Michael Hudson on socialism

hudson-200x300Another extract in this occasional series from Michael Hudson’s iconoclastic “dictionary” J is for Junk Economics. His economics seems to draw on a vast knowledge of economic history, which often makes for some original ideas and enlightening reading. He appears to be a socialist of the reformist variety and he is right that “socialism” is used as a misleading term of invective by some on the political right. But as Geoffrey Hodgson has reminded me in a number of his books, neoliberalism has become something similar on the left. Using terms in this way becomes emotionally provocative and vastly simplifies debates over their history and meaning. But politics and political persuasion are often as much or more about emotion than a sophisticated analysis of policy. As Hodgson argues in his Liberal Solidarity, most people are not political activists, and perhaps even fewer are professional political or economic analysts. Continue reading

Wealth, welfare and well-being – what do we want from our (political) economy?

This post draws on a variety of unconventional yet renowned economists to reconsider the values and goals of economic activity and challenge aspects of the conventional wisdom, arguing that economics would benefit from being more controversial and open to debate.

Economics has been called the science of rational choice. An older definition holds that it is concerned with the production, distribution and consumption of wealth. Some of today’s progressives, which this writer often aspires to be, hope for a capitalism (and beyond) that can somehow reconcile sustainable prosperity, justice and liberty. However it must be acknowledged that attaining these three in a satisfactory way can be fleeting, and requires constant work, both in thought and deed. Continue reading

Questioning Modern Monetary Theory: Part 1

Following yesterday’s introduction, this is the first part of a new series which aims to explore, through some questions and answers, particular aspects of Modern Monetary Theory (MMT) which interest me. As I have already outlined some of MMT’s implications already, I will jump straight in.

What is the essence of money according to MMT? What are some alternatives?

According to Professor Michael Hudson in his J is for Junk Economics, “money’s main function is to denominate debts” and its “defining characteristic” is the willingness by governments to accept it as payment for taxes or fees. Money can be created by the government by running budget deficits which are spent into the economy, or it can be created by private banks which have been “granted…the money-creating privilege.” Furthermore, Hudson argues that “money is a legal creation, not a commodity like gold or silver” which is given “value by accepting it in payment of taxes and fees”. Continue reading

Questioning Modern Monetary Theory: an introduction

TheDeficitMythI recently finished reading Stephanie Kelton’s The Deficit Myth which, judging by the number of reviews it has generated on amazon alone, has been a huge seller, at least for a popular economics book. Whether one agrees with her arguments or not, it was an enjoyable read.

The book makes accessible to a general audience the main ideas of Modern Monetary Theory (hereafter MMT), which has created much heat, and perhaps some light, across social media and the blogosphere. According to Michael Hudson, MMT sees money and credit as a public utility, and a creature of the state, which can potentially be used by governments to achieve all sorts of progressive goals, particularly full employment with moderate inflation, but also reduced inequality and poverty, a Green New Deal, improved public health, education and infrastructure, and so on. The mainstream focus on balancing the government budget, either over the economic cycle, or even, for some economists, at all times, is apparently shown to be misguided. Instead, the main economic constraint facing the government is inflation due to inadequate aggregate supply or a shortage of resources in the face of expanding aggregate demand, whether that is a shortage of labour or other factors of production.

Many MMTers argue that full employment can be achieved and sustained by a Job Guarantee (JG) scheme, so that all those otherwise unemployed who wish to work should be offered a public sector job at the minimum wage providing useful goods and services. In a recession with private sector employment falling, the JG scheme would automatically expand, employing the otherwise unemployed in the public sector. This would also cushion the economy from the usual recessionary fall in aggregate demand. As private sector employment recovers, the JG scheme would shrink, so that JG workers would transfer to higher wage jobs in the private sector.

Contrary to some popular criticisms, MMTers argue that their ideas are not an excuse for the government to print money and forget about budget deficits. If inflation rises above target, policymakers should raise taxes to reduce aggregate demand and shrink the deficit, reducing inflation that is believed to be mostly caused by a limited supply of real resources, as already mentioned. The JG scheme, since the jobs it provides pay the minimum wage, should help to stabilize inflation by anchoring wages across the whole economy to those set by the (public sector) scheme. To the extent that inflation can be caused by wages rising faster than productivity, with firms passing on such cost increases to output prices, the JG scheme can act as a sort of incomes policy by restraining wage inflation.

So MMT potentially offers all sorts of public policy goodies to the left, with apparently little cost economically.

This then is the introduction to a series of posts on MMT which aim to explore and critique (rather than criticise) some of its aspects. The series does not aim to be comprehensive. Instead, I will write about aspects which I find interesting, whether I think they are correct or otherwise. It will be set out as a series of questions and answers, which can be an appealing format, and one which focuses the mind on whatever topic is being suggested.

Michael Hudson on social progress and mythical stages of development

hudson-200x300Some more extracts in this occasional series from Michael Hudson’s J is for Junk Economics. Here he aims to take apart modern notions of progress and of financialized capitalism as somehow the most efficient form of socioeconomic system.

Progress: Today’s word “progress” has degenerated from its 19th- and 20th-century meaning of democratic reform. Every process of social decay euphemizes itself as progress, as if moving forward in time is invariably upward, not retrogressive. So there is “real” progress and false progress. The neoliberal ideology favoring rentier income over wages, deregulation, financialization and privatization over public investment is antithetical to classical political economy’s definition of social progress as replacing feudal privilege with progressive income tax and regulatory policy promoting greater equality of opportunity and income, mainly by taxing economic rent and windfall to property and financial gains.

Theories of progress treat the debt buildup as cumulative and irreversible, in contrast to ancient society’s idea of circular time with periodic financial clean slates to restore economic balance from outside “the market”. Without debt cancellations, economies evolve into oligarchies, which depict their takeovers as “progress” and thus as morally justified on the ground of its seeming inevitability.” (p.184)

Stages of Development: The idea that history has been moving inexorably toward the present distribution of wealth and income, assuming (by tautology) that today’s status quo must be the most efficient and hence “fittest”. The hypothesized stages of development usually are arrayed in sets of three, eg., from agriculture via industrial capitalism to “postindustrial” finance capitalism, culminating in today’s dominance by financial planners – as if this is the end of history, not a retrogression to feudalism.

Most concepts of “stages of development” get the actual sequence backward. Headed by the Austrian School, 19th-century monetary theorists speculated that economies evolved from barter via a money economy to a credit system. This misses the fact that the Neolithic and Bronze Age Mesopotamian economies were credit economies. As planting and harvesting developed in the Neolithic, credit became necessary to bridge the time gap for expenses incurred during the crop year (such as ale to drink and agricultural and public services, typically to be paid for at harvest time).

All three “stages” are usually found simultaneously. Economic historian Karl Polanyi’s (1886-1964) “three stages” of market development, for instance, distinguish reciprocity (gift exchange) and administered prices from market exchange at flexible prices. Even in today’s economies, individuals still reciprocate meals, gifts and other social obligations.

Money developed gradually as a means of denominating and settling crop debts, most of which were owed to the temples and palaces. Rulers set prices for grain, silver, and other key goods and services to enable debts to be paid to these large institutions in these commodities (“in kind”).

The volume of debt grew so large under Rome’s oligarchy that the fiscal and monetary system broke down for the vast majority of the population. Except for the narrow warlord-landlord layer, economic units were obliged to become locally self-sufficient. The Western Roman Empire deteriorated as silver and gold were drained to the East. Debt deflation, austerity and collapse are thus the final stage of debt-ridden economies. This makes the “credit” or “financial” stage a transition to economic collapse and reversion to barter, unless political decisions from “outside” or “above” the market check rentier power to create a more stable and equitable social arrangement. That requires debt cancellations to bring an economy’s debt overhead back within the ability to be paid.

Nearly all modern “stages of growth” theories deny the basic principle that defines “the final stage” of financialization: debts that cannot be paid, won’t be. Either a clean slate or a lapse into debt serfdom is needed to end the preceding cycle and inaugurate a new takeoff or recovery.” (p.213-4)

Michael Hudson on Reaganomics and the Laffer Curve

hudson-200x300Here is another extract, in an occasional series, from Professor Michael Hudson’s J is for Junk Economics, his iconoclastic ‘dictionary’ of misleading terms in economics and political economy. (the two quotes are taken from pages 194 and 138, respectively):

Reaganomics: The policy of cutting taxes for the wealthy (especially for real estate investors) while increasing the Social Security tax on employees. The effect was to quadruple the public debt during the 1981-1992 Reagan-Bush administration, while dismantling environmental regulations and deregulating finance to produce a wave of Savings and Loan (S&L) fraud, junk bond takeovers and a stock market bubble. This was euphemized as “wealth creation,” not debt creation.”

Laffer Curve: Originally drawn on a table napkin by Republican advisor Arthur Laffer in 1974, the hypothetical correlation shows an inverse relationship between tax rates and tax revenues. As tax rates are reduced, tax collection is supposed to rise instead of falling – as if lower tax rates will give less incentive for tax avoidance and more incentive to invest in production and hire more employees. The logic is that taxes stifle business investment, reduce earnings and hence income-tax payments. The deeper the tax cuts, the more tax revenue is supposed to be collected – seemingly without limit. The actual result in the Reagan-Bush administration (1981-92) was a massive budget deficit and a quadrupling of public debt.”

Support for these ideas among the political right has persisted, right through to the Trump administration. Once again, steep tax cuts for the wealthy and corporations seemed to give a short term boost to economic performance, but could not be sustained, and left the country with a larger budget deficit. The boost, as far as it went, was probably more on the demand-side, rather than improving the supply-side of the economy.

Put simply, and more honestly, these kinds of arguments boil down to whether or not policy-induced increases in inequality improve economic performance. An increase in inequality may do so if productive investment is constrained by the supply of savings. Since an increase in inequality will shift incomes to those who are more likely to save it, at the level of the economy as a whole, this will enable investment to rise, which could raise growth in output and productivity.

On the other hand, if productive investment is constrained by consumption rather than savings, then an increase in inequality will have the opposite effect. Wealthier individuals and households are less likely to consume their increase in income, and so investment will not rise. Policies which shift income and wealth to poorer households, which are more likely to consume it, will create incentives for investment in new capacity and increases in employment among firms so as to support the increased level of consumption.

This latter effect could be described as a ‘trickle-up’ policy. By reducing inequality, increased consumption spending by poorer households leads to faster growth in investment, output and productivity for the economy as a whole. On the other hand, if investment is constrained by a shortage of savings, then increasing inequality to boost growth is a form of ‘trickle-down’ economics. This macroeconomic analysis is different from the original arguments presented in the simplified form of the Laffer Curve, which focused on microeconomic incentives to work and invest alongside the potential for tax avoidance.

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.”

Michael Hudson: Adam Smith was no ‘free market’ economist

hudson-200x300Here 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

Michael Hudson on the End of History and Fukuyama’s about-face

hudson-200x300Another 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.”