Michael Hudson on the Austrian School of Economics

hudson-200x300Another extract, in this occasional series, from Michael Hudson’s iconoclastic dictionary of economics, J is for Junk Economics. Last week’s posted video featured a short lecture by institutional economist Geoffrey Hodgson, in which he quoted selectively from Austrian School economist Friedrich Hayek, and appeared to show Hayek’s one-time support for social democratic policies. Hudson’s brief account below is critical of the School:

“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.”

Michael Hudson: Trump’s new tariffs on China help pay for his corporate tax cut

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.

Michael Hudson: debts that can’t be paid, won’t be

JisforJunkEconAnother 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.

*Finance, Insurance and Real Estate

Michael Hudson on John Maynard Keynes

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).”

Michael Hudson on the invisible hand

hudson-200x300Another 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.”

Michael Hudson interview part 2

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.