Friday, October 16, 2015

Michael Hudson Explains It All

Counterpunch Radio did a tour-de-force interview with Michael Hudson recently. The topic was his new book, but the conversation was broad and wide-ranging. I felt that the best way to summarize what he said was through some bullet-point summaries. There was a large portion in the middle where he connects the problems in Ukraine and Greece to the financial looting of those countries and explains the politics of what's really going on there. I was unable to summarize that adequately, so do listen to the whole thing. A transcript is below as well:

· Biological parasitism in nature is a perfect metaphor for finance. The first thing a parasite does is take over the brain of the host and convince it that the parasite is required for the survival of the host. The parasite has enzymes makes the host think that the parasite is its baby – part of its body. The host actually protects the parasite over itself. This is analogous to what finance has done to economic thought.

· Every society in the past has realized that finance and debt was the great destabilizing force of society.

· About 100 years ago, economists like John Bates Clark and other pro-finance economists said that finance is not external to the economy, it’s part of the economy just like landlords, rent, and so on, and the more it takes out of the economy, because it’s part of the economy, the economy is growing. In other words, financial growth is seen as positive growth rather than as a cancer.

· Lloyd Blankfein claimed that the reason Goldman Sachs employees were paid so much was because they were so productive. But what did they produce? National income accounts say everyone is productive in proportion to the amount of money they earn. It doesn’t matter whether its extractive income, or productive income. It doesn’t matter whether it’s by producing things, or simply taking things from other people, or even by fraud. Any way of earning income is considered to be as productive as anything else. It denies that there is any such thing as unearned income.

· Milton Friedman popularized the idea there is no such thing as a free lunch, but finance is the very definition of a free lunch. The people on Wall Street spend all their time looking for a free lunch.

· The primary focus of classical liberal economists was to draw a distinction between productive and unproductive labor – between people who earn their income by wages and profits, and people who don’t earn their income. People who, as John Stuart Mill said, “earn money in their sleep,” that is, landlords and the financial sector.

· When the Chicago School took over Chile, the first thing they did was close all the economics departments. They banned the history of economic thought and assassinated left-wing professors.

· Neoliberalism requires totalitarian control of economic thought – any idea that there is an alternative to the Market must be abolished. It rewrites economic history to claim that classical economists wanted to restore feudalism – not to abolish feudal privileges.

· Neoliberals say they’re against government, but what they are against is democratic government. Neoliberals want only the kind of government that will create wealth for the financial sector, not to increase the overall economy.

· Aristotle described a sequence of types of government:, democracy, then oligarchy, then an aristocracy of the power elite. We are going through the latter phase now in the U.S.

· The real purpose of the labor theory of value was to isolate that part of price that wasn’t value. It defined economic rent as something that was not value, something that was extraneous to production. It defined the portion of price charged to consumers that had no basis in labor, no basis in costs, but was purely a monopoly price. The objective of the classical economists was to bring price in line with value to prevent the free lunch derived from feudal privilege.

· When Hudson first went to school, students were taught the history of economic thought. Today’s students get mathematics instead.

· In England, if you buy a house, you pay a rent fee for the land, which is money that goes to the descendants of the military conquers of England hundreds of years prior. The legal system is set up such that these people are the “real” owners of the land.

· Rent is passively earned income. It is not earned by any enterprise, it is just a claim that society has to pay. The French term was originally for a government bond where a coupon was clipped and sent in to get the money.

· The way European governments avoided price gouging by monopolists was to provide basic services through the government at cost for so-called “natural” monopolies. European governments provide public infrastructure, which is a fourth factor of production in addition to labor, land and capital, freely, to grow the economy by lowering the cost of living and doing business.

· Once infrastructure and natural monopolies are privatized, you have to build in economic rent which takes the form of rising prices, executive salaries, interest, stock options, and so on, and the whole economy is turned into a series of tollbooths. All the great fortunes came from privatizing the public domain, e.g. Carlos Slim became wealthy by buying the Mexican telephone monopoly when the government sold it off. Insider dealing is how most fortunes are derived. As Balzac said “ Every family fortune originates in a great theft.”

· The goal of the so-called “Austrian school” was to create an ideological framework in which they could make theoretical arguments to justify exorbitant rent and to make it into a sort of natural law.

· The key to the Austrian School is that they hated labor. They were the proto-fascists. They feared the spread of democracy throughout the Hapsburg empire.

· One of the first Austrian economists, Anton Menger, developed a theory about the origins of money which eliminated government completely. Money was created by merchants and producers bartering everything. This ideology says that anything the government does to protect society from the rentiers is dead-weight overhead.

· The Road to Serfdom actually shows how to get to serfdom. Serfdom was when families had to pay all of their income to the landlords in rent and were tied to the land. Democracies freed people from this. The Road to Serfdom argues that Democracy is serfdom, rather than the antidote to serfdom.

· If you treat debt as a weapon, finance is the new mode of warfare. In the past, if you wanted to take over a country's land, its public domain, its infrastructure and its mineral resources, you had to have an invasion. That’s very expensive. No democratic country can afford a military invasion anymore. The objective of Wall Street, the City of London and Frankfurt is to obtain the land, property, and mineral rights. Debt leverage allows them to achieve what armies achieved in times past. 

· In antiquity, the way that labor was obtained by private individuals was to make a loan to some family in need, and they would have to work off the loan in the form of labor. In the Bronze Age, the first thing a ruler would do is free the bond servants, return them to their families. annul the debts, and return forfeited lands to their original owners.

· If you get a company or an individual or a country into debt, you can strip away all the assets they have. British and East Coast American sharpies would lend money to farmers who they knew couldn’t pay, and then they would foreclose just before the crops came in and take the land. Corporate raiders raid whole companies by forcing them into debt and then smashing and grabbing. You now have entire countries like Ukraine being taken over by the IMF and ECB by loaning money that they know cannot be repaid. And instead of taking a loss, the countries are forced to sell off their public assets to foreigners.

· The idea that debt can never be a problem is a part of Milton Friedman’s Monetarism, and  is taught in every school and textbook today even though it’s completely false.

· Economics draws a “what if” picture of the world. Textbook authors like Paul Samuelson say that it doesn’t matter of an economic theory is realistic or not. The judgment of whether an economic theory is scientific is simply that it is internally consistent.

· The formulas that are taught in economics do not have government in them. They are based in the mathematics of regression equations that assume the environment remains constant. If you have theory that everything is just an exchange, and there isn’t any government, then you use a theory that has nothing to do with the real world, and you’re using economics for a different ideal than what the classical economists did.

· The classical economists were reformers. They wanted to free society from the legacy of feudalism. They wanted to get rid of land rent, to take money and credit creation onto the public domain.

· Whatever their views, whether left of right, all of the capitalist theorists of the nineteenth century saw capitalism as evolving into socialism.

· What you have since World War One is a reaction to this; a stripping away of the idea that governments have a productive role. If government is not the planner of the economy, then the financial sector is. Neoliberalism is a doctrine of central planning, but with the central planning done by Wall Street. What is the objective of central planning by Wall Street? Not to raise living standards, but to smash and grab.

· Economists from George Mason University* brought Neoliberalism to Latvia. They implemented Steve Forbes’ flat tax and eliminated taxes on real estate. This caused a massive housing bubble.

· Neoliberals maintain support by claiming the alternative is Stalinism. They used anti-Semitic nationalism to maintain power.

· The first thing the Neoliberals did in Argentina was initiate the compulsory setting aside of wages in the form of pension funds that would be controlled by employers. Employers could do whatever they wanted with the funds. They also controlled the banks. What they did was drive the banks under and seize the pension funds. Because pension funds are invested by employers, the employers invest it in their own stock to drive up the price and the managers give themselves stock options. Labor’s wages are docked by the pension contributions that’s used to bid up the stock and pay the managers. This is called pension fund capitalism (or socialism).

· The management of modern American industry is being run for financial purposes, not for industrial purposes. The industrial firms of America have all been financialized. General Motors makes most of its money from General Motors Acceptance Corporation. Fifty years ago Macy’s made most of its money not by selling products but by getting people to use its credit cards, and it only had a store in order to get people to use its credit card. Ninety-two percent of the earnings of the Fortune 100 have been used to buy back their stocks or dividend payouts. So the purpose of running a company is to increase the price of the stock, which increases the managers’ profits, and they sell the stock to pension funds.

· Bush wanted to privatize social security and send the 15 percent FICA tax withheld from workers’ paychecks into the stock market. This would cause a stock market boom by which the official management companies and big banks would get free commissions and make them into hundred billionaires until the American population aged or became unemployed, at which point thy would sell the stock causing a huge market crash that would wipe out the workers.

· When Wall Street plays finance, the casino wins. When employees play finance, they lose.

· In 2009 when the auto companies were facing bankruptcy and bailed out, it was not the automotive manufacturing that was collapsing, it was GMAC, their finance arm, because it was leveraged in credit default swaps and collateralized debt obligations and financial derivatives, i.e. “exotic instruments.” When Obama claimed to have saved General Motors, what he really saved was the Wall street arm of General Motors.

· American economic policy has been run by a combination of Goldman Sachs and Citibank. Obama was the Wall Street candidate. His objective was to wreck America the way he wrecked Chicago when he was working for the big real estate interests tearing down the neighborhoods where the lower-income blacks lived so they could gentrify them and make the blacks pay more than the whites. He made billions for the Pritzker family, so Penny Pritzker introduced him to Robert Rubin, who appointed his cabinet. They appointed the vicious Rahm Emmanuel to drive out any Democrats who were to the left of Herbert Hoover. Obama fought against single-payer and backed the lobbyists of the pharmaceutical/health care interests. He also championed school privatization which benefits Pearson and other big education corporations.

· How do we get the left to talk about economics instead of ethnic identity politics and sexual identity politics and get them talking about what they were talking about a century ago – economic reform, jobs for workers, etc.?

· You need to free society from debt. You want to fund industry not by debt, but by equity. This was what Saint-Simonian banking did and what German banks did before World War One. There was a fear that England and the allies would lose World War One because the banks were running everything.

· Finance should be subordinated to fund industry and fund real consumer growth and not be parasitic, but instead all of our laws favor finance. For example, debt service is tax deductible. If a company pays out 2 billion dollars a year in dividends, a corporate raider can buy it on credit, and if there’s a 50 percent stock rate, he can pay 4 billion to bond holders instead of 2 billion to stock holders.

· Over the last 20 years. The American stock market has been turned into a vehicle for corporate raiding. For replacing equity with debt, and that makes America very high-cost.

· The whole idea of the economy should be to lower the cost of living and doing business. The government guarantees mortgage policies up to 43 percent of your income. Add that to 15 percent for Social security. Only low-income workers fund social security, not the rich, any income over 115,000 isn’t taxed. 10 percent goes for other bank loans and about 20 percent for various sales and income taxes.  Only about 25 percent of what American families earn goes for goods and services. If you gave American workers all of their food, all of their clothing ,all of their transportation for nothing, they still could not compete with foreign countries because so much of their budget goes for financial purposes. That’s why our employment is not going to recover. That’s why our living standards are not going to recover. Even if wages for some workers go up, they’re going to have to pay it all to the banks for education loans, for mortgage loans, for bank debt, for credit card debt, and the result is, if you want to join the middle class by getting an education and buying a house, you have to spend the rest of your life paying the banks.

Here is a transcript of the interview (Naked Capitalism) More Hudson:

The Paradox of Financialized Industrialization (Michael Hudson)

Michael Hudson: Financial barbarians at the gates (eats shoots and leaves)

* Hudson says George Washington University, but I believe this is correct. GMU is a notorious bastion of libertarian/Neoliberal economic thought, is well funded via the Koch Brothers and others, and maintains "The Library of Economics and Liberty," a site dedicated to promoting Austrian/Libertarian economics. Tyler Cowen and Alex Tabarrok of Marginal Revolution are professors there.


  1. Please please PLEASE hire a proofreader.

    Also, please provide a physical mai!address, because the internet is dying and even faster than a pessimist like me can believe.

    1. Alex, can you provide evidence that the internet is dying? It's something I have suspected will happen, but have only seen scant evidence that it will be soon. I've seen plenty on the US grid and failing infrastructure in general. Do you think it will go before the grid does?

  2. Keep stats and you'll notice that so called high-speed is slower than dialup used to be. Yes you can download porn these days, but routine stuff is much sllwer. Does anyone other than myself remember when Google loaded seemingly instantly, even on dialup?

    1. There is too much bloat and garbage on the internet. For example, when you download an article whose text content might only be 20-30 KB, you also get hundreds of MB of garbage - ads, images, animations, code etc.

      It would be nice to have some kind of minimalist, text only sub-internet.

    2. BTW, Michael Hudson is great. He provides the clearest, most concise explanation of neoliberal capitalism that I have seen.

  3. Wow, very thought provoking.

    HOWEVER, I must take issue with where the conclusion leads: "Finance should be subordinated to fund industry and fund REAL CONSUMER GROWTH"

    Aren't we in agreement that "consumer growth" is destroying the biosphere?

    Viewed through that lens, as unfair and base at is it is, this sort of financial parasitism is simply "conservation by other means", as Steve Ludlum puts it..

    So I agree with the assessment of finance, but we can't go back to old models of prosperity. Consumerism itself is a problem: if you loosened the financial stranglehold and allowed American middle class consumerism to run its course you would hit the express lane to environmental catastrophe. We have a populace conditioned for maximum consumption. Imagine fleets of F150s, sprawling suburban McMansions, the environmental toll, and the resource wars necessary to support all of this, if you unleashed billions of capital to slosh through the consumer class. The world is no longer flush with virgin resources, and we have been treating the biosphere like a sewer. We need new models, a new vision of where to go.


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