Michael Hudson on Finance Capitalism

Iconoclastic economist Michael Hudson on ‘Finance Capitalism’, taken from J is for Junk Economics (p.99-100). In today’s finance-dominated economies, his words are especially relevant, even though the term is not a recent one.

“Finance Capitalism: A term coined by Bruno Hilferding in Finance Capital (1910) to signify the evolution of industrial capitalism into a system dominated by large financial institutions, usually in conjunction with government (especially military spending) and heavy industry. To the extent that Wall Street managers take control of industry, their policy typically is to bleed profits to pay interest, dividends and other financial charges instead of investing in new capital formation and hiring. Today’s finance capitalism thus has become antithetical to the needs and dynamics of industrial capitalism.

Finance capitalism is defined by the relationship between creditors and debtors, and speculation for financial gains not related to tangible capital investment or production. The aim is to extract interest and financial fees by indebting labor, industry, real estate and government. Mortgage bankers aim to absorb all the net rental cash flow.

The culmination of this dynamic is the point at which the expanding debt overhead siphons off all net discretionary personal income and business profits. For loans to governments, the aim is to absorb the net tax revenue, and then to strip away the public domain in payment (eg., in the eurozone loans to Greece since 2010).

To increase its gains, the financial sector promotes (indeed, demands) the creation of legal monopolies and privatization of land ownership and public infrastructure, to be sold on credit. This builds interest charges into the break-even cost of doing business, increasing the economy’s overall cost structure. In the bubble stage of finance capitalism, the measure of financial productivity is total returns: interest plus capital gains. These gains on stocks and bonds are engineered by debt leveraging. Homebuyers, real estate speculators and corporate raiders pay their current income as interest, hoping that prices for assets bought on credit will rise at a faster rate.

These gains appear to be “saving” with interest being paid for expectations of capital gains. This economic and political dynamic of finance capitalism following feudalism and industrial capitalism, ends in debt peonage and a plunge of asset prices as the economy succumbs to debt deflation. The effect is a kind of neofeudalism.”


Our resurgent enemy: authoritarian nationalism trumps neoliberalism

Institutionalist economist Geoffrey Hodgson writes a fascinating and highly informative blog entitled New Politics. This post from January discusses the authoritarian nationalist turn in world politics and the vital importance of liberalism in countering this threat. His writing is lucid, compelling, and very well-informed by lessons from history.

Although the post is more about politics than economics, from a political economy perspective, the two are more useful when analysed together. In modern capitalist economies, the role of the state is inseparable from other institutions such as the rule of law and the market.

The debate over economic policy should be thoroughly exercised in the public realm of a healthy democracy. This requires well-educated citizens open to engaging critically in such a debate, allowing space for diversity and pluralism without dictating their terms. Intolerance is present in elements of both left and right and is contrary to the liberal perspective. Continue reading

The Koreas: totalitarian socialism vs industrial policy

A link below to Michael Roberts’ blog post on the Koreas. It focuses mainly on some analysis of the post-Korean War economic history of the North, but also some comparison with the capitalist South and his desire to see the two of them reunified under centrally-planned socialism, something that I cannot see being a success.

The diverging fortunes of North and the South in terms of economic (and political) development illustrate the potential dynamism of capitalism versus largely autarkic socialism. But it does not lend support to an idealised and unfettered free-market capitalism either. Continue reading

Richard Koo explains balance sheet recessions

Economist Richard Koo is well known for his concept of  a ‘balance sheet recession’. In this short video he explains how the recent Great Recession, the Great Depression of the 1930s, and Japan’s economic stagnation since the 1990s are all examples of this, and what can be done about it.

A number of somewhat iconoclastic economists have explored the nature and consequences of asset-price bubbles, fueled by the accumulation of private sector debt, and their subsequent collapse, followed by private sector deleveraging (paying down debt). They include Koo, Michael Pettis, Steve Keen and Michael Hudson, the latter three being influenced by the late Hyman Minsky and his Financial Instability Hypothesis. The four of them proffer somewhat different solutions to the long stagnation that can follow the collapse of a debt-fueled asset-price bubble, which we are arguably still living through.

Koo favours a fiscal stimulus in which government spending exceeds revenue at a rate sufficient to prevent the economy collapsing as a large number of firms use their cash flow to pay down debt, rather than invest. This is what has been done intermittently in Japan. Koo argues that without the stimulus the Japanese economy would have experienced its own Great Depression, rather than simply years of stagnation.

Keen and Hudson favour a Modern Debt Jubilee in which much private debt is simply forgiven and wiped out, allowing households and firms to raise their spending on consumption and investment and drive economic recovery.

Pettis focuses his analysis on the current account imbalances across the global economy which in his view caused the build-up of debt. The unwinding of these imbalances is required to secure a more sustainable global recovery.

There is something to be said for the ideas of all of the above. I am keen to compare them and integrate the most important aspects, as their thinking overlaps to a significant extent. That will be the subject of a future post! In the meantime, I can definitely recommend watching the video as an introduction to Koo’s thinking.

Despite the fall of communism, we are still living in planned economies (Ha-Joon Chang’s Thing 19)

23-things-they-don-t-tell-you-about-capitalismAnother excerpt from Ha-Joon Chang’s 23 Things They Don’t Tell You About Capitalism. While this one may seem obvious, it provides an important counter to at least one aspect of market fundamentalism.

“Capitalist economies are in large part planned. Governments in capitalist economies practise planning too, albeit on a more limited basis than under communist central planning. All of them finance a significant share of investment in R&D and infrastructure. Most of them plan a significant chunk of the economy through the activities of state-owned enterprises. Many capitalist governments plan the future shape of individual industrial sectors through sectoral industrial policy or even that of the national economy through indicative planning. More importantly, modern capitalist economies are made up of large, hierarchical corporations that plan their activities in great detail, even across national borders. Therefore, the question is not whether you plan or not. It is about planning the right things at the right levels (p.199-200)…

The prejudice against planning, while understandable given the failures of communist central planning, makes us misunderstand the true nature of the modern economy in which government policy, corporate planning and market relationships are all vital and interact in a complex way. Without markets we will end up with the inefficiencies of the Soviet system. However, thinking that we can live by the market alone is like believing that we can live by eating only salt, because salt is vital for our survival (p.209).”