he mentions in the same sentence that the beneficiary was the middle class which by definition is not ‘rich’.

      Maybe it would have been better to say ‘accumulated wealth’ and then it would be more correct. As you mention currency inflation through the obligatory interest payments pretty much keeps anyone from getting rich on a mortgage, at least before the whole RE market was turned into a casino operation, but it does allow wealth to be passed on which would not be the case had one rented instead of owned.

      Anyway it was a speech transcript and not a book so willing to cut Hudson some slack on the choice of words. Keep up the good work.

  3. Science Officer Smirnoff

    Michael Hudson is quite right that in principle, there’s no reason why personal dwellings should increase in price. . .

    Almost always meaning the land under the dwelling. This is a very old issue, and property rights are separable—especially motivated in this case of non-productive assets.

    1. Science Officer Smirnoff

      Here is a prize-winning work that amplifies and generalizes beyond the case of unimproved land. This is a great way to see for yourself what has happened in the relevant philosophy in the last forty years.

      J Mazor: Natural Resources & Property Rights
      2009 Harvard PhD dissertation
      [trouble with the link: just search and download gets you the dissertation]

      From the abstract:

      I begin by defending the equality of natural resource claims. I argue that people should be seen as having equal claims to the pristine natural resources that remain after all those who contributed to the value of these resources have been appropriately compensated. And since the value of these remaining natural resources is not generated by anyone’s labor, I contend that libertarians ought to endorse equal claims to these resources. I argue that liberal egalitarians have good reasons to endorse equality of natural resource claims as well. . .

      Finally, I consider how the principle of equal division should work in practice. I engage with the problems of heterogeneity, unexpected change, future people and multiple nation-states. I propose a system of leases of varying lengths with the rents to be distributed equally. Furthermore, I draw the following conclusions: 1) Certain decisions regarding non-separable resources such as the air should be made collectively. 2) We have obligations to each other to conserve for future people. 3) Natural resources are uniquely subject to international redistribution because they are both individually and nationally undeserved. 4) Preventing the appropriation of the Arctic seabed by particular nations is feasible step towards achieving a more just global distribution of natural resource property rights.

  4. JEHR

    The process explained by Michael Hudson in this conversation has speeded up quite a bit with the election of Trump–in four years we may not recognize our world–or ourselves.

  5. diptherio

    Weird title. I thought this was going to have something to do with the Democracy Collaborative, a bona fide member of the non-profit industrial complex.



    Just one little gem to give you the flavor. The Democracy Collaborative’s ED was bringing in $300,000+ for his “work” with the Evergreen Cooperatives in Cleveland at the same time the workers were getting their paychecks rejected for lack of funds in co-ops. Typical BS. While the ED was supposed to be helping raise money to support the co-ops, he was in fact using the co-ops to raise money for Democracy Collaborative. To paraphrase Reagan, there are no more frightening words in the English language than, “we’re from a beltway non-profit and we’re here to help.” That’s my take anyway…granted I’m cynical.

    1. Left in Wisconsin

      I believe in the last embedded interview (at the bottom of the piece) Hudson is introduced by Gar Alperovitz, who is the person I always associated with Democracy Collaborative (though perhaps not who you are referring to). I just went to their website and was surprised, or not, to see a staff of 20+. Can only imagine the list of foundation funders.

    2. Left in Wisconsin

      And thanks for the links. Sigh, why I am not shocked? The Foundation Industrial Complex, junior partner of the neoliberal state.

  6. justanotherprogressive

    I really like what Michael Hudson has to say and I’m glad he’s out there. But somehow, something inside of me thinks that maybe he’s missing something essential. I have a general uneasiness when I read any economist, even though I know their motivations are for the most part, good. Even the Austrian and Chicago schools thought they were doing good Economics based on what they knew of the world. I don’t fault any of them for trying, even when they got it so wrong. But to me there seems to be a very basic reason why they got it so wrong……

    I too spend a lot of my time trying to learn about ancient civilizations and how they rose and how they failed. (I only wish I was as smart and educated as Michael Hudson!)

    It seems to me that the only assets a civilization has at the beginning are its land and its people and what they do with those two assets is what makes up its basic economy. When the land is used over and over, it is an asset that makes the country wealthy. They can collect taxes on that asset year after year and that pays for any natural losses to the value of the land. But when some of that land is used for exploitive industries or becomes privatized, shouldn’t that loss of land be considered a loss to that country’s economics? I know the country would get some of that money back in taxes but never as much as that land and what was extracted was originally worth to them.
    The same with people. When people are fully employed, then they are an asset that makes the country wealthy. But when they are not, should that not also be recorded as a loss to that country? I am not sure why these loses aren’t recorded in a country’s GDP.

    In this context a Jubilee year or a debt cancellation makes sense. The leaders are just returning to the country what it lost through exploitation and the failure to properly value its resources. Would it not make sense today if we could properly value our resources and determine what was lost through exploitation?

    I know this is simplistic, but it is meant to be. What is the basic economy definition of a nation and how should it be measured? If we don’t get this very simplistic part right, then whatever castles we build upon our false premises won’t be right either. And that is where I think most economists miss the point. They build their theories based on premises that might be wrong but they aren’t willing to challenge Econ 101 any more than the the great thinkers before the Renaissance were willing to challenge the ancient Greeks and Romans.

    I don’t know, perhaps it is my engineering background that tells me that if you don’t get the basic principles right, then it doesn’t matter how much intelligence or money you throw at a building – it’s still going to fall down……

    1. Left in Wisconsin

      Lots of good points but it’s not from lack of logical thinking that our economic processes and categories are wrong. It is intentional, and the powers behind those processes and categories will fight tooth and nail to preserve their advantage, including by obfuscation.

      When this building falls down, it will fall on many of us but not all of us.

    1. HopeLB

      Yes he is! We need a fan site….and more fans! We need a Big Economic Heterodox Rock Stars Event (Yves and Lambert included) touring the nation like that Trinity Forum they have in Dublin, with maybe some musical guests to draw in the millenials. (Lambert could even do his part remotely by having a speaker read headlines followed by Lambert’s delivery of his assessment, watercooler style.)


      (I see Economic Rockstars has been taken already);


      I emailed Hudson (his email is on his homepage) during the primary asking him to please advise Bernie and he promptly replied that he would if only Bernie would ask. Lovely man.

  7. PH

    Dazzling mind. Breathtaking breadth of knowledge.

    I wonder what it would take to make the insights and the history into the public consciousness?

    Maybe the best approach would be to focus on public banks. Start at a state or two. Create a successful model.

    Then point to the success, and say “why not everywhere?”

    1. jerry

      Agreed, I think affordable public options (specifically in banking, healthcare, and education) are a huge first step. If the private sector and “free-market” is so efficient, then they should have no problem competing side by side with public options. As people see the success of the public models, then they will be more and more respected.

      It isn’t about killing capitalism or innovation, it’s about balance.

  8. jerry

    Agree with McWatt, what a force this guy is. I’d love to see him in a public debate somewhere with a neoliberal or mainstream economist.

    I thought the last 5 minutes or so were very interesting – Hudson was saying how a century ago people were assuming the productivity and technological gains would have by now allowed us to live a life of leisure, working a couple days of work.

    This seems to have been somewhat on track following world war II and into the 60’s/70’s, and then it all went awry. If I’m understanding this correctly, the FIRE sector/1% basically took over the government and economy to extract the surplus and income that could have gone to the economy at large. Wages were held down for the 95% and the prices for everything else went through the roof (most notably real estate/rent, healthcare, education).

    What could have been a shared prosperity for all was perverted and the parasites took all the gains through corruption, monopoly power, manipulation of markets, etc.. If we kept pace with what the average person made compared to real estate costs in the 1950s, our median income would need to be almost double (close to 100k!). With that kind of income one could indeed afford to live a life of relative leisure today if they chose, perhaps working 2-3 days a week.

    More accurately I suppose would be that the costs of these things wouldn’t have risen as much, so our median income would still be 50k, but the housing, insurance, etc. costs would be a fraction of what they are now, leading to the same result.

    I’m still a little unclear as to what specific causes or legislation were put into place to bring about this kind of effect. 2008 was pretty obvious, but I’d be interested in a list or link to these kinds of things that brought this about in the 80’s and 90’s. Massive FIRE sector deregulation on the one hand combined with suppression of labor rights/unions seems to be a big factor.

  9. Susan the other

    This was great. Thank you tons. I noticed that the transcript seemed to have an editor that avoided inflammatory words and left out lots of sentences. So I just listened. One thing, the only thing, that confused me was Hudson’s bit about the Corn Laws in England – On the one hand inflation was being attacked by the Ricardians who wanted trade to achieve better opportunity for industrialists; on the other were the Malthusians, who were protectionist and wanted to be self sufficient but who certainly did not advocate inflation at all. I guess the Ricardians won, the landed gentry sold themselves off to rich Americans, food got cheaper and etc. But this no longer works in the 21st century… because every country can produce cheap goods for itself. Yet the whole nutty imperative for trade – “productivity” – refuses to die. Now it’s as if trade itself is the thing people are protecting… and etc.

  10. PKMKII

    Flip side of the financial parasites claims that their gains are good, natural, and meritorious for them and the host, is inducing the hosts to see any threats to the parasite as a threat to the host as well. In ’08-’09 the finance industry and its lackeys didn’t outright say, bail us out, no strings or new regulations attached, because we want to keep being rich. They said, failing to bail us out, adding new regulations and more regulatory power, that’s going to wreck the economy. Everything will fall apart if we don’t get what we want!

  11. JIm

    Hudson touches on the banning of debt bondage after the 7th century BC but there is no mention in his narrative of the fascinating rise of a multiplicity of decentralized Greek City-States between 800 and 300BC.

    The creation of an extensive social ecology of many independent city states with more citizen-centered governments may have made possible high levels of Greek economic growth during this period and raises the important issue of how high-level cooperation and largely stable political order was maintained for a period of close to 500 years in the absence of central authority.

    Certainly a modern Left, that is not obsessed with the necessity of state-centralized political authority, might acquire some important insights from the first practical theoreticians of a decentralized social order.

  12. Scott

    Decentralization in the South meant Jim Crow & the accelerated imposition of deed holders wage slavery. For those who as I did, travel for work & land in NYC where I developed a second career, even the regulations of cars would have been better more as are aircraft licensed.
    For labor in the South to be abandoned by the Federal Government meant financial bondage & compromise.
    I feel insecure in my home for all rent all the time, & vowed to buy an airport if ever I got the money to buy land. So I was right. Not a sports star, & the movie doesn’t sell, & I loved Strether Lambert’s “Collapsing in Place”, article.
    Any revolt in the US if not the entire Western Civilization seems doomed. Things are so bad there are bitcoins from my point of view. I thought it was a currency for criminals?
    Of course you become a criminal pretty quick & easy in the US. Just try getting old & sick & disabled by pain now.
    I have been rational in just working up my model of another nation.
    When Benito Trump was elected I said, “The good news is no immediate war with Russia. The bad news is the US is taken over by Putin.”
    There was a time when the US & Wall Street could have offered Statehood for Russia as a perfect resolution to the Cold War.
    They would have gotten regulations & traditions of contract law, & the Bi Polar Power Balance would have been recreated as regards to China, geopolitically.
    Instead the advance of kleptocracy & oligarchy moves onwards along with financial terrorism against all labor & the environmental tipping point is to be pushed towards even faster.
    Dystopian novels are not even science fiction anymore.
    P.S. & now in the US we get news of more beatings and death & prison & poisonings of Putin opposition.

  13. TheCatSaid

    Wonderful interview. It was fascinating to hear about Hudson’s family background and its local economic “personality”.

  14. craazyman

    The utility bashing isn’t supported by the evidence. As always, Professor Hudson is erudite, incredibly learned and passionate, but sometimes he foams at the mouth.

    In the case of electric and gas utilities, state regulators oversee and constrain them. Responding to regulatory directives, utilities have been a leading edge and major force for the renewable energy revolution, adoption of wind power, solar power, coal plant shutdowns and CO2 reduction; safety is good, service is generally good and prices are regulated and generally fair.

    If more of capitalism were regulated and overseen as capably as are utilities it would be a much better and fairer economy. Moreover public ownership is no panacea; checks and balances on human lust for power and corruption can fail just as badly there as anywhere.

    1. John Rose

      As a rentier I pay for water at two properties. The cost for five apartments to a utility run by public servants proud of their work and their foresight is hardly more than for two apartments to a for-profit mega-utility.

  15. Evitpadalam

    “If you’re not willing to kill everybody who has a different idea than yourself, you cannot have Frederick Hayek’s free market. You cannot have Alan Greenspan or the Chicago School, you cannot have the economic freedom that is freedom for the rentiers and the FIRE sector to reduce the rest of the economy to serfdom.”

    Now that the world is slowly immunizing itself from the virus, known by its species name Neoliberalism Economicus (in lay terms, it is just called Neoliberalism), “that indiscriminately latches onto the brains of both liberals and conservatives and turns social consciousness into ego-centrism, cooperation into unconscious greed and only gets worse as it mutates and spreads”, mainstream economists are now trying to pin the blame on Keynes. (see here: http://www.washingtonsblog.com/2017/03/trickle-failed-wealth-income-trickled-top-5.html)

    Neoliberalism was Hayek’s baby… and yes, it should be thrown out with the bath water, when it all becomes junk economics. Keynes sought to euthanize the rentier, but it looks as though the rentiers have euthanized the economy. http://www.marketoracle.co.uk/Article38764.html

    One of the biggest rentier monsters created is WIPO (World Intellectual Property Organization) a $16 TRILLION patent industry with apparently no regulatory apparatus in place and because of this, has unleashed some of the most lethal products and services onto society so as to merit a seat in the pantheon of death merchants. We need a new UN charter with teeth to rein in these fools.

  16. Susan the other

    little epiphany here: When Hudson talks about the industrialists-traders v. the domestic agriculture of England c. 1825 he’s talking about the squabble over who gets to exploit labor… because labor is limited. Ricardo won, Malthus lost, England became industrialized, etc. But the exploitation of labor never ended. Now we don’t even argue about it in “post classical economics”; it’s like “what exploitation? There’s no exploitation here.” So then I remembered a tutorial by Stephanie Kelton wherein someone asked her: If we do not keep a lid on inflation and protect the dollar, who will trade with us? And she answered: Everyone will trade with us if we produce something they want to buy. So my point: our domestic industries are not threatened by public spending, they are enhanced and if they are manufacturing something useful there will be trade regardless of how generous the spending of the dollar is on public infrastructure of all kinds. It makes no difference at all (public spending). The big scam is probably Robert Rubin’s bright idea to buy foreign goods, stimulate global capitalism, and run our labor unions out of existence by simply going into debt with Treasuries – we started trading Treasuries for imports. And under that little business plan, yes we did have to insure the dollar was worth it to , say China, otherwise China was giving us products and we were paying them with cotton candy. And etc. So, of course there is no talk of exploitation, because the whole thing still depends on it – until the economy is so bankrupt it’s not an economy any more. and etc.

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