[A-List] Michael Hudson - The Counter-Enlightenment, its Economic Program - and the Classical Alternative
james.irldaly at ntlworld.com
Fri Aug 20 08:36:41 MDT 2010
The Counter-Enlightenment, its Economic Program - and the Classical
Based on a talk given to Prosper Australia on Friday October 16th, 2009.
First published in Progress Magazine - Autumn 2010. Download Progress #1096
The last few years have seen Social Democratic and Labour parties fall into
disarray throughout the world. Retreating from the economic program that
powered their electoral takeoff a century ago, they have lost their
traditional constituencies. Their golden age was an outgrowth of classical
political economy from Adam Smith via John Stuart Mill to Progressive Era
reformers advocating progressive taxation of land and other wealth, public
infrastructure investment at subsidized prices, price regulation of
monopolies, and public banking reforms to socialize the financial system.
Industrial protectionists, nationalists and neocolonialists - the parties of
heavy industry and military power - also endorsed a strong role for
government. Across the political spectrum the wave of the future appeared to
be a rising role for public oversight of markets, subsidies for capital
formation and education, public health, social welfare and infrastructure
spending. This program was most successful in the United States, Germany and
The guiding assumption of democratic political reform was that voters - with
the working class most numerous - would act in their own interest to
legislate tax and regulatory reforms aimed at raising productivity and
living standards while making their economies more competitive in world
markets. Banks and other financial institutions were expected to play a key
role, in conjunction with government policy (and indeed, a military
The question of who would be the major beneficiaries of pro-industrial
economic reforms depended on who would control the government to administer
tax policy and subsidies, tariff policy, social spending and infrastructure
The two main contenders were labor and industrial capital, and there were
many areas of overlapping interest. The main loser was expected to be the
landed aristocracy as the lower house of Parliament (or Congress) gained
power relative to the upper House of Lords (or Senate).
Finance was viewed as ancillary to industrial capital, not as an independent
class or economic dynamic. Finance capital's proclivity for trust building
and similar predatory behavior was seen as bolstering the increasingly
monopolistic "rent-extracting" trend within industrial capitalism.
Yet what has occurred over the past century is an increasing financial
dominance over industry, real estate and over government itself. Gradually,
finance came to be recognized as an autonomous dynamic making money purely
by financial means - as Marx put it, M-M' rather than by investing in the
production of commodities to sell at a profit, M-C-M'.
The past half-century in particular has seen interest and other financial
charges absorb a rising share of property rent, industrial profits, tax
revenues and personal income.
Financial dominance of real estate and industry, government spending and
personal wealth seeking has been achieved largely by ideological conquest
based on deception. For starters, financial interests seek a cloak of
invisibility when it comes to their own gains and those of their major
Financial wealth - debt claims on society's means of production and income -
presents itself to society as tangible wealth itself, not as its antithesis
on the debt side of the balance sheet. Banking takes on protective
coloration to pose as part of the "real" economy, camouflaging itself as
industrial capital and "wealth creation."
The Federal Reserve's "land as residual" methodology for U.S. real estate
statistics, for example, depict rising land prices as "capital" gains for
buildings. Debt pyramiding is depicted as generic "profit," as if
financial engineering were industrial engineering. And the symbiotic
finance, insurance and real estate (FIRE) sector is reported as part of
gross domestic product (GDP), not as extracting what actually are transfer
payments from the rest of the economy.
Alternatively, finance claims to be a necessary ancillary to the industrial
economy. This was the rationale for the $13 trillion Bush-Obama bailout of
Wall Street - as if the economy could not recover without making financial
speculators whole. According to this trickle-down logic, labor needs its
employers, who in turn need their bankers and bondholders. Likewise, renters
need their landlords who need mortgage lenders. Populations need governments
to run up debts to subsidize (but not regulate) the financial sector to
extend credit (debt) to the economy.
This kind of junk economics was almost unthinkable a century ago. Classical
political economy was evolving from the "Ricardian socialism" of John Stuart
Mill to the industrial socialism of Marx and the Progressive Era's Social
Democratic and Labour parties. But today these parties endorse a tax shift
off property and finance onto labor and consumers.
Tony Blair's British Labour Party has outdone Margaret Thatcher's
Conservatives in privatizing railroads and other public infrastructure in
the notorious Private Finance Initiative. An anti-government (and indeed,
pro-rentier) model leaves resource allocation and planning centralized in
the hands of a financial sector being deregulated rather than steered along
the social lines anticipated by economic futurists a century ago.
Classical political economy as a program of fiscal and financial reform
The result has been a political disorientation, which I attribute to the
abandonment of the thrust of classical economic reform. That program was
centered on three major policies. The first was to tax away the land rent
that had been privatized since medieval times, restoring it to the public
domain as the basis for public investment.
The second was to minimize monopoly rent, by keeping key infrastructure in
the public domain and providing its services at cost or on a subsidized
basis to make economies more competitive. The third reform was to regulate
prices for goods and services produced by natural monopolies in private
The aim of this classical program was to bring income in line with actual
labor effort and cost, thereby freeing markets from the unnecessary "free
lunch" rake-off that added to prices and hence made economies uncompetitive.
Reformers thus focused on the concept of economic rent, defined as revenue
with no corresponding cost of production.
This excess of income (and hence, of prices) over and above the "real" cost
of production was to be taxed away or avoided altogether. Taxing land rent
and minimizing monopoly price gouging in particular was expected to keep
prices in line with the technologically and socially necessary cost of
Industry as well as labor endorsed a liberal tax system aimed at collecting
the excess of market prices over intrinsic value. This excess economic rent
occurred most conspicuously in land rent, mineral and resource rent and
Value and price theory thus was highly political in advocating a tax system
centered on the land tax - collecting the rent that had been taken - indeed,
siphoned off as tribute - by Europe's landed aristocracies since the era of
military conquest parceling out the land among the conquerors.
Classical value and price theory defined cost in a way that enabled it to be
quantified to enforce anti-monopoly price regulation. In the United States,
gas and electricity utilities were privately financed but publicly
regulated. The idea was to prevent what railroad practice called watered
These were not inherently necessary costs, but were "free lunch" tickets
given to owners, managers and strategic politicians in the form of bonds and
stocks. The financial pseudo-cost of interest and dividends on these
securities was passed on to the public, inflating railway fares and similar
prices over the intrinsic direct cost of production.
Today, the Social Democrats have been losing elections throughout Europe. I
believe that this is largely because they no longer have an economic
program. Yet they began as an economic reform party - the party of progress,
progressive taxation, rising wage and living standards and public sector
investment and subsidy. This has been lost. Labour Parties throughout the
English-speaking world in particular have embraced an anti-government
political ideology of privatization diametrically opposite from the views
held a century ago.
Those views were developed by classical economists, from the French
Physiocrats and Adam Smith in the late 18th century to John Stuart Mill.
Mill was a turning point, as the political economy discipline was soon
traumatized by Karl Marx, who pushed classical analysis to its logical
conclusion in dealing with wealth, property and income, earned and unearned.
Post-classical economics as a reassertion of special rentier interests - by
The classical distinction between earned wealth created by one's own labor,
and unearned or socially created wealth obtained without one's own effort or
cost - by inheritance or special privilege appropriating what nature, the
public sector or asset-price inflation provides - points to an economic
policy of taxing away income not necessary for production and distribution.
This fiscal reform triggered a reaction by vested interests receiving such
In a political analogy to Newton's Third Law of Motion (every action has an
equal and opposite reaction) they sought to rationalize un-taxing and
deregulating finance, real estate and monopolies. It was to provide such
logic that post-classical theory began to emerge in the 1880s.
Rather than describing how economies worked, the new doctrine was based on
hypothetical reasoning more akin to science fiction than descriptive of the
real world. It avoided dealing with unearned wealth and economic parasitism
by assuming that all income was earned productively.
Everyone was "worth what they got," so there was no "unearned increment" to
be un-taxed. And to avoid discussion of structural and legal reform, this
post-classical economics focused on merely marginal changes in supply and
demand. Marginal changes are by definition tiny - so small as not to affect
the economic environment.
Changes in the existing political context are treated as "exogenous" to
economic analysis, so the status quo is assumed as a "given." This narrowing
of scope effectively excludes discussion of property, free credit creation
by banks and unearned income as "exogenous."
It also portrays government spending, subsidies and taxes only as
deadweight, inherently unproductive. Yet throughout most of history the
public sector has provided basic infrastructure investment in roads,
railroads and bus systems, education, research and development to enable
economies to obtain basic services most efficiently at minimum cost and on
The largest capital investment in nearly every economy consists of public
infrastructure and enterprises such as have been privatized on credit since
1980 under "free market" carve-ups of the public domain. Economies have been
turned into "tollbooth" opportunities for the buyers of hitherto public
monopolies to extract access ("rent-seeking") charges in what is, from the
overall economic vantage point, a zero-sum set of transfer payments.
Marginal utility theory leaves no room to analyze this appropriation of
wealth from the public domain. It depicts consumers as choosing from an
existing menu, without discussing the advertising, deception, rent
extraction and price fixing involved in real life. The resulting model is
based on a crudely quantitative analysis of satiation of food or other
commodities - but not wealth addiction to monetary and property
The result is a view of prices between individual buyers and sellers as
heuristic stand-ins for relations between consumers and producers in a more
realistically complex economic system. Credit is treated as if "savers"
defer consumption so that consumers can "enjoy" more in the present.
There is no acknowledgement of the fact that banks create interest-bearing
loans freely, or of a wealthy rentier class (and financial firms, hedge
funds and kindred money managers) whose aim is simply to make more money
faster than anyone else, not to consume more.
Austrian theory attributed payment of interest by individuals to "time
preference" - an "impatience" to consume in the present rather than in the
future. Yet most consumer borrowing is to obtain essentials: mortgage loans
for housing, student loans to get education to qualify for a decently paying
job, auto loans to get to work, and credit-cards to buy such basic
necessities as food, transportation and clothing. Interpreting this consumer
demand in terms of impatience shifts the blame for consumer debt off the
economic system as a coercive trap.
Republicans have blamed the real estate bubble's collapse since 2008 on poor
blacks and other minority borrowers cheating the banks by overstating their
income and borrowing irresponsibly.
Yet the FBI (Federal Bureau of Investigation) and Fitch Ratings Agency have
found financial fraud in 70 percent of subprime mortgage loans, involving a
vast network of crooked mortgage brokers, real estate appraisers and
lawyers. The leading culprits (Countrywide Financial, Washington Mutual and
Citibank) set up the system, and ratings agencies helped Wall Street
investment banks (Lehman Brothers, Bear Stearns, etc.) perpetrate a vastly
controlled fraud by giving AAA top-grade ratings to junk mortgages that
quickly plunged some $750 billion into negative equity in the financial
meltdown of 2008 - 09.
This led to a $13 trillion bailout of bad credit default swaps (CDS),
derivatives trades and other casino-capitalist gambles - a power grab of
debt-money by Wall Street lobbyists and insiders in Washington and New
Austrian theory attributes interest on business loans to "roundabout"
production that requires a longer time period for capital investment as
industry becomes more capital-intensive. This view depicts banks as working
with industrial customers to fund long-term investment. The reality is that
the banker's time frame is short-term, and most loans are for speculation.
Every day the equivalent of an entire year's GDP passes through the New York
Clearing House and Chicago Mercantile Exchange in payment for trades in
stocks and bonds, mortgages and packaged bank loans, forward purchase and
repurchase contracts. Most of these trades take about as long as a roulette
wheel takes to spin. They are driven neither by psychology nor by industrial
technology, but are gambles based on computer-driven programs, or leveraged
buyouts of existing assets.
For the economy at large the result is a financial squeeze that lacks a
long-term vision. Post-classical logic has created a narrowed-down body of
junk economics, not science. It impoverishes economies by sacrificing
long-term prosperity to short-term financial greed. It is based on junk
psychology that ignores group psychology (as William MacDougall noted a
century ago) and other social dimensions beyond a crude Jeremy Bentham-style
"calculus of pleasure and pain."
The assumption of diminishing marginal utility views personal gain seeking
as marginal and moderate, never as rent-seeking in a context of greedy
wealth addiction. In this respect today's economics lacks the scope found
over two thousand years ago in Greek philosophy with the goddess Nemesis
punishing hubris (overweaning pride and arrogance injuring others). There is
no room for the idea of miserly wealth addiction in an economic theory that
avoids looking at the social context - and at how the principle of compound
interest works on an economy-wide scale.
How the Left lost its way
One can understand why right-wing parties avoid making a value judgment
between earned and unearned income or acknowledging wealth addiction,
predatory behavior and privatized rent-seeking monopolies extracting
economically unnecessary charges.
But why have the Labour and Social Democratic parties dropped the value
judgments and scope of classical economics that made it so effective a force
for reform and so empirically and scientifically realistic?
Part of the explanation must be that political discourse has been dumbed
down to make financial analysis anthropomorphic. Newspapers and TV
commentators talk about stock and bonds going up or down because of
confidence, or simply correlate their change to whatever the markets
headline is that day. The reality is that markets go up and down because of
the flow of funds - the terms on which credit flows in and out of asset
All credit is debt, and debt is owed by one party to another - in most
economies today, owed by the bottom 90 percent of the population to the top
10 percent. Post-classical economics does not address this financial
polarization. Money and credit are viewed only as affecting consumer prices
and wages, leaving asset prices out of the picture - and also the degree to
which sales are financed on credit.
Hence, one misses how mortgage debt has fueled a rising access price for
land and housing, relative to wage levels and disposable personal income.
One also misses the rising price of purchasing a retirement pension or
income stream (via stock dividends and bond yields) as asset prices rise
relative to wages.
The most interesting economic analysis concerns the forces that are
transforming financial, fiscal and social structures. How should the tax
laws, for instance, be changed to promote prosperity and justice? The fact
that Social Democratic and Labour parties have not proposed an alternative
would seem to be a major reason for their declining popularity at the polls.
Why should anyone vote for a party that doesn't have an alternative to a
system that nearly everyone except academic economists can see is radically
A century ago it was expected that governments would own and operate basic
infrastructure and natural monopolies, from the post office to the
railroads. The aim was to prevent uncompetitive monopolistic rent
extraction, so as to keep private sector prices in line with what was needed
to produce basic services.
It would be logical today, for instance, for the credit card industry to
have a public provider, or at least a regulatory commission that would
regulate the rate that banks can charge for interest on credit cards, now up
to 30 percent in the United States. To add insult to injury, credit card
companies now extract as much in fees and penalties as they do in interest.
And it takes an entire week for an out-of-state check to get credited, as
banks still use antiquated "pony express" time schedules as an excuse to
extract as much as they can for their key functions.
A similar logic applies to health care or cable TV (the "public option") to
insure competition. Progressive Era regulatory philosophy aimed at keeping
such rates in line with the actual cost of producing goods and services.
Today's idea of "free markets" is to permit entire economies to be being
turned into "tollbooth" opportunities to charge access rents for roads and
other transportation, telephone service (viz. Carlos Slim's Telmex monopoly)
and so forth.
In the financial sphere, Social Democratic parties prior to World War I
aimed at bringing banks into the industrial era. The idea was to expand
their focus beyond merely financing the marketing and sale of products that
were already produced, and at the same time to steer them away from
financing government deficits to wage war. (For the latter purpose, national
Treasuries could monetize the credit, as the United States did with its
greenbacks during the Civil War, 1861-65.)
Banking and high finance were to evolve in partnership with government to
An associated idea for the Saint-Simonians in France was to keep debt in
line with the ability to pay. They sought to organize banks in the form of
what today are mutual funds - profit-sharing ventures extending credit in
return for equity shares (stock) rather than straight interest-bearing debt
that had to be paid regardless of the debtor's financial ability.
The capstone of this philosophy was the Credit Mobilier created by the
Pereire brothers in 1852, and the central European trinity between banking,
heavy industry and the government, largely to build navies and armaments to
World War I changes the political and economic trajectory of Western
The Allied defeat of Germany and the Central Powers in World War I led most
countries to adopt the Anglo-American-Dutch banking model based on lending
against collateral in place, not to create capital. The result has been an
increasing emphasis on mortgage lending rather than industry and commerce.
Some 70 percent of bank loans in Britain and the United States today are
against real estate.
World War I also brought the Russian Revolution. After World War II ended,
Social Democratic and Labour parties throughout the world felt increasingly
obliged to disassociate themselves from Soviet Communism and joined the Cold
War. In the United States, the Socialist Party and labor unions became
strong supporters of the Vietnam War in the 1960's.
While much of Wall St opposed the war (Chase Manhattan CEO George Champion
said that it was not fiscally responsible), labor unions and the socialist
parties supported it as a fight against the Soviet sphere, viewing Ho Chi
Minh as a Communist leader rather than a nationalist. The anti-Stalinist
passion of leaders such as Michael Harrington and his mentor Max Shachtman
led 80 percent of the Young Peoples' Socialist League (the party's youth
group) to leave.
The Old Left collapsed, and the New Left that took its place was more
concerned with social and cultural issues than economic ones. Its focus on
people excluded the core of capitalism. Poverty, racial and Third World
inequality took precedence over concerns with the economy's financial core.
The classical economic reform - the land tax - fell out of favor as nearly
two thirds of the population became homeowners. Commercial landlords were
able to use homeowners as front men to advocate untaxing real estate, using
a disinformation campaign to conceal the fact that the main gainers were
large absentee owners. Financial and fiscal policy has been left mainly to
the right wing of the political spectrum since the 1960s. So tonight I will
review what I think Social Democratic and Labour parties need to do to
regain popular appeal.
1. Minimize rent - the excess of market price over cost value - in financial
Classical value and price theory distinguished between income deemed
necessary for the economy to operate and that which was exploitative and/or
wasteful. Today's complaints about exorbitant executive salaries, bonuses,
stock options, extortionate credit card charges and monopolistic price
gouging all refer generically to unearned revenue.
The distinction between income that is earned - wages and profits - and
unnecessary rentier transfer payments can be traced back to the 13th
century, to the medieval scholastics who set to work refining the concept of
Just Price reflecting reasonable cost and risk. Economic thought down
through the late 19th century would elaborate the distinction between market
price and intrinsic cost value.
The aim was to define the extent to which prices in the marketplace exceeded
the necessary cost of production (or more precisely, reproduction under
existing technological and social conditions). The labor theory of value was
the first stage in defining economic rent as prices in excess of these
necessary costs. This included the costs embodied in the capital equipment
and materials used up in production (ultimately provided by labor) and the
cost of research, technology development and education of laborers at each
Interest and other financial fees are a major cause for why prices are
higher than this intrinsic value. These financial charges are largely a
charge without a real cost of production. Today's banks create money and
credit on a keyboard.
Governments can do the same thing. Australia does it when there is an inflow
of foreign exchange by traders borrowing from Americans at 1% to invest in
Australian bonds at 3.25% and collect the arbitrage difference of 2.25%. The
Australian bond seller turns the U.S. dollars over to the central bank,
which creates an equivalent amount in Australian dollars to match the
foreign exchange inflow.
Popular opinion accepts that it is quite all right for the government to
create credit out of thin air to match foreign exchange inflows (for credit
that foreign commercial banks create "out of thin air" on their own computer
keyboards). But that if a government creates money for domestic spending,
commercial bankers accuse this of being inherently inflationary and
The reason for this policy asymmetry seems to be the desire by private
bankers to open up high-interest foreign-exchange markets such as Australia
for arbitrage rake-offs, while keeping domestic markets for themselves
rather than having governments create their own credit.
In principle, the effect of public and private credit creation should be
identical - if governments and commercial banks lent for the same thing. But
they don't. Commercial banks finance the purchase of property, currency
speculation (for which it seeks government credit creation to finance this
speculation) and domestic bond financing (where it wants the government to
leave the field free for private banks to create credit and lend out at a
Governments create money to spend on domestic production and consumption,
paying income to wage earners and buying goods and services.
In the 1970's, Canadian provinces funded domestic spending not by public
money creation, and not even from borrowing domestic currency from the
nation's five major banks. Instead, they borrowed Swiss francs and European
currency. Canadian interest rates were 6.5%, but they could borrow
deutschmarks or Swiss francs at 4%. Provincial treasurers focused on the
interest charges they were saving - some 2.5 percentage points. But the
Canadian dollar then plunged against the D-mark, so the debt principal
I had many arguments with local bankers at the time as an advisor to the
Canadian government. One banker claimed that Canada needed foreigners to
play the role of "honest broker" and be the judge of whether Canada should
borrow or not - so as to save it from inflationary money creation. I replied
that it was wasteful for provinces to borrow abroad simply to convert into
domestic currency. Provinces received their revenue in a soft currency,
while owing money in those whose exchange rate was rising. Canada's
government had to print a domestic-currency equivalent to finance provincial
deficit spending in any event!
This premium was the price to be paid for letting banks foster a financial
ideology based on a false model of reality. Few politicians have a clue
about how money and credit are created - largely because this is not taught
in the schools. Academic economics courses provide students with a
hypothetical "what if" world in which people gain wealth only by dint of
hard labor and enterprise - and put their savings in banks, which then lend
This personified imagery of credit makes it hard to show how bank loans
create deposits on a modern computer keyboard, creating credit in a way that
provides bankers with the proverbial free lunch.
Honoré de Balzac had a more historically realistic view when he wrote in Le
Père Goriot that behind every family fortune is a long forgotten crime - one
"that has never been found out, because it was properly executed." Not
necessarily forgotten, to be sure.
Europe's aristocracy proudly achieved its landed estates by military
conquest, and Gustavus Myers' History of the Great American Fortunes traced
how most family fortunes were quite visibly and notoriously carved out of
the public domain. Novelists and historians seem to understand this much
more readily than economists, whose blind spot usually leaves credit and
debt - and privatized economic rent - out of their narrative of how fortunes
are obtained in today's world.
The anti-classical reaction defined all income as payment for productive
contributions to the economy. The logical (but unrealistic) corollary was
that anyone who receives an income must have earned it by producing a
service of equivalent value. The value of "output" in this post-classical
analysis therefore is measured by the sum of all expenses associated with
it, regardless of whether these expenses take the form of wages, profits,
property rent or financial rent.
This is the familiar complaint against as an economic indicator of actual
output. It leads to productivity being defined as output (the sum of all
costs) divided by labor time.
A perverse result of this methodology is that labor productivity in the
financial service sector is deemed to rise in proportion to the wages and
salaries paid out. When bankers pay themselves more, their productivity is
deemed to rise. Such circular reasoning makes economics an exercise in
tautology exemplifying the GIGO principle (garbage in, garbage out) more
than real science. It is a false empiricism, the illusion of scientific
2. To minimize economic overhead, restore the classical distinction between
price and value
Dysfunctional practices will not be dropped until an alternative concept is
at hand. An alternative exists - the classical political economy that today's
censorial "free market" orthodoxy rejects. The problem is how to restore the
analytic distinctions it drew.
It seems a hopeless task to retrain economists once their minds are
channeled along particular simplistic lines. New ideas almost always require
new individuals to expound them. And by the same token in academia, it is
easier to create a brand new department or discipline than to reform an
obsolete or dysfunctional body of thought. This was the problem that
confronted American protectionists after the Civil War.
Prestige universities in New England and the South taught British free trade
theory - that era's analogue akin to today's neoliberalism. The Republican
solution was not to reform these colleges, but to found state land grant
colleges and business schools to promote their more technologically modern
New government departments were formed, most notably the Department of
Agriculture. Already in the 1840s, protectionist economists were calculating
the ecological effect of plantation exports such as cotton and tobacco on
soil depletion. And the Department of Labor compiled statistics to verify
the "economy of high wages" doctrine correlating wage levels, education and
what today is called human capital with labor productivity. Yet the doctrine
that steered the United States to industrial and agricultural supremacy
doesn't appear in today's textbooks, or even in political or economic
The history of economic thought was taught as a core course when I attended
graduate school in the early 1960's. It has been replaced by mathematical
economics, trivialized by being based on conceptually questionable,
ideologically based statistical categories. My most imaginative students at
the New School where I taught in New York City dropped out of the discipline
and went into sociology or something else. They wanted to study economics to
discover how the world operated, but were disappointed to find that this is
no longer what the discipline is about.
The situation is worse for those students who stayed in the field and sought
academic positions. Promotion is conditional upon publication in "vetted"
journals. The key publications are controlled censorially by an intellectual
inquisition that blocks any critique of pro-financial free market ideology.
It is telling that one of the first acts of the Chicago Boys in Chile after
the military junta overthrew the Allende government in 1973, for example,
was to close down every economics department in the nation outside of the
Catholic University, which was a University of Chicago monetarist
stronghold. The junta then closed down every social science department, and
fired, exiled or murdered critics of its ideology in the terrorist Project
Condor program waged throughout Latin America and spread to political
assassination in the United States itself.
What the Chicago Boys recognized is that free market ideology requires
totalitarian control of the school and university system, totalitarian
control of the press, and control of the police where intellectual
resistance survives against the idea that economic planning should become
much more centralized - but moved out of the hands of government into those
of the bankers and other financial institutions.
Free market ideology ends up as political Doublethink in countering any
freedom of thought. Its remarkable success in the United States and
elsewhere thus has been achieved largely by excluding the history of
economic thought - and of economic history - from the economics curriculum.
The existence of neoliberal thought police and academic censorship that
brands any revival of classical liberalism as heresy has become a major
barrier to restoring the analytic distinctions drawn by classical economists
and other critics of shifting planning power to the lords of high finance.
3. Free economies from the vestiges of feudalism's vested interests
Classical reformers sought to free industrial capitalism from the legacy of
feudalism. Above all were the vestiges of landownership created by the
warlord invasions of England and other European realms. An aristocratic
rentier class lived off its groundrent, while governments ran into debt to
international bankers to wage foreign wars, and then preserved their credit
rating by creating and selling off private monopolies to pay these debts.
Rent added to the price of doing business, wars were expensive, and public
debts involved carrying charges that had to be paid by taxing the economy.
Reflecting the emerging economic liberalism, Josiah Tucker in the late 1750's
called the American colonies an albatross around the neck of England. The
cost of defending them against French designs forced the nation into debt.
Opposed to Britain's seemingly perpetual wars with France, Adam Smith
described the national debt as having come into being to finance wars. Book
V of The Wealth of Nations provides a capsule history of how each war was
financed by a new bond issue, paying its interest by imposing a new tax.
Smith's aim was to make England more competitive, by lowering the price of
living and doing business, by getting rid of the taxes levied to pay
interest on war debts. The three related planks of classical economic
liberalism thus consisted of opposition to wars and the public debts and
taxes they imposed. The related political plank was democratic reform, on
the assumption that people would vote in their self-interest - against the
wars and colonial rivalries that led to public debts and taxes, in that
This logic expanded to include an opposition to monopoly rent.
As Britain's and France's public debts grew so large as to overburden their
economies with taxes to carry their interest charges, governments sought to
retire these debts by creating national monopolies to sell off for payment
in government bonds. Britain created the East India Company in 1600, the
Bank of England in 1694 (for £1.2 million in bonds) and the South Sea
Company in 1711, contemporary with John Law's Mississippi Company in France.
By urging free markets, Smith sought to prevent such monopolies from being
formed, and his classical successors elaborated the critique of what Alfred
Marshall would call quasi-rents in his 1890 Principles of Economics. The
solution pressed by social democratic parties was to keep public monopolies
in the public domain - and to price their output low enough not to rake off
monopoly rents from the economy at large.
By privatizing monopolies from the public domain and cutting taxes on
rent-yielding wealth (real estate and financial privilege), the policy of
Margaret Thatcher and other neoliberals since the 1980's is just the
opposite of what Smith and other "original" liberals represented.
Compounding this, the World Bank and International Monetary Fund have
rendered economies almost hopelessly high-cost by imposing the Washington
Consensus policy on debtor countries throughout the world, most notoriously
on the post-Soviet states since the breakup of the USSR in 1991.
Economies are being sacrificed to pay creditors - and indeed, to vest a
post-modern rentier class - by using tax systems and privatization sell-offs
as a policy aimed at squeezing out revenue almost as if the subject
economies were conquered militarily.
The alternative to today's neo-rentier (I might almost say neo-feudal)
economies would be to default on loans to the financial class for whom the
IMF and World Bank act as collection agents.
Short of default, governments face a choice between raising real estate
taxes (which would threaten the profit margins of land speculators but would
reduce housing prices by leaving less rental income to be capitalized into
bank loans), raising sales taxes (which would drive buyers to other states
while eating into labor's net purchasing power and thereby shrinking local
markets), raising income taxes (driving employees and companies to move
out), or selling off public infrastructure.
The logical implication is that economies must shrink and shrink until such
time as they finally write off debts that can be paid only by polarizing the
economy between increasingly wealthy creditors at the top of the economic
pyramid, and an increasingly indebted population at the bottom, reduced to
This either/or choice when it comes to confronting the all-devouring
financial dynamic of debt explains the political warfare of our post-modern
age. Governments risk pariah status and currency raids, right wing coup d'êtats
and assassination of their leaders, if they hesitate with more than a blink
of an eye to sell off the public domain to privatize rent-seeking
The effect is to raise the prices that people must pay for essentials as the
privatizers erect tollbooths at key access or choke points to roads, the
communications spectrum, water and other basic needs.
Strapped local governments in the United States, for example, are turning
public streets into toll roads.
Chicago, where I grew up, recently sold the right to install parking meters
along the city's curbs. Such rent-extracting privileges are prime collateral
for bank loans, so the rental income is capitalized into interest payments.
This makes the financial sector the ultimate recipient of these overhead
charges - while national economic efficiency shrinks.
This neo-rentier phenomenon is spreading throughout the world. Sponsored
mainly by the financial sector, it is a resurgence of what classical
liberals wanted to avoid by their policy of keeping prices in line with
technologically necessary costs by taxing away economic rent or (in the case
of public utilities) regulating administered prices to prohibit such
charges. Today's policy gives tax breaks to an unnecessary and parasitic
The latter's response was to promote a doctrine misleadingly called
"neoliberal." Instead of freeing markets from rentier charges as the
original liberals sought to do, neoliberal policy imposes these charges on
Today's anti-classical doctrine depicts rentiers as playing a positive role,
increasing "value added" by squeezing out higher rental access charges - as
if privatizing public assets was more efficient rather than less so on an
The cost savings consist more of shifting from hitherto normal working
conditions to dangerous cost cutting that verges on asset stripping - while
CEO mega-salaries and bonuses, interest and management fees to parent
financial conglomerates end up absorbing most of the operational cost
This bankers' eye view of the wealth of nations is a travesty of what Adam
Capitalizing rent-extraction privileges and selling them off to buyers on
credit - whose interest charges are treated as a tax-deductible cost of
doing business - builds in a rent overhead that adds to society's cost of
living and doing business. The financial sector encourages prospective
buyers to bid against each other, with the winner being the one who agrees
to pay the highest proportion of rental income to the banks or other
This turns monopoly rent into financial overhead, much as mortgage lending
does in the case with land rent.
Buyers on credit are willing to pay rental income to bankers because they
hope to come out with a capital gain. Their first policy is to squeeze more
money out of customers - rental tenants or the users of the basic
infrastructure being privatized.
The second policy is to lower the cost of labor, especially by shifting from
unionized to non-union labor, as well as by downsizing (working the existing
labor force harder as employees retire or leave) and outsourcing. Working
the staff longer hours and cutting vacations is trumpeted as "productivity
gains," as if they came from technology and superior management rather than
from a retrogression toward the exploitative practices of bygone sweatshop
But most of all, buyers of real estate and privatized enterprises hope to
gain by asset-price inflation. The result is a Bubble Economy, sponsored by
central banks to help promote commercial bank lending as a way to get rich
by riding the wave of higher land prices and stock market gains.
Today's tax system subsidizes the capital-gains process in two ways. First,
it treats interest as a tax-deductible cost of doing business rather than a
choice as to the mode of financing as compared with equity.
Second, capital gains are taxed at a much lower rate than wages and profits
("earned income"). This fiscal bias supports debt leveraging and financial
rent seeking, while regressive tax policy and deregulation opens the
floodgates for real estate and monopoly rents.
The rent recipient's gain is at the expense of the remaining taxpayers. This
is what economists call a zero-sum activity when viewed from the perspective
of society at large.
Yet real estate is given tax preference over industrial capital formation.
In the United States, the commercial real estate sector paid almost no
income tax from 1945 to 2000, even as land rents rose sharply. Investors can
treat interest as a tax-deductible expense. Also, U.S. depreciation
schedules even let their tax accountants pretend that buildings are wearing
out and hence losing market value- even as land prices (site values) are
soaring. And to top matters, states and localities have been shifting taxes
off property and onto labor since the 1930s.
All this creates capital gains. But sellers of property don't even have to
pay a tax on their gain if they turn around and use the sales proceeds to
buy a new property. That is considered "preserving capital."
The Progressive Era's tax and financial reforms in the late 19th and early
20th centuries sought to prevent such favoritism. What helped defeat this
movement was the financial sector's powerful lobbying for real estate and
monopolies. The bankers' spokesman David Ricardo had developed his theory of
ground rent in 1817 to oppose the Corn Laws' agricultural protectionism for
Britain's rural landowners.
But by the end of the century, real estate had become the banking system's
major customer. Bankers had expected manufacturing to create their major
market in trade financing, but found it most profitable to ride the wave of
real estate gains and monopoly power by extending mortgage credit and
lending to owners and buyers of monopolies.
It was to free economies from financial and fiscal policy dictated by
rentier interests that a broad reform platform flowered in the 19th century.
The thrust of its reform logic dates back to the time that medieval Europe
emerged from its Dark Age and private bankers replaced the Church banking
orders that took the lead in legitimizing and initially even sanctifying
money-lending, fueled by the bullion the Crusaders looted from Byzantium
after 1225. The major borrowers were kings, to wage war - and they issued
bonds secured by taxes.
This was the major "rent problem" that theorists addressed. A rente was a
French government bond, so bondholders were rentiers, receiving interest at
specific calendrical intervals.
The idea of a regular payment, stipulated in advance, applied to landlords
as well. As noted above, the concept of economic rent - revenue in excess of
the necessary cost of production - emerged from medieval discussions of
interest and Just Price: How much was it fair for a banker to charge to lend
or transfer money abroad, taking into account the risk of losing his
capital? So we are brought back to the logic of Thomas Aquinas and the other
Schoolmen who laid the groundwork for the labor theory of value.
4. Where has the surplus gone - and why aren't we living in an economic
Since the 1980s the rentier interests have won radical yet almost
unchallenged victories reversing much of what the classical liberals fought
for. These early reformers saw their logic as so reasonable - and so
strongly supported by democratic political reform, they believed - that they
spent little effort in defending against intellectual and political
The vested financial and real estate interests seemed old and on their way
out. A scientific, technological and hence largely impersonal material
upward trend of technology promised to usher in a post-industrial world of
leisure almost automatically.
There was no worry that the term "post-industrial" would connote a dynamic
of finance capital superceding industrial capital formation, and would throw
its political and economic weight behind the creation of rent-extracting
monopolies to lead the world down the road to debt peonage.
The concern was that people would be so wealthy that they saved too much and
the internal market would shrink, not that people would be driven so deeply
into debt that they would have to work longer and longer hours, at more and
more jobs, just to break even.
The one threat that people worried most about was that of war - the
underside of technology. And the world seemed to put that threat behind them
by creating the United Nations in 1944, followed by the start of European
integration in 1957 with creation of the European Economic Community.
Environmental and ecological concerns were just beginning to raise their
head, catalyzed by Rachel Carlson's Silent Spring in 1962. People did start
to worry about DDT and other pesticides polluting the environment. But
nobody raised a voice about the proliferation of debt pollution (or global
warming, for that matter).
A widespread impression had been spreading since the early 20th century that
the world would be living in a Utopia by now, thanks to technological
progress. Suppose you were told when World War II ended over half a century
ago in 1945 about the breakthroughs in medicine, electronics and information
processing, computers and telecommunication, atomic power and jet aircraft.
Or that agricultural productivity would soar even more than manufacturing
productivity in the United States, as would productivity in mining - just
the reverse of what Ricardian rent theory forecast.
If you had been told all this in 1945, the natural expectation would have
been that we would all be living a life of leisure by now.
So why are employees working longer hours each week and more intensively?
Why are entire families - wives as well as elderly men - being forced into
the labor force instead of having the carefree life that technology seemed
to promise? Why are people being driven deeper and deeper into debt and
losing their homes instead of saving more? Why has home ownership,
education, medical care and retirement involved a proliferation of debt
Nobody expected this. People are suffering and see that something is wrong.
But nobody has explained why it does not have to be this way. Indeed, to do
so is not a path to career advancement in today's world - certainly not to
public policy-making positions or to applause by judges placed in the
leading foundations, universities, political and business centers that shape
popular economic ideology.
Economic futurists talked about the promise of technology, not about the
threat of debt, monopoly power and a resurgence of the old vested interests.
They talked about the world becoming more equal. "Diminishing marginal
utility" would make the wealthy more relaxed and less acquisitive. There was
talk of Madison Avenue using "hidden persuaders" to confuse consumers into
buying specific brand names, but not of politicians creating a deceptive
populism based on junk economics. And nobody expected the academic
curriculum to drop the study of economic history and the history of economic
thought to eradicate warnings from the past about the road to debt serfdom
along which today's world is careening.
The great problem of our time is the financialization of our economic life -
our business and corporate enterprise, our personal life and the government
itself. The debt problem is the most burdensome since medieval war-torn
states and ancient Rome (and even then, there was no corporate debt;
tangible capital was debt free).
By financialization I mean capitalizing every form of surplus income and
pledging it for bank loans at the going interest rate: personal income over
and above basic expenditures, corporate income over and above cash flow
(that is, after meeting the break-even cost of doing business), and whatever
the government can collect in taxes over and above its outlay.
>From the banker's point of view, equilibrium is reached at the point where
the entire economic surplus is committed to be paid out as interest. The
whole economy is capitalized - and the capitalized value of its income
pledged to bankers is taken as the measure of the nation's financial wealth.
It is as if economies grow by being able to borrow more from banks against
their earning power, rather than by tangible capital investment and rising
The problem is that paying out all the economic surplus as interest leaves
nothing over for living standards and what economists in the 18th and 19th
centuries described as the human capital formation (training and education)
required for labor productivity to rise.
There is no cash flow left over for corporations to invest in new tangible
capital formation, and no government spending for infrastructure or other
social and economic needs. An economic and even political Dark Age is
descending as financialization threatens to become a form of neo-feudalism,
especially as bankers prefer to lend against collateral already in place
than to finance new enterprise, and to back rent-seeking rather than more
risky new direct investment.
Frederick Soddy pointed this out in the 1920s, describing financial claims
as "virtual wealth," on the opposite side of the balance sheet from tangible
capital formation. Adam Smith had argued that money is not real wealth. Bank
loans, stocks and bonds are financial claims on wealth.
The essence of balance-sheet accounting is that assets on the left side
equal liabilities on the right-hand side, plus net worth (assets free of
debt). It would be double-counting to add an economy's physical means of
production (the asset side of the balance sheet) together with the debt and
property claims on these assets (on the liabilities side). Yet most public
discourse focuses more on asset prices than on the even faster growth of
Soddy was awarded a Nobel Prize in 1921, showing that good economists
sometimes do win - except that he won for his contribution to chemistry, not
economics. In an analogy to Ptolemaic astronomy, today's academic
gatekeepers depict an economic system shaped by consumer choice rather than
revolving around finance.
This blind spot regarding debt is what makes the worldview sponsored by
financial interests so ironic. Chicago "monetarist" economists talk about
money and credit as if they are not simultaneously debt but merely a veil,
and about "rational markets" as if debt leveraging is a rational way to
increase the wealth of nations. Their approach misses what should be
central: a debt overhead diverts income to be paid as interest and
amortization, while leading to foreclosures and forced sell-offs of private
and public assets, concentrating on property ownership centripetally in the
hands of creditors.
As John Kenneth Galbraith quipped, a precondition for becoming head of the
Federal Reserve or other financial agency is that the candidate not
understand how banking works or the debt burden it creates.
The Great Depression was mainly a debt phenomenon. But to Federal Reserve
Chairman Ben Bernanke, what was needed was more credit, not debt relief.
The vested financial interests and their foundations look for such men who
see only the asset side of the balance sheet being bid up to create gains,
not the debt side. Alan Greenspan was an ideal choice as salesman for bank
He promised that debt leveraging would make homebuyers rich while powering
corporate financialization and takeover lending that raises stock prices to
enable pension funds to grow fast enough to enable people to retire at their
Thinking along these happy lines deters people from looking at how debt
pyramiding leaves them more insecure, and hence afraid to strike or complain
about their working conditions, being "one paycheck away from foreclosure,"
and with less "consumer choice" as more of their paycheck is set aside to
pay debt, as well as the taxes that financial lobbyists pay politicians to
shift onto labor's shoulders. Yet post-classical economics depicts this
indebtedness as being an exercise of "consumer choice," not reflecting an
outright need to obtain access to housing, an education or simply to
maintain living standards.
Prices for real estate, corporate stocks and other assets are whatever banks
will lend. Housing and commercial property prices, for example, are set at
the point where the successful bidder mortgages the property's full rental
Corporate raiders make a similar calculation when they calculate the
prospective cash flow they can pay their bankers and bondholders. Raiders
and "activist stockholders" borrow to buy their companies' own stock in an
attempt to increase its price, and hence the size of their annual bonuses
set by the "value added" to the company's stock-market capitalization.
The payout to creditors is increased by what the tax collector relinquishes.
The revenue is capitalized into higher bank loans that absorb the income
"freed" from taxation. Rolling back taxes on property and finance obliges
the government either to cut back its spending or run deficits, borrowing
from the classes from which they previously taxed.
In practice, most governments choose a third option: to shift the fiscal
burden onto labor ("consumers"). This tax shift shrinks the domestic market
for goods and services, over and above debt deflation. So in effect, every
tax cut on property and finance doubles the overhead - the taxes end up
being paid anyway - by the "real" economy of production and consumption, not
wealth - and the tax savings by property owners are paid out to the bankers
No wonder the financial sector has taken the political lead in sponsoring
"libertarian" pressure for tax cuts. Every dollar of tax cuts ends up in its
pocket, at least in the short run. The problem, of course, is the long run.
This fiscal favoritism for finance and debt pyramiding shrinks the "real"
economy, leaving less and less surplus to be collected either by government
or the creditors.
The blind spot in contemporary economic theory: how economic rent is turned
This ultimately self-defeating character of debt leveraging is not what
business schools teach students. Just the opposite: The idea is to turn over
the entire surplus to the financial sector. The result is a shrinking
economic universe. But financial interests have sought to exclude the
analysis of this debt deflation from economic thought ever since the day of
David Ricardo, whose economic model excluded the analysis of debt that had
Little financial revenue is spent on goods and services or invested in new
means of production. Two hundred years ago, Thomas Malthus argued that
Britain's economy needed its landlord class to spend their rents on coachmen
and carriages, tailors and other luxuries. But only a small part of
financial and property revenue trickles down to be spent on consumption, as
compared to trophies (art already produced, foreign vacations, etc.).
The great majority of financial income is lent out to load yet more property
and income streams down with debt. The economy's bottom 90 percent is driven
increasingly into debt to the wealthiest 10 percent.
This recycling of debt service and financial gains (and government bailout
grants) into new loans reaches its limit at the point where debt service
ends up absorbing the entire economic surplus, leaving no cash flow for new
Depreciation (untaxed revenue) is paid out to creditors rather than being
used to replace equipment that is wearing out or becoming technologically
obsolete. No seed money is left, no revenue for governments to spend on
infrastructure because all is earmarked to pay bondholders. Families are
unable to afford an education or save for their retirement. The economy
Debt ridden economies turn down not for the reason that John Maynard Keynes
worried about in his General Theory - people saving too much as economies
become more prosperous. Economies are shrinking because of debt deflation.
Families, industry and the government have run too deeply into debt to
afford to buy enough goods and services to keep the circular flow ("Say's
Law") intact between production and consumption. Market demand and
employment shrink. This is the problem that is plaguing economies today.
National income statistics quantify the degree to which the financial,
insurance and real estate (FIRE) sector (we may think of it as Economy #2)
extracts interest and rent charges from the production and consumption
economy (what I call Economy #1).
Land rent and monopoly rent is paid out in the form of interest and other
pseudo-costs (enormous paychecks and bonuses, stock options, etc.) that are
not part of the production process as such. This is why Mill defined
economic rent as what a landlord can make in his asleep - without working,
without enterprise, simply by passively receiving what Henry George called
"a payment of obligation."
The classical economic reformers addressed this problem by explaining that
land is no more a factor of production than air, water or sunlight. It is a
property right - a privilege to charge for access to a site for production
or housing. Money and credit likewise are not factors of production. They
are claims for payment or a commission (e.g., as a credit card or foreign
exchange agio), created by legal institutions that differ from country to
These rights can be traced back to insider dealings (as in America's great
railroad giveaways or the post-1991 privatizations in the Soviet Union),
military conquest, monopoly rights granted by lobbying governments, and so
The fact that they are the result of specific historical circumstance
provides an opening for post-classical economists to argue that they should
be excluded from "scientific" analysis, on the grounds that they are not
universally identical but are "institutional" and hence to be exiled to the
academic sub-basement of "sociology."
What is universal, it is claimed, is individual psychic utility (pleasure
and pain) and technology. The inference is that economics should focus on
these "real" core relationships "in the mind," excluding property and
finance as "givens" or simply as "exogenous" considerations.
Rather than making economics scientific and more relevant to policy making,
the result has been to trivialize the discipline. The analysis of markets is
reduced simply to measuring supply and demand - what individuals buy from
the menu put in front of them. Micro-economists focus on individual choice,
but few ask what creates the market in the first place - who created the
menu's contents, how high a price actually needs to be paid, and most of
all, who gets wealth and how fortunes are acquired, e.g., by inheritance,
special privileges, insider dealing, or by their own labor and enterprise.
Yet these were precisely the issues that classical economists discussed. So
economics has retrogressed, not gone forward. And the same can be said of
economic statistics, especially regarding the FIRE sector. The last land
assessment in Britain, home of the great Domesday Book, was in the 1870s.
There hasn't been one since.
Traumatized by the writings of Mill and subsequent socialist reformers, the
landed aristocracy pressured the government to stop estimating land value.
The timeless guiding principle is that if the tax collector doesn't see the
land's rental value, there is less chance of it being taxed. So land - which
used to be deemed "visible wealth" (in contrast to finance as "invisibles")
became statistically invisible, not only to the tax collector but to
government policy makers and the economics profession.
Wall Street raiders, to be sure, spend much of their time poring over
corporate balance sheets looking for undervalued land, hoping to buy out
companies based on current earnings projections rather than the "breakup
price" of selling their land at a capital gain. Academic and public sector
economics thus lags behind pragmatic wealth seeking by ambitious Wall Street
leaders and their investment bankers.
It was the invading Normans, after all, who ordered compilation of the
Domesday Book in 1200 to extract rent as, in effect, military tribute from a
defeated land. It always is the absentee owner, outside buyer or their
creditors who have the major interest in calculating the return to land, not
the occupants and users themselves.
About ten years ago the mayor of London, Ken Livingston, sent his economist
Alan Freeman over to the United States for an Eastern Economic Association
meeting in Boston. I introduced him to my colleague Ted Gwartney, the
property assessor for Bridgeport, Connecticut. Ted explained that his job
was to draw up a land map of the city's properties. His methodology in
making this map was so simple and straightforward that he won every court
case brought against the city by property owners who protested that his
assessments were too high.
The British economist asked how long it took him to make such a map. Ted
said that he had two assistants, and it took three months. The economist
looked wide-eyed and said: "This is incredible. You should win the Nobel
Prize for this! Are you the only person in the world who does this? I've
never heard of such efficiency."
Ted laughed and told him that there are thirty thousand assessors in the
United States that do just what he does. They do it for every city and
county in the nation every two or three years. The Englishman was amazed,
and we discussed whether London might sponsor a similar study.
The proposal never came to fruition, largely as a result of lobbying by
property interests. Real estate investors certainly want to know what they
are buying and selling, but want outsiders to know as little as possible.
They worry that if the government measures land value - especially the
appreciation of land prices - political pressure will arise to tax it.
The upshot is that governments measure wages and corporate profits, but have
only the roughest estimate of wealth, its distribution and rate of growth.
Only Japanese statistics have good measures of land prices. No national
income statistics today measure the most important asset on which classical
economics focused: unearned income and unearned wealth.
This is the concept most seriously lacking from post-classical economics:
recognition of the fact that someone can earn an income without producing a
service of equal social value. Matters almost have got to the point where if
someone robs you in front of a bank teller or ATM and says "Your money or
your life," the national income and product accounts would depict this as a
life-saving service, not as a zero-sum transfer payment.
The NIPA incorporate this kind of circular reasoning. Newspapers and
television report gross domestic product as if it were actual product, not
simply "gross domestic cost."
Rather than measuring economic well being, GDP includes a widening FIRE
sector overhead wedge that is a purely extractive zero-sum activity, not a
productive one. The idea of unearned revenue that has no counterpart in the
actual cost of production has become anathema, and with it the idea of
economic rent as a product of legal privilege to extract income without
having to produce a corresponding real service. Yet this is what occurs when
financial CEOs give themselves tens of millions of dollars of salary and
bonuses. This revenue has no necessary cost of production.
If it wasn't necessary twenty years ago or ten years ago, it is not
necessary now. But it is counted as adding to GDP in payment for producing a
"financial service," just as the U.S. Congress has a Financial Services
Committee without recognizing that this term is itself an oxymoron.
I find it remarkable that nobody has pointed out that Adam Smith did not say
what neoliberals repeat when they count him as their patron saint. His aim,
like that of subsequent classical reformers, was to free society from
privatized land rent, monopoly rents, and financial interest and fees.
These revenues come from purely property rights and privilege, not from
basic technological or economic necessity. It was to isolate these forms of
overhead that classical economists developed their analysis and quantified
it in the 18th and 19th centuries.
Inevitably, the rentiers fought back. They naturally preferred a
post-classical economics that was careful to avoid looking at what is really
important in life, especially at how wealth was being obtained. Wealthy
people like to think of themselves as earning income, not extracting it or
getting a free ride. They even like to think of themselves as hosts, not as
parasites - it is the poor, the welfare recipients and even their employees
who are the parasites whose income is to be minimized, not their own
privileged rake-off income, which they demand should receive special tax
benefits because the wealthy financial classes are so essential for economic
The symbiosis between predatory finance and land ownership is an old
problem - one that buried the Roman economy two thousand years ago.
Individuals who managed to gain wealth bought landed estates, seeking the
prestige of joining the gentry rather than pursuing enterprise, which was
disparaged as ungentlemanly. And wealthy landowners accumulated clients and
had their slaves or sleeping partners lend out their money at usury.
Yet modern discussion over what caused the decline and fall of Rome no
longer points to the debt crisis described in great melodramatic detail by
its own historians Livy, Plutarch and Diodorus. Just as debt problems have
been excluded from the economics curriculum, they have become buried in the
narrative of Western civilization's social history.
The reason is not hard to understand. A realistic economic theory would
describe the problems caused by the tendency of debts to grow faster than
the means to pay. Recognizing the phenomenon of debt deflation would lead to
political pressure to stop the process and save the economy by writing down
debts to the ability to pay.
This would prevent the asset stripping and concentration of power in the
hands of a financial class. Although this would save the economy - and
indeed, enable it to continue to grow - it is not what the financial class
desires. Its aim is to check any public power threatening to save the
economy from indebtedness.
Prior to Roman antiquity, starting in the Bronze Age Near East where nearly
all of civilization's financial practices began, the major creditors were
the public temples and palaces, not a private oligarchy. It was easy for
rulers to cancel debts when most were owed to themselves or their royal
collectors. But by classical antiquity, the oligarchy overthrew kings and
their practice of preserving widespread liberty by debt relief. But that is
another story .
The post-classical road to neo-feudalism and debt peonage: Latvia's
disastrous "Baltic miracle"
The banker's-eye view of the world has a blind spot, which is reflected in
today's political economy. Probably the most seriously affected victims are
the former Soviet States. When the old Soviet Union was dissolved in 1991,
Russia, the Baltics and other East Bloc economies agreed to adopt an
identical predatory Western financial program. Neoliberals were sent from
various U.S. universities - the Harvard Boys to Russia, Washington
University boys to Latvia, and so forth.
In every case a voucher program pretended to give workers ownership of all
the industry and public enterprises. This was called "peoples' capitalism" -
an Orwellian Doublethink term that Margaret Thatcher had coined for Gen.
Pinochet's Chile, which became the dress rehearsal in 1974 for the
post-Soviet states after 1991 (and Iceland after 2001).
At the time the former obtained their political independence from Russia,
these economies had no debt at all, no property claims for rent or interest.
Yet over the past decade they have become the world's most debt-ridden
countries, borrowing against real estate, public enterprises, natural
monopolies and mineral deposits.
This bank lending has enabled buyers to bid up prices for these assets,
prompting the World Bank to applaud the "Baltic Miracle" in Latvia, Estonia
and Lithuania. Insiders and other appropriators got rich by selling off what
the former Soviet Union had put in place - and Western bankers and investors
have collected much more. The West got the credit for the debt-leveraged
run-up - and "old Soviet" mentality was blamed for the crash.
The West showed itself so negligent - and indeed willfully blind when it
came to refusing to see how its own narrow self-interest was predatory with
regard to its post-Soviet victims - that the disaster it created must be
deemed deliberate, the final blow of the Cold War.
The West subdued the post-Soviet population and appropriated the economic
surplus from the property it had built up, along almost identical lines that
had occurred in Latin America in the 16th and 17th centuries, and Africa in
the 19th century, replete with client chieftains, tax "freedom" for the
predators and, in due course, debt peonage for the local labor force.
The post-Soviet trade problem was clear enough at the outset. The USSR had
been a far-flung economic unit, dispersing most industrial production
throughout its member states. These linkages were uprooted when the
post-Soviet states emerged from Russian domination. Breakup of intra-Soviet
trade left these economies dependent on Western imports for consumer and
capital goods, food and many other essentials.
To pay for this trade dependency they needed credit. They hoped that their
commitment to join the European Union would be reciprocated by something
like Marshall Plan aid, and above all with advice to help them develop along
the path that Europe had taken. This expectation turned out to be
Europe misrepresented its history in so blatantly dishonest a way that one
can only regret the lack of an international law against destroying a
population by imposing an economic ideology with almost religious
intolerance (not exactly a novel crime for Europeans to have imposed on the
Most European countries had developed by tariff protection, headed by the
Common Agricultural Policy subsidizing enormous dairy and crop surpluses for
export. Europe also had nurtured its manufacturing and a middle class by
public subsidy and infrastructure support, anti-monopoly regulations and
progressive taxation of income and wealth. However, the last thing that
European governments wanted was to nurture the Baltics and Central Europe as
"Old Europe" saw them crassly as prospective markets for agricultural
surpluses and other exports, and as financial colonies and markets for bank
loans. Austrian banks, for instance, made hard-currency loans to the nation's
historic Hungarian market, and Swedish banks set up Baltic affiliates to
lend euros as well as Swiss francs and sterling to buy the real estate and
other assets being privatized from the public domain from an initially
debt-free position. Local populations throughout the post-Soviet bloc
borrowed to buy the homes occupied without formal ownership rights under
Soviet rule. Political insiders developed hotels and the Old Town areas of
major cities as tourist centers.
By 2004 a property bubble was well underway, as it was in the West. Housing
and office prices soared toward equality with European capital cities. This
fueled a real estate bubble that seemed to be a banker's dream because its
low starting point triggered a wave of sales and re-sales. Nearly all this
mortgage lending was denominated in foreign currency against the real estate
and other public assets being privatized. Some 90 percent of Latvian
mortgages are denominated in Euros or foreign currency.
It was this borrowing from foreign banks that provided the post-Soviet
economies with the foreign exchange to pay for their trade deficits. This
was the great trade-off - increasing debt for current imports. It was bound
to come to an end at the point where all the real estate was fully "loaned
up." And this point arrived when the global real estate bubble burst in
2008. Since then, mortgage lending to these countries has dried up - and
housing prices have plunged between 50 and 70 percent in Latvia (and also in
Iceland, discussed below).
Yet their trade deficits persist. The post-Soviet economies still need to
import consumer goods, fuel and food, machinery and other essentials. But
Europe had done little to help them put in place export industries to cover
the cost of these imports.
These countries simply ran up mortgage debts against their real estate and
other assets inherited from Soviet times. So the only alternative to default
on foreign-currency loans has been to take out yet new loans - to borrow the
interest due. And this time around, the borrowing is being done by the
post-Soviet governments and their central banks, not by the private sector.
This means that not only are the new debts owed to foreign governments
rather than to commercial banks, but that the terms are much more onerous,
destructive and, in a word, neo-colonialist.
Inter-governmental loans are problematic, because they are explicitly
nationalistic on the part of creditor nations - and correspondingly
injurious to the debtor country. They sacrifice policy-making autonomy to
the International Monetary Fund and, in the post-Soviet case, to the
European Union bureaucracy.
The EU and IMF basically use debtor countries as vehicles to extend credit
to their own banks and exporters. Over the past two years they have "helped"
the post-Soviet countries maintain their exchange rates by sacrificing their
domestic economies. The aim of this policy is to sustain the payment of
mortgages to European banks that otherwise would have to take heavy losses
on their loans to real estate debtors unable to pay the higher carrying
charge that would result from their domestic-currency revenue falling
against the euro.
The EU has made it clear that its credit is not to finance domestic
investment or spending, but just the opposite. It requires debtor
governments to impose austerity and even run budget surpluses to squeeze out
foreign exchange by limiting the population's ability to afford imports and
presumably "free" output for export. (It never works.)
This policy of economic shrinkage is just the opposite of Keynesian
counter-cyclical spending such as Mr. Obama's Stimulus plan to help pull the
United States out of its own downturn. Austerity plans are only for export
to economic dependencies - and make them even more dependent on the
Latvia's GDP fell by 18 percent in 2009, and is forecast to shrink
altogether by nearly 30 percent from the crisis' onset in autumn 2008 until
the end. More people already are out of work (the year end 2009 unemployment
rate is reported to be 16.8 percent), so default rates are rising. Housing
and other real estate prices have plunged by about 50 to 70 percent in most
markets, and new construction has all but stopped.
In the public sector where shrinkage is most drastic, Latvia had over 150
hospitals and clinics when the Soviet period ended in 1991. By 2009 it had
only around 40, and the IMF and World Bank demanded that it close half of
them. Many needed services were closed, including trauma centers and
Public health standards have worsened and life spans shortened by several
years for men, as has been the case in Russia. There has been an exodus of
doctors and health specialists, especially to the richer neighboring
Scandinavian countries - part of a serious emigration of highly skilled and
unskilled workers alike. According to a recent poll, about a quarter of the
male population aged between 20 and 35 years old plans to emigrate during
the next five years. And as for the training of new professionals, formerly
free universities are now charging tuition, so money rather than talent now
obtains higher education.
This is the result of financialization as Latvia shrinks its economy to pay
One motive spurring emigration is to avoid being reduced to a lifetime of
debt peonage. Homeowners find themselves frozen into their homes almost as
serfs as property prices plunge below the amount of their mortgage debt.
They cannot move out, because they would have to pay banks the balance due
on their negative equity. They, not the banks, must absorb the loss on the
Unable to find a buyer at a price that covers their mortgage, debtors remain
personally liable to save the Swedish bankers from taking a loss, by making
up the difference out of their own future earnings. And the situation is
getting worse as rents fall in the shrinking economy. There is no way to
find renters to cover the mortgage debt. Many debtors are deciding that it
is easier to leave the country. This is what many parents are urging their
children to do today.
So the economy seems to be in a death spiral - not only economic death but a
demographic crisis as well. Matters threaten to worsen if Latvia's trade
deficit forces the currency to be devalued. Carrying charges on the 87
percent of Latvian mortgages denominated in foreign currency would soar. But
the only way to stave off devaluation is to keep on borrowing from the EU
Worse yet, the financial dictates of the Washington Consensus call for
rolling back wages and living standards, taxing labor all the more and
slashing public spending and investment even further! Instead of coming up
with a plan to extricate the economy from this debt peonage, Latvia's
neoliberal government can only repeat its faith in "restoring equilibrium"
by tightening the fiscal and financial screws.
Iceland's cruel neoliberal experiment threatens neo-feudal financial
Much the same has occurred in Iceland under neoliberal advice to shift
planning into the hands of a narrow banking and financial class. In 2001, a
decade after the post-Soviet states separated from Russia, Iceland gave away
its commanding heights to political insiders and privatized the country's
three leading banks in an atmosphere of deregulation, with the usual insider
Foreign loans and deposits flowed in, and were lent out to bid up housing
prices - while providing the central bank with enough foreign exchange to
sustain a splurge on imports. In just seven years Iceland rose from a
fishing and farming backwater to become one of the stars of world financial
and real estate markets, before blowing in a convulsion of debt-ridden
Icelanders imagined themselves getting rich during the first few years of
this process. As recently as 2007 the United Nations ranked their country as
the world's happiest. But its plunging currency has led property prices to
fall by 70 percent since its financial system went bankrupt in October 2008.
Having given away its banks, the government is being held liable for the
debts that they ran up to British and Dutch depositors in Icesave's on-line
But tax revenues are plunging as the economy shrinks, leaving the government
The population is in the same state. Mortgages are indexed to consumer
prices, which are set by import prices. The effect is to denominate
Icelandic mortgages in euros, while income is earned in soft domestic krónur
in a shrinking economy.
As in Latvia, denominating debts in euros or sterling protects creditor
interests, but has turned Iceland into a debtor's hell. Mortgages at
interest rates from about 5 to 5-6% are indexed to the rate of price
increases, which means in effect to the foreign exchange rate. This imposed
an 18% financial tax charge on Icelanders by spring of 2008. On balance,
homeowners had to pay over 23% mortgage interest (18% + 5%) on property that
had fallen so far as to be unsalable.
Homeowners remain personally liable if they move, as in Europe.
Bankruptcy rates are rising, and so is the suicide rate. Labor is
emigrating, and foreign labor already has left. As many as a third of the
Icelandic young adults are reported to be planning to emigrate to escape
mortgage debt and the collapse of employment. So much for being a happy
debt-financed economy! Its legacy is debt peonage, the final stage of
Iceland held parliamentary elections in April 2008. I met earlier with a
number of Icelandic political leaders and former Prime Ministers to discuss
how the currency faced further depreciation as a result of the debt overhang
and chronic trade deficit.
They worried that it would upset most voters to bring up so intractable a
problem before the elections. The usual tendency in democracies these days
is to vote for politicians who promise the best future. So the election
proceeded without serious economic discussion. The Social Democrat-Green
coalition won, with a prime minister who promised to take the country into
At that time about two-thirds of the voters still thought that Europe wanted
to help them. (This was the same hope that the post-Soviet states earlier
had held.) By early 2010 only about 40 percent want to join Europe, and the
government faced a no-confidence vote by a number of parties over what to do
about the debts that Britain and the Netherlands are claiming to be owed. In
summer 2009 in Parliament, Gordon Brown was asked about depositors who had
lost money in Kaupthing, a British bank owned by Icelandic investors.
As a domestic affiliate, it came under Britain's public regulatory
authority. Gordon Brown said in Parliament that he intended to lean on the
IMF to refuse to lend any money to Iceland, and indeed to block its attempt
to join the EU if it didn't pay what he was demanding - full reimbursement
plus punitive interest charges!
By contrast, IceSave was organized as a branch of Landsbanki, and hence fell
under Iceland's own domestic, purely private insurance scheme. Its
computerized internet accounts offered a very high rate of return - higher
than normally were available, reflecting the risk of losing money to a
banking system whose national bank insurance had been thoroughly privatized
and neoliberalized with little regard for risk, and with scant oversight of
the kleptocratic insiders using deposits to gamble in the world's financial
Yet I'm told that local council authorities in England were directed to
deposit their money in Icesave because they had a "fiduciary responsibility"
to put their savings where they could get the highest interest rate.
"Blame the foreigner" is always a winning political ploy. In demanding
compensation in the face of their own regulatory failure, the British and
Dutch acted without regard for the law. Like most lawbreakers, they have
refused to submit the issue to third-party arbitration.
What is being brought to bear is the exercise of pure creditor power - the
power to destroy an economy, depopulate it and starve it of essentials in
what is the equivalent of a military blockade. As in war, the effect is a
loss of life. Icelandic suicide rates are rising, emigration is rising, and
life spans are shortening, just as in the Baltics and other debt-strapped
This is financial neo-feudalism!
European Union rules give a three-month breathing time for any bank that
goes bankrupt to withhold settlement from depositors, and two more
three-month extensions. So under EU law the Icelandic banks had nine months
to settle. But to save face in the wake of the Northern Rock bank collapse
in Britain, Gordon Brown moved in just two days to repay all the depositors,
using anti-terrorist laws against Iceland.
Branding it as a terrorist nation was the quickest way to freeze and take
over Icelandic assets. The absurdity of this is that Iceland has no army. It
is hard to imagine any accusation that could have made them more resentful.
To cap the insult, Mr. Brown's threat to lean on the IMF to act as a debt
collector was illegal, because Iceland technically didn't owe the money. To
hold its government responsible, the British and Dutch took a hard line with
Icelandic negotiators, who capitulated and returned to Iceland with a bad
deal calling for Iceland to pay 4% of its GDP growth over and above 2007
levels to settle with European Icesave depositors over a period of seven
>From 2010, there would be a seven-year waiting period, and from 2017-2024,
Iceland is pay the balance due.
The governing coalition supported the plan, but a political scandal over the
terms led it to add the condition that after 2024 Iceland would re-examine
the remaining debt, and no further payments will be made if it is deemed
that this would cause extreme distress. This would be logical, especially in
view of the fact that according to the letter of EU law, Iceland can argue
that it owes nothing to either the British or Dutch governments.
But in a show of hubris Mr. Brown and the Dutch rejected this condition.
They continued to threaten not to let Iceland join Europe unless the
government agrees to pay them in full for the mistake that their own bank
insurance agencies made in jumping the gun.
Iceland's Althing duly knuckled under, but Iceland's President refused to
sign the deal, and insisted that such an important agreement - one that
would destroy the national economy for a generation and drive perhaps a
third of the population out of the country, reducing the land to neo-feudal
status - should be put to a vote, which was scheduled for March 5, 2010.
Public opinion polls showed some 70 percent of the population oppose the
agreement - and have soured on the very prospect of joining the EU, seeing
it as an exploitative financial power rather than the Social Democratic
union they earlier had imagined it to be. The actual election showed less
than 2% of Icelanders voting in favor of the agreement. (Some 93% voted
against it, and another 5% turned in blank ballots in what was characterized
as a silent protest.)
The nation is being treated as a financial colony, not as an equal. Matters
got so bad by February 22, 2010, that Iceland's prime minister felt driven
to beg U.S. Secretary of State Hillary Clinton to help ensure that the
Icesave dispute would not be permitted to threaten completion of the IMF
loan that was keeping the currency above the level where mortgage debtors
would owe yet higher indexed debt service each month.
An alternative economic program to that of the neoliberal Washington
Like many other post-Soviet economies, Latvia is a combination of the native
population and Russians whom Stalin moved in during the 1950's, when he
deported the middle class and others with professional backgrounds.
Some 38 percent of Latvia's population are Russian speakers, and they form
the major support for the Harmony Center ("Concord") Party. Joined last year
by ethnic Latvians frustrated with poor governance, it became the ruling
party of Riga, the capital city. National elections will occur in October
2010. I head a Committee of Experts charged with drawing up an economic
platform to rescue the country from the neoliberalism to which it has been
subjected since it achieved political independence from Russia in 1991.
Our first recommendation is that in view of the fact that the currency is
under pressure to be devalued - with 87 percent of mortgage debts being
denominated in foreign currency - banks should only able to take the house
itself when they foreclose. This is the collateral that was supposed to back
the loan, after all.
It is what makes mortgage loans different from personal loans. Banks must
share responsibility for keeping loans within the debtor's ability to pay.
That basic rule has been violated throughout the world in recent years. This
has been largely a result of the banks' greed in making loans more than 70
percent of the property's value, as was long the rule in the United States.
Personal liability is not going to be permitted. I don't know any other way
to prevent banks from making irresponsible loans and then trying to blame
the debtor. This is unconscionable, and we are going to prevent it from
Second, we urge that all loans and obligations should be re-denominated in
domestic currency. This is similar to what U.S. President Franklin Roosevelt
did in 1932 when he overruled the gold clause in most loan contracts. (The
clause stated that if the price of gold changed, the debt had to paid in
This was intended to prevent creditors from obtaining a windfall gain and
indeed, a gain beyond the ability of debtors to pay and hence at the expense
of economic recovery. The economy comes first, not the bankers. This is
especially important in today's world, where there is no longer a constraint
on the banking system's ability to monetize credit.
A third plank of our program is designed to cope with the problem of
abandoned housing, squatters and crime that has plagued foreclosures in the
United States. Upon insolvency or foreclosure of residential and commercial
property, the foreclosing bank must put it up for auction within one month,
to be sold at a market price. The current occupant (either the indebted
owner or renter) will have the right to match the bid.
Our plan is for the government to set up a bank to lend the occupant funds
to buy the property, converting its current rental value into mortgage debt
service. At current prices, the new mortgage may be about 30 percent of the
existing debt - and it will be denominated in domestic currency. The
oligarchs seem happy with this, because loans on the large public utilities
and other assets they have taken over and borrowed against also will be
re-denominated in domestic currency.
In October 2009, Latvia's neoliberal Prime Minister endorsed the first plank
of this program, saying that there should be no more personal liability for
mortgage debt. The Swedish finance minister became furious and said that
this would break all tradition.
The Harmony Centre ("Concord") Party replied that the tradition to which
Sweden seemed to be referring was feudalism, and reminded Sweden that Latvia
threw off the Swedish yoke back in the 15th century - and threw out the
German land barons in 1905.
I have seen no discussion of this in the press, except for my own write-ups
in the Financial Times. There is a case of cognitive dissonance when it
comes to structural financial and fiscal reform.
Most people are not aware that a workable alternative exists, one that was
viewed for a century as being the free market alternative - a market free of
unearned income and "empty" pricing. Students no longer are taught that
economic thinkers have spent the last seven centuries discussing better
modes of taxation, banking and pricing, based on the ability to distinguish
between economically necessary costs and income, and unnecessary costs.
The classical reformers sought to complete what they viewed as the economic
program of industrial capitalism: to throw off the remaining legacy of
feudalism, above all the landlord aristocracy that used to be called the
idle rich, and also predatory bankers - a cosmopolitan interest typically
working with absentee owners, monopolists and other rent-extracting parties.
Landowners, privatizers and monopolists are now backed by their
international bankers, joining forces to become a new aggressive power as
financial speculators. Their activities are not necessary for the industrial
economy to operate, but are a rentier overhead that slows it down.
The most important plank of our program concerns the tax system. Like most
other post-Soviet economies that have been neoliberalized, Latvia has a
dysfunctional flat tax on labor. It is so high - about 59 percent - that it
is the single major factor pricing Latvian labor out of global markets. We
are urging that the tax be shifted off labor and its employers onto where
the classical economists urged it to be placed: on the land and natural
This would "reform the reformers." We expect that the EU and its commercial
bankers will fight against this tax shift, fearing that it might spread to
other countries. And of course, that is the whole point.
Fiscal reform must be a key element in financial reform, because the two
prongs of reform are symbiotic. Taxing the land will save its rental value
from being capitalized into bank loans. Our aim is for bank credit to focus
on creating new means of production, not to bolster the price of
unproductive, extractive privileges and property claims.
Now that you've been here a week, what is your analysis of the Australian
It's hard to be an instant expert on an economy. It seems self-destructive
for Australia to raise interest rates, ostensibly to slow the financial and
real estate bubble. Raising interest rates will hurt public finance in three
ways. Raising the rate by ¼% will oblige the government to pay more to
Homeowners with variable-rate mortgages also will have to pay more to the
banks. This will leave less revenue available for spending in the domestic
market. But most important is the third effect: Raising interest rates above
those of other countries will enable arbitrageurs throughout the world to
borrow from U.S. banks at less than 1% and lend to Australians at 3¼%,
pocketing the difference.
This foreign exchange inflow to buy Australian dollars will bid up the
exchange rate, making exports more expensive. So higher interest rates will
raise prices - just the opposite of what usually is taught in academic
This week I've read in the newspapers that manufacturing companies are
lowering their profit forecasts because they realize that they can't make
export sales - or even hold onto the home market with so high an exchange
This is what plagued Swiss industry for many years as a result of its bank
inflows from crooks, tax evaders and kleptocrats throughout the world. Once
Switzerland became a tax avoidance centre, the franc went way up.
Pharmaceutical companies moved their operations across the German border to
operate at a lower cost.
The nation's Manufacturing was rendered uncompetitive because of the franc's
high exchange rate. I remember that when I went there to consult for
Ciba-Geigy, a Coke cost 60 cents in the United States but was $3.50 in
Basel. High living costs meant high production costs as the economy was
sacrificed to Swiss banking interests.
The same thing is happening here in Australia. A friend of mine who works
for the Canadian government e-mailed me today saying that Canada is going
through what seems to be happening here in Australia. Because of its soaring
export proceeds for raw materials, the Canadian dollar has risen sharply
against the U.S. dollar. That is hurting profits for Canadian oil and gas
producers, while its manufacturers are losing out to U.S. industry.
The moral is that trying to regulate the housing and financial cycle by
raising interest rates penalizes the economy, by raising its cost of living
and doing business. Interest is a cost of doing business, and imports become
more expensive, providing an umbrella for domestic producers to raise their
Yet I have heard no public discussion here of holding down real estate
prices and mortgage debt by increasing the land tax. Politicians avoid this
because voters react negatively to any kind of a tax rise. The distinction
between efficient and inefficient taxes has been lost from public
A revenue-neutral tax shift - lowering sales and income taxes on wages by
the amount that property taxes are raised - would not take in any more tax
revenue than now. But it would levy taxes in a way that holds down property
prices. And it would leave less revenue available for banks to capitalize
into interest charges. Holding down housing and real estate prices - and
debt - would lower the cost of living and doing business. This would make
the economy lower cost. That should be the aim of every economy - to
minimize the cost of living and doing business.
As matters stand, Australia's tax system favors property speculation, and
thus maximizes the cost of living and doing business. People seem to believe
that they are getting rich from seeing their home rise in price. (Actually
it is not the home as such that rises, but the land site.) But this does
force them further into debt to buy a home. And raising interest rates to
slow the property bubble has the effect of raising the foreign exchange
rate. This leads manufacturing to leave, and even erodes profits on mining,
while giving the financial sector a windfall gain.
How can we implement your reform? How would it work from the ground up?
The same way that classical economists advocated in the 19th century. You
start by making a land map on which to base the property tax - away from
buildings, onto the land. You explain to voters that this tax will leave the
rental value of land unchanged, because rents are set by the "marketplace."
But instead of being paid to the banks as interest as at present, this rent
will be paid to the government to form the major tax base.
Homeowners will pay the same amount each month - but will gain as property
taxes enable the government to lower income and sales taxes by an equivalent
amount. A land tax thus will lower the purchase price of property, because
land rent no longer can be capitalized into a bank loan, to be converted
into an interest payment to the bank. You cannot pay the same rental income
twice - and what the tax collector receives is unavailable to the banker.
But at present, the rental value is indeed paid twice - once to the banker,
and then, by "crowding out" the government's fiscal revenue, forcing taxes
to be levied on labor and consumers - over and above the land rent that they
pay to their bankers.
You would explain that you indeed want to see capital investment in houses
and other construction, and you realize that they have to make a profit on
their capital expenditure. But this does not mean that they need to make a
profit on the increase in price of the land's site location - that is, what
the landlord makes in his sleep.
Today, real estate buyers bid against each other, and the winner is the one
who pays out the rental value to the mortgage banker who creates the credit
to finance the property purchase. So the financial sector has joined forces
with the real estate sector to lobby against taxing property, and to tax
labor and consumers - and industry - instead. This is the major political
problem that Australia faces: the lobbying power of the symbiotic FIRE
Along this same line you could enact a natural resource tax. Nature has
provided Australia with subsoil wealth in the form of minerals, oil and gas
with a lower cost of extraction than other countries have.
So you can tax land and minerals without increasing their price.
To the extent that you remove a similar volume of taxes from labour and
capital, you lower the economy's cost of living and doing business.
This should be the objective, as it was to classical economists hoping to
make their national economies more competitive by keeping market prices in
line with actual costs of production - and making the distribution of income
more fair in the process, by collecting the "free lunch" of economic rent as
the natural tax base, as it was for thousands of years in wiser times.
Listen to the original audio from the event that this article is based on
. Where did all the land go?
. No Help in Sight, More Homeowners Walk Away, DAVID STREITFELD, The New
York Times, February 2, 2010, reports: "It would cost about $745 billion,
slightly more than the size of the original 2008 bank bailout, to restore
all underwater borrowers to the point where they were breaking even,
according to First American."
. The New Monetary Order: Borrow? Devalue? Restructure! (Toronto:
Butterworth, 1978, published for the Institute for Research in Public Policy
. Le secret des grandes fortunes sans cause apparente est un crime
oublié, parce qu' il a été proprement fait
. America's Protectionist Takeoff: 1815-1914 (2010).
. "Entrepreneurs: From the Near Eastern Takeoff to the Roman Collapse,"
in David S. Landes, Joel Mokyr, and William J. Baumol, eds., The Invention
of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times
(Princeton: Princeton University Press, 2010):8-39.
. Trade, Development and Foreign Debt (1992; new ed. ISLET 2009).
One Response to " NeoLiberalism and the Counter-Enlightenment "
>From Marx to Goldman Sachs: The Fictions of Fictitious Capital by Michael
Hudson « Dandelion Salad on August 10, 2010 at 1:46 am
[...] as matters have turned out, the rentier interests mounted a
Counter-Enlightenment to undermine the reforms that promised to liberate
society from special [...]
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