Productive versus unproductive labour: Michael Hudson on the creation of value

Where do we define the boundaries of productive activity in the economy? As Mariana Mazzucato argues in The Value of Everything, the ‘production boundary’ has changed over time throughout the history of economic thought until the present, in which mainstream neoclassical economics considers anything priced by the market to be a source of value, amended by the possible presence of market imperfections. She wants to rekindle the debate on the sources of value in economics, with the state as a potential co-creator of markets and innovative activity and, hence, economic value.

hudson-200x300I have already posted on Mazzucato’s book here, so here is Michael Hudson’s take on the issue, from his J is for Junk Economics (p.182-3):

Productive vs. Unproductive Labor: Defining productivity is fairly easy when the measure of output consists of uniform commodities: steel, crops or automobiles produced per man-year. But today’s National Income and Product Accounts (NIPA) define the productivity of labor by Gross Domestic Product (GDP) per work-year, regardless of whether it produces commodities, financial “services” or simply makes money by zero-sum speculation.

Goldman Sachs’s Lloyd Blankfein has bragged that his firm’s partners are the economy’s most productive individuals, as measured by the huge amounts of money they make. This reasoning is circular: it claims that people are paid according to their productivity as measured by their wages, salaries and/or bonuses – which are assumed to be paid in proportion to their productivity!

But what about economic activity that is merely extractive and predatory? Value-free economics abandons the classical definition of productive labor or investment as that which produces profit on “real” production. At issue is what is real and what is mere overhead.

Adam Smith and his followers defined labor as productive only if it produced commodities for sale. That was in an epoch when most services were performed by servants (maids, butlers, coachmen and other employees of the wealthy) as consumption expenses. This personal employment was deemed to be part of the rentier class’s overhead. Church officials, government workers, the army, tutors and teachers or other professionals in what today is called the non-profit sector also were deemed unproductive.

To Karl Marx, labor under industrial capitalism was productive to the extent that it produced a profit for its employer. He pointed out that even prostitutes were productive – of a profit, if employed by their madams, just as steel workers were productive of a profit to mill owners. His 3-volume Theories of Surplus Value reviewed the classical discussion of productive labor, value and price.

From the classical vantage point, rent extraction, debt leveraging and related financial overhead is not part of the economy’s necessary core, and thus would be viewed as a subtrahend from “real” output and productivity. Post-classical economists stopped distinguishing between intrinsic value and market price so as to avoid the critique of land rent, monopoly rent, and financial and other rentier charges as undesirable overhead.

After Russia’s 1917 revolution, Soviet statisticians reverted to Adam Smith’s definition of physical productivity: material output per worker. Their non-capitalist society had no rentier class, and the state did not charge interest or rent, so no implicit rent-of-location or cost of capital was measured in their national income statistics. These exclusions left Russia somewhat naïve when it opened its economy to the West in 1991, not realizing that the main aim of neoliberal investment was rent extraction from natural resources, land and monopolies.

The postindustrial epoch in the West itself has seen industry turned into a vehicle to extract economic rent and interest, and to make “capital” gains from asset-price inflation as a “total return” on equity. From the classical vantage point of the industrial economy at large, this is an overgrowth of unproductive investment. The quick collapse of Russian manufacturing after 1991 is an object lesson in the effect of replacing industrial productivity with rentier asset stripping.”

Michael Hudson on Wall Street

JisforJunkEconHere is another extract from Michael Hudson’s iconoclastic ‘dictionary’ J is for Junk Economics. This time he takes aim at Wall Street (p.243), though the following could be applied to some other major financial centres.

Wall Street: Replacing government as the economic planning center on behalf of the FIRE [Finance, Insurance and Real Estate] sector, Wall Street is the major source and sponsor of financial overhead. Its business plan is to load corporations, households, real estate, natural resources and government with enough debt so that all profit, all wages above basic and subsistence needs, and all rents will be paid to banks and bondholders as interest.

Financial short-termism is a distinguishing feature of junk economics. Corporate income is used for stock buybacks and higher dividend payouts instead of for new capital investment. Political contributions support politicians who vote to harden pro-creditor bankruptcy laws and sponsor regulatory capture to block prosecution of financial fraud. The resulting debt deflation slows economic growth, as debt service absorbs a rising proportion of personal and corporate income.

Wall Street’s business plan is thus inherently self-destructive. A financial crisis can be averted only by an exponential creation of new credit to fuel more asset-price inflation, enabling debts to be paid by borrowing the interest against collateral whose price is being pushed up by easier bank loans. To defend subsidizing the rising debt overhead and bailouts of banks and bondholders, Wall Street has become the major political campaign contributor, and also the major sponsor of junk economics that blames the victims (debtors, labor, immigrants and foreigners) instead of the debt creation and tax favoritism that increase the rentier wealth of the One Percent.”

Too much finance – misallocation, corruption and ideology

800px-A1_Houston_Office_Oil_Traders_on_Monday“[T]he financial sector has become much more profitable than the non-financial sector, which has not always been the case. This has enabled it to offer salaries and bonuses that are much higher than those offered by other sectors, attracting the brightest people, regardless of the subjects they studied in universities. Unfortunately, this leads to a misallocation of talents, as people who would be a lot more productive in other professions – engineering, chemistry and what not – are busy trading derivatives or building mathematical models for their pricing. It also means that a lot of higher-educational spending has been wasted, as many people are not using the skills they were originally trained for.

The disproportionate amount of wealth concentrated in the financial sector also enables it to most effectively lobby against regulations, even when they are socially beneficial. The growing two-way flow of staff between the financial industry and the regulatory agencies means that lobbying is often not even necessary. A lot of regulators, who are former employees of the financial sector, are instinctively sympathetic to the industry that they are trying to regulate – this is known as the problem of the ‘revolving door’.

More problematically, the revolving door has also encouraged an insidious form of corruption. Regulators may bend the rules – sometimes to the breaking point – to help their potential future employers. Some top regulators are even cleverer. When they leave their jobs, they don’t bother to look for a new one. They just set up their own private equity funds or hedge funds, into which the beneficiaries of their past rule-bending will deposit money, even though the former regulators may have little experience in managing an investment fund.

Even more difficult to deal with is the dominance of pro-finance ideology, which results from the sector being so powerful and rewarding to people who work in – or for – it. It is not simply because of the sector’s lobbying power that most politicians and regulators have been reluctant to radically reform the financial regulatory system after the 2008 crisis, despite the incompetence, recklessness and cynicism in the industry which it has revealed. It is also because of their ideological conviction that maximum freedom for the financial industry is in the national interest.”

Ha-Joon Chang (2014), Economics: The User’s Guide, Penguin Books, p.306-7.

Don’t Be Evil. Rana Foroohar on Big Tech

The FT’s Rana Foroohar discusses the ‘evil’ side of ‘Big Tech’. She is pushing her new book, but it is an interesting interview which touches on a range of issues relevant to the economics, business, politics, finance and culture of this increasingly all-pervasive phenomenon.

Foroohar has also written on the dangerous and distorting power and influence of ‘Big Finance’, which has become known as financialisation and has generated a large and growing literature among political economists, particularly those writing in the Marxist and post-Keynesian traditions.

Financialisation is a problem for capitalism. Is socialism the solution? (Part 2)

In this recent post I outlined some of the ideas in Grace Blakeley’s new book Stolen – How to Save the World from Financialisation. Her answer to the apparent political, social and economic problems with financialisation under capitalism is a transformation towards democratic socialism, starting in the UK and spreading across the world.

In the book she describes a range of policies that would, she hopes, encourage such a trend: a Public Investment Bank; a People’s Asset Manager to encourage the spread of public ownership; an ambitious Green New Deal; changes to corporate governance so that a much wider range of stakeholders are more closely involved in decision-making, not only in non-financial corporations, but also in banks and including the Bank of England. She also argues for the restoration of trade union power and influence, the refinancing of private debt and much tougher regulation of private banking, to encourage definancialisation domestically and ultimately globally. Continue reading

Financialisation is a problem for capitalism. Is socialism the solution? (Part 1)

GraceBlakeleyStolenThe rise of finance across the world economy in recent decades and its spectacular fall from grace as the crisis of 2008 unfolded has given birth to the notion of financialisation in academic circles, particularly among heterodox economists. Grace Blakeley, economics commentator for the New Statesman magazine, research fellow at the IPPR think tank and a rising star on the radical left here in the UK, has written an accessible book which attempts to make sense of this phenomenon and attempts to overcome it. Stolen – How to Save the World from Financialisation is aimed at the intelligent layman rather than being an academic work.

In the book, Blakeley explores the recent history of financialisation and the increasing power of finance in society and its damaging economic, social and political impact, focusing mainly on the UK. She also proposes a solution: democratic socialism. In two posts, of which this is the first, I explore some of the thinking in the book and elsewhere on financialisation and its consequences, as well as potential solutions which aim to mitigate or remove its deleterious nature. Continue reading

Inequality in the OECD: causes and policy responses

Inequality has become a ‘big’ topic in recent years, of concern both to economists and the public at large. This is exemplified by the popularity of Thomas Piketty’s Capital in the Twenty-First Century, and many other works. I have written on some of these studies here.

They continue to be churned out: in the July issue of the heterodox Cambridge Journal of Economics, Pasquale Tridico of Roma Tre University analyses the determinants of income inequality in 25 OECD countries between 1990 and 2013. He finds that ‘financialisation’, increased labour market flexibility, the declining influence of trade unions and welfare state retrenchment have been key to its rise.

When other factors such as economic growth, technological change, globalization and unemployment are taken into account, the above four causes remain important, and, to the extent that they can be changed as a matter of policy, they can mitigate inequality without harming economic growth. They are therefore not the full story but, for example, the negative effects of rising unemployment on inequality can be reduced if there is a strong social safety net in place. Continue reading

Michael Hudson on Quantitative Easing

Plenty of economists, investors and others have been wondering what will happen to financial markets and the real economy as monetary stimulus in the form of Quantitative Easing is wound down by central banks from the US to the Eurozone in the face of stronger growth.

I will be writing more about it next week, considering the perspectives of critic Richard Koo among others, but here is Michael Hudson from, as ever, his iconoclastic and insightful ‘dictionary’ J is for Junk Economics (p.189-91): Continue reading

Finance, inequality, ecology – an interview with Steve Keen

A nice interview with post-Keynesian Professor Steve Keen, in which he discusses what are (or should be) some of the most important issues in modern economics.

He covers the role of finance and private debt in generating inequality and what can be done to reduce it; the idea and feasibility of a universal basic income; economics and planetary ecology; and the incorporation of energy into economic models.

J is for Junk Economics – Michael Hudson on the Real News Network

This year I have been regularly posting excerpts from Michael Hudson’s new book J is for Junk Economics. Below is Part One of his interview with The Real News Network, in which he discusses his reasons for writing this iconoclastic ‘dictionary’ of economic thought. In his words, it is a guide to how the economy really works and seeks to overturn a misleading orthodoxy propagated by the media and many academics, not least economists!