The Lifeboat News
[ Message Archive | The Lifeboat News ]

    The Vocabulary of Economic Deception 1 Archived Message

    Posted by Keith-264 on December 24, 2018, 7:07 pm

    http://www.informationclearinghouse.info/50820.htm

    By Michael Hudson

    December 23, 2018 "Information Clearing House" - We discuss Michael Hudson's book, J is for Junk Economics: A Guide to Reality in an Age of Deception, with an emphasis on the degradation of economic vocabulary that hides the real state of the economy; language affects peoples' perception of reality; history of economic thought no longer taught; classical political economy focused on society's unearned income or rent; the rentier landlord financial class; fictitious capital; the real reforms of the progressive era; classical political economists expected capitalism to evolve into socialism; classical economic concepts of value, price and rent; productive versus extractive economic sectors; public financing of infrastructure a windfall for the private sector; effects of the tax deductibility of interest; monetary policy and the Federal Reserve; economics is political - politics has always been about who is going to get what; National Income Accounting; fiscal policy and Modern Monetary Theory; the three stages of debt leveraging.


    Transcript

    The aim of classical economics was to tax unearned income, not wages and profits. The tax burden was to fall on the landlord class first and foremost, then on monopolists and bankers. The result was to be a circular flow in which taxes would be paid mainly out of rent and other unearned income. The government would spend this revenue on infrastructure, schools and other productive investment to help make the economy more competitive. Socialism was seen as a program to create a more efficient capitalist economy along these lines.

    I’m Bonnie Faulkner. Today on Guns and Butter, Dr. Michael Hudson. Today’s show: The Vocabulary of Economic Deception. Dr. Hudson is a financial economist and historian. He is President of the Institute for the Study of Long-Term Economic Trends, a Wall Street financial analyst and distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972 book Super-Imperialism: The Economic Strategy of American Empire is a critique of how the United States exploited foreign economies through the IMF and World Bank. His latest books are, Killing the Host: How Financial Parasites and Debt Destroy the Global Economy and J Is for Junk Economics – A Guide to Reality in an Age of Deception. Today we discuss J is for Junk Economics, an A to Z guide that describes how the world economy really works, and who the winners and losers really are.†We cover contemporary terms that are misleading or poorly understood, as well as many important concepts that have been abandoned ñ many on purpose – from the long history of political economy.

    BONNIE FAULKNER: Dr. Michael Hudson, welcome to Guns and Butter again.

    MICHAEL HUDSON: It’s good to be back, Bonnie.

    BONNIE FAULKNER: You write that your recent book, J Is for Junk Economics, a dictionary and accompanying essays, was drafted more than a decade ago for a book to have been entitled The Fictitious Economy. You tried several times without success to find a publisher. Why wouldn’t publishers at the time take on your book?

    MICHAEL HUDSON: Most publishers like to commission books that are like the last one that sold well. Ten years ago, people wanted to read about how the economy was doing just fine. I was called Dr. Doom, which did very well for me in the 1970s when I was talking about the economy running into debt. But they wanted upbeat books. If I were to talk about how the economy is polarizing and getting poorer, they wanted me to explain how readers could make a million dollars off people getting more strapped as the economy polarizes. I didn’t want to write a book about how to get rich by riding the neoliberal wave dismantling of the economy. I wanted to create an alternative.

    If I wanted to ride the wave of getting rich by taking on more debt, I would have stayed on Wall Street. I wanted to explain how the way in which the economy seemed to be getting richer was actually impoverishing it. We are in a new Gilded Age masked by a vocabulary used by the media via television and papers like The New York Times that are euphemizing what was happening.

    A euphemism is a rhetorical trick to make a bad phenomenon look good. If a landlord gets rich by gentrifying a neighborhood by exploiting tenants and forcing them out, that’s called wealth creation if property values and rents rise. If you can distract people to celebrate wealth and splendor at the top of the economic pyramid, people will be less focused on how the economy is functioning for the bottom 99%.

    BONNIE FAULKNER: Can you describe the format of J Is for Junk Economics – A Guide to Reality in an Age of Deception as an A-to-Z dictionary with additional essays? It seems to me that this format makes a good reference book that can be picked up and read at any point.

    MICHAEL HUDSON: That’s what I intended. I wrote it as a companion volume to my outline of economic theory, Killing the Host, which was about how the financial sector has taken over the economy in a parasitic way. I saw the vocabulary problem and also how to solve it: If people have a clear set of economic concepts, basically those of classical economics – value, price and rent – the words almost automatically organize themselves into a worldview. A realistic vocabulary and understanding of what words mean will enable its users to put them together to form an inter-connected system.

    I wanted to show how junk economics uses euphemisms and what Orwell called Doublethink to confuse people about how the economy works. I also wanted to show that whats called think tanks are really lobbying institutions to do the same thing that advertisers for toothpaste companies and consumer product companies do: They try to portray their product – in this case, neoliberal economics, dismantling protection of the environment, dismantling consumer protection and stopping of prosecution of financial fraud – as ‘wealth creation’ instead of impoverishment and austerity for the economy at large. So basically, my book reviews the economic vocabulary and language people use to perceive reality.

    When I was in college sixty years ago, they were still teaching the linguistic ideas of Benjamin Lee Whorf. His idea was that language affects how people perceive reality. Different cultures and linguistic groups have different modes of expression. I found that if I was going to a concert and speaking German, I would be saying something substantially different than if I were speaking English.

    Viewing the economic vocabulary as propaganda, I saw that we can understand how the words you hear as largely propaganda words. They’ve changed the meaning to the opposite of what the classical economists meant. But if you untangle the reversal of meaning and juxtapose a more functional vocabulary you can better understand whatís actually happening.

    BONNIE FAULKNER: You write that ‘the terms rentier and usury that played so central a role in past centuries now sound anachronistic and have been replaced with more positive Orwellian doublethink’, which is what you’ve begun to explain. In fact, your book J is for Junk – A Guide to Reality in an Age of Deception is all about the depredation of vocabulary to hide reality, particularly the state of the economy. Just as history is written by the victors, you point out that economic vocabulary is defined by today ís victors, the rentier financial class. How is this deception accomplished?

    MICHAEL HUDSON: It’s been accomplished in a number of ways. The first and most brutal way was simply to stop teaching the history of economic thought. When I went to school 60 years ago, every graduate economics student had to study the history of economic thought. You’d get Adam Smith, Ricardo and John Stuart Mill, Marx and Veblen. Their analysis had a common denominator: a focus on unearned income, which they called rent. Classical economics distinguished between productive and unproductive activity, and hence between wealth and overhead. The traditional landlord class inherited its wealth from ancestors who conquered the land by military force. These hereditary landlords extract rent, but don’t do anything to create a product. They don’t produce output. The same is true of other recipients of rent. Accordingly, the word used through the 19th century was rentier. It’s a French word. In French, a rente was income from a government bond. A rentier was a coupon clipper, and the rent was interest. Today in German, a Rentner is a retiree receiving pension income. The common denominator is a regular payment stipulated in advance, as distinct from industrial profit.

    The classical economists had in common a description of rent and interest as something that a truly free market would get rid of. From Adam Smith and John Stuart Mill down to Marx and the socialists, a free market was one that was free of a parasitic overclass that got income without doing work. They got money by purely exploitative means, by charging rent that doesn’t really have to be paid; by charging interest; by charging monopoly rent for basic infrastructure services and public utilities that a well-organized government should provide freely to people instead of letting monopolists put up toll booths on roads and for technology and patent rights simply to extract wealth. The focus of economics until World War I was the contrast between production and extraction.

    An economic fight ensued and the parasites won. The first thing rentiers – the financial class and monopolists, a.k.a. the 1% – did was to say, ‘We’ve got to stop teaching the history of economic thought so that people don’t even have a memory that there is any such a thing as economic rent as unearned income or the various policies proposed to minimize it. We have to take the slogan of the socialist reformers – a free market – and redefine it as a free market is one free from government – that is, from ‘socialism’ – not free from landlords, bankers and monopolists.’ They turned the vocabulary upside down to mean the opposite. But in order to promote this deceptive vocabulary they had to erase all memory of the fact that these words originally meant the opposite.

    BONNIE FAULKNER: How has economic history been rewritten by redefining the meaning of words? What is an example of this? For instance, what does the word ‘reform’ mean now as opposed to what reform used to mean?

    MICHAEL HUDSON: Reform used to mean something social democratic. It meant getting rid of special privileges, getting rid of monopolies and protecting labor and consumers. It meant controlling the prices that monopolies could charge, and regulating the economy to prevent fraud or exploitation – and most of all, to prevent unearned income or tax it away.

    In today’s neoliberal vocabulary, ‘reform’ means getting rid of socialism. Reform means stripping away protection or labor and even of industry. It means deregulating the economy, getting rid of any kind of price controls, consumer protection or environmental protection. It means creating a lawless economy where the 1% are in control, without public checks and balances. So reform today means getting rid of all of the reforms that were promoted in the 19th and early-20th century. The Nobel Economics Prize reflects this neoliberal (that is, faux-liberal) travesty of ìfree markets.î

    BONNIE FAULKNER: What were the real reforms of the progressive era?

    MICHAEL HUDSON: To begin with, you had unions to protect labor. You had limitations on the workweek and the workday, how much work people had to do to earn a living wage. There were safety protections. There was protection of the quality of food, and of consumer safety to prevent dangerous products. There was anti-trust regulation to prevent price gouging by monopolies. The New Deal took basic monopolies of public service such as roads and communications systems out of the hands of monopolists and make them public. Instead of using a road or the phone system to exploit users by charging whatever the market would bear, basic needs were provided at the lowest possible costs, or even freely in the case of schools, so that the economy would have a low cost of living and hence a low business overhead.

    The guiding idea of reform was to get rid of socially unnecessary income. If landlords were going to charge rent for properties that they did nothing to improve, but merely raise the rents whenever cities built more transportation or more parks or better schools, this rent would be taxed away.

    The income tax was a basic reform back in 1913. Only 1% of Americaís population had to pay the tax. Most were tax-free, because the aim was to tax the rentiers who lived off their bond or stock holdings, real estate or monopolies. The solution was simply to tax the wealthiest 1% or 2% instead of labor or industry, that is, the companies that actually produced something. This tax philosophy helped make America the most productive, lowest-cost and competitive yet also the most equal economy in the world at that time.

    This focus on real industry has gradually been undermined. Today, if you’re a real estate speculator, monopolist, bankster or financial fraudster, your idea of reform is to get rid of laws that protect consumers, tenants, homebuyers and the public at large. You campaign for ‘consumer choice’, as if protection is ‘interference’ with the choice to be poisoned, cheated or otherwise exploited. You deregulate laws designed to protect the atmosphere, free air and water. If youíre a coal or oil company, your idea of reform is to get rid of the Clean Air Act, as the Trump administration has been doing.

    The counterpart to junk science is junk economics. It is a lobbying effort to defend the idea of a world without any laws or regulations against the wealthy, only against the debtors and the poor, only against consumers for the ìtheftî of downloading music or stealing somebody’s patented songs or drug monopoly privilege. This turns inside out the classical philosophy of fairness.

    BONNIE FAULKNER: According to 19th-century classical economists, what is fictitious capital, and why is this distinction no longer being made by economists?

    MICHAEL HUDSON: That’s a wonderful question. Today the term ‘fictitious capital’ is usually associated with Marx, but it was used by many people in the 19th century, even by right-wing libertarians such as Henry George.

    Fictitious capital referred to purely extractive claims for income, as distinct from profits and wages earned from tangible means of production. Real capital referred to factories, machinery and tools, things that were used to produce output, as well as education, research and public infrastructure. But an ownership privilege like a title to land and other real estate, a patent or the monopoly privilege to charge whatever the market will bear for a restricted patent, without reference to actual production costs, does not add anything to production. It is purely extractive, yielding economic rent, not profits on real capital investment.

    BONNIE FAULKNER: You say that by the late-19th century, ‘reform movements were gaining the upper hand, that nearly everyone saw industrial capitalism evolving into what was widely called socialism.’ How would you describe the socialism that classical economists like Mill or Marx envisioned?

    MICHAEL HUDSON: They all called themselves socialists. There were many kinds of socialism in the late 19th century. Christians promoted Christian socialism, and anarchists promoted an individualistic socialism. Mill was called a Ricardian socialist. The common denominator among socialists was their recognition that the industrial capitalism of their day was a transitory stage burdened by the remnants of feudalism, headed by the landlord class whose hereditary rule was a legacy of the medieval military invasions of England, France, Germany and the rest of Europe. This was the class that controlled the upper house of government, e.g., Britain’s Lordships. For socialists, the guiding idea was to run factories and operate land and provide public services for the economy at large to grow instead of imposing austerity and letting the rentier classes exploit the rest of the economy and concentrate income, political control and tax policy in their own hands.

    Until World War I, socialism was popular because most people saw industrial capitalism as evolving. Politics was in motion. The term ‘capitalism’, by the way, was coined by Werner Sombart, not Marx. But classical political economy culminated in Marx. He looked at society’s broad laws of motion to see where they were leading.

    The socialist idea was not only that of Marx but also of American business school professors like Simon Patten of the Wharton School. He said that the kind of economy that would dominate the world’s future was one that was the most efficient in preventing monopoly and preventing or taxing away absentee land rent so that almost all income would be paid as wages and profits, not rent or interest or monopoly rents.

    The business classes in the United States, Germany and even in England were in favor of reform – that is, anti-rentier reform. They recognized that only a strong government would have the political power to tax away or regulate parasitic economic rent by the wealthiest classes at that time, in the late 19th and early 20th century. This economic and political cleanup of the rentiers stemmed very largely from the ideological battle that occurred in England after the Napoleonic Wars were over in 1815. Ricardo, representing the banking class, argued against Reverend Malthus, the population theorist who also was a spokesman for the landlord class. Malthus urged agricultural protectionism for landlords, so that they would get more and more rent from their land as grain prices were kept high. Ricardo argued that high food prices to support rents for the agricultural landlords would mean high labor costs for industrial employers. And if you have high labor costs then England cannot be the industrial workshop of the world. In order for England to become the industrial supreme power, it needed to overcome the power of its landlord class. Instead of protecting it, England decided to protect its industrial capital by repealing its protectionist Corn Laws in 1846. (I describe its strategy in my history of theories of Trade, Development and Foreign Debt.)

    At that time England’s banking class was still a carryover from Europe’s Medieval period. Christianity had banned the charging of interest, so banks were able to make their money by combining their loans with a foreign exchange charge, called agio. Banks even Ricardo’s day in the early 19th century made most of their money by financing foreign trade and charging foreign exchange fees. If your listeners they have ever tried to change money at the airport, they will know what a big rake-off the change booths take.

    Later in the 19th century, bankers began to shift their lending away from international trade financing to real estate as home ownership became democratized. Home owners became their own landlords – but on mortgage credit.

    Today we’re no longer in the situation that existed in England 200 years ago. Almost two-thirds of the American families own their homes. In Scandinavia and much of Europe, 80% are homeowners. They don’t pay rent to landlords. Instead, they pay their income as interest to the mortgage lenders. That’s because hardly anyone has enough money to buy a few-hundred-thousand-dollar home with the cash in their pocket. They have to borrow the money. The income that used to be paid as rent to a landlord is now paid as interest to the mortgage banker. So you have a similar kind of exploitation today that you had two centuries ago, with the major difference that the banking and financial class has replaced the landlord class.

    Already by the late-19th century, socialists were advocating that money and credit don’t have to take the form of gold and silver. Governments can create their own money. That’s what the United States did in the Civil War with its greenbacks. It simply printed the money – and gave it value by making it acceptable for payment of taxes. In addition to the doctrine that land and basic infrastructure should be owned by the public sector – that is, by governments – banking was seen as a public utility. Credit was to be created for productive purposes, not for rent-extracting activities or financial speculation. Land would be fully taxed so that instead of labor or even most industry paying an income tax, rentiers would pay tax on wealth that took the form of rent-extracting privileges.

    The aim of classical economics was to tax unearned income, not wages and profits. The tax burden was to fall on the landlord class first and foremost, then on monopolists and bankers. The result was to be a circular flow in which taxes would be paid mainly out of rent and other unearned income, and the government would spend this revenue on infrastructure, schools and other productive investment to help make the economy more competitive. Socialism was seen as a program to create a more efficient capitalist economy along these lines, until the word was hijacked by the Russian Revolution after World War I. The Soviet Union became a travesty of Marxism and the word socialism.

    BONNIE FAULKNER: You write that: ‘Today’s anti-classical vocabulary redefines free markets as ones that are free for rent extractors and that rent and interest reflect their recipientsí contribution to wealth, not their privileges to extract economic rent from the economy.’ How do you differentiate between productive and extractive sectors, and how is it that the extractive sectors, essentially Finance, Insurance and Real Estate (FIRE), actually burden the economy?

    MICHAEL HUDSON: If you're a real estate owner, you want lower property taxes so that as the economy grows and people are able to pay more rent, or when a land site in a neighborhood becomes more valuable because the government builds a new subway – like New York Cityís Second Avenue line – real estate prices rise to reflect the property’s higher income that is not taxed.

    New York landlords all along the subway line raised rents. That meant that their real estate had a ‘capital’ gain reflecting the higher rent roll. Individual owners fortunate enough to own a condo or a townhouse near the stations became more wealthy – while new renters or buyers had to pay much more than before. None of this price rise created more living space or other output (although todayís post-classical GDP figures pretend that it did!). It simply meant that instead of recapturing the $10 billion the government spent on this subway extension by taxing the increased land valuations all along the subway route, New York’s income and real estate taxes have been raised for everybody, to pay interest on the bonds issued to finance the subway’s construction. So the city’s cost of living and doing business rises – while the Upper East Side landlords have received a free lunch.

    Creating that kind of real estate ‘fictitious wealth’ is a capitalization of unearned income – unearned because the Upper East Side landlords didn’t do anything themselves to increase the value of their property. The City raised rental values by making the sites more desirable when it built the subway extension.

    The same logic applies to insurance. When President Obama passed the basically Republican Obamacare law advocated by the pharmaceutical and health management sectors, the cost of medical care went way up in the United States. It was organized so as to be a giveaway to the healthcare and pharmaceutical monopolies.

    None of this increased payment for medical care increases its quality. In fact, the more that’s paid for medical care, the more the service declines, because it is paid to health insurance companies that try to legally fight against consumers. The effect is predatory, not productive.

    Finally, you have the financial part of the FIRE sector. Finance has accounted for almost all of the growth in U.S. GDP in the ten years since the Lehman Brothers crisis and the Obama bailout in 2008. The biggest banks at that time were insolvent as a result of bad loans and outright financial fraud. But the government created $4.3 trillion of reserves to bail out Citigroup, Wells Fargo and Bank of America, with Goldman Sachs thrown in, despite the fact that their fraudulent junk mortgage loans were predatory, not productive credit that actually increased wealth in the form of productive power. There’s a growing understanding that the financial sector has become so dysfunctional that it is a deadweight on the economy, burdening it with increasing debt charges – student loans are an example – instead of actually helping the economy grow.

    Message Thread: