Yves here. A meaty talk for America’s turkey day. Hope those of you in the States are enjoying this holiday and find the chance to consume some intellectual fare, in this case on the big shifts in the global economy. The topics include the decisions to de-industrialize, the US and UK empires, rentierism and the proper uses of protectionism
Originally published by The Duran
GLENN DIESEN: Welcome to today’s program. My name is Glenn Diesen. I’m a professor at the University of Southeastern Norway. With me is my colleague Alexander Mercouris from the very informative and popular Duran.
The guest today is none other than the excellent Michael Hudson, a very renowned economist. He’s written brilliant books, which I can’t recommend enough, on on the industrial economy, the financial economy, the process of debt, empire, collapse. So he’s really one of the great economists of our time.
So the reason we really wanted to talk to him today is because we’re living in an age where the world is undergoing tremendous transformation. I would argue that many of the conflicts and wars we currently have have at least some origin in economics. And what has gone wrong, and what will be the new alternatives coming next, is really something we want to explore today, as we see that the main trend of these days appear to be the relative decline of the West, both the United States and Europe. And we also see the rise of the East, especially then with China at the forefront.
Often the analysis we’re presented with in the media is often limited to GDP, which doesn’t really help us to understand why the US, for example, have lost its competitiveness, its industrial strength, its ability to compete, especially with the Chinese. And while we tend to refer to the Chinese as, you know, a communist country, it has to be pointed out that to a large extent, they appear to resemble the industrial economy of the United States in the 19th century, that of the, especially the American system, I would say. And we don’t have to limit it to China, it appears that Russia is building a similar economic, well, following a similar economic formula, if you will.
So I wanted to hand it over to Michael Hudson first. And I thought we can start off by explaining, I guess, what signifies this US transition from an industrial economy to a financial economy? And why is this so important to understand in terms of what’s happened with debt and the extension or overextension of empire?
MICHAEL HUDSON: Well, you said that the United States has lost its competitiveness. And actually, it’s worse, the United States decided it didn’t want to compete. And this goes back to the Clinton administration in the 1990s. The Clinton administration’s objective, and that of the Democratic Party, was basically a class war against labor. How do we lower the wages of labor so that we can increase the profitability? Well, the way America had of lowering the wages of labor was, let’s hire Asian labor, especially Chinese labor. Let’s let Chinese into a trade relationship with us into the WTO. And then instead of having to bid up the price of labor in our industrial centers, Detroit and the South and the Midwest, we’ll hire products made by Chinese labor that will keep down wages here. And America can be in a post-industrial economy.
During the 1980s and 90s, all of the economic discussion was, how do you have a post-industrial economy? They didn’t want to industrialize. They thought that industrial labor was blue-collar labor. And in America, you’re not going to have college graduates or even high school graduates wanting to have a blue-collar job. They want a service industry job. They want to make jobs, something that’s not industrial, a managerial job. So a new phrase came into being, the professional managerial class. Technology.
The idea of American economic growth from the 1990s on was, instead of producing manufactured goods, we will develop intellectual property monopolies, especially in information technology, in pharmaceuticals. And America will make its economic growth in GDP, not by making profits to employ labor to produce more and more goods and services, but to have monopoly rents for our pharmaceuticals. So we can make pills that cost 10 cents each and sell them for $500 each. We can make computer programs for automatic artificial intelligence and for computer chips and for all of the information technology we have at enormous markups. And we can live on our economic rents, live off the fat of the land, as they used to say. We don’t have to have blue-collar jobs. Everybody can work in an office and make money that way.
So in a way, what’s happened today is exactly what America wanted. And all of a sudden, they’ve woken up to the fact and said, how can America run the world and be number one if it doesn’t have a manufacturing power, if it’s dependent on other countries for its manufacturing and now for its technology, and if all of this is financed by running into debt that the economy runs up for the military spending abroad to prevent other countries from competing with the United States, when actually it’s the United States that has decided we want you to compete because your production and competition with us is what’s winning the class war against labor. Your competition is what’s holding down the price of labor. So they haven’t really thought, what does a post-industrial economy mean? Well, it turns out to be a financialized economy.
You have today, as the election for 2024 is being prepared, the bewilderment of the Democratic Party here. If you look at the GDP, President Biden says, you’re doing so well, look at GDP. And the vast majority of Americans, according to every poll in every part of the country says, we’re not doing well at all. We’re doing awful. And it turns out that when you look at what is the American GDP, well, almost all of it is the growth in prosperity, the growth in financial benefits for the 1%, maybe for the 10% of the population. And the 1% and the 10% has increased its wealth so much since 2008 led the Federal Reserve to slash interest rates that the 1% and the 10% gain is larger than the loss for the 90%. So all that the President Biden can say is, who are you going to believe? Are you going to look at the statistics or are you going to look at your own life and what you have to spend at the grocery store and what you have to spend on rent and housing as America turns away from a homeowner’s economy into a rental economy?
There’s a huge concentration of land and housing in the hands of absentee landlords instead of private homebuyers who now cannot afford to buy a home when the interest rates are soaring to over 7.5%, in which case, if you buy a home with a 10-year mortgage, in only 10 years, the bank makes more money for the mortgage than the seller of the house makes.
So indeed, America has found that, yes, what is the post-industrial economy? It’s a financial economy. And a financial economy has savings on the asset side of the balance sheet and debt on the liability side. But the savings on the asset side are held mainly by the 1%. And the debt on the liability side is owed by the 99%. So when President Biden said, and the economists profession, Paul Krugman and the Nobel Prize winners all say, well, you don’t have to look at debt because we owe it to ourselves. Well, the we who owe it are the 99%. And the ourselves are the 1%. And that’s what is leading the United States to be not a very happy economy these days.
ALEXANDER MERCOURIS: What you’ve described to a British ear, and I live in Britain, I’m in London, is not completely unfamiliar. I mean, it’s like the kind of cycle that we went through ourselves in Britain. I mean, you had this system that the British created, basically, in the late 19th century. We have commodities flowing in. I think it was Keynes who talked about how if you were a person of certain affluence in Britain, just before the First World War, you could order things from all over the world and they would come to you. And we had a heavily financialized system. We had the Bank of England, we had the City of London, we had our currency pegged to gold. We insisted that people, to a great extent, trade with our currency. We started to neglect our industrial base and rely increasingly on the profits of our empire. And, you know, the rental systems began to take hold.
And one of the things that happened in Britain is that, of course, wealth gradually began to drain upwards. It was like, you know, within the social system you saw some people in late 19th century, early 20th century Britain, becoming incredibly rich and building their houses and buying their Rolls-Royce Silver Ghosts and sending their children to expensive schools and living a very agreeable life. But the rest of the country was going through a time of, shall we say, economic atrophy. And, of course, that happened within a framework of empire and a framework of imperial control.
And it seems to me that’s one of the big differences with the United States today, is that at least with the British they could control it to some extent because they actually had a proper formal empire. The United States doesn’t have it in exactly the same way. So you are grafting a late imperial British structure without having the mechanics of empire as well defined as the British did. Am I getting this completely wrong?
MICHAEL HUDSON: No, you’ve got the point. The explanation of what happened is that empires don’t pay. If you look at Britain in the 1930s, it certainly was solidifying its empire with imperial preference and India and other countries had to save all their money and England. But all of the money that Britain made from its empire ended up being used to pay the United States. So Britain had a surplus with its empire and a deficit with trade with the United States and with U.S. firms.
So it turned out that already in the 1930s, the United States was the beneficiary of the empire. And, of course, that enabled the United States to write the rules of world trade and the the International Monetary Fund and the British loan in 1944 and 1945 so that England had to basically give up its empire to the United States. It had to end imperial preference. It had to introduce free trade and free investment, which meant that India and the empire could spend all the money that they made during World War II anywhere they wanted. Meaning, where did they want to? Well, the only country that had enough industry to give them what they wanted was the United States.
Well, the United States is going through what England went through today. The empire really didn’t pay. And starting with the Korean War in 1951, the United States moved from a position where it started in 1950 with 75 percent of the world’s gold held in the United States. The Korean War pushed the United States into chronic balance of payments deficit. And I’ve done the statistics that I’ve published in Super Imperialism, and the entire American balance of payments deficit was military spending abroad to protect the empire. The private sector in America was just exactly in balance. Trade, foreign investment, borrowing, tourism, all of that was balanced. The entire deficit was military spending, and it felt to lock in the empire. Well, you’re seeing that today accelerating.
And the problem is, how can America finance the military spending abroad? Well, ironically, what happened was the military spending in Vietnam and Southeast Asia forced America off the gold standard, as you know, in 1971. And what were foreign central banks going to do with all of the dollars that were flowing in? They weren’t going to do what General De Gaulle and Germany were doing in buying gold. All they could do was say, well, we have to invest our money in securities. We’ll buy U.S. Treasury securities. And so all the money that America spent abroad militarily was sent back to the United States by the central banks of Europe and other payment surplus countries to finance the balance of payments deficit for the war. So in effect, the whole international monetary system was based on IOUs for America’s military spending across the world.
Well, you can imagine what’s happened today now that the United States has taken a very belligerent position in the world, saying it’s our way or we’re just going to smash things up. The United States, this system, has split the world into two opposing camps, as I think you’ve said on this show. I watch your show regularly, and this is what you’ve been talking about week after week after week, how the world is dividing up and what are the dynamics of this. That’s what you’ve been talking about.
Obviously, other countries think that it’s sort of a crazy international financial system when they’re being threatened by America’s military adventurism of China in the Near East and all over the world. Shouldn’t they have a system that doesn’t rely on the dollar and relies on their own mutual trade and investment? That’s what’s changing the whole world economy today.
ALEXANDER MERCOURIS: Absolutely. And it also is affecting trade flows because, again, and I’m going now back to what the British were doing with their empire, one of the aspects of British imperial preference is, of course, the colonies were obliged to trade with the empire on the empire’s terms, on Britain’s terms. And that did have an effect. It distorted the way the economies performed.
I mean, you can see that in India. One of Gandhi’s, Mahatma Gandhi’s campaigns was about the imports into the way in which the cotton trade between India and Britain worked, and it worked entirely to the benefit of Britain. And it actually was not beneficial to people in India, or so he thought. And beyond a certain point it proved negative for the colonies as well. And they started to push back against this.
And am I wrong in thinking that this is also part of what you’ve just been saying, that they’re saying to themselves, well, look, why should we pay the Americans so that the Americans can threaten us? But also that perhaps they’re also saying to themselves, well, why should we work all the time as, you know, build our factories, work hard in order to provide the Americans with the goods that they want, and at the same time we get money from them which we are expected to recycle back into the United States?
MICHAEL HUDSON: Well, it’s certainly true that it takes two to tango. But I think the driving force today isn’t other countries pushing back so much, it’s America’s pushing them away. It’s the United States leaving them no alternative but to protect themselves from sanctions, and from the United States simply grabbing their foreign exchanges. It grabbed 300 billion of Russia’s money. It grabbed Iran’s money long ago. It grabbed Venezuela’s gold from the Bank of England. There’s a change of consciousness. There’s a whole awareness that the world needs to have an alternative to the U.S. dollar standard.
And the creation of an alternative means not only not using the dollar, it means creating a different kind of international monetary fund for trade to finance balance of payments and trade obligations among the rest of the world, the global majority. It requires an alternative to the World Bank, not based on privatization of infrastructure, but on public financing of infrastructure to make its prices low, not high, and not at profit opportunities. It means a whole alternative financial system, and a trade system, and probably an alternative to the United Nations, which you see paralyzed these days.
Now, this takes an enormous amount of effort to say, well, it’s really hard to break away from a system based on the U.S., the unipolar system. At least we knew what was happening. It’s hard to create an alternative, but the United States has really forced the issue, and has forced them, China, Russia, Iran, Central Asia, Africa, South America, all realize that we cannot live in this kind of world where the unipolar system is going to take all of our economic surpluses and transfer them to the United States, and has a trade system where we’re depending on American farm exports for our food. We have to be self-sufficient in food. We’re depending on America for all of the technology that we need, and for the oil, so that if America decides to impose sanctions on oil, all of our factories and electric utilities have to shut down. We don’t want to be in a position where other countries can use trade, and finance, and investment as a kind of economic warfare.
This has forced them to accelerate the creation of what really is a new economic order, and that’s what we’re seeing now. A whole different set of institutions that are not, as President Xi and President Putin have said, not unipolar but multipolar. And multipolar means mutual gain for ourselves instead of your gain is our loss, a zero-sum gain, which is the US unipolar strategy.
GLENN DIESEN: I just wanted to ask a bit about what would be an alternative policy for the United States to pursue, because when you spoke about the International Division of Labour, it reminds me to some extent about the British repealing the Corn Laws in the 1840s, the idea being the British should monopolise on manufactured goods and seeking rent from this, and then the rest of the world could compete, driving down the prices on agriculture. But from the 1990s, of course, the United States pushed for monopolising largely on finance and the high-tech industries, so by extending intellectual property rights in return for ceding its manufacturing, as you were speaking about.
But look, 30 years later now, we can assess it didn’t go very well, because all those people in the United States who worked in manufacturing, they didn’t go to high-skill, high-wage jobs, most of them went into retail, so low-skill, low-wage, creating this huge gap within the United States, even intensifying this polarisation between the super-rich and the now super-poor. So this is what happens domestically, but internationally, it wasn’t even able to hold on to this top tier, because the Chinese were climbing up global value chains, and as you pointed out, the response has been to double down, that is, continue the financial economy and also pushing away the rest of the world. So when the Chinese are challenging the US, they’re seizing, blocking their technologies, their chip technologies, they’re seizing the money of the Russian Central Bank, effectively proving to them that they can’t live in this US-dominated system anymore. So it seems they’re doing everything wrong.
So I guess my question is, what would be the right thing to do? What should the United States be doing at this point?
MICHAEL HUDSON: I’m sorry to disappoint you, but there is no right thing that the United States can do. It’s in a trap. It’s in what economists call the optimum position. Mathematicians say it’s optimum because whatever you do is going to make things worse. And the United States has painted itself into a corner. And the only way it could get out of the corner would be to be a different kind of a country, a different kind of an economy.
For instance, as long as the United States has the enormous military spending throughout the rest of the world, that’s going to be pumping dollars into the world economy. And if other countries do not relend this money to the United States Treasury or the US economy, then the dollar is going to go down and down. The United States can’t really compete given the way in which it’s structured, its medical care and its housing and its finance.
For instance, 18% of America’s GDP is on medical spending. If Americans, wage earners, got all of their goods for nothing, all of their transportation, all of their food, all of their clothes for nothing, they still couldn’t compete given the fact that they have to pay an enormous amount of money, about $20,000 a year, just for medical insurance. And the rents in the United States absorb now about 40% of the income of wage earners. Here in New York, the average rent is $4,500 a month. Well, you can imagine, $60,000 a year just for rent. How on earth can the United States finance its trade and its investment when the cost of living and the cost of doing business is so overpriced?
The employers have to pay a large portion of medical care for their employees, and they want it that way. They want a high medical expense for their own labor because that means that workers are suffering from what Alan Greenspan, the Federal Reserve Chairman, called the traumatized worker syndrome. If a worker goes on strike, they don’t get their medical care. All of a sudden, they have to pay enormous medical care. They can’t pay their credit card monthly statement. And in the United States, most wage earners have a negative credit card balance. The credit card balance is 19% flat. But if you miss a payment, the interest rate goes up to 30% or 31%.
Well, just imagine if you’re paying that much money on what you owe, and if your debt is going up and up, you’re not going to have enough money to buy goods and services. So how can America become an industrial country and roll back the time machine and become the industrial economy it was before if it can’t sell to its own population because its wage earners spend their money on health care, on debt service, and on housing. And other countries are defending themselves by producing their own food, their own manufacturers, and they don’t want to be subject to an America that weaponizes its trade and investment as a kind of locking in its unipolar political and military power. It can’t be done.
So the United States doesn’t really have a cure. And it’s decided the one thing that it can try to do, it’s given up on the global majority. The one part of the world that the United States is able to still gain support from is Europe. And that’s why it cut the Nord Stream pipeline. It wanted to make Europe completely dependent on American energy, really to turn it into the kind of dependent colony that England and the Dutch tried to do in centuries past. So it turns out that the post-industrial economy has really elapsed back into the old feudal imperial economy, and it’s just not going to work as long as other countries have a role to play in their own development.
ALEXANDER MERCOURIS: The former colony turns its imperial master into its own colony. There’s a kind of ironic justice, I suppose. But anyway, that is a bleak picture, but it’s understandable, perhaps, that other countries around the world are responding against it. And China never let itself, it seems to me, become part of this system. And the Chinese put together policies which are now being, I think, looked at by many people around the world as potential alternatives.
And I noticed that Xi Jinping, according to the Chinese readout, he actually sort of alluded to this when he spoke to Biden today. He said, you know, we must understand that one thing we do not want to become is what you are. He actually said that. It’s actually there in the Chinese readout. We do not want to supplant or surpass or become like the United States. We are seeking to rejuvenate through a process of modernization ourselves. And it’s quite an interesting set of words, actually. Do you want to talk a little about China? Because it does seem in so many ways to be a country that is not just different, but almost opposite to the way in which the United States has developed, at least in the post-war period.
MICHAEL HUDSON: Well, words are very important. And we’re dealing with a kind of Orwellian vocabulary here in the United States. Again and again, President Biden has said the United States is a democracy and China is an autocracy. And just yesterday at the end of his meeting with President Xi, President Biden went on television and said, well, I’ve just been dealing with a dictator.
Now, what makes China an autocracy? It’s doing just exactly what the United States, England, Germany, and every other country does. It has public infrastructure investment. It hasn’t privatized its infrastructure. The most important thing that China has done is keep money creation and credit as a public utility so that China doesn’t have to borrow from a wealthy class of bondholders and pay. China can simply print the money to finance its economic growth. So, its economic growth has been self-financing.
Well, the United States says that’s autocratic. The democratic way to do things is the government will borrow from the private sector and that leads the banks to tell the government, we will only give you money if you do what we want to do. So, what the United States calls democracy is what Aristotle and everybody else calls an oligarchy. And the irony is that it’s China that is turning out to be the most democratic country by not having an oligarchy, but by having a central government that pretty much acts with group understanding. The whole central committee, they all talk together. It’s not a one-man rule at all. It’s a very definite idea of what do we want to provide is the core of the economy at the lowest price possible.
Well, you’ve seen what they’ve done with transportation. That’s a public utility as it used to be in England and every other country except the United States to make sure that the cost of transport is as low as possible. Communications is a public utility. Education, in the United States, it costs $40,000 now to get an education. Other countries have free education. So, in the United States now, if you don’t inherit money to pay for your college, if you don’t inherit a trust fund from the 10%, then you have to take on student debt that is so large that once you graduate from college, you cannot afford to buy your own house because the bank will say, I’m sorry, you’re already spending so much money on your student debt that you don’t have enough money to pay the mortgage too. You’re going to have to rent. Well, China avoids that by having free education. It’s medical care. You can go right down the line.
There are certain basic needs that in the United States, and I guess England too now, the labor and their employers have to bear the cost of. They don’t have to do that in China. There’s a certain minimum guaranteed price of living.
The one problem, of course, is that China has not made housing a public utility. And the reason is that as part of China’s policy of let a hundred flowers bloom, it lefts economic policy to the localities and to the local districts and cities throughout China. And the theory 30 years ago, 20 years ago, was let every city try to develop its own means of financing. Well, given the cost of building infrastructure, almost all the cities and small towns in China and localities had to finance themselves by selling off land to real estate developers. And so there was an enormous bias in China for financialized housing, just as was occurring in the United States. So the one way in which the Chinese economy has not freed itself from the Western model is in this financialization of real estate.
Well, normally that would not be a problem for China because it itself is the money and debt creator. So China is able to do something that the United States cannot do. If an industrial company or corporation in China has a problem as it had with COVID and can’t pay its debts, it’s not sold off and forced to close down and fire its labor. China writes down the debt. It’s very easy for a government to write down corporate debt when the debt’s owed to itself. Much harder to write it down when the debt’s owed to a private banker who’s going to scream. Well, the same thing in real estate. China basically could write down the debt that Evergrande and the Country Garden and other real estate huge builders and developers have run up, except that for some reason, I think it’s the insistence of the Shanghai neoliberals there. The Chinese government has guaranteed the dollar debt for these companies to issue their debt.
Well, there’s no reason in the first place for them ever to have issued dollar debt because most of the Chinese money was spent at home, except for what it had to import for steel and cement and other building material. But China has done pretty much what the United States Fannie Mae has done by guaranteeing the mortgage debt. This ties it in a knot. My guess is what the Chinese government is discussing right now is, now that we’re unable to earn the dollars to pay the dollar debt because of the sanctions that the United States insists on, do we want to remove the government promise, the underwriting for the banks that have guaranteed this dollar debt?
Well, China has the option, and this is its financial atom bomb that it has. It can say, well, we’re terribly sorry. We’re going to let the banks go broke that have made this dollar debt. The real estate companies can’t pay. That means that they’re bad debts. The banks can’t pay. We are going to let them go broke. But of course, we do have, fortunately, deposit insurance for all of the depositors up to, let’s say, some given amount that covers 90% of all of the deposits by Chinese families and workers and businesses, and let the debt go under and start all over again with a clean slate. That, I think, is what logically is being discussed right now in China. And you can just imagine what that’s going to do to the dollar holders.
That, to me, is the ultimate kind of de-dollarization that we’re talking about. And you can just imagine where that’s going to leave not only the United States, but other countries that have tried to hold the wealth of their 1% and their domestic client oligarchies in dollars.
ALEXANDER MERCOURIS: Can I just say about the cheap costs of things? You’re absolutely correct. I went to China, and I was actually…there was an awful lot of things that I saw there. But I saw, for example, the Chinese railway system, the high-speed trains. And I noticed, first of all, that they were both very cheap to travel on, but that they were designed to be that way in the sense that the engineering was exceptional. But you didn’t have this enormously complicated system of first class and second class and third class that you’d have in Europe, the very expensive seats that you would have for people who would pay more. It was all actually both impressive and very functional. And that is something that you noticed right across the board in terms of the goods and services that are supplied to the Chinese population. It was something that, for Britain at least, it was very striking.
And now, coming back to all of this, of course, another country, perhaps the one that Glenn and I know a lot better, Russia, in the 1990s, went in the diametric opposite direction to the one that China took. They privatized everything. They opened up their economy in every conceivable way. They allowed banks, private banks, to be established. They made their currency entirely convertible. They privatized their housing stock, which up to then had been publicly owned. And, of course, what happened was that by the time that Putin became president, we had a small group of people who were immensely rich. They were also extracting rents from the Russian economy. We both saw that. We both saw that for ourselves. You could see immense luxury in Moscow for this small group of people.
They were able, because the ruble was convertible, and the government was propping up the price of the ruble using the oil rents that it was getting. They were able to convert their money into dollars at very preferential rates. And, of course, they were investing that money in the London housing market, in New York, and buying bonds. They were also, of course, taking out loans in the West. So they went in the diametrically opposite direction to the one the Chinese took. Now can you say something about that?
MICHAEL HUDSON: The Russian kleptocracy made its money from economic rent, basically natural resource rent. The United States’ promise to the Russians was, well, if you just give all of the property to the owners, give every factory to the factory manager, give the gas company to the heads of managers of Gazprom, if you give it to them, then nature will take its course and they will all be led by the invisible hand to invest and act just as the United States did. But, actually, this is the exact opposite of every way that the United States got rich. And the Russians did not even have a progressive income tax for all of this.
Well, here’s what happened in 1994, 1995, when Russia decided to privatize, essentially, there was a scheme that was put into its hands to privatize all of the nickel and the raw materials and the oil companies. And so the government borrowed money from the banks. The banks would write a check to the government, let’s say, for $5 billion. The government would take this check, and it pledged as collateral, the holdings and Neurolch nickel and other oil and others. And the government then deposited this $500 billion check back in the bank that wrote it. So the bank wrote a check, it was redeposited there, it was free. The banks created free money. That’s what banks do. They create it on their computers, on a balance sheet. And sure enough, Russia ended up giving all of its natural resource rent to the kleptocrats.
Well, you mentioned that they wanted to get dollars. Well, how do they get the dollars? Here they have the stock in Neurolch nickel and Yukos oil. The only way they can get money from the stock is to sell it abroad in England and America because the Russian savings were wiped out with the hyperinflation. So the Russians didn’t have any ability to buy their own rent-yielding natural resources. Only the foreigners did. And from 1995 to 1997, Russia’s stock market was the leading stock market in the world. And that was because it was a bonanza. It was free money from the public sector.
And if you look at the last 2,000 years of history, almost all the fortunes in every country in every century have been made by getting money from the public sector. Fortunes are made by privatizing what was in the public sector and by insiders giving it to themselves. That’s how the Roman Empire made its money, by seizing land right down to the United States, grabbing land from the Native Americans.
So you had all of this privatization, and needless to say, the kleptocrats’ modus operandi was that of a rentier. It was a rent-seeking economy that the neoliberals advised Russia to do, not a profit-making economy where industrialists would hire labor to produce more goods and services. The fact is that the factories, as you know, stopped paying the labor.
And the one thing that Russia did not privatize and give away freely was the housing. I made three speeches before the Duma in 1994 and 1995, and I brought over America’s former Attorney General Ramsey Clark and others, trying to convince them that you should give everybody their housing, just give it in their own name, then they wouldn’t have to buy it. You’d create at least their own housing, you’d create an internal market. That wasn’t done until very, very late in the game, until a point was reached where the Russians and also the Baltic states and all the post-Soviet states had to pay enormous amounts of money just to get housing, while all of the rest of the land and natural resource wealth was given away freely by the kleptocrats. That was the neoliberal travesty of rentier capitalism.
I think that’s why when you read the speeches of President Putin today or Secretary Lavrov, you can see just the disgust that they feel almost for themselves for ever having been suckered into this kind of neoliberal plan. I think that’s spurred them to say, well, look, we have to turn east, not west. This is how all of Europe and America are making its money. They’re turning into a rentier economy. We’ve seen what that did to us, and as President Putin said, Russia lost more of its population economically in the 1990s as a result of neoliberal rentier policy than it lost militarily in World War II. Well, it’s never going to do that again, and that is what has set its mind so much on to creating an alternative. When there’s a will, there’s a way, and there’s now the will, and that’s been the precondition for creating a much sounder basis for growth in Russia, China, and the rest of the global majority.
GLENN DIESEN: You mentioned the will, but what would be the way, because do you see, I guess, Russia following the same path now as China has? Because when we began this program, I mentioned the American system, because I sometimes feel like this is the model maybe at least China, but also to a large extent, Russia might be following because they were in a very similar situation now as the Americans were in the early 19th century, in which the Hamiltonian economics all transformed itself into this American system where the Americans said, we can’t be dependent on British manufacturing, its infrastructure, ports and such, and its national banks, and later on currency. So they began to develop their own system through a lot of protectionist policies, one would have to add.
And you also saw towards the end of the 19th century how people, I know you referred to many times economists such as Simon Patten, who viewed the idea of building a physical industry that is, well, at least the infrastructure to be something imperative investment for the government to make, because it has a dual effect, on one hand, it makes industries more competitive by having the infrastructure in place, but it’s also something that elevates the standard of living for the average citizen. So it seems at least for the Chinese that physical industries has been a key focus of its economic policy.
But I was therefore curious if it’s the same in Russia, because the same three pillars of the American system, I seem to see it in both countries, in one hand, where they seek technological sovereignty, that is what Alexander Hamilton would have focused on manufacturing. But now of course, they look at digital platforms and their own, well, it was in critical industries and technologies that there’s some level of autonomy, they both seek this very vast infrastructure projects to find new areas of connectivity to avoid, you know, American choke points. And last, they both focus on de-dollarization, their own banks, to not end up paying all the rent to the not just Americans, but the Europeans as well.
So I was just curious if you can say something about this. Do you see Russia effectively having learned its lesson from the 90s and following that path or what is the way that the Chinese and Russians are going?
MICHAEL HUDSON: Well, both the Russian economy and the Chinese economy are operating on an ad hoc basis. There’s no economic theory or doctrine that either countries develop to explain what they’re doing. In fact, China is still sending its economic students to the United States where they’re taught neoliberal financial policy. And my students tell me that the American educated students get priority in being hired over domestic students.
So China and Russia are acting pragmatically in a way to create an alternative to the neoliberal growth. But they don’t have, they haven’t systematized it in the way that industrial capitalists in the United States and England spelled out. Here’s our strategy. Here is our set of laws that we have.
I guess you could say what President Putin is doing is jawboning the kleptocrats, the wealthy class saying, okay, you can keep your money, but you have to invest it in ways that we agree will help the Russian economy become self-sufficient, independent, productive and more prosperous. So it’s all done on an ad hoc basis.
One of the problems is that Russia by the 1990s was probably the only country in the world that had no background in Marxism at all. Largely, this was a result of Stalin’s popularization of volume one of Capital to say, well, capitalism is an exploitation of workers by their employers. Well, all that indeed was in volume one, but Marx wrote volume two and three all about finance and rent seeking. And the one thing that Russia did not see coming in the 1990s was rent seeking and financialization and simply using the banks as a means of creating and backing monopolies as their source of income in a non-industrial way.
Marx would have called this a pre-industrial way. And Marx said, well, the revolutionary contribution of industrial capitalism was to free Europe from feudalism, from the legacy of feudalism, from the hereditary landlord class. We’re going to get rid of the landlords so that there can be popular ownership. And yet there’s still, they never got rid of land rent. But land rent is now, instead of being taxed away as the tax base, it’s paid to the banks as mortgage interest in the United States. And in Russia and China, if you want to buy a house, the land rent still, as China becomes more prosperous, people can afford to pay more and more for the housing they buy. And this, they take out a larger loan in order to buy the house and the rent is paid to the bank.
So China is letting a rentier financial sector develop in its midst because it hasn’t really defined what is the model of growth that we want to have. They’re doing it by experimentation, ad hoc, I think. And what needs to be done and what obviously is going to emerge in the kind of, is a consciousness of how are they going to make the economy more productive, more efficient, and use the economic surplus to raise living standards instead of to create a wealthy rentier financial and rent-seeking landlord class monopolist that you’re seeing in Europe and the United States.
ALEXANDER MERCOURIS: The interesting thing is, when you say ad hoc, you’re absolutely correct in the sense that in Russia you get the sense that at the very high level of government, Putin himself, very frustrated right from the outset with a neoliberal model, but at the same time very intimidated by the oligarchs around him, very, very wary of taking on neoliberals within the finance ministry and the central bank, but at the same time as if frustrated himself and going gradually, ever so gradually, with the grain of what is needed to try to bring the system back to some kind of stability.
So you can see this. You can see this, for example, in the banking system. I mean, the banking system, which people don’t know about this or think much about this, I mean, the banking system has been changed completely in Russia over the last 30 years. I mean, it’s become…it had become almost completely private. The Sverbank was still functioning as a state bank, but there was always the possibility that it would be privatized. Now, we’ve gone from a largely private banking system with banks…a Russian banker once said to me, Russian banks are black holes, they’re black holes in the economy, they are a disaster as they are. We’ve gone from a private banking system to one that is almost entirely state-owned.
There are a few Russian private banks still, but the big banks, the really important ones, are state-owned. We’ve also…but we’ve also had other things happening. We have now the emergence of industrial policy. But all of this has been reactive, and to some extent it’s been…it’s happened in response to pressure from the West. So we have financial sanctions, which in effect almost oblige the sort of state control of the financial system. We’ve had a shift in the way in which the ruble is managed from, you know, policy go full convertibility towards now we’re getting capital controls coming back. We’re starting to see a kind of protectionism imposed on the economy from the outside. But it is all completely reactive up to this time.
MICHAEL HUDSON: Well, I think that ad hoc policy was deliberate, certainly in China’s case. In the 1970s, I was working for a number of U.S. government agencies as an economic advisor, and I talked to a Chinese official, the representative of the World Bank, and he said, look, we really love the ideas you have. We’ve got to bring you over to Shanghai for our Futures Institute there, and, you know, tell us a bit about your background.
Well, I told him about my background, and I grew up in a Marxist family. My father was a political prisoner in the United States. And the Chinese official said, oh, dear, I think you’d better not go to China. The one thing they don’t want is anyone with a Marxist background. They want to really develop something new. And I could understand why, because they thought that most people with a Marxist background were the old Stalinist types.
The one thing China did not want to do was follow the old central planning of Russia. They wanted to have a hundred flowers bloom, and they thought that anyone that had a Marxist background, that I would be in favor of that kind of centralized planning. Well, I wasn’t, but they actually said my life might be in danger. They didn’t want me to interfere in domestic Chinese affairs, so I didn’t go. And I could understand why they did this.
The irony is that what really helped China develop so much was none other than the great destroyer of American capitalism, Milton Friedman and the Chicago School, that the Shanghai people had Milton Friedman come over and talk about the free market and all of that. And the one thing that Friedman and the Chicago boys were able to convince China was they’re always going to be ambitious, intelligent people that see a need for something that governments can’t really innovate. Let there be innovation. Let people try to make money everywhere. And if they succeed, let them succeed up to a point and get wealthy up to a point. Let them follow it. And then you decide who to help and who to subsidize and how to join in. But you become their financiers, not private financing. That actually worked.
You had that with Deng’s policy, black cat, white cat, as long as they catch mice, that’s the important thing. Well, that ad hoc policy is what enabled China to end up making good judgment because the judgment was done by a pretty large central committee that ended up having good judgment as to what industries to support, like your high speed rail that you mentioned and other industries. So it all worked out.
Now that it’s working out in their ad hoc way, I think it would be the next step is for them to say, here is why it’s worked out. It’s worked out because here are the basic principles that we want to have as an economic platform, whether you call it socialism or industrial capitalism or something entirely different. The name doesn’t matter, but it would be we really should tie it together into the new economic system that for Russia, China, Eurasia as a whole, and the whole global south, too.
That’s what we’re waiting to see, and I think it’s going to be very much like what happened in the 19th century in British classical political economy, a distinction between profits and rent, a distinction between earned income and unearned income, and productive labor and unproductive labor, and public finance versus private finance. I think all of this is about to be codified, and it would really help if people would look at… All of this has been discussed for a century in the 19th century, and you’re not going to…
In America, they’ve dropped the whole history of economic thought from the economics curriculum because, as Margaret Thatcher said, there is no alternative, and the way you make sure there’s no alternative is you don’t let any knowledge that there was an alternative, and that used to be industrial capitalism, that people can develop.
GLENN DIESEN: Well, I just wanted to comment more than a question. I think it seems like the ideology of capitalism kind of narrowed in what it could actually mean, because the industrial capitalism we had, it seems to have almost been hijacked by the ideology these days, because whenever we speak about capitalism now, we only serve one version, which is the one of Friedrich Hayek or Milton Friedman, and often people use the examples of Adam Smith or David Ricardo to suggest this is the ideological foundation of capitalism.
But David Ricardo, in his book, he even wrote, to much of his surprise, that yes, with every technological innovation, the return of investment will concentrate in the hands of the capital, upsetting the balance with labor. So he did recognize this, and he had the same with Adam Smith, of course. He was recognizing also that yes, the hidden hand or maximum flexible economy is very efficient in order to get more increased revenue. However, he also recognized that once the economy grows, there should be some reforms to capitalism to support and help the poorest, so you don’t have this very uneven distribution.
Even if I’m not mistaken, Adam Smith was also a bit cautious about the development of rent seekers in the economy, someone who can take away and essentially not just take profits away from production, but thereby also making production less competitive. So again, a lot of what problems the United States have today, in which you have an oligarchy class siphoning off wealth, and in the process, making the entire American economy less productive.
But it seems that whenever we talk about capitalism today, this is the Friedman Hayek version, this is the only interpretation, and the alternative would mean that you would be a Stalinist, a Marxist, or something on completely the other side of the spectrum. Did you see any of this changing perhaps? Any other intellectual emerging in who’s able to make distinction between industrial capitalism and financial capitalism? Like a Friedrich Liszt of our time, someone, or another pattern?
MICHAEL HUDSON: Well, you said the magic word, rent. But Adam Smith, Ricardo, John Stuart Mill, and Marx and the others were all talking about with value and price theory. And they defined price as the excess of the price over the intrinsic cost value of products. And that difference of price in excess of value is economic rent.
And the objective of Adam Smith and Ricardo was to say, rent is unearned, it’s a special privilege, it’s a carryover from feudalism, and a historical task of industrial capitalism is to free society from economic rent. And that is why the concept of exploitation in the form of rent culminated in Marx.
The fight against Marxism is a fight against Adam Smith and Ricardo. And what Marx did was push Ricardo, Smith, Malthus, John Stuart Mill to its logical conclusion. And Marx showed how all of this was moving towards socialism, meaning a rent-free economy, where everybody earned what they produced and there was no free lunch.
What happened, of course, was that the rent-seekers fought back. And by the 1890s, you had the Austrian school, reactionary school that became the von Misesians and the Hayek people in Austria. And you had in America John Bates Clark saying there is no difference between rent, there’s no difference between price and value. Economic rent doesn’t exist. Everybody earns whatever they want, whatever they get, no matter how they earn it. And that has become the basis of national income accounting.
So if you look at the gross national GDP accounts of the United States and Europe, they count economic rent as if it’s an addition to product, to GDP. Interest charges, late charges are an addition to GDP. The rise in the rents paid by people as the rents go up for their housing is all GDP. They’ve erased the entire thrust of classical economics distinguishing between earned and unearned income. And, of course, that is exactly what China, Russia, and the rest of the world want to distinguish.
They want to have an economy where people are productive, not where fortunes are made by being parasitic rent seekers making money in their sleep, as John Stuart Mill defined landlord rent and landlord capital gains. And as it turns out, the one thing that GDP does not report is capital gains. In other words, the increase in the price of wealth, the increase in the price of assets. Most wealth in the United States and Europe is not made, and certainly in Russia, was not made by producing more goods and services. It was by increasing the value of the property you had, the real estate property, the stocks and the bonds, the rent privileges that let you take the money you make from oil or nickel or diamonds or other products.
What is needed is a set of economic statistics that actually will tell Russia, China, and other countries how much that we’re producing is actual product and how much is overhead. The Western GDP and post-classical theory denies that there’s any such thing as economic overhead. Monopoly pricing is not an overhead. Higher rents is not an overhead. That’s the one thing that in ad hoc practice Russia and China are trying to minimize.
Well, this intuitive behavior that they’re doing should be reflected in a recasting of economic statistics along just exactly the lines that they’re doing. That’s what I’m waiting for. Most of my effort in talking to the Chinese and the articles that I’m publishing there and the articles I’ve done in Russia through the Academy of Sciences have all been on this topic.
MICHAEL HUDSON: I think that you’re making some progress, actually, because I remember a couple of years ago going to Perm, which is in the Urals, visiting the university there, and meeting people in the economics departments. And they were starting to talk about this there. I mean, there was…I remember a sort of, you know, discussion on these very topics.
And partly, and I’m sure this is partly a consequence also of recent experience in Russia, because rent there was so crude and savage, you know, the sense of rent-taking from the economy. It was so open, and the people who were the rentiers, the oligarchs, were so…are so disliked that it almost set itself up, if you like, for people to start to argue against it and to sort of tilt against it. And yet the power of these people within Russia has managed to slow down processes of change to a very great extent.
And it’s…one of the great paradoxes is that you see that the West has actually been helping, in a kind of curious way, those people in Russia… and this is talked about in Russia itself…who wanted to see things like this change. So Russia obliged to buy its aircraft from the West, from the United States, from Boeing, from Airbus. Now they’re no longer able to do that, so they have to make their own aircraft. And they discovered remarkably they actually do have the resources and the skills of people who know how to make aircraft.
The same is starting to happen in the machine building and machine tools industries. They were importing them from the West, now they’re having to start making them themselves. They’re having a kind of protection system imposed on them. They’re finding also that the oligarchs who are so powerful…actually, they’re not really that powerful at all, after all. They are, in fact, people who are unpopular because they’re seen as pro-Western. But the very fact that they were keeping so much of their money in the West is starting to undermine them.
And it is this very strange thing which…I wonder whether people in the United States have understood the extent to which they’re actually propelling Russia in a direction which many, many people in Russia, including, I think, Putin himself, always wanted to go but which they were very afraid to go towards.
MICHAEL HUDSON: Well, the policymakers certainly do not understand it, because suppose that there is somebody in the State Department or the blob that does understand what you’ve said. They will be called, well, you’re not a team player. What we say goes. We’re the exceptional country. Whatever we say can do. You know, I think you’d be happier with another job. So, not understanding what’s happening is a precondition for keeping your job in the State Department and the blob. That’s the irony. And it’s all working out for the best. You’re right. Where would Russia be without President Biden urging it on?
GLENN DIESEN: I just want to add, because I completely agree with both of you, because if you look at the policies in which large industrial economies have emerged, they’ve hardly ever been on completely unfettered or free markets, completely, and not neoliberal at least. You see, from the West to Japan, you always had the recognition that if you want to have a free competition in international markets, you have to be able to compete. So, in other words, you provide temporary subsidies and tariffs for protection to build up your infant industries vis-à-vis the mature industries in the international markets.
And, of course, sometimes this is, well, historically, at least from the 19th century in the West and Japan, we had to have policies specifically to protect them. But this, with the sanctions, not just against the Russians, but the Chinese as well, this has imposed the development of infant industries. I mean, look at the Chinese chip industry. This is amazing. They would have to have some very unexpected… The Americans threatened to… Well, they did cut off their access to chips. And now the Chinese, in record time, were able to provide all the funding and subsidies and essentially remove this whole huge industry, which was dependent on the United States, brought it under complete technological sovereignty, sovereign control over it.
And now this is, yeah, almost… Well, they were already going this direction, of course, but forcing them to accelerate it. And, again, I see the same in Russia from agricultural products, their cheeses, their digital ecosystems emerging, machine tools across the border, banks, the trading in their own currencies. All of this would have taken maybe 10, 20 years, and it was pushed down to two years to accelerate this process simply out of necessity. But, yeah, I very much agree with Michael Hudson also that this was something that became a requirement, forced. And given that they don’t have specific policies driving this direction, often reacting on an ad hoc manner, I think there’s little recognition for how we contributed to this decoupling from the West ourselves.
Anyways, I keep noticing we may be running out of time soon. So before we wrap up, shall we… I’ll pass on the word to you guys.
ALEXANDER MERCOURIS: Just one question I really wanted to ask. It’s the very last one, because you talk about the conceptual that they haven’t yet worked out, either in China or in Russia, an alternative system of economic thought. And this is potentially, in some ways, a dangerous thing.
But both Glenn and I, I think, have noticed that in Russia they’re now suddenly rediscovering Friedrich List. And Friedrich List was very much, in late 19th, early 20th century Russia, the dominant economic thinker. Not just Sergei Witte, who was the finance minister at that time, who was an open, declared disciple, but if you read, for example, the sort of economic courses that the foreign ministry school in Russia used to teach, very much based on List, looking at the American system as well of the 19th century, saying this is the model that, you know, Russia should follow. And we both, I think, noticed that the Russians are suddenly looking back and thinking about him.
I mean, I haven’t read List. I should make that very clear. Is he someone that perhaps might provide some of the answers, some of the framework, or is it just a case of, you know, nostalgia for another time, which you do unfortunately also see in Russia?
MICHAEL HUDSON: Well, List was the first generation of American protectionists. He developed his ideas in the United States with Matthew Carey in the 1820s. But then he went to Germany, where, of course, he really developed his theory that Germany needed railroad infrastructure and it needed a belt and road initiative, basically. So I think it was via Germany that List got to Russia.
But the second generation of protectionists in the 1840s and 50s in the United States went way beyond List. And so they translated List’s book and said, well, he didn’t really take into account, he didn’t really spell out how you needed to develop an industrial system based on high wage labor. You need to raise labor productivity by raising its wages and making it healthier, better clothed, better housed, and all of that. So List was only stage one of the protectionists. And I wrote a book on this, America’s Protectionist Takeoff, where I talk about List and his followers.
I want to say one thing about what Glenn said about the U.S. that is relevant to this. The U.S. never takes into account that other countries may have a reaction to what the United States does. They’ve missed the boat every time. They had never dreamed that Russia would have an alternative or China would have an alternative as to what to do. And that’s because they don’t think of economics in the United States as a system.
For them, a market exists without government playing any role at all, without policy playing any role at all. And if you don’t have a market, then, of course, there isn’t a system. There’s just a free-for-all and a grabitization. And yet economics in the 19th century was a system. That’s what Marxism is all about. Economics is social and political. That’s why the British called their works political economy. Ricardo’s book was Principles of Political Economy, not a market economy.
And so this free enterprise market idea that governments should not play any role at all, any subsidy, and certainly shouldn’t tax, this anti-government idea has put blinders on American foreign policy, so they have no imagination that Russia could do exactly what [Alex] is talking about, that, of course, they’ve done, as any reasonable person would have done, as China has done. That’s the irony of all this.
So I’m glad that, yeah, I think that Frederick List is probably in the Russian libraries, the most widely held book on protectionist ideas, but also Glenn mentioned Japan’s productive policy. The American leading protectionist in the 1850s was William Seward, the Secretary of State Seward’s law partner, Erasmus Peshine Smith. And the Americans waited for the British ambassador to Japan to go back to England for a vacation, and then Peshine Smith went to Japan, became an advisor to the Mikado, and they translated all of the American protectionist works, and that became the guideline for how Japan developed its protectionism in the late 19th century.
Something like that has to happen in Russia and China, but it’ll have to be by way of people reading the books, because there’s no one living that’s going to go there. So all we can do is recommend books for them to read and to include a history of economic thought and say, how did other countries cope with a problem that Russia has today? How did other countries grow and replace England to be free of England’s control of international trade? Let’s see how other countries did it, and we’ll see what works and what doesn’t work.
GLENN DIESEN: Yes, that’s the reaction you referred to, because when Peshine Smith went to Japan by invitation, the Japanese, of course, have been looking at horrors with Britain destroying China in the opium wars from the 1840s to 60s. So this is, again, a reaction to the system changing around them.
Any final words before we wrap this up?
ALEXANDER MERCOURIS: This has been a stimulating discussion. We could have gone on for hours, I think, but I think this is a good place to stop because, you know, we’ve also discovered, I mean, I didn’t know about this, that there’s this body of economic thought. Perhaps somebody should write to the Kremlin and tell them, and to Zhong Nanhai.
MICHAEL HUDSON: That’s your department, I think.
GLENN DIESEN: Thanks as well. I really appreciate it. This was immensely interesting.
MICHAEL HUDSON: I’m glad we picked up a topic that isn’t on most discussion blogs.
GLENN DIESEN: Thanks again.