Part V of Economics Series: on why I'm more keen on reclaiming the concept of the free market from Neoliberals than blaming their policies on a 'free-market' ideology or theory (massive only because of my 12,000+ words of Hudson quotes)

The Synthesis of Michael Hudson, Steve Keen and Noam Chomsky on the “Free Market”: On Adam Smith and the Concept of the “Free Market” in Classical Economics, on Rentiers and Wall St, and the Question of whether it is Accurate or Rhetorically Useful to Describe Neoliberalism as being Truly Motivated by “Free-Market” Economics Instead of the Hegemonic Interests of Major Corporations and Firms

In his scintillating, rage-making polemic, Killing the Host (2015), the economist (once-upon-a-time Wall St economist) and ancient historian Michael Hudson uses a conceptual apparatus derived from classical economics/classical political economy (the tradition linking Adam Smith to David Ricardo to John Stuart Mill to Karl Marx ((very arguably) to General Theory-era Keynes[1])) to argue that our massively financialised post-1980 economies are rentier economies – parasitic, zero-sum, extractive economies – in which the bankers and monopolists of the 1% have become our ‘equivalent’ to the landed gentry of early capitalism (the class which classical-economics reformers sought to remove in pushing the transition from feudalism to a more just market system, in which everyone would earn their wealth and power would be highly distributed). Wall St bankers, Hudson claims, are, like the aristocrats decried by John Stuart Mill, “making money in their sleep”, not actually contributing to production, not actually making anything, but profiting at the expense of the wider population. Perhaps his most subversive claim is that the neoclassical economics establishment (along with the Austrian school) has, by erasing the key classical concept of “unearned income” and accepting a merely “subjective theory of value” (giving rise to the absurd Chicago School catechisms that “All income is earned” and “There is no such thing as a free lunch”), corrupted the very idea of the “free market” (despite practising nominally “free-market” economics). Instead of the “free market” meaning what it did for the classical economists – a market free from “rent to a hereditary landlord class, and free from interest and monopoly rent paid to private owners”, in which “people would be rewarded for their labor and enterprise, but would not receive income without making a positive contribution to production and related needs” [13] – the free market now has come to mean a mark free for rentiers, free for the “tollbooth-operators” and the financial parasites of the FIRE sector (Finance, Insurance and Real Estate) to suck more and more money out of the economy, to take over the political and regulatory framework implemented to check their power, and – in Hudson’s daring subversion of Hayek – to become the “new central planners” in a system of financial serfdom and oligarchy.

Since I cannot improve upon the way in which Hudson writes about these matters, the following is >12,000 words worth of extracts from the first volume of the book (this took me literally a day of unbroken, rapid typing):

The first two sections of the introduction, “The Parasite, the Host, and Control of the Economy’s Brain”, where he introduces the central metaphor of the book:

“Biological usage of the word “parasite” is a metaphor adopted from ancient Greece. Officials in charge of collecting grain for communal festivals were joined in their rounds by their aides. Brought along to the meals by these functionaries at public expense, the aides were known as parasites, a non-pejorative term for “meal companion,” from the roots para (beside) and sitos (meal).

By Roman times the word came to take on the meaning of a superfluous freeloader. The parasite fell in status from a person helping perform a public function to become an uninvited guest who crashed a private dinner, a stock character in comedies worming his way in by pretense and flattery.

Medieval preachers and reformers characterized usurers as parasites and leeches. Ever since, many economic writers have singled out bankers as parasites, especially international bankers. Passing over into biology, the word “parasite” was applied to organisms such as tapeworms and leeches that feed off larger hosts.

To be sure, leeches have long been recognized as performing useful medical function: George Washington (and also Josef Stalin) were treated with leeches on their deathbeds, not only because bleeding the host was thought to be a cure (much as today’s monetarists view financial austerity), but also because leeches inject an anti-coagulant enzyme that helps prevent inflammation and thus steers the body to recovery.

The idea of parasitism as a positive symbiosis is epitomized by the term “host economy,” one that welcomes foreign investment. Governments invite bankers and investors to buy or finance infrastructure, natural resources and industry. Local elites and public officials in these economies typically are sent to the imperial or financial core for their education and ideological indoctrination to accept this dependency system as mutually beneficial and natural. The home country’s educational cum ideological apparatus is molded to reflect this creditor/debtor relationship as one of mutual gain.

Smart vs. self-destructive parasitism in nature and in economies

In nature, parasites rarely survive merely by taking. Survival of the fittest cannot mean their survival alone. Parasites require hosts, and a mutually beneficial symbiosis often results. Some parasites help their host survive by finding more food, others protect it from disease, knowing that they will end up as the beneficiaries of its growth.

A financial analogy occurred in the 19^th century when high finance and government moved closer together to fund public utilities, infrastructure and capital-intensive manufacturing, especially in armaments, shipping and heavy industry. Banking was evolving from predatory usury to take the lead in organizing industry along the most efficient lines. This positive melding took root most successfully in Germany and its neighboring Central European countries under public sponsorship. Across the political spectrum, from “state socialism” under Bismarck to Marxist theorists, bankers were expected to become the economy’s central planners, by providing credit for the most profitable and presumably socially beneficial uses. A three-way symbiotic relationship emerged to create a “mixed economy” of government, high finance and industry.

For thousands of years, from ancient Mesopotamia through classical Greece and Rome, temples and palaces were the major creditors, coining and providing money, creating basic infrastructure and receiving user fees as well as taxes. The Templars and Hospitallers led the revival of banking in medieval Europe, whose Renaissance and Progressive Era economies integrated public investment productively with private financing.

To make this symbiosis successful and free, immune to special privilege and corruption, 19^th-century economists sought to free parliaments from control by the propertied classes that dominated their upper houses. Britain’s House of Lords and senates throughout the world defend the vested interests against the more democratic regulations and taxes proposed by the lower house. Parliamentary reform extending the vote to all citizens was expected to elect governments that would act in society’s long-term interest. Public authorities would take the lead in major capital investments in roads, ports and other transportation, communications, power production and other basic utilities, including banking, without private rent-extractors intruding into the process.

The alternative was for infrastructure to be owned in a pattern much like absentee landlordship, enabling rent-extracting owners to set up tollbooths to charge society whatever the market would bear. Such privatization is contrary to what classical economists meant by a free market. They envisioned a market free from rent paid to a hereditary landlord class, and free from interest and monopoly rent paid to private owners. The ideal system was a morally fair market in which people would be rewarded for their labor and enterprise, but would not receive income without making a positive contribution to production and related social needs.

Adam Smith, David Ricardo, John Stuart Mill and their contemporaries warned that rent extraction threatened to siphon off income and bid up prices above the necessary cost of production. Their major aim was to prevent landlords from “reaping where they have not sown,” as Smith put it. Toward this end their labor theory of value (discussed in Chapter 3) aimed at deterring landlords, natural resource owners and monopolists from charging prices above cost-value, opposing governments controlled by rentiers.

Reocognizing how most great fortunes had been built up in predatory ways, through usury, war lending and political insider dealings to grab the Commons and carve out burdensome monopoly privileges led to a popular view of financial magnates, landlords and hereditary ruling elite as parasitic by the 19^th century, epitomized by the French anarchist Proudhon’s slogan “Property is theft.”

Instead of creating a mutually beneficial symbiosis with the economy of production and consumption, today’s financial parasitism siphons off income needed to invest and grow. Bankers and bondholders desiccate the host economy by extracting revenue to pay interest and dividends. Repaying a loan – amortizing or “killing” it – shrinks the host. Like the word amortization, mortgage (“dead hand” of past claims for payment) contains the root mort, “death”. A financialized economy becomes a mortuary when the host economy becomes a meal for the financial free luncher that takes interest, fees and other charges without contributing to production.

The great question – in a financialized economy as well as in biological nature – is whether death of the host is a necessary consequence, or whether a more positive symbiosis can be developed. The answer depends on whether the host can remain self-steering in the face of a parasitic attack.”

Chapter 3: The Critique and Defense of Economic Rent, from Locke to Mill:

Epigraph: ““The main substantive achievement of neoliberalization … has been to redistribute, rather than to generate, wealth and income. [By] ‘accumulation by dispossession’ I mean … the commodification and privatization of land and the forceful expulsion of peasant populations; conversion of various forms of property rights (common, collective, state, etc.) into exclusive property rights; suppression of rights to the commons; … colonial, neo-colonial, and imperial processes of appropriation of assets (including natural resources); … and usury, the national debt and, most devastating of all, the use of the credit system as a radical means of accumulation by dispossession … To this list of mechanisms we may now add a raft of techniques such as the extraction of rents from patents and intellectual property rights and the diminution or erasure of various forms of common property rights (such as state pensions, paid vacations, and access to education and health care) won through a generation or more of class struggle. The proposal to privatize all state pension rights (pioneered in Chile under the dictatorship) is, for example, one of the cherished objectives of the Republicans in the US.”

David Harvey, A Brief History of Neoliberalism (Oxford, 2005), pp. 159-160.

The phenomena cited by Harvey represent opportunities for rent extraction. Neoliberals claim that such special privileges and expropriation of hitherto public assets promote economic efficiency. Classical free marketers defined the rents they yielded as neither earned nor necessary for production to occur. They were a post-feudal overhead.

The year 1690 usually is treated as the takeoff point for the classical distinction between earned and unearned wealth and its income stream. At issue then was the contrast between real wealth created by labor, and special privileges – mainly post-feudal overhead – from which society could free itself and thus lower its cost structure.

John Locke’s guiding axiom was that all men have a natural right to the fruits of their labor. A corollary to this logic was that landlords have a right only to what they themselves produce, not to exploit and appropriate the labor of their tenants:

“Though the earth and all inferior creatures be common to all men, yet every man has a property in his own person … The labour of his body and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property … For this labour being the unquestionable property of the labourer, no man but he can have a right to what that is once joined to, at least where there is enough and as good left in common for others.” “Of Property,” The Second Treatise of Civil Government (New York: 1947), p.134.

Locke wrote here as if most rent derived from the landlords’ own labor, not that of their tenants or the economy at large. He also did not distinguish between the original conquerors or appropriators and their heirs. It was as if the benefit of earlier labor (or conquest) should be inherited down through the generations. Yet Locke’s labor theory of property and wealth ownership set the stage for distinguishing between the portion of land rent that resulted from its owner’s expenditure of labor and capital investment, and what was received simply from ownership rights without labor effort. Tis contrast guided tax reform down through the Progressive Era in the early 20^th century.

Despite his conflation of former and present landholder’s labor, Locke’s exposition initiated a centuries-long discussion. By the 19^th century the rising price of land sites was seen as occurring independently of effort by landlords. The rent they charged reflected prosperity by the rest of the economy, not their own effort. Economists call this kind of gain a windfall. It is like winning a lottery, including in many cases the inheritance lottery of how much wealth one’s parents have.

Classical economists argued that labor and capital goods require a cost necessary to bring them into production. Labor must receive wages sufficient to cover its basic subsistence, at living standards that tend to rise over time to sustain personal investment in better skills, education and health. And capital investment will not take place without the prospect of earning a profit.

More problematic are accounting for land and natural resources. Production cannot take place without land, sunlight, air and water, but not labor or capital cost is necessary to provide them. They can be privatized by force, legal right or political fiat (sale by the state). For example, Australia’s richest person, Gina Rinehart, inherited from her prospector father the rights to charge for access to the iron ore deposit he discovered. Much of her wealth has been spent in lobbying to block the government from taxing her windfall.

Classical economists focused on this kind of property in defining a fair distribution of income from land and other natural resources as between their initial appropriators, heirs and the tax collector. At issue was how much revenue should belong to the economy at large as its natural patrimony, and how much should be left in the hands of discoverers or appropriators and their descendants. The resulting theory of economic rent has been extended to monopoly rights and patents such as those which pharmaceutical companies obtain to charge for their price gouging.

The history of property acquisition is one of force and political intrigue, not labor by its existing owners. The wealthiest property owners have tended to be the most predatory – military conquerors, landed aristocracies, bankers, bondholders and monopolists. Their property rights to collect rent for land, mines, patents or monopolized trade are legal privileges produced by the legal system they control, not by labor. Medieval land grants typically were given to royal companions in return for their political loyalty.

This land acquisition process continued from colonial times down through America’s land grants to the railroad barons and many other political giveaways to supporters in most countries, often for bribery and similar kinds of corruption. Most recently, the post-Soviet economies gave political insiders privatization rights to oil and gas, minerals, real estate and infrastructure at giveaway prices in the 1990s. Russia and other countries followed American and World Bank advice to simply give property to individuals, as if this would automatically produce an efficient (idealized) Western European-style free market.

What it actually did was to empower a class of oligarchs who obtained these assets by insider dealings. Popular usage coined the word “grabitization” to describe “red company” managers getting rich by registering natural resources, public utilities or factories in their own name, obtaining high prices for their shares by selling chunks to Western investors, and keeping most of their receipts for these shares abroad as flight capital (about $25 billion annually since 1991 for Russia). This neoliberal privatization capped the Cold War by dismantling the Soviet Union’s public sector and reducing it to a neo-feudal society.

The great challenge confronting post-Soviet economies is how to undo the effects of these kleptocratic grabs. One way would be to re-nationalize them. This is difficult politically, given the influence that great wealth is able to buy. A more “market oriented” solution is to leave these assets in their current hands but tax their land or resource rent to recapture portions of the windfall for the benefit of society.

Without such restructuring, all that Vladimir Putin can do is informal “jawboning”: pressuring Russia’s oligarchs to invest their revenue at home. Instead of making the post-Soviet economies more like the productive ideal of Western Europe and the United States in their reformist and even revolutionary heyday a century ago, these economies are going directly into neoliberal rentier decadence.

The problem of how an economy can best recover from such grabitization is not new. Classical economists in Britain and France spent two centuries analysing how to recapture the rents attached to such appropriations. Their solution was a rent tax. Today’s vested interests fight viciously to suppress their concept of economic rent and the associated distinction between earned and unearned income. It would save today’s reformers from having to reinvent the methodology of what constitutes fair value. Censoring or rewriting the history of economic thought aims at thwarting the logic for taxing rent-yielding assets.

The Physiocrats develop national income accounting

Seeking to reform the French monarchy in the decades preceding the 1789 Revolution, the Physiocrats popularized the term laissez faire, “let us be.” Coined in the 1750s to oppose royal regulations to keep grain prices and hence land rents high, the school’s founder, Francois Quesnay, extended the slogan to represent freedom from the aristocracy living off its rents in courtly luxury while taxes fell on the population at large.

Quesnay was a surgeon. The word Physiocracy reflected his analogy of the circulation of income and spending in the national economy with the flow of blood through the human body. This concept of circular flow inspired him to develop the first national income accounting format, the Tableau Économique in 1759 to show how France’s economic surplus – what was left after defraying basic living and business expenses – ended up in the hands of landlords as groundrent.

Within this circle of mutual spending by producers, consumers and landlords, the Physiocrats attributed the economic surplus exclusively to agriculture. But contra Locke, they did not characterize landlords as taking rent by virtue of their labor. The crop surplus was produced by the sun’s energy. This logic underlay their policy proposal: a Single Tax on land, l’împot unique. Taxing land rent would collect what nature provided freely (sunlight and land) and hence what should belong to the public sector as the tax base.

[…]

The Physiocrats’ analysis of the economy’s circular flow of revenue and spending enabled subsequent economists to analyze the net surplus (produit net), defined as income over and above break-even costs. They asked who ends up with it, and who ended up bearing the tax?

Quesnay’s circular flow analysis describes what I call rent deflation. Like debt deflation to pay creditors, it is a transfer payment from agriculture, industry and commerce to rent recipients that do not play a direct and active role in production, but have the power to withhold key inputs needed for it to take place, or from consumers.

Adam Smith broadens Physiocratic rent theory

Adam Smith met Quesnay and Les Économistes on his travels in France during 1764-66. He agreed with the need for free labor and industry from the land rent imposed by Europe’s privileged nobilities: “Ground-rents and the ordinary rent of land are … the species of revnue which can best bear to have a peculiar tax imposed on them.” But in contrast to the Physiocratic description of industry being too “sterile” to tax, Smith said manufacturing was productive.

In his lectures at Edinburgh a decade before he wrote The Wealth of Nations, Smith generalized the concept of rent as passive, unearned income – and used the labor theory of value to extend this idea to finance as well as land ownership:

“The labour and time of the poor is in civilized countries sacrificed to the maintaining of the rich in ease and luxury. The landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his exactions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full enjoyment of the fruits of his own labours; there are no landlords, no usurers, no tax gatherers.”

Failure to tax this rent burden shifted taxes onto commerce and industry, eroding its profits and hence capital accumulation. In addition to bearing the cost of land rents, populations had to pay excise taxes levied to pay interest on public debt run up as as a result of the failure to tax landlords.

The major focus of value and price theory remained on land rent throughout the 19^th century. In 1848, John Stuart Mill explained the logic of taxing it away from the landlord class: “Suppose that there is a kind of income which constantly tends to increase, without any exertion or sacrifice on the part of the owners: those owners constituting a class in the community.” Rejecting the moral justification that Locke provided for landownership – that their land owed its value to their own labor – Mill wrote that landlords

“grow richer, as it were in their sleep, without working, risking, or economizing. What claim have they, on the general principle of social justice, to this accession of riches? In what would they have been wronged if society had, from the beginning, reserved the right of taxing the spontaneous increase of rent … ?” Principles of Political Economy, with Some of their Applications to Social Philosophy (1848), Book V, ch. II 5.

The value of land rose as a result of the efforts of the entire community. Mill concluded that rising site value should belong to the public as the natural tax base rather than leaving it as “an unearned appendage to the riches of a particular class.”

Mill justified taxing land rent on grounds of national interest as well as moral philosophy. The aim was to avoid taxing labor and industry, but on income that had no counterpart in labor. In time the labor theory of value was applied to monopoly rents.

The remainder of the 19^th century was filled with proposals as to how best to tax or nationalize the land’s economic rent. Patrick Dove, Alfred Wallace, Herbert Spencer, Henry George and others provided an enormous volume of journalistic and political literature. Short of nationalizing the land outright, these land taxers followed Mill’s basic logic. […]

When Britain’s House of Commons finally legislated a land tax in 1909-10, the House of Lords created a constitutional crisis by nullifying it. The procedural rules were changed to prevent the Lords from ever again rejecting a Parliamentary revenue bill, but the momentum was lost as World War I loomed and changed everything.

[…]

From rent deflation to debt deflation

Ricardo’s labor theory of value sought only to isolate land rent, not the payment of interest. As Parliamentary spokesman for his fellow financiers, he accused only landlords of draining income out of the economy, not creditors. So his blind spot reflects his profession and that of his banking family. (The Ricardo Brothers handled Greece’s first Independence Loan of 1824, for instance, on quite ruinous terms for Greece.)

Seeing no parallel between paying interest to bankers and paying rents to landlords, Ricardo sidestepped Adam Smith’s warning about how excise taxes levied on food and other necessities to pay bondholders on Britain’s war debt drove up the nation’s subsistence wage level. His one-sided focus on land rent diverted attention from how rising debt service – the financial analogue to land rent – increases break-even costs while leaving less income available for spending on goods and services. Treating money merely as a veil – as if debt and its carrying charges were not relevant to cost and price levels – Ricardo insisted that payment of foreign debts would be entirely recycled into purchases of the paying-nation’s exports. There was no recognition of how paying debt service put downward pressure on exchange rates or led to domestic austerity.

In Parliament, Ricardo backed a policy of monetary deflation to roll back the price of gold (and other commodities) to their prewar level in 1798. The reality is that keeping debts on the books while prices decline enhances the value of creditor claims for payment. This polarization between creditors and debtors is what happened after the Napoleonic Wars, and also after America’s Civil War, crucifying indebted farmers and the rest of the economy “on a cross of gold,” as William Jennings Bryan characterized price deflation.

The financial sector now occupies the dominant position that landlords did in times past. Debt service plays the extractive role that land rent did in Ricardo’s day. Unlike the rental income that landlords were assumed to spend into the economy for luxuries and new capital investment, creditors recycle most of their receipt of interest into new loans. This increases the debt burden without raising output or living standards.

Ricardo’s critique of rent extraction was used first to oppose tariff subsidies for Britain’s landlords, and then by “Ricardian socialists,” such as John Stuart Mill, to advocate taxing away their land rent. But rentiers have always fought back, rejecting any analysis depicting their income as imposing an unearned parasitic overhead charge on labor and industry (not to mention leading to austerity and depression).

Today, banking has found its major market in lending to real estate and monopolies, adding financial charges to land and monopoly rent overhead. The financial counterpart to diminishing returns that raise the cost of living and doing business takes two forms. Interest rates rise to cover the growing risk of lending to debt-strapped economies. And the “magic of compound interest” extracts an exponential expansion of debt service as creditors recycle their interest income into new loans. The result is that debts grow more rapidly and inexorably than the host economy’s ability to pay.”

12 Key Points at the end of chapter 4, “The All-Devouring “Magic of Compound Interest””

“The Magic of Compound Interest” vs. The Economy’s Ability to Pay

“1. Neither money nor credit is a factor of production. Debtors do the work to pay their creditors. This means that interest is not a “return to a factor of production.” Little credit is used to expand production or capital investment.  Most is to transfer asset ownership.

2. If loan proceeds are not used to make gains sufficient to pay the creditor (productive credit), then interest and principal must be paid out of the debtor’s other income or asset sales. Such lending is predatory.

3. The aim of predatory lending in much of the world is to obtain labor to work off debts (debt peonage), to foreclose on the land of debtors, and in modern times to force debt-strapped governments to privatize natural resources and public infrastructure.

4. Most inheritance consists of financial claims on the economy at large. In antiquity, foreclosure for non-payment was the major lever to pry land away from traditional tenure rights inheritable within the family. (Early creditors got themselves adopted as Number One sons.) Today, most financial claims are on the land’s rest, leaving ownership “democratized” – on credit.

5. Most interest-bearing debt always has been predatory, apart from lending for commerce. Carrying a rising debt overhead slows material investment and economic growth.

6. The rate of interest never has reflected the rate of profit, the rise in physical productivity or the borrower’s ability to pay. The earliest interest rates were set simply for ease in mathematical calculation: 1/60 per month in Mesopotamia, 1/10 annually in Greece, and 1/12 in Rome. (These were all the unit fractions in their respective fractional systems.) In modern times the rate of interest has been set mainly to stabilize the balance of payments and hence exchange rate. Since 2008 it has been set low to re-inflate asset prices and bank profits.

7. Any rate of interest implies a doubling time for money lent out. See the Rule of 72 (e.g., five years in Mesopotamia).

8. Modern creditors avert public cancellation of debts (and making banks a public utility) by pretending that lending provides mutual benefit in which the borrower gains – consumer goods now rather than later, or money to run a business or buy an asset that earns enough to pay back the creditor with interest and still leave a profit for the debtor.

9. This scenario of productive lending does not typify the banking system as a whole. Instead of serving the economy’s production trends, the financial sector (as presently organized) makes the economy top-heavy, by transferring assets and income into the hands of an increasingly hereditary creditor class.

10. The exponential growth of debt shrinks markets and slows investment, reducing the economy’s ability to pay debts, while increasing the debt/output and debt/income ratios.

11. The rising volume of debt changes the distribution of property ownership unless public authorities intervene to cancel debts and reverse expropriations. In antiquity, royal “Jubliee” proclamations liberated bondservants and restored lands that had been foreclosed.

12. Cancelling debts was politically easiest when governments or public institutions (temples, palaces or civic authorities) were the major creditors, because they were cancelling debts owed to themselves. This is an argument for why governments should be the main suppliers of money and credit as a public utility.”

On Minsky and Cycles of Catastrophic Debt Build-ups from Chapter 5, “How the One Percent Holds the 99 Percent in Debt”

Deterioration of loan quality to interest-only loans and “Ponzi” lending

“Hyman Minsky has described the first stage of the financial cycle as the period in which borrowers are able to pay interest and amortization. In the second stage, loans no longer are self-amortizing. Borrowers can only afford to pay the interest charges. In the third stage they cannot even afford to pay the interest. They have to borrow to avoid default. In effect, the interest is simply added onto the debt, compounding it.

Default would have obliged banks to write down the value of their loans. To avoid “negative equity” in their loan portfolio, bankers made new loans to enable Third World governments to pay the interest due each year on their foreign debts. That is how Brazil, Mexico, Argentina and other Latin American countries got by until 1982, when Mexico dropped the “debt bomb” by announcing that it could not pay its creditors.

Leading up to the 2008 financial crash, the U.S. real estate market had entered the critical stage where banks were lending homeowners the interest as “equity loans.” Housing prices had risen so high that many families could not afford to pay down their debts. To make the loans work “on paper,” real estate brokers and their banks crafted mortgages that automatically added the interest onto the debt, typically up to 120 percent of the property’s purchase price. Bank credit thus played the role of enticing new subscribers into Ponzi schemes and chain letters.

Over-lending kept the economy from defaulting until 2008. Many credit-card holders were unable to pay down their balances, and could only pay the interest due each month by signing up for new credit cards to stay current on the old ones.

That is why Minsky called this desperate third stage of the financial cycle the Ponzi stage. Its dynamic is that of a chain letter. Early players (or home-buyers) are promised high returns. These are paid out of the proceeds from more and more new players joining the scheme, e.g., by new homebuyers taking out ever-rising mortgage loans to buy out existing owners. The newcomers hope that returns on their investment (like a chain letter) can keep on expanding ad infinitum. But the scheme inevitably collapses when the inflow of new players dries up or banks stop feeding the scheme.

Alan Greenspan was assisted by the mass media in popularizing an illusion that the financial sector had found a self-sustaining dynamic for the exponential growth of debt by inflation asset price exponentially. The economy sought to inflate its way out of debt through asset price inflation sponsored by the Federal Reserve. Higher prices for the houses being borrowed against seemed to justify the process, without much thought about how debts could be paid by actually earning wages or profits.

Banks created new credit on their keyboards, while the Federal Reserve facilitated the scheme by sustaining the exponential rise in bank loans (without anyone having to save and deposit the money). However, this credit was not invested to increase the economy’s productive powers. Instead, it saved borrowers from default by inflation property prices – while loading down property, companies and personal incomes with debt.

The fact that price gains for real estate are taxed at a much lower rate than wages or profits attracted speculators to ride the inflationary wave as lending standards were loosened, fostering lower down payments, zero-interest loans and outright fictitious “no documentation” income statements, forthrightly called “liars’ loans” by Wall Street.

But property prices were bound to crash without roots in the “real” economy. Rental incomes failed to support the debt service that was owed, inaugurating a “fourth” phase of the financial cycle: defaults and foreclosures transferring property to creditors. On the global plane, this kind of asset transfer occurred after Mexico announced its insolvency in 1982. Sovereign governments were bailed out on the condition that they submit to U.S. and IMF pressure to sell off public assets to private investors.

Every major debt upswing leads to such transfers. These are the logical consequence of the dynamics of compound interest. […] By 2005, for the first time in recent history, Americans in the aggregate held less than half the market value of their homes free of debt. Bank mortgage claims accounted for more than half. By 2008 the ratio of home equity ownership to mortgage debt had fallen to just 40 percent.

Bank mortgages now exceed homeowners’ equity, which fell below 40% in 2011.

What happens when the exponential buildup of debt ends

During the financial upswing the financial sector receives interest and capital gains. In the fallback period after the crisis, the economy’s private- and public-sector assets are expropriated to pay the debts that remain in place.

A “Minsky moment” erupts at the point when creditors realize that the game is over, run for the exits and call in their loans. The 2008 crash stopped bank lending for mortgages, credit cards and nearly all other lending except for U.S. government-guaranteed student loans. Instead of receiving an infusion of new bank credit to break even, households had to start paying it back. Repayment time arrived.

This “saving by paying down debt” interrupts the exponential growth of liquid savings and debt. But that does not slow the financial sector’s dominance over the rest of the economy. Such “intermediate periods” are free-for-alls in which the more powerful rentiers increase their power by acquiring property from distressed parties. Financial emergencies usually suspend government protection of the economy at large, as unpopular economic measures are said to be necessary to “adjust” and restore “normalcy” – finance-talk for a rollback of public regulatory constraints on finance. “Technocrats” are placed in control to oversee the redistribution of wealth and income from “weak” hands to strong under austerity conditions.

This aftermath of the bubble’s bursting is not really “normalcy” at all, of course. The financial sector simply changes gears. As debt deflation squeezed homeowners after 2008, for instance, banks innovated a new financial “product” called reverse mortgages. Retirees and other homeowners signed agreements with banks or insurance companies to receive a given annuity payment each month, based on the owner’s expected lifetime. The annuity was charged against the homeowner’s equity as pre-payment for taking possession upon the owner-debtor’s death.

The banks or insurance companies ended up with the property, not the children of the debtors. (In some cases the husband died and the wife received an eviction notice, on the ground that her name was not on the ownership deed.) The moral is that what is inherited in today’s financialized economy is creditor power, not widespread home ownership. So we are brought back to the fact that compound interest does not merely increase the flow of income to the rentier One Percent, but also transfers property into its hands.

Financialization at the economy’s expense

The buildup of debt should have alerted business cycle analysts to the fact that as debt grows steadily from one cycle to the next, economies veer out of balance as revenue is diverted to pay bankers and bondholders instead of to expand business.

Yet this has not discouraged economists from projecting national income or GDP as growing at a steady trend rate year after year, assuming that productivity growth will continue to raise wage levels and enable thrifty individuals to save enough to retire in affluence. The “magic” of compound interest is held to raise the value of savings as if there are no consequences to increasing debt on the other side of the balance sheet. The internal contradiction in the approach is the “fallacy of composition.” Pension funds have long assumed that they and other savers can make money financially without inflicting adverse effects on the economy at large.

Until recently most U.S. pension funds assumed that they could make returns of 8.5 percent annually, doubling in less than seven years, quadrupling in 13 years and so forth. This happy assumption suggested that state and local pension funds, corporate pension funds and labor union pension funds would be able to pay retirees with only minimal new contributions. The projected rates of return were much faster than the economy’s growth. Pension funds imagined that they could grow simply by increasing the value of financial claims on a shrinking economy by extracting a rise in interest, dividends and amortization.

This theory simply wrapped Richard Price’s “sinking fund” idea in a new guise. It is as if savings can keep accruing interest and make capital gains without shrinking the economy. But a rate of financial growth that exceeds the economy’s ability to produce a surplus must be predatory over time. Financialization intrudes into the economy, imposing austerity and ultimately forcing defaults by siphoning off the circular flow between producers and consumers.

To the extent that new bank loans find their counterpart in debtors’ ability to pay in today’s bubble economies, they do so by inflating asset prices. Gains are not made by producing or earning more, but by borrowing to buy assets whose prices are rising, being inflated by credit created on looser, less responsible terms.

Today’s self-multiplying debt overhead absorbs profits, rents, personal income and tax revenue in a process whose mathematics is much like that of environmental pollution. Evolutionary biologist Edward O. Wilson demonstrates how impossible it is for growth to proceed at exponential rates without encountering a limit. He cites “the arithmetical riddle of the lily pond. A lily pad is placed in a pond. Each day thereafter the pad and then all its descendants double. On the thirtieth day the pond is covered completely by lily pads, which can grow no more.” He then asks: “On which day was the pond half full and half empty? The twenty-ninth day,” that is, one day before half the pond’s lilies double for the final time, stifling its surface. The end to exponential growth thus comes quickly.

The problem is that the pond’s overgrowth of vegetation is not productive growth. It is weeds, choking off the oxygen needed by the fish and other life below the surface. This situation is analogous to debt siphoning off the economic surplus and even the basic needs of an economy for investment to replenish its capital and to maintain basic needs. Financial rentiers float on top of the economy, stifling life below.

Financial managers do not encourage understanding of such mathematics for the public at large (or even in academia), but they are observant enough to recognize that the global economy is now hurtling toward this pre-crash “last day.” That is why they are taking their money and running to the safety of government bonds. Even though U.S. Treasury bills yield less than 1 percent, the government can always simply print the money. The tragedy of our times is that it is willing to do so only to preserve the value of assets, not to revive employment or restore real economic growth.

Today’s creditors are using their gains not to lend to increase production, but to “cash out their financial gains and buy more assets. The most lucrative assets are land and rent-yielding opportunities in natural resources and infrastructure monopolies to extract land rent, natural resource rent and monopoly rent.

The inability of economies to sustain compound interest and a rising rentier overhead for any prolonged time is at the root of today’s political fight. At issue is whose interests must be sacrificed in the face of the incompatibility between financial and “real” economic expansion paths. Finance has converted its economic power into the political power to reverse the classical drive to tax away property rent, monopoly rent and financial income, and to keep potential rent-extracting infrastructure in the public domain. Today’s financial dynamics are leading back to shift the tax burden onto labor and industry while banks and bondholders have obtained bailouts instead of debts being written down.

This is the political dimension of the mathematics of compound interest. It is the pro-rentier policy that the French Physiocrats and British liberals sought to reverse by clearing away the legacy of European feudalism.”

My Final Extract: Hudson’s observations in chapter 6, “Rentiers Sponsor Rent-Free National Income Statistics” about the astonishingly Orwellian accounting procedures in America

Epigraph: “The people of Goldman Sachs are among the most productive in the world.” Lloyd Blankfein, Goldman Sachs chief executive, November 10, 2009.

“The question is, productive of what? To Goldman Sachs, it is productive of profits and speculative gains. Neoliberals such as Gary Becker (discussed below) define the firm’s high salaries and bonuses as returns to “human capital.” The National Income and Product Accounts (NIPA) depict all this charge as adding an equal value to the nation’s “product” of financial services. It all seems to be what Mr Blankfein notoriously euphemized on another occasion as “doing God’s work” of raising productivity.

At issue is whether today’s widening inequality between the wealthy and wage earners is justified or not. This question has been catapulted to the forefront of the news by the statistical research of Thomas Piketty and Emmanuel Saez showing the increasing concentration of income in the hands of the richest One Percent. The main remedies they propose are a wealth tax (especially on inherited estates) and a return to steeper progressive income taxation.

The idea of taxing higher income brackets more without regard for whether their gains are earned “productively” or in extractive rentier ways represents a victory in dissuading critics from focusing on the policy aim of Adam Smith and other classical economists: preventing “unearned” income from being obtained in the first place. As Chapter 3 has described, they recognized not only that rentier revenue (and capital gains) is earned in a predatory and unproductive way, but also that land rent, monopoly rent and financial charges are mainly responsible for the rising wealth of the One Percent as compared to that held by the rest of society.

The turn of the 20^th century saw wages rising, but most of the increase was paid to landlords via higher housing costs, and to monopolists, bankers and financiers. These rentier charges prevented wage earners from benefiting from wage gains that flowered through their hands to the Finance, Insurance and Real Estate (FIRE) sector. What ultimately is important is how much remains for discretionary spending after meeting payments for real estate, debt service and other basic needs. What is most unequal is the share in the economic surplus net of break-even subsistence costs. To the extent that labor or businesses only break even while income is concentrated in the hands of the FIRE sector and monopolies, the degree of inequality is much more pronounced than gross statistics indicate.

Instead of treating rentier overhead as a charge against production and consumption, today’s NIPA depict rent-extracting activities as producing a “product.” FIRE sector revenue appears as a cost of producing an equivalent amount to Gross Domestic Product (GDP), not as unearned income or “empty” pricing. And neither the NIPA nor the Federal Reserve’s flow-of-funds statistics recognize how the economy’s wealthiest financial layer makes its fortunes by land-price gains and other “capital” gains. A cloak of invisibility thus is drawn around how FIRE sector fortunes are amassed.

J.B. Clark denies that rentier income is unearned

“The foundation myth of pro-rentier economics is that everyone receives income in proportion to the contribution they make to production. This denies that economic rent is unearned. Hence, there is no exploitation or unearned income, and no need for the reforms advocated by classical political economy.

In America the rejection of classical analysis was spearheaded by John Bates Clark (1847-1938). Like nearly all American economists of the late 19^th century, he had studied in Germany where he absorbed the Historical School’s emphasis on public policy to shape markets. But upon returning to the United States, Clark became a critic of labor and socialism, finding his ultimate academic home at Columbia University (1895-1923), a natural center for the reaction against classical rent theory. The journalist Henry George had attracted a large following among New York City’s large Irish population (driven out of its home country by the depredations of British landlords), and almost was elected mayor in 1885 by proposing a land tax and public ownership of railroads and similar natural monopolies. Other immigrant communities brought Marxism and an advocacy for labor unionization with them to the States. The fight against absentee landlords merged naturally with denunciations of Wall Street.

By the time Clark wrote The Distribution of Wealth in 1899 he was a full-fledged defender of rentier interests. His core message was that everyone earns what they deserve, in proportion to their contribution to production. “It is the purpose of this work,” he wrote in the introduction, “to show that the distribution of the income of society is controlled by a natural law, and this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates.” The revenue of each recipient (euphemized as a “factor of production”) is assumed to be equal to the value they add to the product being sold, whether it takes the form of wages, profits, rents or interest. Robber barons, landlords and bankers are depicted as part of the production process, and prices are assumed to settle at their cost of production, defined to include whatever rentiers manage to obtain.

This closed logical circle excludes any criticism that markets may work in an unfair way. To Clark and other “free market” economists, “the market” is simply the existing status quo, taking for granted the existing distribution of wealth and property rights. Any given distribution of property rights, no matter how inequitable, is thought of as part of economic nature. The logic is that all income is earned by the recipient’s contribution to production. It follows that there is no free lunch – and also that There is No Alternative to the extent that the existing distribution of wealth is the result of natural law.

Treating any revenue-yielding asset as capital conflates financial and rentier claims on production with the physical means of production. The vantage point is that of financiers or investors buying land and real estate, oil and mineral deposits, patents, monopoly privileges and related rent-extraction opportunities without concern for whether economists classify their returns as profit or as rent. Today’s tax laws make no such distinction.

Clark’s most trenchant critic was Simon Patten, the first economics professor at America’s first business school, the Wharton School at the University of Pennsylvania. “The defect of the reasoning of Professor Clark,” he observed, “was his failure to distinguish manmade capital from property rights that did not involve any necessary or intrinsic cost of production.” The result, Patten said, was to conflate profits earned on tangible industrial capital investment with land and monopoly rent. To real estate investors or farmers buying properties on mortgage, the financial and monopoly charges built into their acquisition price appear as an investment cost. “The farmer thinks that land values depend on real costs” because he had to pay good money for his property,” explained Pattern, “and the city land speculator has the same opinion as to town lots.”

This individualistic view is antithetical to the socialist and Progressive Era reforms being introduced in the late 19^th century. That is what makes classical concerns with the economics of national development different from the financialized investor’s-eye view of the world. At issue was what constitutes the cost of production in terms of real value, as distinct from extractive rentier charges. Freeing economies from such charges seemed to be the destiny of industrial capitalism.

“Institutionalist” and sociological reformers retained rent theory

Patten pointed out that land sites, like mineral rights provided by nature and financial privileges provided by legal fiat, do not require labor to create. But instead of describing their economic rent as an element of price without real cost or labor effort, Clark viewed whatever amount investors spent on acquiring such assets as their capital outlay and hence as a market cost of doing business. “According to the economic data he presents,” Patten wrote, “rent in the economic sense, if not wholly disregarded, at least receives no emphasis. Land seems to be a form of capital, its value like other property being due to the labor put upon it.” But its price simply capitalizes property rights and financial charges that are not intrinsic.

“Professor Clark has a skilful way of hiding land values by subserving them under the general concept of capital,” Patten observed elsewhere, but “if the doctrine of physical valuation is once introduced the public will soon be educated to the evils of watered land values” and railroad rates. By “doctrine of physical valuation” he meant the classical analysis of real costs of production, in contrast to what his contemporaries called “fictitious” costs such as land rent, watered stocks and other political or institutional charges unnecessary for production to take place.

“Rent is obtained by owners of land, not as a right based on economic considerations,” because land and monopoly rights are not real factors of production, but are claims for payments levied as access charges to land, credit or basic needs, that is, ultimately “from the lack of supply of some needed article,” Patten explained. “Although the case of land is not the only example where there is an unearned increment, because the price of food is always more than its cost of production on the best land, yet it is the best example, and hence is the one in common use as an illustration.”

For national economies, the problem is that land rent and natural resource rent are taken at the expense of wage earnings as well as from industrial profits. “It seems to me,” Patten wrote,

“that the doctrine of Professor Clark, if carried out logically, would deny that the laborers have any right to share in the natural resources of the. … All the increase of wealth due to fertile fields or productive mines would be taken gradually from workmen with the growth of population, and given to more favored persons … When it is said that the workingman under these conditions gets all he is worth to society, the term ‘society,’ if analysed, means only the more favored classes … They pay each labourer only the utility of the last laborer to them, and get the whole produce of the nation minus this amount.” “Another View of the Ethics of Land Tenure,” pp. 356f.

This is why Patten’s contemporary reformers urged that land, natural resources and monopolies be kept in the public domain, so as to minimize the rake-off of national patrimony “given to more favored persons.” The idea of unearned income as a subtraction from the circular flow of income available for labor and industry as wages and profits has vanished from today’s post-classical NIPA. Now, whatever is paid to rentiers is considered a bona fide cost of doing business as if it embodies intrinsic value for a product.

Clark’s claim that no income is unearned defines all economic activities as being productive in proportion to how much income they obtain. No one way of making money is deemed more or less productive than any other. Everyone earns just what he or she deserves. Natural law will proportion income and wealth to their recipients’ contribution to production, if not “interfered” with.

Today’s highest paying occupations are on Wall Street, running banks, hedge funds or serving as corporate Chief Financial Officers. In Clark’s view they earn everything they get, and everyone else only deserves whatever is left over. Gary Becker, the University of Chicago economist, followed this logic in justifying such incomes as being earned productively, warning that progressive taxation would discourage their enterprise and hence productivity: “A highly progressive income tax structure tends to discourage investment in human capital because it reduces take-home pay and the reward to highly skilled, highly paid occupations.”

Rentier income, inherited wealth, landlords and monopolies making money off the economy is thus interpreted as “earnings” on one’s “human capital,” the neoliberal catchall residual to absorb whatever cannot be explained in terms of actual labor effort or cost. It replaces what former economists called unearned income. It is as if the One Percent and the FIRE sector do not make money off the property they have (either inherited or built up far beyond what anyone’s individual labor and enterprise could explain), but out of their own human talents. Finance capital, rentier capital, land and monopoly rights are all conflated with “capital”.

To depict an economy bifurcated between earned and unearned income, it is necessary to distinguish interest and economic rent from wages and profit, to trace the flow of payments from production and consumption to the FIRE sector and other rentier sectors. This discussion recently has been revived as it applies to banking.

Siphoning off the circular flow of production and consumer spending

All national income accounts since the Tableau Économique are based on the idea of circular flow: recognition that one party’s spending is another person’s revenue. Since Keynes, discussion of the circular flow of spending and consumption has been framed in terms of “Say’s Law,” named for the facile French economist, Jean-Baptiste Say. His “law of markets” is standard textbook teaching, usually paraphrased as “production creates its own demand.” Workers spend their paychecks on the goods they produce, while industrial employers invest their profits on capital goods to expand their factories and employ more labor to buy yet more products.

But buying a property, stock or bond does not involve hiring labor or financing production. Neither Say’s Law nor national income accounts distinguish between spending on current production and asset markets, or between productive and unproductive labor, earned and unearned income. Today’s NIPA thus fail to address how financial and allied rentier overhead imposes austerity. Say’s Law simply states the precondition for economies to operate without business cycles or debt deflation draining income to pay a rentier class. The reality is that debt service and rent payments rise, extracting income from markets and preventing them from buying what they produce.

Most economics professors discuss Say’s Law simply to explain why it doesn’t work to maintain full employment. Keynes worried that as economies grew richer, people would save a larger proportion of their income instead of spending on consumption. This drain from the circular flow would lead to depression, unless governments compensated by infusing money into the economy, hiring labor for public works.

Keynes depicted saving simply as hoarding – withdrawing revenue from the spending stream of production and consumption. But what actually happens is that the savers lend to debtors while banks create new “endogenous” credit at interest. When repayment time arrives – when consumers have to start paying down their credit card balances and homeowners pay down mortgages without taking out new loans – “saving” takes the form of reducing deb. A negation of a negation is counted as a positive – and in this case, negating debt is defined as “saving”. This sets in motion an exponentially rising rake-off of financial returns from the “real” economy.

Value-free monetary theory of prices

Mainstream monetary theory likewise has narrowed to exclude transactions in assets and payments to the FIRE sector. All money (M), credit and income are assumed to be spent only on goods and service transactions (T), not on buying more real estate, stocks and bonds or being lent out to indebt the economy. Economics students are taught the MV=PT tautology.

(Money × Velocity = Prices × Transactions)

But by far most money and credit (M) is spent on real estate, stocks, bonds and bank loans. Every day an entire year’s worth of GDP passes through the New York Clearing House and the Chicago Mercantile Exchange for such asset transactions. Assuming that changes in the money supply only affect commodity prices and wages ignores this fact that T only refers to transactions in current output, not assets. When this fails to work in practice, any errors and omissions are swept up into V (Velocity of turnover, whatever that means), a residual determined by whatever M, P and T leave out of account.

There always is an economic gain for some party in sponsoring bad theory. Many erroneous economies can be traced to policies endorsed by the bad theorists. Leaving rentier income and spending out of the equation enables anti-labor economists to demand monetary austerity and a balanced government budget as their knee-jerk policy response. The narrow-minded MV=PT tautology enables economists to blame wages for inflationary pressures, not the cost of living being pushed up by debt-leveraged housing prices and other FIRE sector expenses, or by the rising corporate debt service built into the pricing of goods and services.

In reality, asset prices rise or fall at a different rate from commodity prices and wages. This is a result precisely of the fact that the Federal Reserve and other central banks “inject” money into the economy via Wall Street, the City of London or other financial centers, by buying and selling Treasury securities or providing commercial bank reserves, e.g., in the post-2008 waves of Quantitative Easing.

Monetary injections affect asset prices by influencing the interest rate. Central bank purchases of government bonds bid up their price. The higher price lowers the interest yield (i) on government securities (or whatever the central bank may buy), and this affects asset prices in general. The interest rate is used to “discount” the income flow of a bond, rental property or dividend-paying stock. At a 5% rate of interest, the income-yielding asset would be 20 times earnings; at 4%, 25 times earnings, and so forth.

National income accounts exclude rent extraction and financial drains

The NIPA were created in the 1930s and World War II to help keep inflationary pressures in check by comparing wages and profits to the flow of output, not to focus on the rentier dynamics weighing down modern economies. Failure to isolate the FIRE sector and rentier overhead has led national income accounting into a quandary. Instead of estimating economic rent, the NIPA counts it as “earnings” for making a contribution to Gross Domestic Product (GDP). Rentiers appear to earn their income by producing a “product” equal in value to the rents they collect. If landlords charge more rent, real estate product rises correspondingly. If Goldman Sachs and other bankers charge their clients more for financial services, or make money by winning arbitrage bond trades against them or other counterparties so as to pay themselves more, their financial “product” is counted as rising accordingly. The assumption is that people only receive income for what they produce.

This assumption rests on a tunnel vision that reflects the ideological victory that landlords and vested financial interests achieved in the late 19^th century against the classical drive to tax economic rent. The effect of excluding land rent, natural resource rent and monopoly rent – the drain of income from producers and consumers to pay landlords, privatizers, monopolists and their bankers – is to deter measurement of what I call rent deflation. That is the analogue to debt deflation – the diversion of income to pay debt service.

There also is no measure of criminal income, smuggling or fictitious accounting for tax avoidance. No category of spending is counted as overhead, not even pollution cleanup costs or crime prevention, not to mention financial bailouts. Economists dismiss these as “externalities,” meaning external to the statistics deemed relevant. Yet despite the rising proportion of spending that takes the form of rent extraction, environmental pollution cleanup costs, debt pollution and its bailout costs, GDP is treated as an accurate measure of economic welfare. The result confuses healthy growth with that of a tumor on the body politic. Taken together, these omissions deter the kind of systemic analysis that would have alerted policy makers and voters to the distortions leading up to the 2008 crash.

Treating economic rent as “earnings”

The word “rent” appears only once in the NIPA, and it reflects neither what most people imagine rent to be nor the classical concept of economic rent. In fact, it is not even any transaction that actually is paid or received. It is “imputed homeowners’ rent” – the amount that homeowners would have to pay if they rented their own homes. No cash changes hands in their valuation. The NIPA include this imputed non-payment because enjoying one’s home is part of the economy’s product – less than 2 percent of GDP and falling.

This is not classical economic rent. Rental income obtained by commercial investors and natural resource owners is called “earnings” on a par with profits and wages. This diverts attention away from how fortunes are made without labor or out-of-pocket production costs. It also requires a convoluted reorganization of statistics to discover how large the actual cash-flow return to absentee real estate ownership is, given the heavy component of interest and the “just pretend” economic category of over-depreciation.

Fred Harrison, the British economics journalist, summarizes how economists have confused the burgeoning land rent with the much more modest imputed homeowners’ self-rental estimate. The successful strategy at euphemistic confusion has made its way into today’s leading textbooks as if it represents land rent for the economy as a whole. The most famous school text of its day, Economics by Paul Samuelson and William D. Nordhaus, reports that “Rent income of persons” is less than 2 percent of Gross National Product – and falling steadily over the past half-century. A more recent textbook by Paul Krugman and Robin Wells states that “rent” constitutes only 1 percent of U.S. national income.

This obviously would be too trivial for a century of classical political economy to have bothered to analyse, not to mention urging that it serve as the tax base. Land rent appears to have disappeared into the Orwellian memory hole. It is as if commercial real estate investors and owners receive no land rent at all.

This terminological sleight of hand helped divert attention from how bank over-lending led to the real estate bubble that burst in 2008. It also trivializes international trade theory, by failing to recognize how capitalizing land rent into mortgage loans raises the cost of housing and other debt-leveraged prices.

What the NIPA do make clear is that most real estate rental income is paid to the banks as interest. NIPA accountants find real estate and banking are so intertwined in the symbiotic FIRE sector that for many years financial and real estate income was not separated in the statistics. The activities of mortgage brokers and real estate agents seem to belong to Finance, Insurance or Real Estate in common.

The NIPA also show how the tax fiction of over-depreciation (writing off a building more than once, over and over again) offsets otherwise taxable earnings for commercial real estate, enabling commercial real estate, oil and mining companies to operate decade after decade without a reportable taxable profit. An army of accountants has been backed by political lobbyists to write “loopholes” (a euphemism for distorting economic reality) into the tax code to make it appear that landlords and oil companies lose money, not make it! According to the NIPA, real estate earnings do not cover the rate at which landlords pay interest as a cost of production and buildings depreciate.

Depreciation and the rate of return

For industrial capital that wears out or obsolesces (becoming high-cost as a result of improving technology, e.g., computers that quickly get out of date even though they remain in working order), depreciation is a return of capital, and hence not part of surplus value strictly speaking.

But this is not the case in the real estate, because buildings do not wear out – and rather than their technology becoming obsolete, older buildings tend to have much more desirable construction, or else have been renovated as a result of the ongoing maintenance repairs that typically absorb about 10 percent of rental income (or a property’s equivalent rental value). So for real estate, depreciation is largely a fictitious category of income designed to make rental revenue tax-free. The same building can be depreciated all over again – at a rising price – each time the property is sold to a commercial investor. (Homeowners are not allowed this tax subsidy.) Thus, despite the pretense by accountants that real estate is losing its value, the land’s site value (and the decline in interest rates) actually is increasing its value. Reality and seemingly empirical statistics tell opposite stories.

No wonder the wealthiest One Percent have widened their wealth gap over the rest of the economy, defending this just-pretend statistical picture as if it is empirical science and therefore objective simply because its deception has decimal points.

Classical economics is free of such pretenses and rentier tax favouritism. What actually happens is that landlords, oil and gas companies, mining companies, monopolies and banks charge rents for access to the land, natural resources, and credit needed for production to take place. These payments drain the circular flow of spending between producers and consumers, shrinking markets and causing unemployment. Rentiers spend their income not only to hire labor and buy its products (as Malthus described, and as Keynes applauded) but also to buy financial assets and more property. Banks use their revenue to make more loans. This creates yet more debt while bidding up asset prices, obliging new homebuyers to borrow even more for ownership rights.

[…] Real estate price gains […] reflect rising site values for land, magnified by bank credit at rising debt-leveraging ratios, “capitalizing” rental value into mortgage loans at falling rates of interest. These price gains far overshadow actual rental income, and are taxed at much lower rates than wages and profits. Yet the Federal Reserve’s flow of funds accounts have no statistics for price increases for real estate, stocks and bonds; or, for that matter, for speculative winnings by arbitrageurs and other gamblers. […] Without a measure of such price gains, one cannot calculate “total returns,” defined as current income plus asset-price gains. Each year’s growth in Land Value far exceeds the growth in National Income.

In short, the NIPA are not really a model of how economies work and how fortunes are made in today’s world. Instead, the NIPA provide a cloak of invisibility for rent-extracting activities. The vested interests have won the fight against creating more relevant statistical categories. Their hope evidently is that is exploitative activities are not seen or quantified, they are less likely to be taxed or regulated.

Does the financial sector produce a “product,” or a subtrahend from GDP?

Today’s major rentier sector is banking and high finance. Most bank loans are geared not to produce goods and services, but to transfer ownership rights for real estate, stocks (including those of entire companies) and bonds. This has led national income theorists to propose treating the revenue of such institutions as transfer payments, not payments for producing output or “product.” Australian economist Bryan Haig has called this “the banking problem.” “If financial services were treated like other industries,” he writes, “the banking sector as a whole would be depicted as making a negligible, or perhaps even negative, contribution to national economic output as being, effectively, unproductive.” [“The treatment of interest and financial intermediaries in the Economy and Society,” Review of Income and Wealth, Vol. 32 (1986), p. 409.]

Updating this discussion of how best to describe financial services in the national income accounts, Brett Christophers asks: “What ‘service’, if any, is actually being rendered by the banks here?” At issue are “situations where payments are made but production is not considered to have taken place.” As Britain’s 2006 National Accounts report noted, such payments “do not represent ‘any addition to current economic activity.”

The Clark-like neoclassical view assumes that if someone pays a few, they must be getting a product in return. Treating bank payments as a subtrahend or simply as a cost of transferring wealth without affecting production is anomalous to today’s mainstream. The concept of unproductive labor or unearned income that was at the core of classical economics has disappeared. As Christophers explains:

“… national accounts economists of the mid-to-late twentieth century could not see anything but paradox in the notion that such a prosperous industry as banking, with such self-evident utility, either detracted from the national output or added only marginal value to it; a negative or nil output was unacceptable because, from the neoclassical perspective, it literally made no sense.” [“Making finance productive”, Economy and Society, 40 (2011).]

Raising “the banking problem” thus poses a threat to post-classical economic doctrine. There is no category in the NIPA for income obtained without contributing an equivalent amount to “national product.” Finance and rent seeking appear as part of the economic growth process, not parasitic and external to it.

This explains why the NIPA exclude “capital” gains from rising prices for land and other real estate, stocks and bonds. They have the same effect as income – raising the net worth of owners, and are mainly responsible for building up fortunes over the past half-century, especially since 1980. But they are incompatible with the facile “income = product” assumption used to rationalize and justify rentier income (so as to save it from being taxed as classical economists urged). Making asset-price inflation statistically invisible helps deter public pressure to tax real estate and financial gains at the same rate as normal income, as originally was the case in the U.S. tax code.

Today’s economic accounts ignore the classical economic focus on rentier overhead. Keynesian macroeconomics traces the circular flow among sectors, without analysing intrinsic value or the classical concern for “invested labour” or how revenue is obtained. Instead, a seemingly empirical statistical picture pretends that the FIRE sector plays a productive role in helping economies grow and prosper.

Here’s the problem: If all income is obtained as part of the production process and spent on buying goods and services, as Clark and his followers claimed, there is no diversion of spending away from economic growth. But what about income spent on assets, loans or debt payments?

At issue is what constitutes “economic growth” – in reality vs. under today’s measurement concepts. A rising portion of economic activity does not have to do with production (investment and output) or consumption, but with buying and selling property already in place: primarily real estate (the largest asset), natural resources, stocks and bonds. A recent book, G.D.P.: A Brief but Affectionate History [by Diane Coyle, Priceton, 2014], notes how irrational this measure is for the financial sector. In view of “the negative output of an imaginary segment of the economy,” the GDP’s measure “greatly exaggerate[s] the importance of financial services to overall economic output. Perversely, in the final quarter of 2008, Britain’s banking industry showed its fastest growth on record, almost matching manufacturing in size, just as the money markets all but froze.”

Treating the creating of largely fictitious, unpayably high financial claims on the economy as if this adds to output and wealth leaves out of account the massive public bailouts needed to sustain the banking sector. The “external economic” costs are a form of debt pollution. “When someone confidently quotes the contribution of financial services to national income,” writes Financial Times columnist John Kay, “you can be sure they have no understanding of the esoteric concept of ‘financial services indirectly measured’ (don’t ask). Only a few people in the depths of national statistics offices do. This problem casts doubt on the validity of reported growth rates both before and after the crisis.” In a similar vein Yves Smith notes the effect “of periodic crisis.” Andrew Haldane of the Bank of England, using a simple back-of-the-envelope analysis, concluded that there was no way for banks to even remotely pay for all the damage they produce in terms of lost output … ”

The GDP’s report of the financial sector’s economic contribution in “services”

“doesn’t account for risk. Before the 2008 crisis, banks’ increased risk-taking and leverage was counted as ‘growth’ in GDP. Since then studies have shown that adjusting for risk-taking would reduce financial sector contributions to GDP by 25-40%.” … As a result, “the financial sector contribution to GDP is largely a statistical mirage …” [Yves Smith, “Yes, Virginia, Banking Contributes a Lot Less Value Than You are Lead [sic] to Believe,”, Naked Capitalism]

The resulting system of seemingly empirical statistics leads to confusion about what actually is happening to the economy. As Alan Greenspan summarized, if you just look at GDP statistics you miss the bubble altogether:

“So, the question is if you can’t stop a bubble, what do you do? Fortunately most bubbles are not toxic. The dot-com boom when it collapsed, you can’t find it in the GDP figures in 2001, 2002. It didn’t happen. The 1987 crash, which was really the most horrendous thing, I defy you to find that in the GDP numbers. It’s not there. Yes, there were huge capital losses, but to the people who made the capital gains, essentially.” [interview with Justin Fox at the Harvard Business Review, cited by Izabella Kaminska, “Greenspan, the Keynesian,”]

What a realistic set of national accounts should show is that instead of using their wealth to invest in producing more to raise living standards, the One Percent lend out their savings at interest to extract revenue from wage earners, real estate, industry and government, shrinking the economy instead of expanding it.

Most financial transactions now take place with other financial institutions, largely in the form of computerized bets (“derivatives”) calculating risks on which way interest rates and exchange rates or stock and bond prices will move. One party’s gain is another’s loss, and the overall system ends up needing to be bailed out by government. Bust instead of simply creating the money to pay everyone off, central bank managers insist that labor and industry must pay, by raising taxes on the “real” economy to pay for the financial sector’s losses, on the pretense that the financial sector is what is making the economy richer, not poorer, and that austerity (poverty for the 99 Percent) will be a “cure” – a cure mainly for the fact that the One Percent do not yet control all the wealth.

The guiding principle of today’s official statistical models seems to be that if people don’t see unearned wealth explicitly labeled as overhead, if there is no measure of how much output the FIRE sector and monopolies siphon off, voters will be less likely to advocate regulating or taxing it. The concept of parasitic activity, in which one party’s gains are another’s loss, is cynically excluded from government accounting formats. This numbing of the obvious has enabled the vested interests to gain control of society’s statistical sensory system that is supposed to guide its economic planning, tax policy and resource allocation.

So we are brought back to the strategy of financial parasitism: In order to extract the economy’s surplus in the form of rent and interest, it is necessary to convince people that the FIRE sector makes a contribution to the real economy in keeping with the income its recipients get. The NIPA defend land rent, interest and other financial rents and monopoly rents as contributing to output, not extraneous to the “real” economy extracting parasitic transfer payments. The rentier “free lunch” is depicted as a contribution to national income and product, not as a subtrahend, that is, a transfer payment from the 99 Percent to the One Percent. The idea that interest, rent and price gouging are a burdensome overhead disappears.

Little of this financial revenue is spent back into the “real” economy of production or consumption. Most is simply recycled into the acquisition of yet more property, financial securities or new loans. The banking system creates credit mainly to finance the purchase of rent-yielding assets, headed by real estate, oil and mineral resources, and monopolies. Banks lend out their receipt of interest as yet more mortgage credit to buyers of rent-yielding resources. The effect is to turn economic rent into a flow of interest payments, which expands exponentially, inflating asset prices but also draining debt service from the economy. Paying land rent as interest leaves it unavailable as the tax base, so labor and industry must bear the burden, raising the economy’s cost of living and doing business.

This wasn’t how the financial sector was expected to evolve when the Industrial Revolution was gaining momentum. And it doesn’t have to be the way today’s post-industrial finance capitalism develops. Alternatives were advocated in the 19^th century to mobilize finance to fund capital investment in production and public infrastructure. But after World War I, financial interests joined with property interests to shift the tax burden off themselves onto labor and industry by promoting an illusion that rent and interest are payments for productive services, and even deserved special breaks.”

I am very attracted to Hudson’s arguments in this book for obvious reasons: I think they provide a way for leftists to reject the arguments of those professedly ‘free-market’ advocates for the international financial elite (the Davos men) and transnational corporations, not on moral grounds or using economic theories and findings that are anti-‘free market’ on the ‘free-market’ conception of the rentier class, but by attacking the rentiers’ very understanding of the words they use and the historical figures from whom they claim an intellectual legacy. To those lobbyists, ‘think-tank’ employees and terrible economists who espoused the offshoring of manufacturing in the 1970s and 1980s or promoted the end of the era of deficit-spending in favour of hegemonic monetary policy in the Friedman-ascendency of the early 1980s, or who advocate the destruction of all regulations, regardless of efficacy, or promote Wall St’s regulatory capture of the ratings agencies and government institutions designed to crack down on fraud, or abet the plutocratisation of Western political systems, or encourage the corporatisation of the university in flagrant contravention of the Enlightenment-originating tradition of the non-vocational liberal-arts education, or promote the bloating of the FIRE sector even as financial instability rises and private debt rapidly increases, we can say not only the usual things that someone like me might say (“Research Kaldor, and you’ll realise that, quite apart from the devastating short- and medium-term consequences on millions of American workers and the communities and regions to which they belong, in the long-run, massive offshoring of production was guaranteed to be a very bad thing for the health of your economy, and for the future ability of the economy to innovate and grow, because manufacturing is a far more important force than any other kind of economic activity (agriculture, the service sector) for powering long-term, broad-based growth because it lays a foundation for quick technological transformations, and once you lose factories and machinery and an entire class of people with technical skill, it’s extremely hard to get these things back (and saying that it was good to get in early because automation was already beginning to destroy jobs is not a sufficient excuse because countries like America, Britain and Australia are clearly in a worse position socially and economically than they would have been if we did not offshore so much industry, and less ready to transition, e.g., to a renewable-industry-based economy) ” [https://www.concertedaction.com/2017/03/16/noah-smith-on-free-trade/] , and “Read Peter Turchin or other theorists of social cohesion, and you’ll know that these changes are going to contribute to future social breakdown, because all these policies are creating an autocatalytic process of elite overproduction and increasing elite capture of the political process, as well as helping destroy vital institutions which help strengthen the psychological ‘social contract’ (an affordable system of popular healthcare, a strong educational system accessible for all, public libraries etc), plus the ideology that has gone along with these policies has been one of self-interest, all of which is going to lead to further degradation in social cohesion and unity”, and “Read Joseph Stiglitz’s Globalization and its Discontents or Noam Chomsky or Ha-Joon Chang, and you’ll see that, with the help of (especially) the IMF and its rabid hypocritical policies of violent “liberalization” and rabid opposition to protectionism (even for fledgling industries) and capital controls in the Third World, those (especially) American corporations allowed to take their operations all over the world since the beginning of the neoliberal assault have used this freedom to pay workers peanuts in horrifying conditions in Latin America, South-East Asia and Africa, in the process usually destroying precious environments and ecosystems in countries without adequate environmental protections or regulations (an inadequacy often abetted by the IMF’s opposition to ‘interference’ in the free operation of the rapacious totalitarian institutions known as corporations), and then taking their profits back to their shareholders in the US, who have been receiving massively increasing dividends even as the real wages of workers outside of the Wall St bubble have been stagnating.”); we can also say, “You are helping make the market less free. Your policies have encouraged and encourage the financialisation of the economy; by offshoring manufacturing and allowing the financial sector to grow ever larger through deregulation and the abandonment of fiscal policy (the abandonment of which induces the banking sector, as it were, to ‘step in’ through its own money creation (but money with interest in this case), hence the explosion of credit cards since the 1980s), you have fostered he transformation of Western corporations into essentially financial, ‘bullshit’ non-productive-but-massively profit-making entities run by MBAs instead of engineers; you have induced the bloating of the rentier class on Wall St, massively increasing Wall St’s share of “GDP” (a whopping 40% in 2008 for America), despite the fact that these financiers, because only 1% of their activity is funding entrepreneurs with good ideas to set up companies (for which they no longer have any incentives, because this kind of investment is risky and the regulation must be set up in the right way to encourage it) and 99% of their activity is making money by making bets on other people’s activity, making fictitious capital grow into yet more fictious capital (asset-price inflation being the one kind of inflation the ‘free-market’ advocates never bother with) – because, in other words, 99% of their activity is “financial engineering”, that is, making money out of other people’s or coporations’ debt – actually constitute a burden on the real economy, a subtrahend from it. You do not realise, my little idiot, that a bloated financial sector has one powerful motive: to induce citizens and corporations to take on more and more debt. Just as the Feudal landlords of the pre-capitalist era sought to maintain a system of peonage in order to maintain their power, the tumescent financial sector of today seeks to continually expand the number of peons which it controls financially, even as this leads to a worsening economic performance, increasing rates of mental health, and increasing financial instability (eventually leading to the crisis-precipitating point where, since the most reliable debtors are already up to their ears in liabilities, the banks resort to making adjustable-rate and NINJA loans to desperate people in a massively overinflated market, and the utterly supine regulatory apparatus cannot control the packaging of these junk mortgages into fraudulent assets which spread throughout the Wall St ecosystem and bring the whole fucking travesty down).”

“Crucially,” you can say, “you fail to recognise that once the banks do set up their rent-extraction systems, they are not earning their profits, but accruing them. That is, they are not participating in a free market where they are forced to produce valuable goods to get ahead; the vast majority of their activity boils down to vacuuming up other people’s money. Moreover, in the metastasis of the financial sector as a whole, as the banking system disrupts more and more of the economy’s ‘circular flow’, it distorts the economy as a whole, making the market less and less free in the sense of free from rentiers who, by means of their tollbooths, can impose rent far above unit-costs, and free from the idle rich of the financial class who make money without actually making any physical goods.  This financial motive to extract rent, of course, also leads to disaster when governments privatise natural monopolies like utilities, railways, roads, national parks under the utterly nonsensical pretence of unleashing the efficiency of the private sector (it should be obvious why this is utterly nonsensical for natural monopolies).  Once these assets are in the hands of the rentier class, tollbooths are placed on them. The incentives become more short-term; maintenance is less of an issue since the horizon in a totally financialised economy is extremely near (‘We just need our quarterly profits to increase, then we’ll attract more investors and our stock value will be boosted’).  In the case of railways, as we see, for example, in England, [https://www.youtube.com/watch?v=-vY7U9rQI70], this has led to drastic price increases and a simultaneous decrease in equality – a double negative whammy! So if you are an advocate of neoliberal policies, in practice, you actually don't like the free market. Essentially, you just want to create a more unjust and inequitable system which eventually leads to catastrophic outcomes, like Trump. You want to try your best to take us back to a more Feudal-type era; at the very least you want to repeal the institutions and regulations that made the market more free after the Gilded Age (the minimum wage, labour rights, financial regulations, the progressive taxation system, and so on).”  

Ultimately, the way I think about Hudson’s argument is this: the concept of a free market for someone like Adam Smith or J.S. Mill (who mind you became much more of a ‘Ricardian socialist’ in his later life, accepting more government intervention) was one derived from a highly egalitarian moral philosophy, in both cases. Recall that Adam Smith was the chair of Moral Philosophy at Edinburgh University and wrote about the power of human benevolence, and that John Stuart Mill’s political philosophy placed civic participation at its centre, with the belief that everyone ought to have the means to develop their moral and rational faculties to their full potential, including labourers, by means of actively participating in democratic debate and discussion (see Carole Pateman’s Democracy and Participation). The idea of a free market for both of them was a vision of a more equal society, in which everyone earned what they deserved, and the political interests of factions was reduced to its minimum extent. For Smith, writing in an era which (of course) has very little in common with today’s world, the vision was radical. Consider these Smith quotes, and tell me if the sentiments behind them sound like those that motivate modern ‘free-market’ advocates:

“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it” [The Theory of Moral Sentiments, Section I, Chap. I].

“This disposition to admire, and almost to worship, the rich and powerful, and to despise or, at least, neglect persons of poor and mean conditions, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments” [ibid, Section III, Chap. II].

“The great source of both the misery and disorders of human life, seems to arise from over-rating the difference between one permanent situation and another. Avarice over-rates the difference between poverty and riches: ambition, that between a private and a public station: vain-glory, that between obscurity and extensive reputation. The person under the influence of any of those extravagant passions, is not only miserable in his actual situation, but is often disposed to disturb the peace of society, in order to arrive at that which he so foolishly admires. The slightest observation, however, might satisfy him, that, in all the ordinary situations of human life, a well-disposed mind may be equally calm, equally cheerful, and equally contented. Some of those situations may, no doubt, deserve to be preferred to others: but none of them can deserve to be pursued with that passionate ardour which drives us to violate the rules either of prudence or of justice; or to corrupt the future tranquillity of our minds, either by shame from the remembrance of our own folly, or by remorse from the horror of our own injustice” [ibid, Section III, Chap. III].

“How many people ruin themselves by laying out money on trinkets of frivolous utility? What pleases these lovers of toys is not so much the utility, as the aptness of the machines which are fitted to promote it. All their pockets are stuffed with little conveniences. They contrive new pockets, unknown in the clothes of other people, in order to carry a greater number. They walk about loaded with a multitude of baubles, in weight and sometimes in value not inferior to an ordinary Jew's-box, some of which may sometimes be of some little use, but all of which might at all times be very well spared, and of which the whole utility is certainly not worth the fatigue of bearing the burden” [ibid, Section IV, Chap. I].

“As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce” [The Wealth of Nations, Chapter VI, p. 60].

“No society can surely be flourishing and happy, of which the greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged” [ibid, Book I, Chapter VIII, p. 94].

“Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people” [ibid, Book I, Chapter IX, p. 117].

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty or justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary” [ibid, Book I, Chapter X, Part II, p. 152].

“Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters” [ibid, Book I, Chapter x, Part II, p. 168].

“The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it" [ibid, Book I, Chapter XI, Part III, Conclusion of the Chapter, p. 292].

“All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind” [ibid, Book Four, Chapter IV, p. 448].

“Monopoly of one kind or another, indeed, seems to be the sole engine of the mercantile system” [ibid, Book Four, Chapter VII, Part II, p. 684].

“Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all” [ibid, Book Five, Chapter I, Part II, p. 775].

“The man whose whole life is spent in performing a few simple operations, of which the effects too are, perhaps, always the same, or very nearly the same, has no occasion to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him, not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country, he is altogether incapable of judging; and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance, in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it” [ibid, Book Five, 781]

“The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion” [ibid, Book Five, Chapter II, Part II, Article I, p. 911].

“Every tax, however, is to the person who pays it a badge, not of slavery but of liberty. It denotes that he is a subject to government, indeed, but that, as he has some property, he cannot himself be the property of a master” [ibid, Book Five, Chapter II, Part II, p. 927].

I fully recognise that there are a couple of important passages in The Wealth of Nations where Smith explains that the merchants’ pursuing their self-interest can lead to good for the society as a whole, e.g. that famous line from early in chapter II: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”. But – get this – I actually think what he says in those passages is true, and has nothing to do with Neoliberal or Libertarian ideology. Yeah, sure, in a complex decentralised society, you can get this kind of shit happening. What he certainly doesn’t say is that everyone constantly pursuing their self-interest will lead to a healthy, cohesive, prosperous society (a totally bizarre and stupid belief to everyone, in every era, except total imbeciles), nor that human beings are naturally self-interested utility maximisers. My quotes show pretty damn clearly that he didn’t believe either, so it makes no sense to say that those ideas can be traced to him.

Now, as for Mill, I find it rather telling that, today, advocates of the Millian conception of democracy and the Millian justification for it (to cultivate our rational and moral faculties), which lay at the heart of his political philosophy (based on his rich utilitarian doctrine (as opposed to the vulgar Benthamian utilitarian doctrine of economists) which implied that all humans should have a taste of higher pleasures, which in turn required that all citizens developed a capacity for reason), are not those who call themselves ‘free-market’ advocates or Libertarians, but instead people who ardently oppose Neoliberals and Libertarians (like me). The reason is simple: Neoliberals and Libertarians are utterly opposed to this kind of vision of society. They seek a society in which people are raised not to cultivate their faculty of reason, but to be materialistic and greedy, driven only to claw their way up the economic ladder and acquire wealth. Proponents of such ideologies are logically bound to have nothing but contempt for participatory democracy. Instead, they typically take a Lippmannian/Schumpeterian/Popperian/Rikerian view that democracy should be as restricted as possible while still retaining its sole justifiable function of providing a means of removing bad rulers. The advocates of the Millian vision, meanwhile, are either lefty radicals – Carole Pateman (of course), late-career Robert Dahl, Noam Chomsky and other libertarian- or populist-type leftists (including anarchists of all stripes) – plus a tiny group of nearly politically undefinable (anti-corporate libertarians, anti-developmentalists, localists) like Frank Bryan or Bill Kauffman (look them up, they’re cool), who, despite belonging to a tiny academic caste, probably speak for millions of rural people with no voice in the academy.

Finally, we’ve got all the history out of the way. Now I’m going to talk about how the Neoliberal period has actually been a period marked by increasing consolidation of monopolies and corporate power, despite all the rhetoric, and despite the fact that the economic advisers to the policy changes have been passionately hostile to monopolies.

A history of the growth of monopoly power in the US since the 1970s can be found here, by the popular leftist journalist, Matthew Stoller: https://www.theatlantic.com/politics/archive/2016/10/how-democrats-killed-their-populist-soul/504710/. One major shortcoming of this piece is that Stoller has an extremely stupid reading of John Kenneth Galbraith. He also doesn’t understand the role of economic theory in the Neoliberal assault (the overthrow of the neoclassical-synthesis Keynesianism in the academy by Friedman and Lucas, and its replacement by micro-founded macroeconomics). Stoller may think that the growth of monopoly power over this period proves that mainstream, ‘free-market’ economic theory didn’t play a role, but, in fact, we can see that famous academic economists have always played a massive role in US politics, and probably more so after the late 1970s (Friedman had the ears of both Thatcher and Reagan, and the Fed chief is always a major academic economist (e.g. Bernanke)); the problem, as far as monopolies go, is literally just that they fucked up in implementing their own vision (they didn’t realise that antitrust shit was actually very important, and that markets don’t self-regulate, but instead naturally tend towards oligopoly or monopoly).

The penultimate paragraph of Stoller’s piece sums it up: “For most Americans, the institutions that touch their lives are unreachable. Americans get broadband through Comcast, their internet through Google, their seeds and chemicals through Monsanto. They sell their grain through Cargill and buy everything from books to lawnmowers through Amazon. Open markets are gone, replaced by a handful of corporate giants. Political groups associated with Koch Industries have a larger budget than either political party, and there is no faith in what was once the most democratically responsive part of government: Congress. Steeped in centralized power and mistrust, Americans must now confront Donald Trump, the loudest and most grotesque symbol of authoritarianism in politics today.”

The key thing about this, of course, is that it shows that free-market economists don’t even know how to bring about their limited version of a free-market and instead just favour the interests of the mega-wealthy.

Chomsky also has plenty to say about the contradictions of Reagan and Thatcher’s ‘free-market’ ideology, along with the farcical notion of ‘free trade’ (exclusive corporate investment agreements). Some of what he has to say can be found here: https://chomsky.info/199705__/.

The curious thing about all this stuff for me - the reason I'm writing this essay - is that, after reading Steve Keen’s Debunking Economics and Joseph Stiglitz’s Globalization and its Discontents in early 2015 and learning more about the power of economics PhDs in the halls of power in national governments and in institutions like the IMF and the World Bank (learning about what Larry Summers has done, for example), I came to the conclusion that the economics profession has played a major role in the Neoliberal assault, and in the devastating ‘liberalizing’ work of the IMF in, e.g. East Asia or Russia or most of Latin America or East Africa (which I wrote about extensively in my “Economics Manifesto”, a link to which can be found to your right). This conclusion seemed to clash with what Chomsky showed me: that what was going on in international economics was protectionism for Western industry, and liberalization for poor countries without the power to defend themselves - clearly not a consistent application of economic theory. What I slowly recognised, however, is that this can be explained in the following way:
The world is damn complicated!
Academic theory and power interact in fucking complex ways, and it's very hard to determine their respective impact. Mr. Unlearning Economics recently wrote a nice blogpost on exactly this subject, and I shall end this absurdly large document by linking it: https://medium.com/@UnlearningEcon/no-criticising-economics-is-not-regressive-43e114777429.

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[1] There’s a famous quote in The General Theory where Keynes light-heartedly quips about his desire for the “euthanasia of the rentier” ; he is talking about bankers, not aristocrats like himself.