Here are some further enlightening extracts from Michael Hudson’s iconoclastic J is for Junk Economics, this time on Adam Smith (p.28) and the school of Classical Political Economy. Hudson has an extraordinary knowledge of economic history, as can be gathered from viewing any of his interviews on YouTube, or reading his books.
Smith is often falsely regarded as being an advocate of the free market, justifying a libertarian focus on deregulation and minimal levels of taxation. Hudson shows that Smith’s (and the Classical’s) thinking was a bit more complicated: Continue reading →
Another extract in this occasional series from Michael Hudson’s J is for Junk Economics (p.88-9), a book which aims “to revive a more reality-based analysis and policy-making…[by reconstructing] economics as a discipline, starting with its vocabulary and basic concepts.” This time he considers the phrase famously coined by political scientist Francis Fukuyama in the early 1990s, and how events superseded Fukuyama’s ideas, forcing a change of heart.
“End of History: A term reflecting neoliberal hopes that the West’s political evolution will stop once economies are privatized and public regulation of banking and production are dismantled. Writing in the wake of the collapse of the Soviet Union, Francis Fukuyama’s The End of History and the Last Man (1992) coined the term “liberal democracy” to describe a globalized world run by the private sector, implicitly under American hegemony after its victory in today’s clash of civilizations.
It is as if the consolidation of feudal lordship is to be restored as “the end of history,” rolling back the Enlightenment’s centuries of reform. As Margaret Thatcher said in 1985: “There is no alternative” [TINA]. To her and her neoliberal colleagues, one essayist has written “everything else is utopianism, unreason and regression. The virtue of debate and conflicting perspectives are discredited because history is ruled by necessity.”
Fukuyama’s view that history will stop at this point is the opposite of the growing role of democratic government that most 20th century economists had expected to see. Evidently he himself had second thoughts when what he had celebrated as “liberal democracy” turned out to be a financial oligarchy appropriating power for themselves. In 1995, Russia’s economic planning passed into the hands of the “Seven Bankers,” with US advisors overseeing the privatization of post-Soviet land and real estate, natural resources and infrastructure. Russian “liberalism” simply meant an insider kleptocracy spree.
Seeing a similar dynamic in the United States, Fukuyama acknowledged (in a February 1, 2012 interview with Der Spiegel) that his paean to neoliberalism was premature: “Obama had a big opportunity right at the middle of the crisis. That was around the time Newsweek carried the title: ‘We Are All Socialists Now.” Obama’s team could have nationalized the banks and then sold them off piecemeal. But their whole view of what is possible and desirable is still very much shaped by the needs of these big banks.” That mode of “liberal democracy” seems unlikely to be the end of history, unless we are speaking of a permanent Dark Age in which forward momentum simply stops.”
Another extract in this occasional series from Professor Michael Hudson’s alternative economics dictionary J is for Junk Economics (p. 58). Here he briefly outlines the historical evolution of class struggle under capitalism since the 19th century:
“The 19th century’s characteristic class conflict saw industrialists fight to keep profits high by keeping money wages low. This was to be achieved by promoting free trade so as to buy food and necessities more cheaply abroad – and by taxing landlords instead of labor and its necessities. Ricardian value theory assumed that raw manual labor would earn mere subsistence wages in any case. So lower prices for food and necessities would mean that industrialists could pay lower money wages to hire workers. Importing low-priced food would therefore save employers money, as money wages would fall to subsistence levels.
The main political struggle accordingly was between capitalists and landlords, with capitalists aiming to minimize economic overhead in the form of land rent and monopoly rent. The class struggle by the industrial capitalist class began as a fight against landlords who sought protective agricultural tariffs (Britain’s Corn Laws) to keep food prices (and hence, subsistence wages) high. After the bourgeois revolutions of 1848, the fight against the landlord class was well on its way to being won, giving way to the class struggle against labor unions and socialists over wages and working conditions.
Class conflict has always been concerned with whether the tax burden should fall on land rent (landlords), business profits or consumer spending. But now that banking and the financial sector finds its major source of business in real estate (accounting for 70% to 80% of bank loans) – followed by mining and other privatized natural resources and public monopolies such as water, power and communications – interest is paid more out of economic rent than out of industrial and business profits. The financial sector accordingly has joined forces with real estate, natural resource extraction and other monopoly rent seekers. These rentier sectors now struggle jointly against labor.”
Another excerpt in this occasional series from Michael Hudson’s J is for Junk Economics, his often enlightening and generally iconoclastic dictionary of the dismal science (p.231-2).
The pretense that reversing progressive taxation and giving more income to the wealthiest One Percent will maximize economic growth and prosperity for the 99 Percent. The actual effect is to help the rich get richer. The rentier class has manipulated the tax code so that, as Leona Helmsley put it: “Only the little people pay taxes.”
A supporting factoid is that the One Percent spends its income buying products produced by labor. That was Thomas Malthus’s argument for why British landlords should receive agricultural tariff protection (the Corn Laws). His argument endeared him to John Maynard Keynes, but in practice the wealthy bought largely foreign luxuries and financial securities or more property. Today’s One Percent lend out their income and wealth to further indebt the economy to themselves.
Another false assumption is that financiers and property owners (the FIRE [Finance, Insurance and Real Estate] sector) will save and invest their revenue to expand the means of production and employ more labor. In practice, the wealthy wield creditor power to force governments to privatize the public domain and buy companies already in place. When the fictions of “trickle-down economics” lead to financial crises, the wealthy demand that governments rescue banks, give bailouts to uninsured depositors and bondholders, and shift taxes to further favor the FIRE sector at the expense of labor. The result of trickle-down policy is thus economic polarization, not prosperity.
One of the earliest and most blatant expressions of trickle-down demagogy is found in the pleading by Isocrates in his Areopagiticus (VII, 31-34, written in 355 BC). Like most Sophist rhetoric teachers, he charged fees so high that only the wealthy could afford to study with him, so it hardly is surprising that his written speeches supported the oligarchy. “The less well-to-do among the citizens were so far from envying those of greater means that they…considered that the prosperity of the rich was a guarantee of their own well-being.” This may be the earliest written example of the Stockholm Syndrome.
Isocrates praised harsh judges for being “strictly faithful to the laws”. This meant creditor-oriented laws. He noted that “judges were not in the habit of indulging their sense of equity”, that is, what would be fair in the traditional morality of mutual aid. His over-the-top rationale for why Athenian judges “were more severe on defaulters than they were on the injured themselves” (meaning the creditors “injured” by not being paid in full) was that “they believed that those who break down confidence in contracts” (as if being unable to pay was a deliberate attack on pro-creditor laws) “do a greater injury to the poor than to the rich; for if the rich were to stop lending, they [the rich] would be deprived of only a slight revenue, whereas if the poor should lack the help of their supporters they would be reduced to desperate straits.” It is as if usury doesn’t deprive the poor of their land and liberty, which Socrates did not hesitate to explain as the “sting” of usury that stripped debtors of their land and hence degraded their status as citizens.”
“Austrian School of Economics:Emerged in Vienna toward the late 19th century as a reaction against socialist reforms. Opposing public regulation and ownership, the Austrian School created a parallel universe in which governments did not appear except as a burden, not as playing a key role in industrial development as historically has been the case, above all in Germany, the United States and Japan.
Carl Menger developed an anachronistic fable that individuals developed money as an outgrowth of barter, seeking a convenient store of value and means of exchange. The reality is that money was developed by cost accountants in Bronze Age Mesopotamian temples and palaces, mainly as a means of denominating debts. Few transactions during the crop season were paid in money, but took the form of personal debts mounting up to fall due on the threshing floor when the harvest was in. Mercantile trade debts typically doubled the advance of merchandise or money after five years.
Most of these advances were initially made by temple or palace handicraft workshops, or collectors in the palace bureaucracy. Menger’s Austrian theory ignored the fact that weights and measures were developed in the temples and palaces, and that throughout antiquity silver and other metals were produced in standardized purity by temple mints to avoid private-sector fraud. This history has been expurgated, as if enterprise only occurs in the private sector, needing no public role or regulation.
Also not appearing is the exploitation of labor by industrial capitalists. Austrians developed the idea of “time preference.” Profits were attributed to the fact that capital-intensive (“roundabout”) production took time, so profits were simply a form of interest built into nature.”
A video interview below with the always original Michael Hudson on the Real News Network (transcript here). He discusses the impact of Trump’s tariffs, the failure to bring back manufacturing production to the US, and how the President is managing to isolate America and unite much of the rest of the world.
Another excerpt in this occasional series from Michael Hudson’s heterodox ‘dictionary’ J is for Junk Economics (2017, p.72):
“Debts that can’t be paid, won’t be”: Over time, debts mount up in excess of the ability of wide swathes of the economy to pay, except by transferring personal and public property to creditors.
The volume of debt owed by businesses, families and governments typically is as large as gross domestic product (GDP) – that is 100%. If the average interest rate to carry this debt is 5%, the economy must grow by 5% each year just to pay the interest charges. But economies are not growing at this rate. Hence, debt service paid to the financial sector is eating into economies, leaving less for labor and industry, that is, for production and consumption.
Greece’s debt has soared to about 180% of GDP. To pay 5% interest means that its economy must pay 9% of GDP each year to bondholders and bankers. To calculate the amount that an economy must pay in interest (not including the FIRE* sector as a whole), multiply the rate of interest (5%) by the ratio of debt to GDP (180%). The answer is 9% of GDP absorbed by interest charges. If an economy grows at 1% or 2% – today’s norm for the United States and eurozone – then any higher interest rate will eat into the economy.
Paying so much leaves less income to be spent in domestic markets. This shrinks employment and hence new investment, blocking the economy from growing. Debts cannot be paid except by making the economy poorer, until ultimately it is able to pay only by selling off public assets to rent extractors. But privatization raises the economy’s cost of living and doing business, impairing its competitiveness. This process is not sustainable.
The political issue erupts when debts cannot be paid. The debt crisis requires nations to decide whether to save the creditors’ claims for payment (by foreclosure) or save the economy. After 2008 the Obama administration saved the banks and bondholders, leaving the economy to limp along in a state of debt deflation. Economic shrinkage must continue until the debts are written down.
Another in this occasional series from Michael Hudson’s excellent J is for Junk Economics:
“John Maynard Keynes (1883-1946): In the 1920s, Keynes became the major critic of World War I’s legacy of German reparations and Inter-Ally debts. Against the monetarist ideology that prices and incomes in debtor countries would fall by enough to enable them to pay virtually any level of debt, Keynes explained that there were structural limits to the ability to pay. Accusing Europe’s reparations and arms debts of exceeding these limits, Keynes provided the logic for writing down debts. His logic controverted the “hard money” austerity of Jacques Rueff and Bertil Ohlin, who claimed that all debts could be paid by squeezing a tax surplus out of the economy (mainly from labor).
Modern Germany has embraced this right-wing monetarist doctrine. Even in the 1920s, all its major political parties strived to pay the unpayably high foreign debt, bringing about economic and political collapse. The power of “sanctity of debt” morality proved stronger than the logic of Keynes and other economic realists.
In 1936, as the Great Depression spread throughout the world, Keynes’s General Theory of Employment, Interest and Money pointed out that Say’s Law had ceased to operate. Wages and profits were not being spent on new capital formation or employing labor, but were hoarded as savings. Keynes viewed saving simply as non-spending on goods and services, not as being used to pay down debts or lent out to increase the economy’s debt overhead. (Banks had stopped lending in the 1930s.) He also did not address the tendency for debts to grow exponentially in excess of the economy’s ability to carry the debt overhead.
It was left to Irving Fisher to address debt deflation, pointing to how debtors “saved” by paying down debts they had earlier run up. And it was mainly fringe groups such as Technocracy Inc. that emphasized the tendency for debts to grow exponentially in chronic excess of the economy’s ability to carry its financial overhead. Emphasis on debt has been left mainly to post-Keynesians, headed by Hyman Minsky and his successors such as Steve Keen and Modern Monetary Theory (MMT), grounded in Keynes’s explanation of money and credit as debt in his Treatise on Money (1930).”
Another extract in this occasional series from Michael Hudson’s J is for Junk Economics (p.128-129). It defines a well-known term in economics, co-opted by the right, often misleadingly, in order to provide support for ‘free’ markets:
“Invisible Hand: The term dates back to Adam Smith’s Theory of Moral Sentiments (1759) postulating that the world is organized in a way that leads individuals to increase overall prosperity by seeking their own self-interest. But by the time he wrote The Wealth of Nations in 1776, he described hereditary land ownership, monopolies and kindred rent-seeking as being incompatible with such balance. He pointed to another kind of invisible hand (without naming it as such): insider dealing and conspiracy against the commonweal occurs when businessmen get together and conspire against the public good by seeking monopoly power. Today they get together to extract favors, privatization giveaways and special subsidies from government.
Special interests usually work most effectively when unseen, so we are brought back to the quip from the poet Baudelaire: “The devil wins at the point he convinces people that he doesn’t exist.” This is especially true of the financial reins of control. Financial wealth long was called “invisible,” in contrast to “visible” landed property. Operating on the principle that what is not seen will not be taxed or regulated, real estate interests have blocked government attempts to collect and publish statistics on property values. Britain has not conducted a land census since 1872. Landlords “reaping where they have not sown” have sought to make their rent-seeking invisible to economic statisticians. Mainstream orthodoxy averts its eyes from land, and also from monopolies, conflating them with “capital” in general, despite the fact that their income takes the form of (unearned) rent rather than profit as generally understood.
Having wrapped a cloak of invisibility around rent extraction as the favored vehicle for debt creation and what passes for investment, the Chicago School promotes “rational markets” theory, as if market prices (their version of Adam Smith’s theological Deism) reflect true intrinsic value at any moment of time – assuming no deception, parasitism or fraud such as characterize today’s largest economic spheres.”
Following Tuesday’s video, here is more from this interview with Michael Hudson on Trump’s economic policies, from tax cuts and trade wars to infrastructure, privatisation, industrial policy, Wall Street versus Main Street and Artificial Intelligence and its effects on unemployment.