Michael Hudson: The Vocabulary of Economic Deception

Originally published at Michael Hudson’s website

This is Guns and Butter, October 8, 2018.

The aim of classical economics was to tax unearned income, not wages and profits. The tax burden was to fall on the landlord class first and foremost, then on monopolists and bankers. The result was to be a circular flow in which taxes would be paid mainly out of rent and other unearned income. The government would spend this revenue on infrastructure, schools and other productive investment to help make the economy more competitive. Socialism was seen as a program to create a more efficient capitalist economy along these lines.

I’m Bonnie Faulkner. Today on Guns and Butter, Dr. Michael Hudson. Today’s show: The Vocabulary of Economic Deception. Dr. Hudson is a financial economist and historian. He is President of the Institute for the Study of Long-Term Economic Trends, a Wall Street financial analyst and distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972 book Super-Imperialism: The Economic Strategy of American Empire is a critique of how the United States exploited foreign economies through the IMF and World Bank. His latest books are, Killing the Host: How Financial Parasites and Debt Destroy the Global Economy and J Is for Junk Economics – A Guide to Reality in an Age of Deception. Today we discuss J is for Junk Economics, an A to Z guide that describes how the world economy really works, and who the winners and losers really are.†We cover contemporary terms that are misleading or poorly understood, as well as many important concepts that have been abandoned ñ many on purpose – from the long history of political economy.

BONNIE FAULKNER: Dr. Michael Hudson, welcome to Guns and Butter again.

MICHAEL HUDSON: It’s good to be back, Bonnie.

BONNIE FAULKNER: You write that your recent book, J Is for Junk Economics, a dictionary and accompanying essays, was drafted more than a decade ago for a book to have been entitled The Fictitious Economy. You tried several times without success to find a publisher. Why wouldn’t publishers at the time take on your book?

MICHAEL HUDSON: Most publishers like to commission books that are like the last one that sold well. Ten years ago, people wanted to read about how the economy was doing just fine. I was called Dr. Doom, which did very well for me in the 1970s when I was talking about the economy running into debt. But they wanted upbeat books. If I were to talk about how the economy is polarizing and getting poorer, they wanted me to explain how readers could make a million dollars off people getting more strapped as the economy polarizes. I didn’t want to write a book about how to get rich by riding the neoliberal wave dismantling of the economy. I wanted to create an alternative.

If I wanted to ride the wave of getting rich by taking on more debt, I would have stayed on Wall Street. I wanted to explain how the way in which the economy seemed to be getting richer was actually impoverishing it. We are in a new Gilded Age masked by a vocabulary used by the media via television and papers like The New York Times that are euphemizing what was happening.

A euphemism is a rhetorical trick to make a bad phenomenon look good. If a landlord gets rich by gentrifying a neighborhood by exploiting tenants and forcing them out, that’s called wealth creation if property values and rents rise. If you can distract people to celebrate wealth and splendor at the top of the economic pyramid, people will be less focused on how the economy is functioning for the bottom 99%.

BONNIE FAULKNER: Can you describe the format of J Is for Junk Economics – A Guide to Reality in an Age of Deception as an A-to-Z dictionary with additional essays? It seems to me that this format makes a good reference book that can be picked up and read at any point.

MICHAEL HUDSON: That’s what I intended. I wrote it as a companion volume to my outline of economic theory, Killing the Host, which was about how the financial sector has taken over the economy in a parasitic way. I saw the vocabulary problem and also how to solve it: If people have a clear set of economic concepts, basically those of classical economics – value, price and rent – the words almost automatically organize themselves into a worldview. A realistic vocabulary and understanding of what words mean will enable its users to put them together to form an inter-connected system.

I wanted to show how junk economics uses euphemisms and what Orwell called Doublethink to confuse people about how the economy works. I also wanted to show that whats called think tanks are really lobbying institutions to do the same thing that advertisers for toothpaste companies and consumer product companies do: They try to portray their product – in this case, neoliberal economics, dismantling protection of the environment, dismantling consumer protection and stopping of prosecution of financial fraud – as ‘wealth creation’ instead of impoverishment and austerity for the economy at large. So basically, my book reviews the economic vocabulary and language people use to perceive reality.

When I was in college sixty years ago, they were still teaching the linguistic ideas of Benjamin Lee Whorf. His idea was that language affects how people perceive reality. Different cultures and linguistic groups have different modes of expression. I found that if I was going to a concert and speaking German, I would be saying something substantially different than if I were speaking English.

Viewing the economic vocabulary as propaganda, I saw that we can understand how the words you hear as largely propaganda words. They’ve changed the meaning to the opposite of what the classical economists meant. But if you untangle the reversal of meaning and juxtapose a more functional vocabulary you can better understand whatís actually happening.

BONNIE FAULKNER: You write that ‘the terms rentier and usury that played so central a role in past centuries now sound anachronistic and have been replaced with more positive Orwellian doublethink’, which is what you’ve begun to explain. In fact, your book J is for Junk – A Guide to Reality in an Age of Deception is all about the depredation of vocabulary to hide reality, particularly the state of the economy. Just as history is written by the victors, you point out that economic vocabulary is defined by today ís victors, the rentier financial class. How is this deception accomplished?

MICHAEL HUDSON: It’s been accomplished in a number of ways. The first and most brutal way was simply to stop teaching the history of economic thought. When I went to school 60 years ago, every graduate economics student had to study the history of economic thought. You’d get Adam Smith, Ricardo and John Stuart Mill, Marx and Veblen. Their analysis had a common denominator: a focus on unearned income, which they called rent. Classical economics distinguished between productive and unproductive activity, and hence between wealth and overhead. The traditional landlord class inherited its wealth from ancestors who conquered the land by military force. These hereditary landlords extract rent, but don’t do anything to create a product. They don’t produce output. The same is true of other recipients of rent. Accordingly, the word used through the 19th century was rentier. It’s a French word. In French, a rente was income from a government bond. A rentier was a coupon clipper, and the rent was interest. Today in German, a Rentner is a retiree receiving pension income. The common denominator is a regular payment stipulated in advance, as distinct from industrial profit.

The classical economists had in common a description of rent and interest as something that a truly free market would get rid of. From Adam Smith and John Stuart Mill down to Marx and the socialists, a free market was one that was free of a parasitic overclass that got income without doing work. They got money by purely exploitative means, by charging rent that doesn’t really have to be paid; by charging interest; by charging monopoly rent for basic infrastructure services and public utilities that a well-organized government should provide freely to people instead of letting monopolists put up toll booths on roads and for technology and patent rights simply to extract wealth. The focus of economics until World War I was the contrast between production and extraction.

An economic fight ensued and the parasites won. The first thing rentiers – the financial class and monopolists, a.k.a. the 1% – did was to say, ‘We’ve got to stop teaching the history of economic thought so that people don’t even have a memory that there is any such a thing as economic rent as unearned income or the various policies proposed to minimize it. We have to take the slogan of the socialist reformers – a free market – and redefine it as a free market is one free from government – that is, from ‘socialism’ – not free from landlords, bankers and monopolists.’ They turned the vocabulary upside down to mean the opposite. But in order to promote this deceptive vocabulary they had to erase all memory of the fact that these words originally meant the opposite.

BONNIE FAULKNER: How has economic history been rewritten by redefining the meaning of words? What is an example of this? For instance, what does the word ‘reform’ mean now as opposed to what reform used to mean?

MICHAEL HUDSON: Reform used to mean something social democratic. It meant getting rid of special privileges, getting rid of monopolies and protecting labor and consumers. It meant controlling the prices that monopolies could charge, and regulating the economy to prevent fraud or exploitation – and most of all, to prevent unearned income or tax it away.

In today’s neoliberal vocabulary, ‘reform’ means getting rid of socialism. Reform means stripping away protection or labor and even of industry. It means deregulating the economy, getting rid of any kind of price controls, consumer protection or environmental protection. It means creating a lawless economy where the 1% are in control, without public checks and balances. So reform today means getting rid of all of the reforms that were promoted in the 19th and early-20th century. The Nobel Economics Prize reflects this neoliberal (that is, faux-liberal) travesty of ìfree markets.î

BONNIE FAULKNER: What were the real reforms of the progressive era?

MICHAEL HUDSON: To begin with, you had unions to protect labor. You had limitations on the workweek and the workday, how much work people had to do to earn a living wage. There were safety protections. There was protection of the quality of food, and of consumer safety to prevent dangerous products. There was anti-trust regulation to prevent price gouging by monopolies. The New Deal took basic monopolies of public service such as roads and communications systems out of the hands of monopolists and make them public. Instead of using a road or the phone system to exploit users by charging whatever the market would bear, basic needs were provided at the lowest possible costs, or even freely in the case of schools, so that the economy would have a low cost of living and hence a low business overhead.

The guiding idea of reform was to get rid of socially unnecessary income. If landlords were going to charge rent for properties that they did nothing to improve, but merely raise the rents whenever cities built more transportation or more parks or better schools, this rent would be taxed away.

The income tax was a basic reform back in 1913. Only 1% of Americaís population had to pay the tax. Most were tax-free, because the aim was to tax the rentiers who lived off their bond or stock holdings, real estate or monopolies. The solution was simply to tax the wealthiest 1% or 2% instead of labor or industry, that is, the companies that actually produced something. This tax philosophy helped make America the most productive, lowest-cost and competitive yet also the most equal economy in the world at that time.

This focus on real industry has gradually been undermined. Today, if you’re a real estate speculator, monopolist, bankster or financial fraudster, your idea of reform is to get rid of laws that protect consumers, tenants, homebuyers and the public at large. You campaign for ‘consumer choice’, as if protection is ‘interference’ with the choice to be poisoned, cheated or otherwise exploited. You deregulate laws designed to protect the atmosphere, free air and water. If youíre a coal or oil company, your idea of reform is to get rid of the Clean Air Act, as the Trump administration has been doing.

The counterpart to junk science is junk economics. It is a lobbying effort to defend the idea of a world without any laws or regulations against the wealthy, only against the debtors and the poor, only against consumers for the ìtheftî of downloading music or stealing somebody’s patented songs or drug monopoly privilege. This turns inside out the classical philosophy of fairness.

BONNIE FAULKNER: According to 19th-century classical economists, what is fictitious capital, and why is this distinction no longer being made by economists?

MICHAEL HUDSON: That’s a wonderful question. Today the term ‘fictitious capital’ is usually associated with Marx, but it was used by many people in the 19th century, even by right-wing libertarians such as Henry George.

Fictitious capital referred to purely extractive claims for income, as distinct from profits and wages earned from tangible means of production. Real capital referred to factories, machinery and tools, things that were used to produce output, as well as education, research and public infrastructure. But an ownership privilege like a title to land and other real estate, a patent or the monopoly privilege to charge whatever the market will bear for a restricted patent, without reference to actual production costs, does not add anything to production. It is purely extractive, yielding economic rent, not profits on real capital investment.

BONNIE FAULKNER: You say that by the late-19th century, ‘reform movements were gaining the upper hand, that nearly everyone saw industrial capitalism evolving into what was widely called socialism.’ How would you describe the socialism that classical economists like Mill or Marx envisioned?

MICHAEL HUDSON: They all called themselves socialists. There were many kinds of socialism in the late 19th century. Christians promoted Christian socialism, and anarchists promoted an individualistic socialism. Mill was called a Ricardian socialist. The common denominator among socialists was their recognition that the industrial capitalism of their day was a transitory stage burdened by the remnants of feudalism, headed by the landlord class whose hereditary rule was a legacy of the medieval military invasions of England, France, Germany and the rest of Europe. This was the class that controlled the upper house of government, e.g., Britain’s Lordships. For socialists, the guiding idea was to run factories and operate land and provide public services for the economy at large to grow instead of imposing austerity and letting the rentier classes exploit the rest of the economy and concentrate income, political control and tax policy in their own hands.

Until World War I, socialism was popular because most people saw industrial capitalism as evolving. Politics was in motion. The term ‘capitalism’, by the way, was coined by Werner Sombart, not Marx. But classical political economy culminated in Marx. He looked at society’s broad laws of motion to see where they were leading.

The socialist idea was not only that of Marx but also of American business school professors like Simon Patten of the Wharton School. He said that the kind of economy that would dominate the world’s future was one that was the most efficient in preventing monopoly and preventing or taxing away absentee land rent so that almost all income would be paid as wages and profits, not rent or interest or monopoly rents.

The business classes in the United States, Germany and even in England were in favor of reform – that is, anti-rentier reform. They recognized that only a strong government would have the political power to tax away or regulate parasitic economic rent by the wealthiest classes at that time, in the late 19th and early 20th century. This economic and political cleanup of the rentiers stemmed very largely from the ideological battle that occurred in England after the Napoleonic Wars were over in 1815. Ricardo, representing the banking class, argued against Reverend Malthus, the population theorist who also was a spokesman for the landlord class. Malthus urged agricultural protectionism for landlords, so that they would get more and more rent from their land as grain prices were kept high. Ricardo argued that high food prices to support rents for the agricultural landlords would mean high labor costs for industrial employers. And if you have high labor costs then England cannot be the industrial workshop of the world. In order for England to become the industrial supreme power, it needed to overcome the power of its landlord class. Instead of protecting it, England decided to protect its industrial capital by repealing its protectionist Corn Laws in 1846. (I describe its strategy in my history of theories of Trade, Development and Foreign Debt.)

At that time England’s banking class was still a carryover from Europe’s Medieval period. Christianity had banned the charging of interest, so banks were able to make their money by combining their loans with a foreign exchange charge, called agio. Banks even Ricardo’s day in the early 19th century made most of their money by financing foreign trade and charging foreign exchange fees. If your listeners they have ever tried to change money at the airport, they will know what a big rake-off the change booths take.

Later in the 19th century, bankers began to shift their lending away from international trade financing to real estate as home ownership became democratized. Home owners became their own landlords – but on mortgage credit.

Today we’re no longer in the situation that existed in England 200 years ago. Almost two-thirds of the American families own their homes. In Scandinavia and much of Europe, 80% are homeowners. They don’t pay rent to landlords. Instead, they pay their income as interest to the mortgage lenders. That’s because hardly anyone has enough money to buy a few-hundred-thousand-dollar home with the cash in their pocket. They have to borrow the money. The income that used to be paid as rent to a landlord is now paid as interest to the mortgage banker. So you have a similar kind of exploitation today that you had two centuries ago, with the major difference that the banking and financial class has replaced the landlord class.

Already by the late-19th century, socialists were advocating that money and credit don’t have to take the form of gold and silver. Governments can create their own money. That’s what the United States did in the Civil War with its greenbacks. It simply printed the money – and gave it value by making it acceptable for payment of taxes. In addition to the doctrine that land and basic infrastructure should be owned by the public sector – that is, by governments – banking was seen as a public utility. Credit was to be created for productive purposes, not for rent-extracting activities or financial speculation. Land would be fully taxed so that instead of labor or even most industry paying an income tax, rentiers would pay tax on wealth that took the form of rent-extracting privileges.

The aim of classical economics was to tax unearned income, not wages and profits. The tax burden was to fall on the landlord class first and foremost, then on monopolists and bankers. The result was to be a circular flow in which taxes would be paid mainly out of rent and other unearned income, and the government would spend this revenue on infrastructure, schools and other productive investment to help make the economy more competitive. Socialism was seen as a program to create a more efficient capitalist economy along these lines, until the word was hijacked by the Russian Revolution after World War I. The Soviet Union became a travesty of Marxism and the word socialism.

BONNIE FAULKNER: You write that: ‘Today’s anti-classical vocabulary redefines free markets as ones that are free for rent extractors and that rent and interest reflect their recipientsí contribution to wealth, not their privileges to extract economic rent from the economy.’ How do you differentiate between productive and extractive sectors, and how is it that the extractive sectors, essentially Finance, Insurance and Real Estate (FIRE), actually burden the economy?

MICHAEL HUDSON: If youíre a real estate owner, you want lower property taxes so that as the economy grows and people are able to pay more rent, or when a land site in a neighborhood becomes more valuable because the government builds a new subway – like New York Cityís Second Avenue line – real estate prices rise to reflect the property’s higher income that is not taxed.

New York landlords all along the subway line raised rents. That meant that their real estate had a ‘capital’ gain reflecting the higher rent roll. Individual owners fortunate enough to own a condo or a townhouse near the stations became more wealthy – while new renters or buyers had to pay much more than before. None of this price rise created more living space or other output (although todayís post-classical GDP figures pretend that it did!). It simply meant that instead of recapturing the $10 billion the government spent on this subway extension by taxing the increased land valuations all along the subway route, New York’s income and real estate taxes have been raised for everybody, to pay interest on the bonds issued to finance the subway’s construction. So the city’s cost of living and doing business rises – while the Upper East Side landlords have received a free lunch.

Creating that kind of real estate ‘fictitious wealth’ is a capitalization of unearned income – unearned because the Upper East Side landlords didn’t do anything themselves to increase the value of their property. The City raised rental values by making the sites more desirable when it built the subway extension.

The same logic applies to insurance. When President Obama passed the basically Republican Obamacare law advocated by the pharmaceutical and health management sectors, the cost of medical care went way up in the United States. It was organized so as to be a giveaway to the healthcare and pharmaceutical monopolies.

None of this increased payment for medical care increases its quality. In fact, the more that’s paid for medical care, the more the service declines, because it is paid to health insurance companies that try to legally fight against consumers. The effect is predatory, not productive.

Finally, you have the financial part of the FIRE sector. Finance has accounted for almost all of the growth in U.S. GDP in the ten years since the Lehman Brothers crisis and the Obama bailout in 2008. The biggest banks at that time were insolvent as a result of bad loans and outright financial fraud. But the government created $4.3 trillion of reserves to bail out Citigroup, Wells Fargo and Bank of America, with Goldman Sachs thrown in, despite the fact that their fraudulent junk mortgage loans were predatory, not productive credit that actually increased wealth in the form of productive power. There’s a growing understanding that the financial sector has become so dysfunctional that it is a deadweight on the economy, burdening it with increasing debt charges – student loans are an example – instead of actually helping the economy grow.

BONNIE FAULKNER: So just to reiterate, what is the classical distinction between earned and unearned income?

MICHAEL HUDSON: This distinction is based on classical value and price theory. Price is what people have to pay. The margin of price over and above real cost value is called economic rent. A product’s value is its actual, necessary costs of production: the cost of labor, raw materials and machinery, and other elements of what it costs to tangibly produce it. Rent and financial charges are the product of special privileges that have been privatized and now financialized.

Classical value theory isolated this economic rent as unearned income. It was the aim of society either to prevent it from occurring in the first place, by anti-monopoly regulation or by public land ownership, or to tax it away in cases where you can’t help it going up. For instance, it’s natural for neighborhoods to become more valuable and high-priced over time as the economy gets richer. But it doesnít cost more to construct buildings there, and rents keep going up and up and up on buildings that were put up 100 years ago. This increased rent does not reflect any new cost of production. It’s a free lunch.

Neoliberals, most notoriously the University of Chicago’s Milton Friedman, kept insisting that ‘There’s no such thing as a free lunch.’ But that’s exactly what most of the wealth and income of the richest 1% is. It’s the result of running the economy primarily to siphon off a rentier free lunch. Of course, its recipients try to distract public attention from this face and tell national income and Gross Domestic Product statisticians to pretend that they actually earn their income wealth, not merely transfer income from the rest of the economy into their hands as creditors, monopolists and landlords. The leading Wall Street firm Goldman Sachs said so notoriously a few years ago that ‘Our partners are the most productive in the country because look at how much we’re paid.’ But they don’t really earn their wealth in the classical sense of earning by performing a productive economic service. The economy would get along much better without Goldman Sachs and indeed the banking and financial system or the health insurance system being run the way they are, and without real estate being untaxed in the way that it is.

BONNIE FAULKNER: I noticed that you used the term ‘rent’ for unearned income. Is rent the same as profit, or not?

MICHAEL HUDSON: It’s not at all the same. Profit is earned by investing in a means of production to make useful goods and services. Classical economists viewed profit as an element of cost if youíre going to have a privately owned economy – and most socialists have accepted private ownership, although in a system regulated so as to benefit society as a whole. If you make a profit by a productive act acting within this system, you’ve earned it by being productive.

Economic rent is different. It is not earned by actively building means of production, conducting research or development. It’s passive income. When pharmaceutical companies earn rent, it’s simply for charging much more for the drugs they sell than it actually costs to produce them. This is especially the case when the government has borne the research and development cost of the drugs and simply assigns the rent-yielding patent privilege to the pharmaceutical companies. So rent is something over and above the profit necessary to induce the activity that these companies actually perform. Profits are why investors produce more. Rent is not necessary. If you got rid of it, you wouldnít discourage production, because itís purely an overhead charge, whereas profits are a production charge in a capitalist economy.

BONNIE FAULKNER: Well, thank you for that distinction between rent and profit. That’s a very important thing to understand.

MICHAEL HUDSON: I describe it more clearly in my book, which includes the appropriate classical quotations.

BONNIE FAULKNER: You point out that interest and rent are reported as earnings, as if bankers and landlords produce gross domestic product (GDP) in the form of credit and ownership services. How do you think interest and rent should be reported?

MICHAEL HUDSON: They should be classified interest and rent. But the rentier classes have taken over the National Income and Product Accounts (NIPA) to depict their takings as actual production of a service, not as overhead or a transfer payment, that is, not as parasitic extraction of other peoples’ earnings.

For instance, suppose you have a credit card and you miss a payment, or miss a payment on a student loan, electric bill or your rent. The credit card company will use this as an excuse to raise your interest charge from 11% to 29%. The national income account treat this rise to 29% as providing a ‘financial service’. The so-called service is simply charging a penalty rate. The pretense is that everything that a bank charges – higher interest or penalties – is by definition providing a service, not simply extracting money from cardholders, transferring income from them to itself.

Classical economists would have subtracted this financial rake-off from output, counting it as overhead. After all, it simply adds to the cost of living and doing business. Instead, the most recent statisticians have added this financial income to the Gross National Product instead of subtracting it, as the classical economists would have done ñ or simply not counted it, as was the case a generation ago.

Most reporters and the financial press donít get into the nitty-gritty of these national accounts, so they donít realize how lobbyists have intervened in recent years to turn them into propaganda flattering bankers and property owners. Today’s ‘reformed’ GDP format pretends that the economy has been going up since 2008. A more realistic description would show that it is shrinking for 95 percent of the population, being eaten away by the wealthiest 5% extracting more rentier income and imposing austerity.

If you look at the national balance sheet of assets and liabilities, the economy is becoming more debt-ridden. As student debt and mortgage debt go up, and penalty fees, arrears and defaults are rising. The long rise in home ownership rates is being reversed, and rents are rising, while people also have to pay more for medical care and other basic needs. Academic economists depict this as ‘consumer choice’ or ‘demand’, as if it is all a voluntary choice of the ‘market’. The GDP accounting format has been modified to make it appear that the economy is getting richer. This statistical sleight-of-hand is achieved by counting the takings of the rentier 1% as a product, not a cost borne by the economy at large. What really should be shown is a loss – land and monopoly rent, interest and penalties is in fact so large a ‘product’ that the economy seems to be growing. But most of that growth is unreal.

BONNIE FAULKNER: How does government fiscal policy, taxation and expenditure influence the economy?

MICHAEL HUDSON: That’s what Modern Monetary Theory (MMT) is all about. When governments run a budget deficit, they pump money into the economy. For Keynesians the money goes into the real economy in ways that employ labor. For neoliberals, quantitative easing is spent directly into the financial sector, and is used to finance the purchase of real estate, stocks and bonds, supporting the valuation of wealth owned mainly by the One Percent. The effect is to make housing more expensive, and also the price of buying a retirement income. Having to take on larger mortgage debt to buy a house and spend less each month in order to save for one’s pension is not really ‘wealth creation’, unless your perspective is that of the One Percent increasing its power over the 99%.

At least the United States is able to run deficits and avoid the kind of unemployment and austerity that Europe is imposing on itself and especially on Greece and Italy. I think in one of our talks on this show explained the problem that Europe is suffering. Under the constitution of the Eurozone, its member countries are not allowed to run a budget deficit of more than 3%. Most actually aim at extracting a surplus from the economy (as distinct from producing a surplus for the economy). That means that the government doesn’t spend money into the economy. People and businesses are obliged to get their money from the banks. That requires them to pay more interest. All Europe is on the road to looking like Greece – debt-strapped economies that are kept artificially alive by the government creating reserves to give to the banks and bail out bond markets, not spending into economies to help them recover.

The ability to create debt by writing a bank loan that creates a deposit is a legal privilege. There’s no reason why governments cannot do this themselves. Instead of borrowing from private creditors to finance their budget deficits, governments can create their own money – without burdening budgets with interest charges. Credit creation has little cost of production, and therefore does not require interest charges to cover this cost. The interest is a form of monopoly rent to privatized privilege.

Classical economists saw the proper role of government as being to create social infrastructure and upgrade living standards and productivity for their labor force. Governments should build roads to minimize the cost of transportation, not private companies creating toll roads to maximize the cost by building in financial charges, real estate and management charges to what users have to pay. Government should be in charge of providing public health insurance, not private companies that charge extortionate prices and whatever the market will bear for their drugs. It’s the government that should run prisons, not private companies that use prisoners as cheap labor to make a profit and advocate that more people get arrested so to make more of a profit from their incarceration.

The great question is, what is the government going to spend money on, and how can it spend money into the economy in a way that helps growth? Imagine if this trillion dollars a year that’s spent on arms and military – in California and the districts of the key congressmen on the budget committee – were spent on building roads, schools, transportation and subsidizing medical care. The country could become a utopia. Instead, the rentier classes have hijacked the government, taking over its money creation and taxing power to spend on themselves, not to help the economy at large produce more or raise living standards. Special interests have captured the regulatory agencies to make them serve rent extractors, not protect the economy from them.

BONNIE FAULKNER: Interest is tax-deductible, whereas profit is taxable. Does the tax deductibility of interest have a major impact on the economy?

MICHAEL HUDSON: Yes, because tax deductibility encourages companies to raise money by going into debt. This tax deductibility of interest catalyzed the corporate raiding movement of the 1980s. It was based on debt leveraging.

Suppose a company makes $100 million a year in profit and pays this out to its stockholders as dividends. In the 1980s this profit was taxed at about 50%, so you could only pay $50 million to the stockholders. Then as today, they were the wealthiest layer of the population. Drexel Burnham and other Wall Street firms sought out corporate raiders as clients and offered to lend them enough money to buy companies out, by buying out their stockholders. Stocks were replaced by bonds. That enabled companies to pay out twice as much income as interest than they had been paying as dividends. When they bought out target companies with debt, a company could pay all $100 million of its income as interest instead of only $50 million as dividends on stock.

So the wealthiest classes in the United States and other countries decided that they could get more from own bonds than stocks anymore. Government revenue declined by the added amount paid to financial investors as a result of this tax subsidy for debt.

The advantage of issuing stocks is that when business conditions turn down and profits fall, companies can cut back their dividend. But if they have committed to pay this $100 million to bondholders, when their earnings go down they may face insolvency.

The result was a wave of bankruptcy since the 1980s as companies became more debt-pyramided. Also company heads went to the labor unions and threatened to declare bankruptcy and wipe out their pension funds, if their leaders did not agree to change these funds and replace the guaranteed retirement pension that were promised for a defined contribution plan. All they know is what they have to pay in every month. Retirees will only get whatever is left when they reach pension age. The equity economy shift into a debt economy has enriched the wealthy financial class at the top, while hurting employees.

Most statistical trends turned around in 1980 for almost every country as this shift occurred. Indebting companies has made them more fragile and also higher-cost, because now they have to factor in the price of interest payments to the bondholders and corporate raiders who’ve taken them over.

BONNIE FAULKNER: Do you think that changes should be made to the tax deductibility of interest?

MICHAEL HUDSON: Sure. If interest were to be taxed, that would leave less incentive for companies to keep on adding debt. It would deter corporate raiding. It is a precondition for companies being run to minimize their cost of production and to serve their labor force and their customers more. For homebuyers, removing the tax-deductibility of interest would leave less ‘free’ rent to be pledged to banks for mortgages, and hence would reduce the size of bank loans that bid up housing prices.

I think that interest and rents should be taxed, not wages and legitimate profits. The FICA wage withholding now absorbs almost 16% of most wage-earning income for Social Security and Medicare. But wealthy people don’t have to pay any contribution on what they make over than about $ $116,000 a year. They donít have to pay any FICA contribution on their capital gains, which is how most fortunes are made. The rentiers’ idea of a free market is to make labor pay for all of the Social Security and Medicare – and then to give so much to Wall Street that they can say, ‘Oh, there’s no more money’. The system’s short, so we have to wipe out Social Security, just as so many companies have wiped out the pension commitments. As George W. Bush said, there’s not really any money in the Social Security accounts. Its tax on the lower income brackets that was used to cut taxes on the higher income and wealth brackets. The economy has been turned into a grab bag for the rich.

BONNIE FAULKNER: What about monetary policy, interest rates and the money supply? Who controls monetary policy, and how does it affect the economy?

MICHAEL HUDSON: The biggest banks put their lobbyists in charge of the Federal Reserve, which was created in 1913 to take monetary policy out of the hands of the Treasury in Washington and put it in the hands of Wall Street. That made the Fed a lobbyist for its members, the commercial banking system. It’s run to control the money supply – in practice, the debt supply – in a way that steers money into the banks. That’s why not a single banker was jailed for committing the junk mortgage scams and other frauds that caused the crash. The Fed has turned the banking system into a predatory monopoly instead of the public service that it was once supposed to be.

Monetary policy is really debt policy, because money is debt on the liabilities side of the balance sheet. The question is, what kind of debt is the economy going to have, and what happens when it exceeds the ability to be paid? How is the government going to provide the economy with money, and what will it do to keep debts line with the ability to be paid? Will money and credit be provided to build more factories and product more output, to rebuild American manufacturing and infrastructure? Or, are you going to leave credit and debt creation to the banks, to make larger loans for people to buy homes at rising prices reflecting the increasingly highly leveraged and outright reckless credit creation?

Monetary policy is debt policy, and on balance most debts are owed by the bottom 90% to the wealthiest 10%. So monetary policy becomes an exercise in how the 10% can extract more and more interest, rent and capital gains from the economy – all the while making money by impoverishing the economy, not helping most people prosper.

BONNIE FAULKNER: The economy is always being planned by someone or some force, be it Wall Street, the government or whatever. It’s not the result of natural law, as you point out in your book. It seems like a lot of people think that the economy should somehow run itself without interference. Could you explain how this is an absurd idea?

MICHAEL HUDSON: It’s an example of rhetoric overcoming people’s common sense. Every economy since the Stone Age has been planned. Even in the stone age people had to plan when to plant the crops, when to harvest them, how much seed you had to keep over for the next year. You had to operate on credit during the crop year to get beer and rent, to draft animals. Somebody ís in charge of every economy.

So when people talk about an unplanned economy, they mean no government planning. They mean that planning should be taken out of the hands of government and put in the hands of the 1%. That is what they mean by a ‘free market’. They pretend that if the 1% control the economy it’s not really a planned economy anymore, because it’s not planned by government, officials serving the public interest. It’s planned by Wall Street. So the question is, really, who’s going to plan the American economy? Is it going to be the government of elected officials, or is it going to be Wall Street? Wall Street will euphemize its central planning by saying this is a free market – meaning it ís free of government regulation, especially over the financial sector and the mining companies and other monopolies that are its major clients.

BONNIE FAULKNER: You emphasize the difference between the study of 19th-century classical political economy and modern-day economics. How and when and why did political economy become ìeconomicsî?

MICHAEL HUDSON: If you look at the books that almost everybody wrote in the 19th century, they called it political economy because economics is political. And conversely, economics is what politics has always been about. Who’s getting what? Or as Lenin said, who-whom? It’s about how society makes decisions about whoís going to get rich and how they are going to do it. Are they going to get wealthy by acting productively, or parasitically? Eeverything economic turns out to be political.

The economy’s new central planners on Wall Street pretend that what they’re doing is not political. Cutting taxes on themselves is depicted as a law of nature. But they deny that this is politics, as if there’s nothing anyone can do about it. Margaret Thatcherís refrain was ‘There is no alternative’ (TINA). That is the numbing political sedative injected into today’s economic discussion.

The aim is to make people think that there is no alternative because if they’re getting poorer, if they’re losing their home by defaulting on a junk mortgage of if they have to pay so much on the student loan so that they can’t afford to buy a home, or if they find that the only kind of job they can get driving an Uber car, it’s all their fault. It’s as if that’s just nature, not the way the economy has been malstructured.

The role of neoliberalism is to make people think that they are powerless in the face of ìthe market, as if markets are not socially and politically structured. The 1% have hired lobbyists and subsidized business schools so as to shape markets in their own interest. Their aim is to control the economy and call it ‘nature’. Their patter talk is that poverty is natural for short-sighted ‘deplorables’, not the result of the predatory neoliberal takeover since 1980 and their capture of the Justice Department so that none of the bank fraudsters go to jail.

BONNIE FAULKNER: In your chapter on the letter M – of course, we have chapters from A to Z – in your chapter on M, you have an entry for Hyman Minsky, an economist who pioneered Modern Monetary Theory and explained the three stages of the financial cycle in terms of rising debt leveraging. What is debt leveraging, and how does it lead to a crisis?

MICHAEL HUDSON: Debt leveraging means buying an asset on credit. Lending for home ownership in the United States is the leading example. From the 1940s to the 1960s, if you took out a mortgage, the banker would look at your income and calculate that the mortgage on the house you buy shouldn’t absorb more than 25% of your income. The idea was that this would leave enough income to pay the interest charge and amortize – that is, pay off – the mortgage 30 years later, near the end of your working life. Minsky called this first credit stage the hedge stage, meaning that banks had hedged their bets within limits that enabled the economy to carry and pay off its debts.

In the second credit stage, banks lent more and loosened their lending standards so that mortgages would absorb much more than 25% of the borrower’s income. At a certain point, people could not afford to amortize, that is to pay off the mortgage. All they could do was to pay the interest charge. By the 1980s, the federal government was lending up to almost 40% of the borrower’s income, writing mortgages without any amortization taking place. The mortgage payment simply carried the existing homeownerís debt. Banks in fact didn’t want to ever be repaid. They wanted to go on collecting interest on as much debt as possible.

Finally, Minsky said, the Ponzi stage occurred when the homeowner didn’t even have enough money to pay the interest charge, but had to borrow the interest. So this was how Third World countries had gotten through the 1970s and the early 1980s. The government of, let’s say Mexico or Brazil or Argentina, would say, well, we don’t have the dollars to pay the debt, and the banks would say, we’ll just add the interest onto the debt. Same thing with a credit card or a mortgage. The mortgage homeowner would say, I donít have enough money to pay the mortgage, and the bank would say, well, just take out a larger mortgage; we’ll just lend you the money to pay the interest.

That’s the Ponzi stage and it was named after Carlo Ponzi and his Ponzi scheme – paying early buyers out of income paid into the scheme by new entrants. That’s the stage that the economy entered around 2007-08. It became a search for the proverbial ‘greater fool’ willing to borrow to buy overpriced real estate. That caused the crash, and we’re still in the post-crash austerity interim (before yet a deeper debt writeoff or new bailout). The debts have been left in place, not written down. If you have a credit card and have to pay a monthly balance but lack enough to pay down your debt, your balance will keep going up every month, adding the interest charge onto the debt balance.

Any volume of debt tends to grow at compound interest. The result is an exponential growth that doubles the debt in little time. Any rate of interest is a doubling time. If debt keeps doubling and redoubling, it’s carrying charges are going to crowd out the other expenses in your budget. You’ll have to pay more money to the banks for student loans, credit card debts, auto loans and mortgage debt, leaving less to spend on goods and services. That’s why the economy is shrinking right now. That’s why people today aren’t able to do what their parents were able to do 50 years ago – buy a home they can live in by paying a quarter of their income.

BONNIE FAULKNER: Dr. Michael Hudson, thank you so very much.

MICHAEL HUDSON: Well, itís good to be here as always, Bonnie.

I’ve been speaking with Dr. Michael Hudson. Today’s show has been: The Vocabulary of Economic Deception. Dr. Hudson is a financial economist and historian. He is President of the Institute for the Study of Long-Term Economic Trends, a Wall Street financial analyst and Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972 book Super-Imperialism: The Economic Strategy of American Empire is a critique of how the United States exploited foreign economies through the IMF and World Bank. He is also author of Trade, Development and Foreign Debt, among many others. His latest books are Killing the Host: How Financial Parasites and Debt Destroy the Global Economy and J Is for Junk Economics: A Guide to Reality in an Age of Deception. Dr. Hudson acts as an economic advisor to governments worldwide on finance and tax law. Visit his website at michael-hudson.com. That’s michael-hudson.com.

Guns and Butter is produced by Bonnie Faulkner, Yarrow Mahko and Tony Rango. Visit us at gunsandbutter.org to listen to past programs, comment on shows, or join our email list to receive our newsletter that includes recent shows and updates. Follow us on Twitter @gandbradio.

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67 comments

  1. Steve H.

    > Monetary policy is really debt policy, because money is debt on the liabilities side of the balance sheet.

    Back on the fifth, I asked “in trying to reconcile energetic economics (including Soddy, Odum, now some Keen) with ‘what is money,’ could it be as simple as, money has a debit column of its own?”

    It looks like Hudson is saying the answer is Yes. Could it be that simple?

    Reply
  2. Bj

    I would like to get other’s opinions on Michael Hudson going on podcasts like this one. If you look at other episodes, Guns and Butter is filled with quackery. There is climate change denial and electric universe theory just to name a few. Having looked over the other stuff, it makes me feel like deep down maybe I should question my positive feelings towards Hudson. I recognize this might be a logical falicy, but I don’t know how to place him amoung the rest of the corrupt information.

    Reply
    1. eg

      Hudson can only go where he’s welcome. Given the heterodoxy of his ideas, unfortunately that means the margins — for now.

      Be grateful that Yves has the perspicacity to bring his work here.

      Reply
    2. NotTimothyGeithner

      Doesn’t the NYT have Brett Stephens on the payroll? His views on climate change are unusual or GOP orthodoxy.

      Reply
      1. Craig H.

        Guilt by association is pointless.

        This story is also on the top of Unz’s website.

        If you want to make a list of guilty associates you are going to be busy for a very long time. Did you know that Thomas Jefferson owned slaves?

        Reply
    3. JEHR

      Bj:

      Michael Hudson has been telling us about the history of finance for some time and I don’t think his name should be in the same paragraph with the word “quackery.”

      Your example just means that each of us has to be diligent in what we accept as truth. It is difficult to know for sure what it true and it takes a lot of reading and exploring to make sure that what we are learning is legitimate.

      Reply
    4. paul

      I first heard michael hudson on guns and butter maybe 15 years ago when noone else was giving him a hearing.
      Bonnie faulkner has always come across as a thoroughly good egg.
      I happen to like listening to some crazy stuff, usually makes more sense than the mainstream.
      Luckily I have this thing at the top of my neck to judge whats worth paying attention to.

      Reply
  3. michael hudson

    Absolutely right that my views are not mainstream. This was an annual fundraising show for WBAI in New York City. Bonnie Faulkner came to Rimini to record the MMT presentations with Stephanie Kelton, Bill Black and Marshall Auerback along with me. I guess you could say that we’re all not exactly MSNBC material. It sounds like you should stick with the New York Times and be very wary of this site too. Guilt by association is the best way to remain intellectually mainstream.

    Reply
    1. Off The Street

      It would be great to have your interview presented to high school students as part of their life skills preparation. Did you happen to interact with John Gatto, as you would seem to have had much to discuss?

      Reply
    2. Cal2

      Screw The Pacifica Foundation and their radio stations.
      Guns and Butter is now hosted on unz.com which has turned into a very interesting and eclectic site, the second one we read after N.C.

      When KPFA cancelled Guns and Butter, that was the last straw.
      Not one more cent will donated to them after the thousand$ we have sent them over the last few decades. Their other delictos were insulting our ancestors because of their race, blaming practically everything on us for the same reason, and installing newsreaders who can barely speak English, to box our ears and their attempt to defeat Western Patriarchy.

      They claim to “speak for women, immigrants, students, and disenfranchised communities. ”
      Fine, that’s their new donor base then.

      Reply
    3. Bj

      Dr. Hudson, I have enjoyed your stuff on the Left Out podcast and some of your older stuff I believe you did with This is Hell. I listened to about ten Guns and Butter podcasts and would say out of the ten only 2 were believeable and those two were of you. I have curated what I consider trusted sources like Naked Capitalism, This is Hell, and Economic Update. I thought after Naked Capitalism featured your last conversation on Guns and Butter, I would give that podcast a try but I felt like I was being gaslighted. It is pain staking to have to go back and re fact check everything I hear, which is why I think it is important to stick to places that are not purposely only going down dead ends like electric universe theory or some guy who thinks he can cure Downs syndrome with diet.

      Reply
      1. Yves Smith Post author

        So you are saying you aren’t capable of distinguishing between a venue and a writer? Help me. The Wall Street Journal occasionally has important op eds that are not right wing, precisely because the WSJ is just about the only place that will publish a complex finance or economic argument, but you’d say, “Oh, no, Wall Street Journal, can’t go there.”

        Reply
  4. Newton Finn

    “The role of neoliberalism is to make people think that they are powerless in the face of the market, as if markets are not socially and politically structured.” Perceptive comment, indicating that the thrust of neoliberalism is at least as psychological as economic. It’s a system in which the 99% or 90% (why quibble?) is not only getting squeezed but also brainwashed. Indeed, without the latter violation, the former would become impossible to sustain. Hudson (along with others) is on to something vitally important but often overlooked. The upshot is that gaining freedom from the vise-grip of neoliberalism requires, as a first step, the cleansing and clearing of the minds of the masses being squeezed. Is this not the raison d’etre for Naked Capitalism? Yet how can it reach beyond its self-selected readers? “Aye, there’s the rub” for Naked Capitalism and its enlightened but inherently elite companions in arms. Might something be learned by looking back to the first Gilded Age, when radical socialist thinkers like Edward Bellamy were able to catch fire nationwide, if only for a few brightly burning years?

    https://indigo.uic.edu/bitstream/handle/10027/22670/WILLI-DISSERTATION-2018.pdf?sequence=1&isAllowed=y

    Reply
  5. philnc

    Staying informed, gaing understanding, is a messy business, and hard work. Many people don’t bother because they don’t think they’ll ever be in a position to make a difference — which is probably the most insidious bit of prpaganda that has been peddaled over the years. Thanks, Mr. Hudson, for doing your part to show the true nature of the system we’re living in.

    Reply
  6. cnchal

    MICHAEL HUDSON: This distinction is based on classical value and price theory. Price is what people have to pay. The margin of price over and above real cost value is called economic rent. A product’s value is its actual, necessary costs of production: the cost of labor, raw materials and machinery, and other elements of what it costs to tangibly produce it.

    I am confused by this definition. Necessary costs of production, to my mind, consist of a series of inputs, each with their own price that when added together is the cost of production. Value is determined by the buyer of the product and when the price paid is greater than the cost of production, that difference is the gross margin and profit is a portion of that. Equating that margin with economic rent implies that every business owner is a rentier, which adds a bit more to my confusion

    To summarize my view, price is what you pay, value is what you get. Am I wrong about that?

    Reply
    1. ape

      There is no single “value”. There’s production value (which is where Marx gets the labor theory of value), there’s exchange value, there’s social value, there’s use value.

      And I think the interview was very clear about the difference between rent and profit. Profit is what you get from investment in production; rent is what you get by investment in cash-flows.

      Reply
      1. chuck roast

        Marx got the Labor Theory of Value from Ricardo and Smith. Problem was, he associated it with actual laborers, thus turning Classical Economics on its head.
        There were only two things to do: 1. develop marginal utility theory to obscure the real relations of production, and 2. separate politics from Political Economy by developing business schools.
        Hudson is demonstrating that what we used call “obscurantism” back in my URPE days has now been developed into a high art.

        Reply
      2. cnchal

        Interesting title: “The Vocabulary of Economic Deception”.

        Exchange value minus production value equals use value.

        Most of the time we deceive ourselves and use value and price interchangeably. They are distinct.

        Classical price theory defines the cost of production as “the value” of whatever it is you are trying to sell, and as per Michael Hudson, “the margin of price over and above real cost value is called economic rent”.

        My problem with this is, that’s where profits have to come from. At what point do profits become rent?

        From an accounting perspective, there is a sum that represents all the expenses paid to make any particular product for sale, and that sum is called “value” in Classical price theory. My conception of value has been in error, according to that theory.

        Reply
    2. Grebo

      It is theorised that with perfect competition—supposedly a goal of capitalism—prices will tend towards the cost of production and profits to zero. In this conception then, profit is due to market failure and can be considered unearned economic rent.

      I think that “value” is a slippery term and should be qualified when it can’t be avoided.

      Reply
  7. tegnost

    really great article, thanks, just loaded with details, I control c’d so many passages I figured I’m better off copying the title and sending it out as a christmas letter, and also as a way to ameliorate my absence from socal this holiday by pointing out that these are the extremely unpopular things I’d be saying around the free market shopping season feast table where saint obama holds the place of honor….”See?…you really didn’t want me there…” I truly live in fear of the TDS crowd. Along those lines, I like also that the good doctor makes a just criticism of the trump administration, i.e. “reforming” the Clean Air Act and doesn’t hide the bipartisan grifters behind a R!R!R! smokescreen.

    Reply
  8. Summer

    “They turned the vocabulary upside down to mean the opposite. But in order to promote this deceptive vocabulary they had to erase all memory of the fact that these words originally meant the opposite.”

    And people thought I was joking when I told them I aced an economics class by understanding this.
    I left the class thinking: the world is in deep trouble.
    Then I fooled myself into thinking it would be contained. So many smiley faces!

    Reply
  9. Summer

    “This statistical sleight-of-hand is achieved by counting the takings of the rentier 1% as a product, not a cost borne by the economy at large. What really should be shown is a loss – land and monopoly rent, interest and penalties is in fact so large a ‘product’ that the economy seems to be growing. But most of that growth is unreal.”

    And that is why I said notice what the financial pages are calling actual obscene rent hikes, extraction from the economy: rent “growth”.
    It’s a disgusting lie of an “economy” at this point – unless you are a sociopath.

    Reply
  10. Summer

    “The long rise in home ownership rates is being reversed..”

    Yes, especially if you distinguish between a mortgage owner and a home owner. Owning a mortgage may (and asterick that) give one a certain finanancial position or leverage, but it is not exactly owning a home.

    Reply
    1. Pookah Harvey

      What kills me about “home ownership” is ,as you say, that it is really mortgage ownership. The bank owns a large percentage, if not the majority, of your home. Still the equity people have in their home is the largest proportion of most Americans wealth. We have only one tax that taxes wealth, the property tax. When you pay your property tax you not only have to pay the tax on your wealth (your equity) but also on the outstanding loan which is wealth the bank owns.

      Never seemed quite fair to me.

      Reply
    2. John Wright

      Yes the policymakers should mention the actual equity a homeowner has.

      Here is one link that attempts to do that

      https://www.fool.com/investing/general/2015/05/25/the-typical-american-has-this-much-in-home-equity.aspx

      Notice that home equity is in the range of 20k-97K until age 65, and then flattens out to about 130K.

      If this median homeowner’s primary wealth is in their home, extracting the equity by selling, investing the proceeds and renting is not appealing.

      If one achieved a fine return of 10% on invested equity, it would be about 13K a year to cover rent on the replacement residence and inflation.

      It is as if the elite and government have designed for a compliant/desperate USA workforce by promoting expensive homeownership and college degrees while making the world safe for moving US jobs and factories overseas.

      Perhaps a non-economist can suggest what has historically worked to lessen inequality.

      It isn’t internal reform or economic growth.

      An op-ed from Austrian historian Walter Scheidel is titled “Only cataclysm can cure inequality”

      see https://www.bostonglobe.com/ideas/2017/06/08/only-cataclysm-can-cure-inequality/IUPTxGAyXwTIO3jVdDHPgM/story.html

      Here is a quote:
      “Throughout history, peace and stability have often benefited the few more than the many.”

      Changing the USA system to benefit the non-elite may require a drastic change, per Scheidel “In the United States, only the Great Depression and World War II managed to drive down inequality”.

      Maybe the commoners of the USA in 2008 should have embraced the new Great Depression that the elite threatened citizens with if the banks weren’t rescued?

      Reply
      1. John Rose

        Piketty shows the inevitable growth of wealth holders’ equity was interrupted only by WW I and II. They were followed by the greatest expansion of real wealth held by real people in all of history.

        Reply
  11. McWatt

    Wow!!!!!!!!!!!!!!!!!!! It just doesn’t get better than this. Michael Hudson will hopefully be
    somewhere forefront in the new Sanders administration.

    Reply
  12. Steven Greenberg

    For a long time I have suspected that GDP growth had stopped being an indicator of a growing economy. I suspected that the gains of the financial sector were making it appear that we had a growing economy. This is the first time I have seen a confirmation by an expert that my suspicions were correct.

    Reply
  13. Alternate Delegate

    Thank you Michael,

    I just picked up your 2018 book “And Forgive them their Debts” and am almost done reading it, but have already bought some additional copies for friends.

    I thought I had a fairly firm grip on classical and earlier history, but it turns out I didn’t, and I am going to have to rebuild a number of my ideas. In my defense, a lot of the Mesopotamian records in particular were not understood or (correctly) translated before now.

    On the other hand, I knew that I *didn’t* understand economics. But now I think I do. I’m probably still wrong. So now I need to pick up “J Is for Junk Economics”. Can you slow down writing these books a little? (Just kidding.)

    Reply
  14. DavidW

    I agree with this post but recognising the rentier problem is one thing, solving it is something else. Faced with the stranglehold and powerful levers the rentiers have, there is little wonder that TINA has taken hold of us. Do you envision any realistic ways to get back to sanity without having to go through the havoc and danger of a major worlwide bust first?

    Reply
  15. ape

    “The Soviet Union became a travesty of Marxism and the word socialism.”

    Strangely enough, the big, bad tough Soviets seem to have been terribly naive. That the mega-killer Stalin actually believed that by denying a capitalist basis to the civil servants running the government, you didn’t need elections, etc anymore. And that the world economic conflict could be solved by guns and tanks.

    In fact, most of the Communist revolutions seem to have been run by the strangely naive. This may have been a strategic error by Marx and his followers to focus on winning the fight and not talking about the after effects (Chomsky does this too). You can’t just turn over economics to whatever random people can win a fight — in fact, those folks are probably the most naive and ignorant about how systems work, kinda like expecting military training to give you the tools to run an economy.

    Reply
    1. rob

      I don’t think these people were naive. Not the leaders anyway. anyone who believed them, maybe. and certainly ;yes. But when you read lenin’s works on western banking, and their interlocking stock ownership, which is what they derived their “value” from. It is the same as it is today. Their “value” was partially figured by what they owned. And since a lot of what they owned was each others stock , which made their valuations a community of interest. These “concerns” were aligned in their all feeling the same, in that no one would rock the boat, lest they all fall over.. Too big to fail anyone. cdo’s .solvency for rhe whole group, or insolvency for all.
      I think these people were not naive. They were just telling tales, making up new myths for the people. I doubt they ever really believed what they were telling the masses.Certainly not stalin.I’m sure they knew better. They were just stealing the world from the powers that were…. and tthey were becoming the powers that were to be….
      I think it is naive of people to believe that these people really believed what they were telling the masses. Like believing democratic party politicians really believe their election memes.. or believing republicans are obstructionist because they have “values” and vote and act because of deep seated ideologies….
      It is all just “schtik”… for the simple minded and gullible

      Reply
  16. Susan the other

    I’m thinking there isn’t even a thing called production value. MH: “The question is what kind of debt is the economy going to have and what happens when it exceeds the ability to be paid? How will the government provide the economy with money and what will it do to keep debts in line with the ability to be paid?” We might not have any margin for growth at all. Even if all the inmates start running the asylum our high maintenance existence is beyond an economic solution already. So in “real” terms we are not going to be long for this world, let alone the stock market. This planet is dying right in front of our eyes and we actually still think money has value. We’ve externalized the life out of it. And even more delusional, now we are rationalizing whose fault it is. Dear god. At COP24 the big bone of contention (as usual) was that the first world must pay for CO2 cleanup because we have caused most of it, while the “emerging economies” cause only a modest fraction of CO2 per capita. But can we just look at this nonsense with some basic reality accounting? Low emissions per capita means that there are lots of people per unit so they interpret this as frugality. The fact is population itself causes global warming all by itself. 8 billion people are the problem – and not just for emissions but for all sorts of other pollution and externalized “costs”. We have population ponzi – not just debt ponzi. I really don’t think chapters 9, 11 and 13 apply anymore. We need drastic action if we are going to salvage humanity. Everybody will have to cooperate. Then we’d be talkin’ real money.

    Reply
  17. Hayek's Heelbiter

    Absolutely brilliant analysis, but what do we do practically as drones and former drones (in the earlier sense) do, except perhaps buy tumbrel futures?

    Reply
  18. Hamford

    Dr. Hudson. Thank you.

    Do you recommend at the individual level we try to insert legacy, effective language like “rentiers” and “usury”? Any other powerful frames, words we can use? Also, I find your use of “dismantling protections” as opposed to “deregulating” effective. “Deregulation” has been completely taken over where most Americans think it is necessarily a good thing; by using “protections” instead of “regulations” we hopefully avoid the extractor’s framing.

    Reply
  19. Jessica

    Michael Hudson: “Most statistical trends turned around in 1980 for almost every country as this shift occurred. “
    Why was this shift so uniform? Was American hegemony so profound that the U.S. could impose a change that started being harmful for the vast majority of people in each of these countries, a change that weakened rather than strengthened producer companies? Or had capitalism reached a developmental impasse that had only one exit that maintained (and increased) the power of existing elites?
    Since the latter seems a likelier explanation, what was the nature of that impasse? My best candidate is the transition from an economy driven primarily by capital/plant and infrastructure to an economy driven by knowledge. A true knowledge economy requires a quite different set of rules and is most likely incompatible with private property in the primary means of production (knowledge). The financial capitalism that afflicts us all now is the perverted form that the knowledge economy takes when it is confined within the types of social organization that worked (crudely) for industrial capitalism. It is the only type of knowledge economy that allows the existing elites to stay in power.
    If this is true, then the solution will not lie within capitalism. This is a conclusion that one may also reach by observing the inability of any capitalist nation to enact even reforms that would be in the longer term interest of the current finance capitalist system itself.

    Reply
    1. tegnost

      There’s always been knowledge, now there are increasing patent and trade rules that define who gets a piece of the fruits of production. Maybe not so different?

      Reply
      1. Jessica

        What is different is the relative importance of knowledge to the economy.
        There have been patents and copyrights since the 1800s at least, but as long as knowledge was less important than the amount of machinery used, the inadequacies of the patent/copyright system didn’t matter so much. Now they do.

        Reply
        1. tegnost

          thanks for responding, and I think you make your point well. I’d add that in 1980 we entered the neoliberal era, and a symbiosis between finance and the patent/copyright/dare I call it ownership class, i.e. non mortgage holders, and now the machines are in china making gorilla glass or whatever and to say that it’s just knowledge that has put us where we are leaves out a lot of other production inputs. In other words if your knowledge patents a device and you produce it with a machine in china the industrial process remains the same, but the money in the us economy goes to the patent holder, ie the knowledge, and the labor is seemingly left out of the equation when it is in fact still there, just paid in china and for less money so less status, which the knowledge holder (it’s really not knowledge, it’s ownership of an idea for production, there’s all variety of knowledge, it’s only worth money if you patent it) recently does not seem to mind,indeed seeks out.

          Reply
          1. Jessica

            Yes, all the other inputs are still there, but at a certain point, the money flows to those who own the knowledge, not so much to those who own the machines (or before that, to those who own the farmland).
            Back in 30s or 40s or 50s, the amount of machinery or the amount of industrial production (steel and concrete, for example) correlated quite well with international power. Now, knowledge (and its weaponized form, financial services) do.

            Whatever the primary input is, other inputs are organized like that primary input. So in the industrial age, agriculture was organized more like a factory and nowadays farm equipment makers dominate farmers through the copyrights on the software incorporated into farm machinery.
            In the post-industrial age, machines are used not just to produce things but as a way to create opportunities to collect economic rents. For example, car companies that make their money more from car loans than from making cars, to the point that making cars can become primarily a way to create the opportunity to make car loans.
            On the level of appearances, all the same things are still there, but at a deeper level the way that they are connected to each other has changed significantly.

            Reply
            1. tegnost

              the money flows to those who “own” the knowledge is doing a lot of work here. Increasing patent protections for the “owners” (I put that in quotations because other people may use the same process or have the same idea. but if they don’t patent it and someone else does, a very common thing and patent trolls are constantly trying to steal patents because it’s not the knowledge that’s worth money it’s the patent.) by extending the length of protection, that’s not knowledge, (disney and pharmeceuticals for instance, though they are not alone trying to own something others may possess but only they can charge money for, in other words knowledge is in everyones head, but maybe not patented knowledge) that’s protectionism and currently I haven’t heard anyone talk about shortening patents, only extending them. Knowledge economy sounds very noble but isn’t it really an immigration and offshoring economy. Was it knowledge that led us to QE forever? Because that’s the economy we live in now, it wasn’t some special thing, it was simple choosing winners and losers, and the winners are calling themselves smart because they profited from control fraud. No it was market manipulation on a grand scale by the powerful to shore up the failures their knowledge engendered.

              Reply
              1. Jessica

                “Knowledge economy sounds very noble but isn’t it really an immigration and offshoring economy.”
                Yes, you are quite correct about the actual existing ‘knowledge economy’. In that economy, in which the power of knowledge is constrained within the rules that serve those at the top, the goal is to create an artificial scarcity of knowledge, i.e. ignorance. In an economy that was organized to use knowledge for everyone’s benefit, none of this nonsense would go on and productivity and well-being would be sky high.
                Thank you for the interesting back and forth, Tegnost.

                Reply
            2. juliania

              I’m not sure how ‘knowledge’ entered into the value system. I thought it was an entity that belongs to the commons, in Prof. Hudson’s excellent analysis. Not to the elite. The corrective, I would have thought, would be free education. But perhaps I am not understanding your definition.

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              1. Jessica

                Knowledge should belong to the commons, but much of it does not. For example, medical research data is held by multiple different pharma companies and research is funded based on its likelihood of generating patents, so research into non-patentable items, such as herbal remedies, is underfunded.
                More generally, patents and copyrights and other proprietary information are used to create monopolies and economic rents. Education is used to sort people by class and shackle us with debt.
                A better economy/society will educate everyone to the maximum of their capacity and desire, then design work around those capacities.
                Knowledge work (research, teaching, application) needs to be fairly compensated but the knowledge itself needs to be turned loose for all to make good use of.
                Universal education will be hard to achieve in a stratified society with so much wealth and power concentrated in a few hands. Proper organization of knowledge work is most likely fundamentally incompatible with private ownership of knowledge and knowledge organizations (universities, research facilities, etc.)

                Reply
                1. rob

                  What is knowledge?. In this information age , it is a great irony that what passes for information is largely propaganda.
                  last time I saw a factual number, the NIH actually provided the research for over a third to a half of new patents on drugs. Then the “knowledge” was “given” for free. to pharma companies to actually produce said drugs. Now this “knowledge” was paid for by “the public” and given away to private monopolies who then overcharged the “public” for what ;according to whose knowledge it SHOULD have been,was rightfully theirs in the first place. The pharma industry regularly spends more on advertising than research. They also spend more on lobbying than research. Yet, because of the deals made by the pharma industry, that prevented the gov’t from negotiating on drug prices , , the pharma industry has a license to steal. And where is that knowledge among the people.The conservative republicans, and the people’s democrats all are in on the wasting of public monies funneling into private hands.
                  But again, my big quibble is that people ought not think that there is a knowledge economy happening. It is precisely the lack of knowledge of the way things are that is the lynchpin of our economy.
                  We live in an age of ignorance.
                  The enemy of knowledge isn’t ignorance, it is the illusion of knowledge.

                  Reply
    2. Grebo

      The shift was uniform because it had long been prepared for. It was not US hegemony but US corporate money that laid the infrastructure throughout the world. By the mid 1970s everything was in place ready for the necessary crisis to present itself. OPEC unwittingly provided it.
      It was not destiny, or the force of economic logic, but a conscious political movement.

      Reply
  20. flora

    Great post. I ask Prof. Hudson’s indulgence for my comment.

    Vocabulary is not only horizontal, as in the horizontial economic strata, vocabulary also differs in the vertical economic strata, even though the same words are used. What everyone might understand as ‘the same’ in the same horizontal strata (left, right, center) as ‘what everyone knows’ might be understood completely differently between the vertical economic strata. imo. Same words, different meanings, or different “what everyone knows.” imo.

    Reply
  21. bruce wilder

    “rent-seeking” is a term and concept popularized by Gordon Tullock and the Virginia School of public choice theory. that use of the concept of economic rent, it seems to me, has served reactionary purposes.

    Reply
      1. bruce wilder

        Is frequency the issue?

        I was trained as an economist and can do chapter and verse on various concepts of economic rent till I sound like a Wikipedia article, but I would not say that any use of those concepts is exactly popular now. Hudson makes the valid and important point that classical economics and Georgist use made economic rent central to popular political discourse and major policy reforms historically, but that that is no longer true.

        Neoclassical economics focused on using the marginal as its explanatory framework and economic rent is inframarginal; the classical concept of land’s claim on income was discarded in favor of Pareto’s generalization to all factors and application to explaining allocation, as in the analysis of spatial rents. So, if you use Google to find a quickie definition of economic rent, you are likely to be directed to a textbook definition of Paretian rent, and are less likely to find the classical concept.

        Piketty documented how land rent collapsed as a component of wealth during the late 19th century and early 20th and that might have been another factor affecting how important the classical concept seemed to contemporary politics.

        “Rent-seeking”, the pejorative introduced by Public Choice economics, does not have a formal theoretical formulation, nor has it ever become especially frequent in popular discourse, but it has been incorporated into neoliberal ideology. Where what we mean by “neoliberal ideology” are the worldviews and professional discourse of actual neoliberal technocrats, “rent-seeking” is core to the informal and shared understanding of how political economy works and what justifies neoliberal policy and institution building that isolates policy from democracy.

        I have my own views on the great usefulness of economic rent as an explanatory concept in economic analysis, but am not trying to express or push those. I was simply hoping some other commenters might have some insight into how the neoliberal rhetoric of “rent-seeking” relates to the more general ideological habit of simply ignoring economic rent. Is it the exception that proves some rule? I rephrased in a second comment.

        Reply
  22. bruce wilder

    “rent-seeking” has been a pejorative coined and used by reactionaries associated with the Virginia School of public choice theory.

    is that an exception to excluding mention of economic rent from the mainstream? and, are they up-ending classical understanding as well?

    Reply
  23. mauisurfer

    I sent this article to a friend and he replied:
    “I don’t really buy Hudson. I see rent as the incentive to build. Would you build a second house if you could not rent it? No way. And if you did not build the house someone would have no place to live. No one forces the tenant to rent. The tenant has the choice to live on the beach. The tenant thinks the house is worth the rent, so they pay the rent to live in the house.”
    Analysis? Comments?

    Reply
    1. Mark

      First of all, living on the beach in winter results in freezing to death in most places and is not an option. Aside from temperature most land is owned by somebody who is very likely to use violence or the threat of violence (police, private security etc.) to make sure no one squats on their land without paying rent.
      Regarding the first, no one is going to build houses, argument I think your friend missed the distinction between profit and rents or unearned income. Building is a productive activity and creates value in form of the new house and therefore can generate profit. Unearned income or economic rent exists when a building increases its exchange value without changing or without input from the rentier. For example a building might become more expansive simply because the landowner thinks he can charge more for the “use” of his land but the building didn’t change and therefore no value was created. The landowner’s extra income syphons of other productive activities, it is therefore unearned income or economic rent, rent on the land to be precise, from the point of view of the classical economist and to be avoided or taxed. Dr. Hudson gives the subway line extension example during the interview himself.

      Reply
    2. BillC

      Your friend graphically demonstrates the mental blinders that neoliberal thought has intentionally fostered in the western body politic.

      The state can build as many houses as needed for its population using fiat currency (presuming adequate labor and physical resources, but see Susan the Other’s environmental caveats above) and charge the minimal rent necessary to ensure efficient but humane use of the housing resources so created.

      A libertarian may object that leaves the population at the mercy of a possibly arbitrary and capricious state. How does that differ from the rational and dependable bias of individual landlords against those of lesser means?

      An aesthete may object that results in cookie-cutter and inhumane designs (e.g., 1960’s high-rise public housing in Chicago and New York). WPA building projects during the great depression demonstrated that state building can be diverse and attractive when skilled artists are incorporated into the project. Why not do so even for public housing?

      And for those who have the desire and means to own their own home rather than rent, why not provide public funds for a low-interest mortgage instead of depending “private” banks (quoted because they enjoy the exclusive state-granted privilege to create money at their whim) that have every incentive to charge usurious fees at the slightest excuse and, when “everybody else does,” to indulge in massive control fraud leading to disasters like the last decade’s great recession?

      Finally, nothing here conflicts with the last paragraph of Mark’s excellent comment immediately above, written at the same time as this one.

      You might ask your friend to re-read Hudson’s well-researched piece with fewer mental blinders.

      Reply
    3. Jessica

      The word “rent” being used in two different ways is creating confusion here.
      If someone invests money in building a building, then earns profits by selling the use of that building temporarily (“rent” in the way most people use it in day-to-day life), in the political economic sense of the term, this is a legitimate profit on investment, not an unearned gain (“rent” in the sense that political economics uses it).
      To make matters worse, in the case Professor Hudson gives of the new subway line in New York, the rent checks that a building owner receives from tenants contain both profit on the building owner’s investment and unearned income (economic rent) that the building owner is taking for themselves but that comes from the city’s investment in the subway line.

      Reply
  24. RBHoughton

    What a fine sentence – “Think Tanks portray neoliberal economics, dismantling protection of the environment, dismantling consumer protection and stopping the prosecution of financial fraud as ‘wealth creation.’”

    Professor Hudson reveals to us that the owners and governors of universities are part of the peoples’ problem too, restricting useful data taught to fee-paying students to produce a class of less informed, slightly thoughtless, people, people ideal for managing a country day by day like lawyers, doctors, accountants, economists, statisticians, geologists but not up to the big thoughts – how to keep a population submissive, docile and obedient, willing to die for the impersonal cause of the nation’s owners.

    Thank you NC for bringing this article to our attention.

    Reply
    1. juliania

      Indeed, yes. Just the history lesson alone is invaluable:

      “…The income tax was a basic reform back in 1913. Only 1% of America’s population had to pay the tax. Most were tax-free, because the aim was to tax the rentiers who lived off their bond or stock holdings, real estate or monopolies. The solution was simply to tax the wealthiest 1% or 2% instead of labor or industry, that is, the companies that actually produced something. This tax philosophy helped make America the most productive, lowest-cost and competitive yet also the most equal economy in the world at that time…”

      Reply

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