Hudson: The Neo-Rentier Economy

Michael Hudson is giving a talk titled “The Road to Debt Deflation, Debt Peonage, and Neofeudalism” at the Levy Institute on Friday, February 10 at 2:00 p.m.

Hudson is a research associate at the Levy Institute and a financial analyst and president of the Institute for the Study of Long Term Economic Trends. He is distinguished research professor of economics at the University of Missouri–Kansas City and an honorary professor of economics at Huazhong University of Science and Technology, Wuhan, China.

The abstract for the presentation is below the fold.

“What is called “capitalism” is best understood as a series of stages. Industrial Capitalism has given way to Finance Capitalism, which in turn has passed through Pension-Fund Capitalism since the 1950s, and a U.S.-centered Monetary Imperialism since 1971 when fiat dollar creation (mainly to finance U.S. global military spending) became the world’s monetary base. Fiat dollar credit made possible the Bubble Economy after 1980, and its sub-stage of Casino Capitalism. These were economically radioactive decay stages that resolved into Debt Deflation after 2008 and now are settling into a leaden Debt Peonage and the austerity of Neo-Serfdom.

To make a long story short, the end product of capitalism thus has become a Neo-Rentier Economy – something that Industrial Capitalism set out to replace in is Progressive Era from the late 19th century to early 20th century. A financial class now plays the role that landlords used to play: a class living off special privilege. Most economic rent now ends up being paid as interest, interrupting the circular flow between production and consumption.

The result is economic shrinkage – the opposite of industrial capitalism’s original expansive industrial and commercial impulse. The “miracle of compound interest,” reinforced now by fiat credit creation, is cannibalizing industrial capital as well as the returns to labor.

Politically, the thrust of industrial capitalism was toward democratic parliamentary reform, so as to break the stranglehold of landlords on the national tax system and lawmaking. But today’s finance capital is inherently oligarchic, because it seeks to capture the government – and especially the Treasury, central bank and the courts – to enrich (indeed, to bail out) the banking and financial sector. This is why financial “technocrats” (proxies and factotums for high finance) were imposed in Greece and why Germany and opposed the idea of holding a public referendum to gain voter agreement in the European Central Bank’s austerity program. Central banks are to be made “independent” of oversight by elected political representatives.

“The Future of Capitalism”—what kind of capitalism do we mean?

What is lacking in the recent debates about “The Future of Capitalism” is confusion about just what kind of capitalism we are talking about. Most people have in mind tangible investment in plant and equipment, employing labor to produce output at a markup (profit). But the Western world is now on a path of economic austerity, shrinking employment and downsizing. The main kinds of investment being financed are debt-leveraged buyouts of public assets (“privatization”) and corporate takeovers of assets already in place – along with foreign exchange and interest rate arbitrage.

This is not what was envisioned in the 19th century and early 20th century as the Industrial Revolution was peaking. To expand markets and increase an economy’s competitive pricing position, the classical economists sought to free their societies from the legacies of feudalism – a landed aristocracy extracting land rent, and a banking class extracting interest and converting national debts into the creation of monopoly trading privileges. To Progressive Era reformers a free market meant taxing away land rent, breaking up monopolies or keeping them in the public domain. The aim was to bring market prices in line with cost-value. This required a strong enough government to tax and check the vested financial, insurance and real estate (FIRE) interests to achieve what John Maynard Keynes called “euthanasia of the rentier” in 1936.

When Joseph Schumpeter spoke about creative destruction, he was referring to innovations that raised productivity, enabling new companies to unseat the old by lowering costs below those of competitors. The main change that he envisioned was new industrial companies emerging on the wave of innovations. Lower costs were supposed to be passed onto consumers in the form of falling prices. The resulting expansion of production would raise wage levels in keeping with productivity, as production required a parallel growth in consumer demand.

Companies were not supposed to be destroyed and left as bankrupt shells by financial raiders. Banking was expected to be modernized to serve industry, not loot it by loading it down with interest charges and financial fees by raiders wielding junk bonds as their weapon of choice. To supporters and strategists of industrial capitalism, the driving dynamic was what the Wharton Business School professor Simon Patten called the “Economy of Abundance,” not innovations in modes of financial attack.

Instead, despite the vast rise in productivity, prices have not fallen and real wages have not increased for the past generation (since the late 1970s in the United States). The economic gains have been taken by the finance, insurance and real estate (FIRE) sector, dominated mainly by high finance. Industrial capitalism has evolved into finance capitalism, in ways not dreamed of a century ago. Finance capitalism itself turns out to be an evolutionary family of offshoots – pension-fund capitalism, the bubble economy, debt deflation, austerity – and perhaps the stage of debt peonage and neofeudalism, the way today’s trends seem to be leading.”