[A-List] Michael Hudson - The Counter-Enlightenment, its Economic Program - and the Classical Alternative

[james daly]

Michael Hudson

The Counter-Enlightenment, its Economic Program - and the Classical 
Alternative

Based on a talk given to Prosper Australia on Friday October 16th, 2009.

First published in Progress Magazine - Autumn 2010. Download Progress #1096 
here.

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 
Central Europe.

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 
industrial buildup).

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 
investment.

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 
clients.

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[1]. 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 
hands.

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 
production.

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 
monopoly rent.

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 
costs.

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 
ignoring them

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 
gains.

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 
fair terms.

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 
aggrandizement.

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 
York[2].

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 
markets.

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 
malstructured?

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 
fund industry.

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 
be sure.

World War I changes the political and economic trajectory of Western 
civilization

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 
"services"

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 
stage.

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 
undesirable.

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 
mark-up).

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 
nearly doubled!

I had many arguments with local bankers at the time as an advisor to the 
Canadian government[3]. 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 
it out.

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.[4]" 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 
measurement.

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 
economic logic[5].

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 
histories.

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 
logical order.

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 
debt peonage.

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 
monopolies.

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 
rentier class.

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 
markets.

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 
economy-wide basis.

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 
savings.

This bankers' eye view of the wealth of nations is a travesty of what Adam 
Smith advocated.

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 
creditors.

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 
days.

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 
utopia?

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 
counter-revolution.

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 
pollution?

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 
living standards.

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 
debt.

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 
credit.

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 
leisure.

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 
flow.

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 
and bondholders.

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 
into interest

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 
become commonplace.

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 
capital investment.

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 
collapses.

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 
country.

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 
forth.

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 
survival.

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[6].

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 
drastically wrong.

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 
world).

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 
rivals.

"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 
financial core[7].

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 
ambulance services.

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 
foreign creditors.

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 
bad loan.

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 
and IMF.

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 
colonialism

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 
corruption.

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 
bankruptcy.

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 
bank accounts.

But tax revenues are plunging as the economy shrinks, leaving the government 
broke.

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 
neoliberalism.

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 
Europe.

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 
casinos.

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 
economies.

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 
years.

>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 
Consensus

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 
recurring.

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 
gold equivalence.)

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 
resources.

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 
economy?

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 
bondholders.

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 
models.

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 
rate.

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 
prices.

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 
discussion.

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 
sector.

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 
here

Footnotes:

.[1] Where did all the land go?

.[2] 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."

.[3] The New Monetary Order: Borrow? Devalue? Restructure! (Toronto: 
Butterworth, 1978, published for the Institute for Research in Public Policy 
[IRPP]).

.[4] Le secret des grandes fortunes sans cause apparente est un crime 
oublié, parce qu' il a été proprement fait

.[5] America's Protectionist Takeoff: 1815-1914 (2010).

.[6] "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.

.[7] 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 [...]