Interviews
Europe’s Loss is America’s Gain
RADHIKA DESAI: Hello and welcome to the 23rd Geopolitical Economy Hour, the show that examines the fast-changing political and geopolitical economy of our time. I’m Radhika Desai.
MICHAEL HUDSON: And I’m Michael Hudson.
RADHIKA DESAI: And working behind the scenes to bring you this show every fortnight are our host, Ben Norton; our videographer, Paul Graham; and our transcriber, Zach Weisser.
2024 is being billed as the greatest election year in history. More than 50 countries are going to the polls, that’s 7 out of its 10 most populous countries, with a combined population of 4.2 billion, that is more than half the world’s 8 billion population. Among these, for good or ill, one might add, the US election will be the most consequential, deciding life and death questions such as how much war the world will witness, how well its economy will do.
This is not because the US is a force for peace and development. On the contrary, it’s been weighing down on the prospects of peace and development for decades. Of course, the formal choices before the US public promise to change little, though a worsening on both fronts is entirely in the cards, no matter which of the two main contenders on the scene at present win the election. But will they even, will either of them win the election because there are so many uncertainties around this election? Will Biden run? Can Trump run? If not they, then who will represent this increasingly divided country? And if no one can, is civil war a possibility that has been canvassed in practically every major news outlet on the cards? And what will civil war in the US mean for the rest of the world? All these questions are part of the story of the 2024 elections. These are the circumstances in which they are being held.
Biden’s approval rating is only 38%. Indeed, it had dipped into negative territory by August of the first year he took office. And since then, they have only gotten worse.
MICHAEL HUDSON: Well, what does the public see that Biden and his supporters are not recognizing? That’s really the question that I think we have to talk about today.
RADHIKA DESAI: Exactly. And what is the public seeing and what is the public experiencing to give him these negative ratings? Biden’s one hope was to unite the country behind him through good economic stewardship. After all, it was James Carville, Bill Clinton’s campaign manager, the guy who helped reshape democratic politics in the aftermath of the Reagan electoral earthquake, who said, it’s the economy, stupid. You can’t win elections without a good economy.
And you can’t say Biden hasn’t tried. He’s even ponied up a new term, Bidenomics. We are told that this is going to solve the US’s deep-seated economic problems. And certainly his Bidenomics has included considerable sops to the biggest US corporations, the idea being that somehow this is going to induce them to invest, although it is not clear what sort of quid pro quo had actually been set up. And nor is it clear that they’re actually investing even after receiving these sops.
The pro-Biden establishment, of course, has picked up this term and run with it. They’re trying hard to set up an election year narrative that under Biden, the US economy has done very well, Bidenomics is working, and it has moreover achieved that miracle of miracles, a soft landing, by which is meant that it has slain the dragon of inflation without inducing a recession. However, their job is not easy, and the holes in the story that they’re trying to weave together are widening.
So Michael and I thought it would be a good time to do a 360-degree check on the US economy, and we want to do it by going through a number of major topics. We’ll talk about employment, we’ll talk about the investment situation, the trade situation, the real story about inflation in the US, because it’s not so clear that the dragon of inflation has been slain, the problem of financial stability, and finally, of course, the issue of the budget. So these are the topics we are going to go through.
But before that, before we go through these topics, we must begin with a contrast. On the one hand, the stock market is soaring. Let me just show you a few of the stock market indices here. This is the S&P, so Standard and Poor 500. You can see it is at the highest point it’s ever been in its history. This is the Dow Jones Industrial Average, similarly at a peak. And the NASDAQ is, if not at a peak, at a peak pretty close to its previous peak. So you can see that all the stock markets are doing really, really well. But Michael, does this mean that the US economy is doing well?
MICHAEL HUDSON: Well, it certainly means that there is a tech bubble and a war industry bubble. But let’s look at all the things that are increasing. Since your chart, not only are stocks going up, but when stocks go up, economic polarization increases, because most of the stocks are owned by the top 10% of the population.
So economic polarization is increasing as wealth is concentrated at the top of the economic pyramid. And a lot of voters see this as unfair. So to say that the stock market and the 1% are doing well is not really a good political selling point, unless you can convince people that, well, you can be a capitalist in miniature. You can invest your pension funds in the stock market, you can invest your savings, and maybe you can get rich just like the billionaires. How do you get them to think of themselves not as wage earners, but as stock market investors? If you can convince voters to think that they’re finance capitalists instead of wage earners, you’ve got a good selling point.
But let’s look at other things that are up. Crime is up. Shoplifting, robbery, phone and internet scamming. I’ve already got my morning internet scam call. Rents are up, utilities are pricing, and food outside the home is pricing. I think we’ll get to these charts later. There we go. Basic food, eggs. All of a sudden, people are having to pay more, whether they’re eating at home or whether they’re buying the food at the stores. Everybody’s noticing the prices are rising and the packages are getting more and more empty. You’ll get a box of cornflakes and a lot of it is air now.
RADHIKA DESAI: It’s called shrinkflation. It’s called shrinkflation. Prices go up and what they sell you, the quantities go down.
MICHAEL HUDSON: That’s right. Exactly. Housing is also basically up. When housing prices are up, you also get homelessness up. Taking the subway in New York, you’ll see a very crowded subway car, and then all of a sudden, you’ll see cars with hardly anyone in it, and that’ll be a homeless person that maybe hasn’t had a chance to take a bath for quite a few days. You’re seeing that already.
RADHIKA DESAI: If I may just interject, this is the percentage of households who spend more than 30% of their income on housing. Overall, 30% of all US households are spending more of their housing, but among renters, this ratio goes up to 50%, while among owners, it is 21%. You can see that those who are wealthy and relatively better off who own their own homes are penalized less than those who are relatively worse off.
You see here, again, another really shocking statistic. This chart goes back to 1960. You can see that the ratio of house prices to the median household income went down after the 60s and remained low right into the 1980s, but from about 2000 onwards, basically coinciding with the easy money policy of the Federal Reserve, house prices as a proportion of median income has risen, and although they again fell after the 2008 housing bubble burst, they began rising again, and today they are even higher than they were in 2008.
MICHAEL HUDSON: The situation is actually much worse than that chart says, because not only have housing prices gone up, but the mortgage rates have gone up. They’ve doubled from about 3% to almost 7%. Now, if you have a mortgage, you want to buy a house, you don’t want to be a renter, you want to escape from being a renter, you buy a house, and your mortgage has to be 7%. That means the entire price of the house, the mortgage that you’re paying, doubles in 10 years, and if it’s a 30-year mortgage, it doubles again and it quadruples in 20 years and multiplies eight times by the end of the 30-year mortgage, so that the bank will get eight times as much for the house you buy as the person who sells the house to you. The mortgage rate and the debt attached to the house is expanding even more rapidly than the housing prices.
That’s what debt deflation is, and that’s part of why the economy is being malstructured.
So what voters are seeing is not simply the economy’s getting worse, but the whole way in which it’s structuring and the direction it’s going in, financialization and the whole neoliberal plan makes them want to throw the rascals out of office.
RADHIKA DESAI: Indeed, the approval ratings figures are showing exactly that.
MICHAEL HUDSON: Yes, what they’re disapproving of is the economy above all, and people say, oh, it’s just because Mr. Biden’s getting senile. Well, it’s not that he’s getting senile, it’s that he’s a nasty, bad person running a nasty, bad economy. That’s really the key.
We haven’t even mentioned the medical costs going up for people who have lost their jobs or they have to stay home because of COVID. There’s a whole COVID effect of the economy. Long COVID is a problem that isn’t being counted. A lot of people are having to take part-time jobs. So what you’re seeing is a kind of crapification of the economy. You mentioned that about the prices that we’re seeing. A whole new vocabulary is being developed to describe what’s happening in the economy, and shitification, the whole bit.
So let’s look at what hasn’t increased. Maybe there’s a bright spot there. Well, lifespans have not increased, and health generally has gone way down. You have a reversal in the whole post-war rise of lifespans. They’ve gone down. They’ve gone down especially for people who earn less than $50,000 a year. For non-white people, they’re turning down. Wages have been turning down.
The Financial Times last week had a story that wages are growing more slowly for employers working at home because employers want to see them in the office. And yet what they’ve found in your country now, England, is that workers from home, the productivity is going up even faster than workers who actually have to go to the office and sit on the long transportation train to get in, whether it’s London or New York. So the Financial Times said this is a success story. Employers gain in both ways. The workers get to stay home, and they’re more productive, but you’re paying them less for the right to stay home.
RADHIKA DESAI: And you’re not paying for all those offices. We’ll come back to that as well. But shall we go into our discussion of the various topics now?
MICHAEL HUDSON: Sure.
RADHIKA DESAI: So the first topic we wanted to discuss was employment. So on the employment front, recently, as many of you will have seen, the Biden administration is making much of a report of the Bureau of Labor Statistics, which reports that 350,000 new jobs were created in the previous month. However, there are huge problems with that.
First of all, let me just show you the story, the official story that the Biden administration would like to emphasize. So this is the official unemployment rate that is shown on the Federal Reserve website. And you can see this chart also goes back to 1950. And you can see that there have been various peaks in unemployment in the 1980s and again after 2008. And then unemployment went down. And then, of course, this huge narrow spike is the COVID pandemic, when, of course, it hit nearly 15%, officially, at least. And since then, it has declined. And so President Biden feels that he can pat himself on the back for bringing down the unemployment rate.
However, there are many, many other elements to this story, which are not being talked about. First of all, as opposed to the Bureau of Labor Statistics, coming up with this number of 353,000 new jobs, a private payroll company, which essentially gathers, you know, basically, it knows who is paying whom, how much in wages, etc. what is the payroll of different companies, reported that only 107,000 private sector jobs were created, which is a very small amount. And even if to this, you add the public sector jobs that are created, which will have expanded, because of Biden administration initiatives, nevertheless, it, you know, this would mean that if 353,000 new jobs were created, then job creation is being led by the government.
But at the same time, let’s also see something else, full time employment has fallen. That means, and this is, of course, been historically the issue, the United States always claims that it is such a wonderful job creating economy. But few people point out that the bulk of the jobs that are created are part time jobs, they may even be zero hours contracts, and so on. So, the actual quality, and of course, the kind of jobs there are, the benefits are low, the wages are low, etc. So, you essentially have an epidemic of McJobs rather than good paying jobs.
Furthermore, this unemployment rate that I showed you is, unemployment rate is always calculated as the number of people who have failed to find work out of a total number, which includes those who are, those who are either working or actively seeking work. But it does not include those who have stopped actively seeking work. And that number has actually gone up incredibly, particularly over the, I mean, it has been going up for, sorry, that number has been going up for a long time, but it has particularly spiked in recent years.
So, in reality, the actual number of American people who are employed as a proportion of the labor force is going, sorry, just one second, I want to show you the chart. The labor force participation rate was fairly low, just below about 60% in the 50s, because of course, at that time, most women did not work. But beginning in the 1960s, as women began entering the labor force, the labor force participation rate began to go up, and it rose steadily through all those decades, up to about 2000, when you see this final little peak here. And since then, it has been in decline.
So, essentially, what workers are saying is that as neoliberalism has matured, as labor legislation, which decreased the onus on employers and essentially allowed employers to offer workers worse and worse jobs for worse and worse conditions and pay and so on, people who could choose to leave the labor force have been leaving the labor force, of course, we’re not even counting those who become disabled, particularly after COVID and so on. But it has been declining, it declined massively during COVID. Since then, it has recovered, but it still remains short of the point it was at when COVID struck.
So, you can see that this is a relatively favorable story that the administration is trying to, is able to tell entirely because of this matter of labor force participation rates.
And finally, a couple of final points. Wage growth has been down for a year, particularly, as Michael was saying, for work-at-home employees. But the productivity is higher, so employers are gaining. Workers’ insecurity is very high, and it is high precisely because they don’t have stable, permanent jobs. They have jobs that don’t last very long, that are part-time, that they hold at the whim of the employer. So, the traumatized worker syndrome still remains.
Back in the late 1990s, when Alan Greenspan was asked why, if the economy was running so, you know, the economy was running so hot, essentially, it was running so well, how come there was not more inflation? And he said it’s because of the traumatized worker. Workers are unwilling to demand higher wages, even though, according to him, the labor force, you know, the employment rate was very high. But the simple reason was the workers were getting bad jobs, that they were getting insecure jobs. So, they were traumatized and insecure. They were unable to complain. So, and finally, the quitting rate is very high, partly for medical reasons, but also because hospital workers, teachers, etc., do not feel medically protected at their job. So, and according to the Biden administration, of course, COVID is over. So, these are some of the problems with this idea that somehow the Biden administration has given Americans a low unemployment rate.
MICHAEL HUDSON: Well, you’ve made all the points that I would have made, so I don’t have to make them. I would like to see a chart for statistics they don’t collect. The employment by U.S. multinational corporations worldwide. Their employment in the U.S. may have gone down, but their employment abroad, especially in Asia, the maquiladoras along the Mexican border, their employment has gone up, but just not employment for their workers in the United States because it’s not really economic to employ American labor, given the rise in housing costs that we’ve just discussed, medical costs, and all the other costs that are going up. America has priced labor out of the market, except for monopolies, especially artificial intelligence monopolies and military-industrial complexes. These are not competitive, so America doesn’t really have to do anything there.
You pointed to the structural shift in labor. It’s dangerous to go back to the office if they don’t have clean air and if you’re exposed to COVID, and the COVID rates continue to go up, and there’s nothing being done to encourage air purifiers or even the use of masks. You’ve made the points that I would have made.
RADHIKA DESAI: Okay. There’s another couple of points, though, and Michael, I think you wanted to talk about pensions as well, but let me make one point here further, which is that there’s a very odd discrepancy in U.S. growth figures that is increasingly being talked about.
And that is that there are two measures of GDP. One is GDP, gross domestic product, and the other is GNI, gross national income, and very often these two are basically supposed to match. I mean, there were maybe some statistical discrepancies, but the first, GDP, which measures essentially how much value was made out of the production of goods and services, and the GNI, gross national income, which measures how much people earned out of that process, this discrepancy is essentially being put down to the fact that workers are not buying, workers essentially are not, you know, they’re not getting high wages, they’re not buying enough goods, and a lot of their income is actually replaced by debt.
And the second thing is that, in fact, a lot of the things that are actually being produced are not, in fact, being sold. So, both of these things are also problems
Michael, you wanted to talk about pensions on the employment.
MICHAEL HUDSON: Yes, that’s the problem. Not only are the workers’ conditions getting poor, but pensions are no longer defined-benefit pensions, and many of the pension plans in the United States are actually broke.
Again, there was a Financial Times article last week that said that, Brooks Masters wrote, that the typical Generation X household has just $40,000 saved for retirement, and 40 percent of their 401k pension plans are zero. So, this is the result of not having a pay-as-you-go pension policy like Germany has and Europe has. Pensions have been financialized. In other words, instead of just paying out of the current economic surplus that you’re producing, workers and companies have to pay, save up money in advance instead of investing.
The post office, for instance, post office rates, postage prices in America are soaring because the attempt by Congress to privatize the post office means you have to include the pension plans for the next 75 years all in the price of your postage by saving it in advance, not hiring more labor, not improving the mail delivery, but just the turnover to the stock and bond markets to invest so you can pay pensions if there are any postal employees left.
Of course, the whole objective in increasing the public pension plans is to say, oh, I’m sorry, the post office and other public agencies are broke. We’ve got to privatize them. You privatize them, and what happens is what happened in England under Margaret Thatcher. You wipe out all of the pensions because there’s no company to pay them anymore.
Now, Peter Drucker called this pension-fund socialism before because he said this is wonderful. Workers and companies are going to pay for stocks, and that’s going to create financial wealth that’s going to be spent on new factories and new employment, and workers will be capitalists in miniature. Through the pension plans, they’ll be stockholders. But the effect is simply to divert wage income into the financial markets, into the stock market. The pension system is a bonanza for the stock market and for bondholders because it’s financializing the economy, but it’s an awful noose for the workers who have to pay their own pensions instead of making pensions a public right like it is in socialist economies.
RADHIKA DESAI: Exactly, and if I may add a few points to this, this idea that the Peter Drucker idea that somehow you will get a kind of pension-plan socialism.
There’s a very interesting real-life example of this. In the 1970s in Sweden, thanks to a very high level of coordination between trade unions, governments, and employers, what had happened is that they had managed to create a fairly high-wage economy, a fairly prosperous working class, a very, very generous welfare state providing a whole range of services.
So then the question was, how would workers, whose wages will continue to increase thanks to rising productivity, what would be now done with the rising wages? What would they do? So they decided that they would create a wage earner fund, and the wage earner fund would slowly start buying up the stock of existing corporations for which they work, and slowly they would eventually become the owners of these companies, and that was the general idea. It was called the Renn-Miedner plan.
And this plan was much discussed. Everybody thought it was great, but what immediately followed, beginning in the 1980s, was a major capitalist counter-offensive, an attack on the unions, which essentially meant that this wage earner fund plan was watered down to an extent that it became meaningless. And of course, today, in many ways, people would say that Sweden has gone from a valhalla of socialism or social democracy to being a valhalla of neoliberalism. So I did want to say that.
MICHAEL HUDSON: I want to add a technical twist, and that already occurred in the 1970s in Chile under the University of Chicago guidance. You’ll have the Chilean companies found out how to do pension plans the neoliberal way. You do have the workers buy the stock in the company, but the company owner will also have a whole array of companies. They’ll have a holding company for the industrial company, they’ll have an offshore bank account to hold the stock in the company, and the company will continue to make basically loans to its holding company and be loaded down with more and more debt. It’ll borrow, borrow, and then the holding company, the actual industrial employer, will be left to go bankrupt. It’s a corporate shell, and all the money will have been taken by the holding company.
And so very quickly, Sam Zell, the real estate owner, did this with the Chicago Tribune. The Chicago Tribune had exactly what you’re saying. We’re going to be part owners, we reporters and news people. And so Zell bought the Tribune, then he took all the money in the pension plan, lent it to himself and the holding company, and then said, oh, it’s broke, and wiped out all of the stockholders. I discuss that in my book, Killing the Host. That’s the pension plan finance capitalism.
RADHIKA DESAI: Exactly. And this is exactly the reason why, as this is particularly true in the United States, one reads every few months, one reads that some or the other pension plan has essentially lost its money. And that means the workers who had put in their money, their hard-earned money into these financialized pension plans, essentially are getting nothing in return.
But there’s a couple more points to be made. First of all, when you financialize pension plans, workers are encouraged to think that somehow they are also becoming capitalists, that they have a stake in the stock market, et cetera.
Now, what really happens when our pension money goes into, essentially becomes privatized and is now being managed by some or the other private financial institution, is that our pension money just becomes so much throw weight that they can use in order to move markets in their favor. Remember, when you are speculating, if you are speculating with a few hundred or a few thousand dollars, you are a price taker, a market taker. But when you are speculating with millions of dollars and maybe even billions of dollars worth of money, you are a market maker, you are a price maker, which means that you essentially get to rig the system.
So, our money is used by these fund managers and so on as throw weight in their speculative activities. So, this actually increases speculation, it inflates asset bubbles, and it makes financial crisis, from which we all suffer as working people, more regular, more frequent, and so on.
MICHAEL HUDSON: The situation actually gets worse than fund managers. Because the pension plans are in deficit, the pension managers are desperate. How are they going to get more money? They turn the money over to private capital. And private capital is much worse than the pension fund managers. Private capital makes its money by buying a corporation and driving it bankrupt.
Private capital does to the U.S. economy what it’s done to Sears Roebuck, to Toys R Us. The company will borrow a lot of money from a bank. It’ll pay a special dividend to the private capital owners. The owners will immediately say, we’ve got the increased earnings, we’re going to cut back productivity. When workers leave, we’re not going to replace them. We’re going to work them harder. We’re going to give the traumatized workers syndrome with emphasis. And so, by workers thinking, I’m going to be a capitalist, just like the rich people, and my pension fund is going to make money for me as a capitalist. But making money as a finance capitalist means hurting their identity as a wage earner. What are they going to think of themselves as?
RADHIKA DESAI: Well, exactly. And so, definitely. And the other thing as well is that, of course, the companies that are brought into the control of private capital, these CEOs, etc., they borrow money in order to also, like Michael said, they certainly borrow money in order to pay huge dividends, but they also borrow money in order to engage in share buybacks, which increases the value of the shares. And all of this is being done on the backs of existing employees. And of course, in doing so, they very often misuse and misapply pension funds so that they can go bust as well.
But my second and third point are equally important, which is that workers who think that they are participating in the stock market and therefore rising stock markets are good for them, etc., should always remember two things.
Number one, when markets go up, they may benefit, but they always benefit much less than the people who are controlling these markets, the big financial institutions and so on. They are very low on the pecking order of benefit from financial speculation.
And number two, when there is a loss, they lose much more than those who are controlling these pension funds, etc., who have their golden parachutes and so on.
So that’s about the employment situation. Now, let us look at the next point, which is what is happening with investment.
So here again, you know, we are being told that parts of the US economy are finally doing much better because investment rates are somehow better and so on. But let’s look at what’s really happening with investment.
So this is a chart showing gross fixed capital formation in the United States from 1970 to onwards. And you can see that on average, if you drew a trend line in this chart, it would basically be pointing downwards. So basically throughout the neoliberal era, investment, which is in many ways the main driver of the economy, consumption is also important, but investment is essentially, you know, the more there is investment, there is the more growth there will be because investment itself creates growth and it increases productivity and growth.
So this has essentially been going down. This peak here is at the end of the 1970s. It’s going down. This is about 1990, going up again just with the tech bubble up here and then with the housing and credit bubble, but then essentially declining after 2008. Since then, it has risen, but as you can see, it remains below, in fact, even many of the low points of the previous 50 years, let alone the high points. So and in the last couple of years of the Biden administration, these figures are only available to us for now up to 2021. But you can see that under Biden’s first year, it effectively took a downturn.
And let me also add one other thing, which is that investment is a proportion of GDP. You know, the United States and the Biden administration make much of competing with China and so on. Let’s take a look at this graph. It only goes to 2015, but I don’t think the story has changed. And this graph, by the way, is the work of my partner, my husband and intellectual partner, Alan Freeman. And here you can see he has given investment as a proportion of GDP for China, which is this bold blue line, and for many other countries. But we just want to focus on China and the United States, which is the green line.
And indeed, as you can see, the green line is basically at the bottom of all these comparable countries, including Europe, Japan, other industrialized countries, and so on, and even the global south, which is here in this thin blue line. So you can see if you’re going to compete with China in terms of growth and productivity and so on, China at its peak is spending 45 percent of its GDP on investment. By contrast, the US is spending less than 20 percent, less than half in investment. So this is the sorry state of investment in the United States.
MICHAEL HUDSON: Oh, it’s much worse than that. It doesn’t say how the composition of this investment has shifted. This re-rising of the US investment is largely military industrial. A lot of it is also real estate. That’s probably the largest element of a lot of this investment. And the real estate investment has been transforming the whole economy.
And that includes buying out existing companies. That’s counted as a new investment. If you buy a building that was at a low price before, buying it at a high price is a new investment. In London, for instance, you just had the sale of the British telephone phone tower last week to a hotel company. So it’s privatized. They’re going to essentially use that as a new investment. But it’s not building a new building. It’s just taking something over.
In the United States, you had the last few months, you had Greyhound bus terminals sold. That was an investment, sort of like Stagecoach in London. The company that bought Greyhound is a real estate company. They said, we’re going to tear down the terminals that are put in the center of the city. The reason they’re in the center of the city is so that they’ll be convenient for people who ride the bus. They can go to the terminal, have a place to sit, buy tickets. We’re going to make them go to the outskirts of the city and wait outside, regardless of the weather, because we don’t care about the users of our service. We want the real estate. So we’re going to essentially dismantle the public service investment and make a gentrified version out of this.
And in New York, you’re having the Wall Street area. All of these commercial office buildings in New York, there’s a 40% vacancy rate on commercial buildings. So companies are coming in to try to invest the company, saying, well, there’s no more industrial economy to put in these buildings. Let’s gentrify it for all the people who are getting rich on the financial sector, making money de-industrializing the economy.
Well, there’s one problem with this that they’re suddenly finding out. You can take an office building, a bank, or a publishing company, or whatever, and divide it into residential units, but where are you going to put the kitchens? These buildings are not geared to have gas and electricity and venting for kitchens. And what about bathrooms? If you look at how your employer is set up at a company, this is not the kind of bathroom that you’re going to want near a bedroom or living room for a residential person. So there’s an idea that somehow you can do to the commercial office buildings in America what President Obama did to Chicago before president when his job was tearing down black neighborhoods and getting rid of the low-income blacks and gentrifying them for his sponsor, the Pittsburghs, to make a real estate fortune there.
So fortunes are being made by real estate investment, not exactly industrial investment. Real estate is, again, part of the FIRE sector, finance, insurance, and real estate. You’re having investment in research and development. That’s called capital investment. You’re getting the picture that the investment that is taking place isn’t the kind of investment that originally helped an industrial economy. It’s a de-industrializing form of investment.
RADHIKA DESAI: And there’s also, I mean, well, gross fixed capital formation will actually measure physical investments, so that there’s definitely some physical investment taking place. But as we see, it’s much lower than China’s, it is not really recovering. And more to the point, if there has been any kind of recovery or whatever little investment is taking place, let’s put it that way, whatever little investment in actual plant and machinery is taking place under the Biden administration is happening in large part because of the sops he’s giving to industry via his Inflation Reduction Act and other such initiatives. So essentially, he is giving certain corporations money to invest in certain sectors. And this is why you are seeing it. So it’s the dynamo or the dynamic, the mojo of American capitalism is definitely not back. It is definitely very weak.
MICHAEL HUDSON: You mentioned the inflation and that act. One of the high points of it was advertised by Taiwan, taking its computer chip company, wanting, getting, I think, over vast billions of dollars to set up a computer chip system in Arizona. The people came up here and they say, oh, it’s not going to work. There are no workers. You know, you said that you were going to provide us with American labor to work in the investment plant, but there aren’t any American workers because they’re not trained as working industrially. You know, who are we supposed to hire as workers for our computer chip plant if you don’t have workers trained to work in computer chip plants or other industries?
RADHIKA DESAI: And, you know, that also reminds me, I mean, we haven’t even talked about this, but the state of public education, that is the education that most ordinary American kids get, has actually been declining to such an extent, as we know, for decades. You know, teachers will complain that they spend all their time trying to keep control of the classrooms. How are they going to teach kids anything? So if your kids are not learning what they need to learn, how are they going to become even semi-skilled workers, let alone skilled workers? So absolutely, I’m not at all surprised.
Some time ago, I remember reading somewhere that the Japanese companies that were being encouraged to invest in car plants in the so-called right-to-work states, these companies were having to produce the literature to minimally give instructions to workers using symbols rather than putting it in writing, because many of these kids were functionally illiterate.
But let’s go on, because we have quite a few things more to talk about, and we don’t want to go too much over an hour.
So very briefly, we said that we would talk about the U.S. trade deficit, and once again, vis-a-vis the trade deficit, the Biden administration is crowing about its great achievement. You see here the U.S. trade deficit, which, of course, historically had been very low. That is, you know, in this graph, the higher the line is, the better the situation. So when the line dips, the deficit grows. So you can see beginning around the 1980s and then really taking off in the 1990s, the U.S. trade deficit was quite, you know, dipped quite low. People were really worried about the so-called twin deficits and so on. And then after 2008, precisely because of the massive recession in the United States, the trade situation improved. The trade deficit actually narrowed. And this is also very interesting, you know, historically because of deindustrialization.
The United States has a tendency that when the economy grows, the trade deficit grows. Why? Because American consumers prefer buying foreign goods. So this has been the case for many decades in the United States. So obviously, with incomes shrinking, so did the trade deficit. But once again, it resumed declining. And as you see here, in the Trump years and also in the Biden years, the trade deficit declined. You know, as you see, it reached a really, really low point already under the Trump administration. And it has recovered, but it still remains at historic high levels. So in that sense, if there has been any improvement in the trade deficit, again, this is largely because of the sickness of the American economy, the poverty of American consumers, not because of any miracle that the Biden administration has executed or has brought off in the U.S. economy.
MICHAEL HUDSON: I think the Biden administration has vastly helped the trade deficit. You know, what is Bidenomics? It’s a slogan for a war economy, financed by a financial bubble. And the State Department official, Victoria Nuland, just gave another plea for Congress to give a few hundred, a hundred million dollars for the weapons in Ukraine and Israel. And since our show focuses on geopolitics, I want to point out how war spending is contributing to the trade balance and also to American affluence against Europe’s NATO countries that America has just conquered economically.
Nuland picked up President Biden’s point that in reminding politicians that almost all the money for the war in Ukraine is going to be spent here in the United States, employing labor in the local districts of all the congressmen on the military and national security committees. That’s why war stops are going up. And it’s the merchants of death business.
And Biden is pretending to reindustrialize the economy by emphasizing how this military industrial sector is not subject to price competitiveness. You can do it with low productivity, high cost labor, because it’s a proprietary good. It’s an economic monopoly good for the weapons. Biden said, quote, but patriot missiles for air defense batteries made in Arizona, artillery shells manufactured in 12 states across the country, in Pennsylvania, Ohio, Texas, and so much more.
Well, these are the swing states in the election. And you have Biden, Hillary Clinton, Nancy Pelosi, and the other Democrats recognize that the world economy is splitting up between the U.S. and NATO neoliberal countries called “democracies” and the global majority seeking independence. Well, it’s almost as if they’re channeling Rosa Luxemburg. She said the choices between socialism and barbarism. And Biden and Nuland agree, except what socialism is, what’s occurring in the global majority. Barbarism is what’s occurring in the American NATO militarization and the fight in Ukraine and the Near East.
But the fight in Ukraine has helped the U.S. balance of payments, the trade balance, by essentially forcing the NATO countries to impose the sanctions against Russia that we’ve talked about. The anti-Russian sanctions have broken the German industrial economy for good. And that’s why German companies, Mercedes, Porsche, BASF, are moving to the United States, because they can’t get the oil and the gas and the energy that’s needed to make industrial goods.
And what’s happening as a result? America is not buying European investments. America is replacing Russia as a supplier of gas, liquefied natural gas. That’s way up for the exports. Oil, way up. Basically, America is gaining.
And also, this $100 million, all these billions that NATO have given to Ukraine have emptied out their war stocks. And they now say, we have to buy new arms of up to 2% to 3% of our GDP. And who can make it? America can make it, because we don’t have any oil and gas to power the industry to make these stocks. This is going to be a huge, huge increase in the American trade balance while the euro goes down and down and down.
RADHIKA DESAI: If I may add, one of the things that I forgot to mention earlier is that a large part of the improvement in the US trade deficit under Biden in the last couple of years, particularly, has come precisely from the export of liquefied natural gas. So think about it. Instead of having some kind of serious industrial policy, the United States is once again an exporter of primary products like natural gas, an exporter of energy.
Two more quick points. You’re so right to emphasize that, you know, many people think that NATO exists to defend the West against all, you know, originally against communism, and then now against all these vague, you know, dictators and what have you.
In reality, the NATO exists so that the US military-industrial complex will have an export market because of NATO interoperability considerations. Essentially, when a country joins NATO, they become a captive market for the American military-industrial complex.
But there is one final point I’d like to make. You know, many, many decades ago, a couple of decades, maybe two or three decades ago, Madeleine Albright is supposed to have said, what’s the point of having such a vast and sophisticated army if you don’t get to use it? Because she was saying, you know, we should, of course, we should go to war if we want to, etc.
I’d like to paraphrase her on this. What’s the point of having a $1.5 trillion annually military-industrial complex if it actually cannot produce sophisticated weapons today? As far as technological sophistication is concerned, Russia and even China are further ahead of the United States. They can produce things like hypersonic missiles. They can produce electronic technology to fight wars that is far superior to anything the United States has.
So, this is another really interesting point, which is that the United States today can only get customers for its coddled military-industrial complex, which has become incapable of producing anything decent, when it essentially makes people join NATO and essentially convinces the governments of various countries to act against the interests of those countries. Because every country that is being brought into NATO on the premise that its security is going to increase is actually going to have its security decreased.
First, because, of course, NATO is increasing in security around the world. And second, because in reality NATO is not capable of defending these countries. It has deficient armies, it has deficient industrial and military production, and it has deficient weapons technology.
So, for all of these reasons, and the reason why the Russians and the Chinese are able to surpass the United States in terms of military technology is very simple. Yes, they have also in military industries, but their military industries and their armies are actually devoted to the defense of the country, not devoted to their own expansion for their own reasons. So, that’s another thing that I wanted to mention, that this is really in terms of the trade deficit.
But we also have three more interrelated things to discuss, which is what’s really happened on inflation, what’s really happening to the financial sector and financial stability, and what’s really happening to the budget deficit, and how are all these things interacting.
So, let’s take inflation first. What I’d like to say about inflation is the following. Throughout the last many months, the story has been that the Federal Reserve has managed to create a soft landing. We have vanquished inflation while not being in recession. Now, Michael and I have already told you how the U.S. economy is doing far less well than you might imagine, and that if you look at the GNI statistics, the Gross National Income statistics, the U.S. economy is in recession. It has had several quarters of declining GNI.
On inflation then, the story that we are being told, the official story, is that the Federal Reserve has performed a miracle. It has achieved a soft landing, it has defeated inflation, and the U.S. economy is not in recession. But the reality of it is that if you go by the GNI figures, the Gross National Income figures, the U.S. is in recession in reality.
And the other problem is that, in fact, it’s quite possible that inflation has not been vanquished, because the fact is that while the more volatile prices, but particularly energy prices, have indeed gone down, at least they are down for the moment, core inflation remains stubbornly high, which is why the Federal Reserve, after talking for so many months about reducing interest rates in 2024, is already beginning to postpone the reduction of interest rates. So, in that sense, inflation has not gone away as a problem, and this creates massive problems for financial stability to which the widening U.S. budget deficit is making its own contributions, and we’ll talk about that in a minute.
Let’s take a look at financial stability then. The fact of the matter is that we already saw at the beginning of this year that we had a series of failures of American banks, the Silicon Valley Bank and a few other banks failed, and they failed chiefly because of the way in which the Federal Reserve is trying to deal with the problem of inflation.
We’ve already discussed in the past that the problem of inflation cannot be really resolved by raising interest rates. Indeed, one economist, Robert Solow, had essentially referred to the raising of interest rates as a means of dealing with inflation as burning a house to roast a pig. I mean, you don’t need to do that. You are basically creating a lot of destruction.
But nevertheless, the U.S. Federal Reserve started raising interest rates, and this began affecting the financial institutions like Silicon Valley Bank and the other banks that went bust that had relied on the continuation of easy monetary policy. So, in a certain sense, we are facing the prospect of another financial crisis, which in 2008, also the financial crisis occurred because in the mid-2000s, the Federal Reserve started raising interest rates once again because the dollar was falling too low, because commodity prices were rising, and as they brought interest rates up to about 5.25 percent, which is roughly where they are at right now, this was enough to prick the housing and credit bubbles, and you got the 2008 North Atlantic financial crisis as a result.
The new financial crisis has arguably already begun. It already began with the bank failures earlier in 2023, and now we read headlines like this, bad property debt exceeds reserves at the largest U.S. banks. This is a financial time story. Loan provisions have thinned even as regulators highlight risks in commercial real estate markets.
So, they are showing us these major banks, how many lost reserves they have in relation to loans that have already become delinquent, loans on which payments have already been missed. These are the six largest banks, and except for J.P. Morgan Chase, which has a ratio higher than 1 percent, compared to 2022, in 2023, which is this light blue line, practically every bank has less than one dollar of reserve for every dollar of its exposure to bad loans in the commercial real estate market.
And these sorts of problems are, by the way, not just commercial real estate is just one, but there is also private equity. There are many other asset markets in which trouble is brewing.
And this also goes for the market in U.S. treasuries, because as interest rates go up, the U.S. essentially has to pay a higher rate of interest in order to borrow money on the international market. And what’s more, over the last many years, the treasury market has been sinking. And yeah, the treasury market has been sinking and it has essentially not got enough buyers. As a result, the Federal Reserve has had to step in in order to prop up the treasury market. But even then, even with all the support the Federal Reserve is going to get, is giving, you can see here this up to 2023 is the real figures. And then from here on, these are estimates. And you can see that interest costs as a percentage of GDP, the interest costs on U.S. debt are going up and they will contribute to a worsening U.S. budget deficit. So you see here, interest costs have been just a little above 1 percent for a while, and now they will go up to 2 and 3 and 4 percent. And this is going to brew trouble.
And finally, this is an interesting story that appeared, even though the United States budget is in such deep doo-doo, basically, you have the United States government spending more and more money on the military-industrial complex. We are told that it was, the official story is that it’s worth about 750 billion dollars, three quarters of a trillion dollars. But studies show that the actual size of military spending in the United States is about 1.5 trillion dollars. That is a huge sum. The total amount of U.S. GDP itself is about 20 trillion. So you can imagine, it’s like about 7 odd percent of U.S. GDP.
So this is the state of the U.S. economy. And so we can expect in the near future to hear finally an official admission of the recession the U.S. is in, continuing inflation, and with continuing inflation, the possibility of the Federal Reserve increases interest rates. So maybe even if it does not increase interest rates, the possibility of another financial crisis. So this is the sort of cauldron of troubles that is already brewing as the U.S. approaches an election year.
MICHAEL HUDSON: Well, there are a couple of things. Let me go over your charts one by one again. You sort of went very quickly.
When you showed the chart about the banks being in negative equity, this is especially the case for small community banks. About 30 or 40 years ago, there began to be small community banks. The smaller banks, if you notice, are the ones that are in the most trouble because they’re the ones that have made loans to local businesses, local landlords.
You already have one of the big New York City community banks going broke in the last week, just like you had the Valley National Bank go broke before. What these charts show is that the U.S. financial system in general is in negative equity.
Now, just think of that. If you have a financial system that’s in negative equity, what do you need a financial system for? The whole idea of finance is people are supposed to be abstinent and save rich people and save their money. You remember Karl Marx’s quip that the Rothschilds must be the most abstinent family in Europe because they have so much money. Well, the fact is that if banks don’t supply money to the economy, but they’re broke and they get all the money from the government, this is just what China’s doing.
Why don’t we just say, okay, money is a public utility?
RADHIKA DESAI: Nationalize the banks.
MICHAEL HUDSON: If it’s a public utility like China, then it’s not going to make this de-industrial real estate kind of property investment.
Now, let’s look at the chart again for the interest rates going up in the U.S. economy. This has overjoyed Biden, and especially it makes Obama very, very happy. This is Obama’s dream to privatize Social Security. The government’s going to say, we have to balance the budget. The Republicans are going to close down Congress, as they’re threatening to do this Friday, by the way, in order to balance the budget. Because the market, the magic of the marketplace, has raised the interest rates.
Between the higher interest rates and the military charges that you just showed, there really isn’t enough money for social spending anymore. But we can do what Margaret Thatcher did to the English economy. We can privatize Social Security. And now all the money that you had for Social Security is not going to be your money anymore. It’ll be, we put it in the hands of the banks that have already driven themselves and then the financial sector into negative equity. Now they can take your Social Security and drive it into negative equity. That really is the grand plan, to privatize, to treat Social Security, Medicare, Medicaid like the post office. It’s all going to be privatized. That’s the neoliberal plan. And this is not an accident. This is, it’s a feature, not a bug in the economy. And that’s basically the direction we’re going in.
The privatization of finance, instead of doing the obvious thing, if finance is now broke, why not do it? The government can create the money instead of what it’s doing now. The banks are giving the bad loans and basically they’re putting their assets with the Federal Reserve and borrowing the money to stay in business. You can be in negative equity forever as long as the Federal Reserve, which basically works for the commercial banks as their customers, is creating enough money to subsidize the negative equity for the banks and the financial sector. What they’re not doing is subsidizing the negative equity of the wage earners, the negative equity as a result of their housing costs, their medical costs.
RADHIKA DESAI: Two things very quickly. And I think we should probably wind down because we are just about a little over an hour here. But just two quick observations that in the 2008 financial crisis, there were many people who were arguing that, yes, there should be a bailout, but not of the banks that caused the financial crisis in the first place, but of the homeowners who were not necessarily at fault. And of course, the economic benefit of bailing out the homeowners would vastly be greater for the good of the American economy than bailing out the banks.
But of course, a government that is beholden to the big financial institutions was not going to do that. And so it did what it did. It bailed out the big banks and not the poor people who lost their homes, who lost their jobs, etc.
The second thing is that, you know, I completely agree with you, Michael, that this is what neoliberal governments have done for many decades now. They essentially want to privatize everything in sight. And of course, by creating a crisis of social security and so on, that’s what they generally do. They first run down any institution, whether it’s social security or any other publicly owned asset, and then they say it’s time to privatize it because that will improve it.
But, you know, I wonder, I wonder if there are not even enough people who can buy U.S. Treasury securities, if the market for Treasury securities is not great, if the big financial institutions are already sitting on mountains of negative equity, where are they going to get the money to buy? Where is going to be the market to buy these assets that the governments are going to privatize?
Because in the history of privatization, there have been many privatizations that have had to be called off because there are not enough buyers. And we may very well be in that situation.
MICHAEL HUDSON: You pose a question, I get to answer it. The answer is they’ll get it from abroad. This is a geopolitical hour after all. Europe’s loss will be America’s gain.
What affluence is flowing in? You could say that since World War II, Europe and America have gained by keeping the prices of raw materials and the global South countries low and keeping the prices of their industrial goods very high.
What you’re seeing today from Europe is, I think, their way of solving the problem you’ve just posed. The bright spot is getting a flow of American, of European companies into the United States, relocating here because they can’t, the European economy is collapsing. You’re having a flow of labor and skilled labor from other countries into the United States. Affluence is this kind of flowing in.
If you’re not producing an economic surplus at home and you want to somehow sustain American living standards and corporate profits, it has to be done externally. It has to be done via foreign countries. And that’s the geopolitical implications of all this.
If America is turning into a deficit, parasitic economy, some other countries have to pay. And that’s why there’s all of this military spending.
RADHIKA DESAI: I would beg to differ, actually, because here’s the thing. The geopolitical economy of the North Atlantic financial crisis was roughly like this, that in the process of deregulation of European financial institutions that came along with the launching of the euro, a lot of European financial institutions ended up outside of North, the United States and Britain, becoming the main customers of the toxic securities that were being generated in the 2000s as a result of the housing and credit bubbles.
Once that bubble burst, once the crash occurred, essentially European money left and it has generally stayed away. And there, as I said, this money is not even available to buy U.S. treasury securities.
If the Europeans invest in the United States, they will be investing in creating new assets. They’re not necessarily going to buy up what the American government necessarily wants to privatize.
And what’s more, in recent decades, recent years, I should say, China and Japan have also been increasingly reluctant to buy treasury securities. So all in all, all I’m trying to say is that it is not a given that these assets, that the old tradition of essentially privatizing things at bargain basement price, even at bargain basement prices, is necessarily going to work. That’s all. I’m just wanting to raise some questions around it.
But so all in all, Michael, I think what we’ve done is we’ve painted a picture of an extremely precarious situation, an extremely dangerous situation in which people are suffering. They are unhappy. They are going to the polls. They are going, they’re being asked to choose between two candidates, both of whom have failed in signal ways. And there is not any simple way out. And so, as I say, it’s going to be a really, really rocky road to the election.
MICHAEL HUDSON: Yep. If you have a democracy, you cannot let people have a vote for the other candidate. That’s what our democratic hero in Ukraine, Zelensky, says, cancel the elections. That’s what’s happening in Israel. Netanyahu, no way of throwing him out.
And that’s what’s happening here. There can’t be a third party. You have to, as long as the Republicans and the Democrats have the same program, just with a different rhetoric, that’s the new meaning of democracy.
RADHIKA DESAI: Well, I think that you’ve said that, said it, Michael. So I think with that, we’ll say goodbye for now. And we look forward to seeing you in a couple of weeks. Thank you and goodbye.
And please remember to like our show and to share it as to other interested people and to subscribe to the channel. Thank you very much and goodbye.
Photo by Maksym Mazur on Unsplash
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Novara interview on almost everything (e.g. Crisis, Democracy, Syria, Israel-Palestine, Journalism at gunpoint)
Ash speaks to Yanis Varoufakis and film director Raoul Martinez about their new film Eye Of The Storm: The Political Odyssey of Yanis Varoufakis, what the left got wrong after 2008 and the West’s complicity in the genocide happening in Gaza.
You can buy ‘In The Eye of the Storm: The Political Odyssey of Yanis Varoufakis’ at http://www.eyeofthestorm.info 00:00
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Introduction 00:30
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Eye Of The Storm 04:40
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The Financial Crisis 07:16
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Why Wasn’t Democracy Enough?09:12
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Syria and Optimism 12:38
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Should we Confront State? 16:50
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But What About Don’t Pay? 20:20
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Israel Is Killing Journalists 22:55
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Palestinian Resistance Is Unacceptable To The West 28:17
The Polycrisis Novara Live broadcasts every weekday from 6PM on YouTube and Twitch. Episodes of Downstream are released Sundays at 6PM on YouTube. Support our journalism by buying Novara Media merch: https://shop.novaramedia.com
The post Novara interview on almost everything (e.g. Crisis, Democracy, Syria, Israel-Palestine, Journalism at gunpoint) appeared first on Yanis Varoufakis.
PoliticsJOE interview on capitalism, technofeudalism, the Labour Party, Western Hegemony and Gaza
Sat down to discuss the downfall of capitalism and Western hegemony, the Labour Party’s shunt to the right, and the ongoing humanitarian crisis in Gaza. Also, we discussed Raoul Martinez’s documentary In The Eye of the Storm: The Political Odyssey of Yanis Varoufakis
The post PoliticsJOE interview on capitalism, technofeudalism, the Labour Party, Western Hegemony and Gaza appeared first on Yanis Varoufakis.
The Guilty Feminist Culture Club: In the Eye of the Storm with Yanis Varoufakis and Raoul Martinez
Interviewed by by Deborah Frances-White in Brian Eno’s Studio, on the occasion of the launch of Raoul Martinez’s IN THE EYE OF THE STORM: Yanis Varoufakis’ Political Odyssey
Recorded 15 February in London. Released 21 February 2024.
For THE GUILTY FEMINIST side, click here.
The post The Guilty Feminist Culture Club: In the Eye of the Storm with Yanis Varoufakis and Raoul Martinez appeared first on Yanis Varoufakis.
The Politics & Letters Podcast – a (joyous) discussion on my TECHNOFEUDALISM
What isn’t ending? What isn’t on the verge of extinction? It’s a short list of exemptions these days, and we, us human beings, aren’t on it. Neither are bees, bipartisanship, butterflies, coastlines, childhood, civility, coral reefs, democracy, elephants, empire, facts, families, frogs, gender, glaciers, God, higher education, humanities, love, male supremacy, manatees, manhood, men, morality, middle classes, minibars, national borders, Nature, objectivity, party systems, patriarchy, religion, science, sex, soil, tigers, transgression, whiteness, work . . . and these species are endangered according to activists, journalists, and writers of every political persuasion. And now, if we are to believe Quinn Slobodian, Clara E. Mattei, McKenzie Wark, and Yanis Varoufakis, capitalism, too, has outlived its expiration date. Once upon a time, as the saying goes, it was easier to imagine the end of the world than to imagine the end of capitalism. No longer.
The post The Politics & Letters Podcast – a (joyous) discussion on my TECHNOFEUDALISM appeared first on Yanis Varoufakis.
Jacobin Magazine’s David Moscrop reviews my TECHNOFEUDALISM
The idea that we are entering an era of techno-feudalism that will be worse than capitalism is chilling and controversial. We asked former Greek finance minister Yanis Varoufakis to elucidate this idea, explain how we got here, and map out some alternatives.
The controversial concept of techno-feudalism suggests we have transitioned from capitalism to something even worse — a new era that exhibits disturbing feudal characteristics. On this view, capitalists now primarily rely on consolidated political power and rents to extract capital. If true, this form of feudal extraction represents a drastic shift away from the conventional mechanisms of capitalism. Importantly, it would mark a move from capitalism’s claimed foundational attributes of competition and innovation.
Jacobin’s David Moscrop recently talked to economist and former Greek finance minister Yanis Varoufakis about his latest book Technofeudalism: What Killed Capitalism. Varoufakis makes the case for techno-feudalism, arguing that rents have displaced profits. He delves into the rise of cloud capital, the implications of what a new feudal order would mean for us, and the possibilities of an alternative future.
Capitalism, But Not as We’ve Known It
DAVID MOSCROPIn Technofeudalism, you argue capitalism has brought about its own demise, but not in the way that, say, Marx would have expected. Capitalism has its own contradictions — most fundamentally in the antagonism between capital and labor — and yet those contradictions seem to have produced a mutation that is perhaps worse than anyone might’ve expected. So how did capitalism kill itself and what is replacing it?
YANIS VAROUFAKISThis book falls squarely within the Marxist political-economic tradition. I wrote it as a piece of Marxist scholarship. So, from my Marxist perspective, this is a tragic book to have to write.
The contradictions of capitalism didn’t lead to the anticipated resolution where, after all these centuries of class stratification, society would be distilled into two classes, poised for a high-noon clash. This decisive confrontation between oppressor and oppressed would result in the liberation of humanity — the emancipation of humanity from all class conflict. Instead of that, however, this clash between the capitalist — the bourgeoisie — and the proletariat ended up in the complete victory of the bourgeoisie: a complete loss after 1991, especially.
In the absence of a competitor in the form of trade unions — the organized working class — capitalism went into a rampant dynamic evolution that caused this mutation into what I call cloud capital. This transformation effectively marked the end of traditional capitalism. It killed capitalism — a development that embodies a Marxist-Hegelian contradiction, but not the kind of contradiction we would have hoped for.
Cloud capital has killed off markets and replaced them with a kind of a digital fiefdom where not just proletarians — the precarious — but bourgeois people and vassal capitalists are all producing surplus value for the vassal capitalists. They are producing rents. They’re producing cloud rent, because the fiefdom is a cloud fiefdom now, for the owners of cloud capital.
Cloud capital created a kind of power, which we as Marxists must recognize as being structurally, qualitatively different from the monopoly power of somebody like Henry Ford, Thomas Edison, or the great robber barons. Because those people concentrated capital, concentrated power, bought out governments, and killed off their competitors to sell their stuff. Today’s “cloudalists” — cloud capital owners — they don’t even care about producing anything and selling their stuff. This is because they have replaced markets — they have not simply monopolized them.
If capitalism is market-based and profit-driven, well then this is no longer capitalism, because this is not marketplace-based. It’s based on digital platforms that are closer to techno-fiefdoms or cloud fiefdoms, and they’re driven by two forms of liquidity. One is cloud rent, which is the opposite of profit, and the other is central bank money, which funded the building of cloud capital. And that is not capitalism.
Now you can choose to call it capitalism if you want, if you redefine capitalism and if you say that anything that stems from the power of capital is capitalism, but it’s not capitalism as we’ve known it. To paraphrase Spock in Star Trek: “It is life but not life as we’ve known it.”
And I think that it’s important to make the linguistic transition from the word “capitalism” to something else, which is very difficult to make, because we’re all wedded to the idea that we’re fighting against capitalism. After all those decades of feeling that we came to this planet to overthrow capitalism, it’s really very difficult to have an idiot like me coming along and saying, “But this is not capitalism anymore.” You say, “Bugger off. Of course it is capitalism. If it’s not socialism, it must be capitalism.” That’s what a fellow Marxist said to me. And I killed myself laughing because I remember my Rosa Luxembourg. No, it can be barbarism.
Vampire-Like Parasitism
DAVID MOSCROPIf techno-feudalism has replaced capitalism, as you’ve suggested, it has also led to the emergence of “cloud serfs” and “cloud proles,” modern equivalents of the serfs and proletarians discussed in historical contexts. How do these contemporary classes differ from their counterparts in the traditional capitalist model?
YANIS VAROUFAKISFrom a Marxist perspective, the simple answer is that cloud serfs directly produce capital with their free labor. That has never happened before. Serfs under feudalism produced agricultural commodities. They did not produce capital — that was up to the artisans who produced tools and instruments and plows and stuff. In contrast, modern users contribute to capital formation simply by engaging with platforms, offering free labor to augment cloud capital for the capitalist. That never happened under capitalism.
Techno-feudalism remains deeply reliant on the capitalist sector, mirroring the dependence of capitalism on the agricultural sector and the feudal sectors for sustenance. And just as capitalism needed feudalism to ensure a food supply, techno-feudalism is parasitic, drawing essential support from the capitalist sector to sustain itself.
All surplus value is produced in the capitalist sector, but then it is usurped. It is appropriated by this mutant capital — cloud capital — most of which is not reproduced by proletarians.
So, the capitalist sector remains foundational. It is producing all value — it’s why this analysis is distinctly Marxist. All surplus value is produced in the capitalist sector, but then it is usurped. It is appropriated by this mutant capital — cloud capital — most of which is not reproduced by proletarians. It’s reproduced by people in their leisure time who work for no pay. That has never happened. That’s why I’m saying this is not capitalism. And it doesn’t help to think of this as capitalism, because if you remain wedded to the word capitalism, the mind fails to comprehend the great transformation.
DAVID MOSCROPYou mentioned that the rise of techno-feudalism is driven by two primary causes: the enclosure and privatization of the internet, similar to pasture enclosure in eighteenth- and nineteenth-century England, and a steady, heavy flow of central bank money, particularly after 2008. Could things have gone otherwise?
YANIS VAROUFAKISWell, everything could be different. That’s what David Graeber has taught us, right? And as leftists, we have to believe that nothing was foretold. Otherwise, we don’t believe in human agency — otherwise, what’s the point of living? We might as well become couch potatoes watching the world go by. So, everything can always be different. The historical counterfactual is always interesting, but I cannot do it. I really cannot do it. I mean, I tried to do it often in my previous book, which was a political science-fiction novel called Another Now. Effectively, I created another time line where in 2008 we did things differently with Occupy Wall Street to bring about socialist transformation. And that’s a great game to play with your own mind, but I don’t think it’s historically pertinent.
How could things have been different? Well, one could say that the privatization of the internet was inevitable because we live under capitalism. And capitalism has this capacity of eating up and infecting every capitalist-free zone. The reason why I could never align with utopian socialism, like that of Robert Owen in the nineteenth century. Despite his efforts to create capitalism-free zones, history shows that capitalism inevitably invades and corrupts these spaces. You cannot have pockets of socialism surviving for long within capitalism.
Now With More Crisis
DAVID MOSCROPYou say techno-feudalism is parasitic on capitalism. If that’s the case, techno-feudalism will still require the existence of classical capitalist production. Amazon still needs producers to manufacture goods to sell on its platform. Uber and Tesla require physical vehicles. How will that relationship work in the long run under a techno-feudalist order?
YANIS VAROUFAKISAgain, I need to make this point very clearly. Capitalism in the eighteenth century and nineteenth century, when it emerged, overthrew feudalism, but it needed the feudal sector to continue producing food because otherwise we would all have died. That’s why I’m saying that capital was parasitic on the feudal agricultural sector. So, it’s not that one dies and the other lives. What happens is that capital takes over the hegemony of the system, but it is parasitic on the previous system. That’s a standard Marxist, historical, material analysis.
The takeover by cloud capital — the supplantation of capitalism by techno-feudalism — is making our societies more fraught with conflict.
Now what is happening is that at the center of techno-feudalism you have a capital sector, which is absolutely necessary. The capital sector is the only sector that produces value — exchange value in Marxist terms — but the owners of that capital, of old-fashioned capital, are vassals to the cloud capitalists. Their profits are being skimmed off. So surplus value is withdrawn from the circular flow of income by the “cloudalists.”
Now that makes the system even more unstable, even more prone to crisis, and even more contradictory and even less viable than capitalism was. That’s what I’m saying in the book: that the takeover by cloud capital — the supplantation of capitalism by techno-feudalism — is making our societies more fraught with conflict. They’re becoming more stupid, more conflictual, more poisoned, and less capable of allowing space within them for social democracy, for the liberal individual — for values that even the Right cherished under capitalism.
The Left was never against the idea of liberty; our critique lies in the limiting of liberty to a select few. But now even this limited form of liberty is under threat, and therefore the contradictions are getting worse. I hold on to hope that perhaps these growing tensions will push humanity into a decisive showdown between good and evil — between the oppressors and the oppressed. But the rapid approach of climate catastrophe poses the risk that we may reach the point of no return before that resolution takes place. So, we have our work cut out for us, and humanity is staring extinction in the face — unless we pull our socks up.
Not Your Parents’ Rentiers
DAVID MOSCROPYou spend a lot of time making the case that rents have usurped profit. Is it not the dream, though, of every “capitalist” to extract rent? Does any capitalist really want to be a capitalist? It seems to me every capitalist wants to be a rentier.
YANIS VAROUFAKISWell, the era when capitalists wanted to be capitalists was gone a long time ago. I trust that Henry Ford liked being a capitalist in the same way that, in a strange and completely warped manner, Rupert Murdoch likes to be a newspaperman — even though he has done so much to destroy newspapers. But these people are either dead or on their way to hell. So, yes, capitalists don’t want to be capitalists, especially here in Europe, especially in my country. All the capitalists, and I’ve known quite a few, have stopped being capitalists; they’ve become rentiers.
The difference is that the capitalists who were transforming themselves into being rentiers, until the emergence of cloud capital, were essentially passing their capital stock onto others or possibly to private equity. These former capitalists extracted rent from the monopoly profits of these highly concentrated capitalist firms.
But what happens with people like Jeff Bezos and Elon Musk, I mean, they want to do what they’re doing. They want to be cloud capitalists or “cloudalists,” as I call them. They love it. These people, a bit like Thomas Edison, love what they do. They’re not like standard rentiers. They’re not like the feudal lords of the past. They are not like the capitalists who no longer want to be capitalists. These people are enthusiastic’ and they’re very talented, and, unfortunately, they’re very smart. The combination of their drive with the exorbitant power of the cloud capital that they own creates a highly potent, concentrated form of “cloudalist” power, which we have to take very seriously.
DAVID MOSCROPThe end of the Bretton Woods system transformed global capitalism and ultimately made possible, among other things, techno-feudalism. Could we imagine a contemporary Bretton Woods cast in the mold of deep egalitarian multilateralism and a socialist financial system?
YANIS VAROUFAKISOh, yes, I have done that. That was the reason why I wrote my previous book. Another Now envisions exactly what you say. It features a new Bretton Woods system inspired by John Maynard Keynes’s original proposal — rejected by Harry Dexter White and the Roosevelt administration — merged with a participatory democratic socialist framework. This setup has been designed for ongoing redistribution of income and wealth from the Global North to the Global South, especially in the form of green investment. So, I’ve mapped all that and can answer your question of how things could work today, with the technologies that we have, if property rights were equally distributed — which is what I believe socialists should be aiming at. But that was my political science fiction. This book is about what we’re facing.
The World’s Biggest Excel File to the Rescue?
DAVID MOSCROPAs part of an alternative order, you advance this idea of a central bank digital wallet system and monthly dividend. How would that work?
YANIS VAROUFAKISWell, technically it’s dead easy. It can be done in a week because it is so straightforward. Imagine something like an Excel file, which is kept by the Fed, and every single resident in the United States is one row. And when a payment is made, the corresponding value transfers from one cell to another, representing the payer and payee. This process would be free, instantaneous, and anonymized. By creating a separation between the software operators and the identities of individuals, identified only by codes similar to Bitcoin addresses, privacy can be assured. And checks and balances could be established to ensure that the state is not watching what each one of us is doing.
They’re printing trillions on behalf of financiers. Why not print them on behalf of the little people? Of everyone equally?
And because the money will be shuffled through the same spreadsheet, nothing stops the central bank from adding the same number to everybody every month. And that’s a universal basic income (UBI), which is not, and this is crucial, funded by taxation. Because the problem with the idea of UBI is that it is vulnerable to complaints like, “What are you talking about? You’re going to tax me, tax the dollars that I earn, to give to a bum, a surfer in California or to a drug addict or to a rich person?” But this proposal leverages the central bank’s capacity to generate funds. And we should let no one tell us that it would be inflationary or would be a problem — because they’re printing trillions on behalf of financiers. Why not print them on behalf of the little people? Of everyone equally?
Now, the reason why you don’t have this system in the United States and why you are very far away from a digital dollar is because if anybody in the Fed dares move in that direction, they will be murdered by Wall Street — they’ll experience political and character assassination. Wall Street will never allow it because it would spell the end of Wall Street. Because why would you want to have a bank account with Bank of America if you can have a digital wallet with the Fed?
Bank of America would be compelled to justify their services and fees. They’d have to come and convince you that you need to have an account with them because they want to give you something at a decent price — like a loan — without scamming you. And they can’t do that because the whole point of Bank of America or Citigroup is to extract rents from you by monopolizing payment systems and holding deposits. You keep your money with them because, currently, there’s no other way of keeping your money.
CONTRIBUTORS
Yanis Varoufakis was Greek finance minister during the first months of the Syriza-led government in 2015. His books include The Global Minotaur and Adults in the Room.
David Moscrop is a writer and political commentator. He hosts the podcast Open to Debate and is the author of Too Dumb For Democracy? Why We Make Bad Political Decisions and How We Can Make Better Ones.
For JACOBIN’s site, click here.
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FORTUNE Magazine’s Nick Lichtenberg reviews my TECHNOFEUDALISM
When I admit to my fandom as we sit down for a zoom interview, he immediately tells me off. (This is exactly what I wanted.) “I don’t want fans in life, you know,” he says. “Ever since I entered politics, I acquired two things that I never wanted to have: enemies and fans.” You see, Varoufakis insists, polarization is a greater problem than whether you’re left or right, whatever your beliefs are.
“Humanity’s escape from tribalism was the one thing that we could celebrate and now we are going back to a kind of tribalism,” he says. But that’s not why we’re here. We are here to talk about humanity’s escape from something else entirely: the economic system of capitalism. Because Varoufakis’ new book, now out in the U.S. after a European release in 2023, is his theory of “Technofeudalism: What Killed Capitalism.”
I am such a fan of Varoufakis that I had to write my own critique in the pages of Fortune, insisting that while his and others’ concept of technofeudalism is compelling, what we saw in 2023 was the return with a vengeance of “retro capitalism.” Supply chains and energy independence were the major economic stories of that year as inflation continued its long descent from a 40-year peak in 2022, while so far 2024 is showing that old-school automobiles are still the rage as the electric vehicle revolution stumbles out of the gates.
But when Varoufakis, at 62 years old a very distinguished type of provocateur, is sitting across from you on a Zoom call, it’s hard to argue some of his points. But it’s more fascinating to know what his friends and, yes, his fans had to say about his new book that argues capitalism has already been dead for over a decade, and we’re only just now beginning to realize it.
“I have to say I was expecting a far worse reception than I got,” he tells me, and he says the left (his own “tribe,” so to speak) was more upset with it, and not because they disagreed with it. “People on both left and right are wedded to the idea of capitalism” he says, likening it to “the air we breathe.”
He mentioned the case of an old-school Communist in London who confronted him. “He was spot on. He said, ‘I can’t accept what you’re saying, because if what you’re saying is right, then it’s not enough to organize auto workers and nurses.’” At least he was honest, Varoufakis adds. “He was saying that, you know, [your book is] making my life so unbearably difficult that I can’t possibly accept your premise.”
Here’s how Varoufakis broke down his own journey to realizing that capitalism died without (almost) anyone realizing it, how it has especially “poisoned” Gen Z, how the Fortune 500 is in danger of becoming the Fortune 7, and why we all need to act like one of this Gen Xers’ favorite bands, and “rationally” rage against the machine.
How the 2008 crash turned capitalism into a Soviet ‘wet dream’
Shortly after telling me about his Communist friend, Varoufakis clarifies that he’s not saying he’s like Adam Smith, the Scottish Enlightenment genius who saw the capitalist world to come with The Wealth of Nations, but he’s not not Adam Smith, either.
Feudalism had been the way of the world for hundreds of years, so who could really believe that free markets and capital would take over? Similarly, we are now living through a “great transformation whereby everything we took for granted is no longer,” he said, adding, “you’re not going to have many converts” to that idea, “at least not at the beginning.”
Varoufakis’ own mind rebelled at his conclusions. “It took me years before I accepted that, before I could say to myself that capitalism is dead. When I first said that to myself, I thought, ‘Come on, you’re being stupid.’”
But just consider: The Global Financial Crisis and the collapse of century-plus-old banks on Wall Street. Just like the crash of 1929 that brought on the Great Depression, says Varoufakis, the crash of 2008 got him worrying about the state of the world. Even still, he didn’t imagine that something would emerge that would be other than capitalism.
After his combustible, short-lived political career, Varoufakis tells me (as he details in his new book), he went back to his mathematical training and began really looking at the algorithms driving the major winners of post-crash capitalism: Big Tech. What he found wasn’t capitalism, wasn’t even a marketplace, at all.
“The moment you enter Amazon.com, you’ve exited capitalism,” he says, adding that it’s a trading platform, not a market, and you must not confuse the two. And here, the self-described Marxist appeals to the wisdom of not just Adam Smith, but also the arch-free-market economists Milton Friedman and Friedrich Hayek. “If they were alive, they would agree with me” that every market has to be decentralized, at least to some degree, he says.
“We all walk into a market, even if there’s only one seller, at least we can talk one to one another as buyers and exchange views.” For Amazon, Google, Facebook and all of what he calls “cloud capitalists,” there is no conversation of economic exchange that isn’t mediated by the algorithm, “which is owned by one man,” adding that such an outcome would be a “wet dream” of the Soviet Union’s State Planning Committee, or Gosplan. “If Gosplan had the algorithm, they would be over the moon, because it’s the ultimate in centralization.”
I have to ask him at this point about the major markets story of 2023 and early 2024, as the exceptional American stock market shook off its bear market and stormed into a bull run with the so-called “Magnificent Seven,” the tech companies that include the very same names Varoufakis accuses of ruining capitalism. Does he see their dominance of the stock market as a sign that he’s right or that he’s wrong? Of course, he says, it just shows that the Fortune 500 risks becoming irrelevant if all the value is going to accrue to the tech firms that operate their own fiefdoms. “It’s going to become the Fortune 7 very soon,” he says with a smile on his face.
The poisoning of Gen Z and ‘death of the liberal individual’
And this gets to why you are reading about a Marxist provocateur in the pages of Fortune magazine: He is also a committed individualist and, yes, a liberal.
This is not to say liberal in the recent American political context of center-left, or liberal in the Adam Smith sense of free markets being the most efficient, but liberal in the tradition of Enlightenment philosophers such as John Locke or Thomas Hobbes, prizing the importance of the individual in society. (To be clear, this is my interpretation of Varoufakis’ thought, not his own.)
Varoufakis does have an example of liberalism in his book: Ironically, it’s his father, a chemical engineer who was a committed Communist while being a very successful bourgeois capitalist, thriving within a system he was ideologically committed to overthrowing—much like his famous son today. Varoufakis writes movingly in Technofeudalism about how his father was the “personification of the liberal individual,” free to have his own political beliefs and his own hobbies, publishing articles on archeology, dabbling in metallurgy, teaching his son about the Greek mythology that animates his thinking even today.
This separation of work, leisure and hobbies is gone in the age of the algorithm, Varoufakis argues. Just look at Gen Z and the lie of Big Tech. The Silicon Valley mythology encourages the indulgence of self-expression, but how can you do that in a culture mediated by an algorithm owned by one man? “If you are an upper middle class kid. and you have aspirations for life, you know that every video you upload on TikTok, everything you write on Twitter, everything you put on Facebook is going to be thrown at you during a job interview.” There are only two reactions: apathy or inhibition.
In an argument that recalls Kyle Chayka’s Filterworld and Taylor Lorenz’s Extremely Online, Varoufakis says the digital native Gen Z generation is not being driven by a sense of “inner liberty,” but rather by what they think Google considers to be a free person. “There’s no nice, clean separation between work and play anymore. And that cannot leave that generation untouched. It really poisons their way of relating to one another, because even [that] is going to become part of their CV.”
It’s a “depressed society,” where aggregate demand is low, he says (agreeing with Larry Summers’ arguments about “secular stagnation”). Every effort by central banks to stimulate the economy goes largely to the cloud fiefdoms described in his book, as economic activity is sucked out of marketplaces into the trading platforms of the cloud. In the real world, the “cloud serfs” with depressed prospects face increased asset prices and a housing market that Varoufakis calls “unapproachable.”
The zeitgeist agrees with much of what Varoufakis says. From “quiet quitting” among western Gen Zers to “lying flat” in China to even the surgeon general’s remarks about the “loneliness epidemic,” the emerging culture of young adult professionals is one of grappling with mental health struggles, if not outright depression.
The Gen Z that Varoufakis sees are “alienated” people who are cynical because of the pervasive effects of social media on all of culture. “They get much older, much faster as a result of living in a social media world in which they are compelled to try to find an identity which in the end is not self-driven. That’s why I am talking about the death of the liberal individual, because then it’s no longer autonomous.”
He even waxes a bit nostalgic for the supposedly “tyrannical” days of mid-20th century capitalism, when to work for IBM, “you had to be dressed in the IBM way,” or to work for Toyota, “you had to sing the Toyota anthem.” In those times, you could be a corporate person during the day and an anarchist poet in the evening at night, he says, and that’s lost to us now.
So, I ask, what he describes sounds a lot like one of my favorite bands from the proto-digital 1990s: Rage Against The Machine. Does he want us to take that away from his book?
“I loved Rage Against The Machine,” he responds. “I’ve danced to many of those songs. So obviously my answer to you is yes,” but then he pauses and emphasizes that “It has to be a rational rage, a very moderate rage.” Every rebellion is pregnant with authoritarianism, he responds, and after all, he adds, he is a liberal.
“Some people think that sounds like a contradiction, to be liberal and left wing.” But the whole point of liberalism, he adds, is the importance of the autonomous individual.
It’s a message you could almost be a fan of.
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Q and A with Caroline Derry on Agatha Christie, lesbians and criminal courts
Lesbian relationships in Britain were regulated and silenced for centuries, through the courts and though wider patriarchal structures. In an interview with Anna D’Alton (LSE Review of Books), Caroline Derry speaks about research from her book, Lesbianism and the Criminal Law: Three centuries of regulation in England and Wales (2020) and what the portrayal of same-sex relationships in Agatha Christie’s novels reveals about attitudes towards homosexuality – and specifically lesbianism – in post-war Britain.
Caroline Derry will speak at a hybrid event hosted by LSE Library, Agatha Christie, lesbians, and criminal courts on Thursday 15 February at 6.00 pm.
Q: In your book, Lesbianism and the Criminal Law: Three Centuries of Legal Regulation in England and Wales, you speak of lesbianism being silenced in upper-class British society “because of acute anxieties about female sexual autonomy.” Where did these anxieties stem from?
Women’s autonomy posed a profound threat to patriarchal structures. Marriage, particularly for elite men, was central to maintaining those structures: transfer of property, inheritance, and control over their household all depended upon it. Legally, the wife’s existence was subsumed in her husband’s, giving him power over her property, actions, and sexuality. This was not only true in the 18th century, when the book begins; it persisted through the 19th century and has only slowly been dismantled over the past century and a half. For example, the legal rule that a man could not be convicted of raping his wife was finally abolished in 1991.
There was anxiety that if women ‘discovered’ lesbianism, both individual marriages and the institution itself would be undermined.
There was anxiety that if women “discovered” lesbianism, both individual marriages and the institution itself would be undermined. That was explicitly stated by lawmakers at various points in history. In 1811, Scottish judge Lord Meadowbank said that “the virtues, the comforts, and the freedom of domestic intercourse, mainly depend on the purity of female manners”. In 1921, judge and MP Sir Ernest Wild asserted in Parliament that “it is a well-known fact that any woman who indulges in this vice will have nothing whatever to do with the other sex”. And the 1957 Wolfenden Report, which proposed reform of the law on male homosexuality, spoke of lesbianism as damaging to “the basic unit of society”, marriage.
Q: Why do you write in Lesbianism and the Criminal Law that “Patriarchal oppression […] made the criminalisation of lesbianism almost redundant”?
There were many other ways of regulating women’s lives and relationships that could offer more effective control and less public scandal. These included economic constraints: in the 18th and 19th centuries, married women of all classes had little or no legal control of their own money. Single women without private incomes were little better off. For example, servants’ employers regulated most aspects of their lives under threat of dismissal without a reference.
Social norms set strict limits for unmarried women’s behaviour and gave families a great deal of control over them – although this could sometimes be evaded, as we know from Anne Lister’s diaries! Religious regulation of moral conduct was important, while medicalisation became more significant from the 19th century. Lesbian relationships were pathologised as a symptom of mental illness and the consequences could be awful: an extreme example was the use of clitoridectomy by surgeon Dr Isaac Baker Brown in the 1860s. In the 20th century, “treatments” included aversion therapies and even brain surgery. And until relatively recently, the courts themselves had the power to detain young women in “moral danger”.
Q: Although lesbianism may not have been strictly outlawed, you refer to a “regulation by silencing” of lesbianism within the British court systems. How did this operate?
Legal silencing was based on the assumption that if women – particularly “respectable”, higher class, white, British women – were not told that lesbianism existed, they probably wouldn’t try it. Eighteenth-century models of sexuality assumed women craved men’s greater “heat”, while 19th-century models (which still influence today’s courts) emphasised women’s passivity and lack of independent desire. It was unlikely that two passive and desireless creatures would discover lesbian sex for themselves.
19th-century models (which still influence today’s courts) emphasised women’s passivity and lack of independent desire.
In the criminal courts, silencing worked in several ways. The most obvious was to avoid criminal prosecutions altogether, because court hearings are public and could be reported in the press. So, there has never been a specific offence criminalising sex between women (unlike sex between men, which was wholly illegal until 1967). However, when a prosecution did seem necessary, silencing could be maintained by choosing an offence which concealed the sexual element of the case. There is a long history of prosecutions for fraud where one partner presented as male (cases relevant to both lesbian and transgender history). In the 18th century, this was supposed financial fraud to obtain a “wife’s” possessions; in the later 19th and 20th centuries, making false statements on official documents. And throughout these periods, women have been brought before magistrates for disorderly behaviour and breach of the peace – although few records survive.
Q: What does analysis of the defamation case Woods and Pirie v. Cumming Gordon (1810-1812) reveal about how legal discourses defined morality in relation to race and class?
This Scottish case offers a really potent example of those discourses. A half-Scottish, half-Indian teenager, Jane Cumming, told her grandmother Lady Helen Cumming Gordon that her schoolmistresses were having a sexual relationship. Cumming Gordon urged other families to withdraw their daughters, forcing the school to close, and the teachers brought a defamation claim for their lost livelihood.
The court had to wrestle with difficult questions: could two middle-class women of good character have done what was alleged? If not, how did their accuser come to know of such things? At the initial hearings, the judge’s answer was that the story must been invented by a working-class maid. But when witness evidence was heard, it became apparent that the story originated with Jane Cumming. Attention then shifted to her early life in India. The climate, the supposedly immoral culture, her race, or – in a mixture of race and class discourses – the bad influence of “native’” servants were all blamed.
This supposed contrast between Indian immorality and British, Christian morality was no accident. In the early 19th century, there was a shift in justifications of British imperialism.
This supposed contrast between Indian immorality and British, Christian morality was no accident. In the early 19th century, there was a shift in justifications of British imperialism. Greater awareness of the horrors of violence, corruption and exploitation by the East India Company made it difficult to present their activities as legitimate trading. Instead, a moral justification was claimed: that Indian people needed to be rescued from iniquity by the imposition of superior British law and standards, exemplified by virtuous British womanhood. Many of the judges and witnesses in this case had connections to India, so it is unsurprising that these discourses made a particularly powerful appearance here.
Q: What were the legal implications of the 1957 Wolfenden report for homosexual activity in Britain? What did the report (or its omissions) reveal about attitudes towards women’s sexuality?
The Wolfenden Report recommended partially decriminalising sex between men, but barely acknowledged sex between women. The few mentions implied that lesbianism was “less libidinous” and thus less of a threat to public order. That was important because politically, equality for gay men through full decriminalisation was not attainable at that time. Wolfenden therefore took the pragmatic approach of silencing lesbianism as far as possible, to avoid the question of why women were treated differently by the law, and focusing on arguments specific to male homosexuality. It was successful: Parliament eventually implemented the recommendations in the Sexual Offences Act 1967.
Wolfenden […] took the pragmatic approach of silencing lesbianism as far as possible, to avoid the question of why women were treated differently by the law
Nonetheless, the Report was a watershed event in the legal regulation of lesbianism. Until then, the law had treated male and female sexuality as very different things. Wolfenden introduced the term “homosexuality” into law, and lesbianism became seen as “female homosexuality”. Combined with the Report’s characterisation of lesbians as less sexual than gay men, this meant that lesbianism was treated as a lesser variant of male homosexuality – an attitude that has never gone away.
Q: Was it remarkable that Agatha Christie included or suggested homosexuality in her novels?
Yes and no. These were not issues that were generally discussed in polite conversation. At the same time, lesbian (and gay) people were a fact of life, even if not directly acknowledged. In 1950, most people knew of women living quietly living together like Miss Hinchcliffe and Miss Murgatroyd in A Murder is Announced. Christie walked a careful line in that book, portraying an intimate and deeply loving relationship but showing nothing explicitly sexual about it.
By 1971, when [Christie] wrote of one woman’s love for another in Nemesis, it was no longer possible to directly silence lesbianism in law or society.
And of course, Christie was a rather more daring writer than people often realise: it’s unfair to treat her as a narrowly conservative author of formulaic novels. By 1971, when she wrote of one woman’s love for another in Nemesis, it was no longer possible to directly silence lesbianism in law or society. But Christie was in any event happy to engage with difficult issues in her work, even quite taboo ones like child murderers.
Q: What insights do these portrayals provide into the criminal justice system’s attitudes to lesbianism in post-war England?
Christie’s novels reflect wider middle-class attitudes at the specific times they were written, so they offer insights that we can’t get from court reports alone. They also come from a woman’s perspective rather than that of the elite men who mostly made the law, and gender does make a difference here. Men were convinced that respectable women did not know of such things, but women didn’t necessarily agree!
The novels reveal how the extent to which the courts were keeping pace with wider societal attitudes and understandings.
In particular, the novels reveal how the extent to which the courts were keeping pace with wider societal attitudes and understandings. If we look at medical, psychological and sexological work on women’s same-sex relationships in post-war Britain, the courts seem hopelessly old-fashioned in comparison. But Christie’s books show us that outside expert circles, attitudes were indeed decades behind the latest science. In other words, the courts were reflecting and contributing to mainstream opinions, not falling behind them.
Note: This interview gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics and Political Science.
Image credit: A still from the the episode, “A Murder is Announced” of the BBC Miss Marple series (1984 to 1992), adapted from Agatha Christie’s novels, featuring Joan Hickson as Miss Marple (left) and Paola Dionisotti as Miss Hinchcliffe (right). This image is reproduced under the “Fair Dealing” exception to UK Copyright law.
Pathways to Solutions
Economic solutions: How to go from financialized neoliberalism to a productive, sustainable economy. Geopolitical Hour
22, February 9, 2024.
RADHIKA DESAI: Hello and welcome to the 22nd Geopolitical Economy Hour, the show that examines the fast-changing political and geopolitical economy of our times. I’m Radhika Desai.
MICHAEL HUDSON: I’m Michael Hudson.
RADHIKA DESAI: And working behind the scenes to bring you this show every fortnight are our host, Ben Norton, our videographer, Paul Graham, and our transcriber, Zach Weisser. We all urge you to click the Like button, if you like what we are doing, share it on social media, and subscribe to our work by hitting the Subscribe button.
In our last show, which we entitled “The Debt Explosion, How Neoliberalism Fuels the Debt Crisis”, we promised that our next show would be about what the solution is, what is the solution to the myriad problems that we were describing. And that is indeed what we are going to discuss today.
The solution, we feel, in the United States and in all countries that have gone down the road of neoliberalism and financialization involves a root and branch reform of the financial system. And this would be the foundation for the urgent economic transformation. It will be the single largest component of the economic transformation that so many of us realize we also badly need. We must reorient the financial system away from the sort of predatory lending and speculation that we described last time, the sort of predatory lending and speculation on which it has come to rest for the past five decades, and increasingly so over the last five decades.
It has to reorient away from that and towards lending for more sustainable production, pure and simple, and the sustainable production of the goods and services which everyone needs. This involves transforming the very basis of our money and credit system. And given the link between the US financial system and the dollar’s world role, it would also involve ending that role and setting up an international monetary system for the world on the basis of cooperation among the different countries of the world.
Most Americans, I mean this may surprise many Americans, because they are all invited to feel rather proud of their dollar’s world role. However, precisely those who invite American citizens to feel proud of their role are hiding the fact that it is precisely this financial system or it is precisely this world role and the financial system that underpins it that has undermined the US’s productive economy and its capacity to create well-paying, skilled and meaningful jobs for most people in the United States.
Most people in the rest of the world have been asked to regard the dollar’s world role as natural and inevitable. But as Michael and I have shown repeatedly in so many shows, it is anything but natural and inevitable. It is indeed instead unstable, volatile, crisis-prone and profoundly exploitative. The dollar’s world role has always rested, as we have argued in our shows and our writings, on an attempted and never successful imperialism, and it has to give way to international cooperation for universal development and planetary sustainability, and the international monetary and financial system that promotes production, sustainability, equality and a broad-based prosperity, a broad-based well-being, let’s say, if not prosperity.
The ultimate goal has to be economies in which money plays as small an independent role as possible, where most things are available as entitlements in kind, whether it’s food, clothing, housing, education, transport, culture, goods produced publicly and equitably and provided in adequate quantity and quality with a view to sustainability.
However, to get there from here, from our very highly financialized economies, transformations are necessary in a number of spheres. So today we want to focus on some of the main elements of this transformation, and one way to summarize what these elements would be is we’ve tried to divide our conversation into the following topics: Who should create money? What should monetary policy aim for? How do we redesign the taxation system? What about land, rent and so on? Should we nationalize the land and eliminate rent? How should the financial system be regulated? What should replace debt? Obviously, income rather than credit. And finally, how should international money be reorganized? So that’s what we want to discuss today.
So Michael, why don’t you start us off by just offering some thoughts on what should money creation look like in the different type of economy we’re talking about now?
MICHAEL HUDSON: Well, the key word that you used was system. And a system has many dimensions of the solutions. And so all the points that you mentioned are various parts of the overall system that we’re trying to put together. There’s not one single reform that can cure the problem. And the problem basically is that most money is issued by commercial banks, not by the government. And bank credit, as we’ve discussed in the last episode, is largely created for the wrong things. It’s created against housing to inflate housing prices. It’s granted for corporate takeovers.
One thing bank credit is not issued for is to build new factories and to employ labor and to increase economic growth. That’s the job of the government when the government treasury creates money to spend into the economy for functions that are supposed to serve society and serve economic growth.
But when a government lends money, it’s for very different reasons. It’s for the real economy. And when banks lend money, it’s for the financial overhead economy. And that’s why we would like to see all money created basically by the Treasury. And of course, if the loans are lent out by commercial banks, if they are the agents of the government, they will get credit and the ability to issue credit from the Treasury, but really not from the Federal Reserve.
The Federal Reserve was created to get rid of the Treasury in 1913. The Treasury wasn’t even allowed on the Federal Reserve. Most people don’t realize that before there was a Federal Reserve here, all of the functions that are now done by the Fed were created by the Treasury. And that’s the same in most countries. Every country that has a central bank is to essentially take power away from the government to spend money into the economy, to insist that the government should run a balance and not create money and force everybody to depend on bank credit for whatever they need. And the bank credit, as we’ve described before, is not very helpful. And so money is created by running into debt for a commercial bank.
We want money created by the treasury where it does not involve this kind of debt. There are many ways of doing it. If the commercial banks acted like savings banks, 100 percent reserve, then they would essentially be reliant on the government to create their credit for the kind of thing that the treasury creates credit for, for growth.
And so if you look at the solution, what is the problem that you’re trying to solve? The problem is to minimize the debt overhead and to maximize economic growth.
RADHIKA DESAI: Absolutely. And just, you know, you’ve said so many interesting things, Michael, and I just you’re prompting me to say a few things in this response. So what are the implications of what we’re talking about here is that essentially the government would be, because it is the main issuer of money, it would be capable of lending to itself the money that it needs, whether to build roads or schools or hospitals or what have you. And for that matter, engage in all sorts of sustainability initiatives, whether it is protecting forests or transforming the fossil fuel economy into a different type of economy. All of these investments can be made. So that’s the first thing.
And so the key here in terms of the creation of money is to take away the power that has been given by governments to the private sector to create money as credit and essentially create instead money as cash on the part of the government, minimizing the role of credit and therefore also minimizing the kind of indebtedness that has been so problematic for economies.
This would then also lead to the merging of essentially fiscal policy and monetary policy, because in the sense that, you know, today the two are divided because in order to expand government spending, governments are told that they have to borrow from private creditors. This will no longer be the case.
And finally, thirdly, you know, central banks, you know, a lot of people, I mean, I’m against what the Federal Reserve has been doing for a very long time. But having said that, central banks are necessary because there has to be some institution that mediates the relationship between the national currency and the currency of other countries.
So typically, historically, central banks have had three roles. Number one, to maintain the external value of your currency. Number two, to set the interest rates. And number three, to regulate the financial sector. So obviously, the first function is, of course, important. And the way in which it will be different in the scenario that we are talking about, the kind of anti-financialization scenario, is that the maintenance of the external value of the currency would not just be governed by the need to keep the value of the currency high in order to enable rich people to benefit from it. Sometimes devaluation may be necessary because that is what will be necessary to expand employment, etc.
As far as setting interest rate is concerned, the simple fact should be, as the old adage goes, credit should be cheap, but not easy. And I think that’s the way in which this should be run.
And finally, the whole regulation of the financial sector, I mean, this is exactly where the Federal Reserve in particular, and many other central banks that have permitted vast degrees of financialization to occur, have essentially abused their power. Because instead of regulating the financial sector in the interest of a productive economy, they have regulated it in such a way as to permit financialization and predatory lending. And the whole nature of financial regulation will have to change radically and go back to something like what it was in the aftermath of the depression era banking legislation that was implemented in the United States.
MICHAEL HUDSON: Well, you pointed to another product of the banks, and that’s junk economics, pretending that the bank credit fuels economic growth and that it does so in a way that promotes stability.
But what it really does is financial parasitism, a debt overhead. You mentioned cash and that you want to replace the bank credit with cash. What you mean, basically, is like the paper money in your pocket. The government would spend the equivalent of paper money by any kind of government-created credit through the Treasury or through Treasury banks, or even by commercial banks acting like savings banks with the savings coming from the government.
The distinguishing feature of the paper money you have in your pockets that’s different from bank credit is the paper money doesn’t have to be repaid. Nobody is going to somehow repay your currency and say, I’m going to cash it in. You cash in a $10 bill, you get two $5 bills. But bank credit does have to be paid and comes with interest.
The Treasury credit does not have to entail this huge increasing debt overhead that banks create. That’s basically it. It’s this debt overhead that actually, as we will discuss later, deflates the economy instead of inflates it. Bank credit inflates prices for assets, for houses, for stocks and bonds. But it deflates the economy by making people spend more and more of their income on debt service to buy the higher-priced houses or to buy the higher-priced retirement income that the banks bid up.
RADHIKA DESAI: Michael, I think that you’re absolutely right that this is exactly what’s going on right now. However, in our past programs, one of the things we have emphasized is that historically, this was not the case even in the United States in the immediate post-war period. It was a very different type of banking system which did lend for productive expansion. And it’s only really sort of in the 60s and particularly from the 70s onwards that the kind of deregulation we have witnessed have converted the bank lending into lending essentially for mortgages and the kind of lending you’re talking about.
And of course, the other thing we’ve emphasized is that historically in countries like Germany or Japan or China today, the banking system is very different. And it is geared not towards lending for mortgages, et cetera, alone, but rather lending for productive activities. And so there is a different model. And that’s the model that we need to go for.
I just wanted to add one other point, which is that, of course, when you talk about increasingly taking away the right, [or] the franchise, that has been given to private financial institutions to create credit, create money in the form of credit. One of the subjects that has become increasingly discussed these days is, of course, that today we can, in fact — the system of government creating money can be made far more efficient thanks to information technology, which is why so many central banks are looking at central bank digital currencies.
Now, the thing to remember about anything you read about central bank digital currencies is that a large part of the discourse is affected by the need to placate the financial sector, which would be wiped out — the private financial sector would be wiped out if you had central bank digital currencies. And I’ll explain why in a minute.
But so it’s either those who are trying to sort of create the world in favor of it, but they are afraid of the power of private finance. They articulate their discourse in a way as to placate private finance. And of course, private financial interests are dead set against the creation of central bank digital currencies.
But on the other hand, precisely because other countries, countries like China and so on, are going to look at it and may well be in the forefront of implementing it. Other central banks have to look at what’s being done and look at its potential. So this is what you have to understand.
Now, the reason why the private financial sector is dead set against creating central bank digital currencies is very simple. Historically, the existence of a private financial sector has been justified by saying that, well, the central bank cannot have, you know, a presence in every locality. So the idea has been that in order to create a dispersed financial system, you should have private, you should allow private banks to set up shop wherever it is needed. And all you then have to do is regulate it. And we’ve seen what has happened to that regulation, particularly over the past five decades.
But now, essentially, information technology allows every person to have an account directly with the central bank. And therefore, the central bank can essentially regulate, central banks can essentially regulate the money system in a much more tactile way than was ever possible without the intermediation of private interests.
And this would also have a further effect, which is that, you know, today there is a so-called financial exclusion. A number of people who are excluded from having bank accounts, etc., they would be included. And there are a number of people who are excluded from participating in payment systems like credit cards and so on, because they are unable to get them. But if the government creates a payment system, then everybody could use it without the sort of usurous credit card charges that are essentially charged by central banks.
So, in this way, central bank digital currencies can be part of the solution.
MICHAEL HUDSON: Okay, next topic.
RADHIKA DESAI: Okay, next topic. So, what should monetary policy aim for?
MICHAEL HUDSON: Well, we were going to, the monetary policy has to go hand in hand with tax policy. It always does, because what gives money its value is its ability to be accepted in payment of taxes.
One of the problems is that banks have led the fight for the last 100 years against progressive taxation. And the result has been that banks have united with the landlords and monopolies to create monopolies to finance an absentee ownership class. And essentially, instead of following the classical economics that we discussed last time, Adam Smith and John Stuart Mill and Marx and the others, instead of making economic rent the basic tax base, land rent, monopoly rent, and financial rent, the banks have led the fight to untax real estate and to untax land because they know, they say, there’s all this economic rent, this free lunch, the advantage of price over and above the cost of production, purely empty prices, monopoly prices, when monopolies raise the price of your pharmaceuticals or when stores raise the price of groceries, the banks want all of this monopoly rent for themselves.
And so if the government were to pursue anti-monopoly regulations, or if it was to do the classical policy of taxing the land, then there would be two results. Number one, the land tax would not be paid to the banks and not be capitalized into higher housing prices. And number two, the price of housing would be kept down, the price of monopoly goods would be kept down, the price of doing business would be kept down because this excess economic rent, which means empty pricing, which means free lunch, would not be paid to the banks as its major source of income.
And we’ve talked before, last time, about how 80% of bank loans are mortgage loans. So the whole idea of progressive taxation is not simply taxing incomes higher, it’s taxing a particular kind of income higher, bad income, unearned income, economic rent income, not wages, not corporate profits.
The original American income tax in 1913, along with the Federal Reserve, didn’t tax wages, and it didn’t tax normal small businesses. It taxed the wealthy bankers and the wealthy real estate owners and the monopolists. And the last century has been moving away from this because banks became the mother of trusts, as they used to be called. Banks became the main fighters against any kind of economic progress toward the kind of free markets that the classical economists talked about.
So we’re not going to go into value, price, and rent theory here, but if you’re looking at the principles of credit reform and bank reform, you want to ask, how does this affect the relationship between the prices that people have to pay and what it actually costs to build a house? The land is provided freely by nature. The locations are more valuable than others. But banks don’t create this money, but they get all the rent for it, just like before the 20th century, landlords used to get all the rent for it.
You want to fulfill the fight that the classical economics had to free the economies from the legacy of feudalism. Banks want to restore a kind of feudal economy where the richest people live off rent, rentiers. They live off interest, off landlord rent, and monopoly rent. And you want to get rid of that, and that’s what makes socialist economies so much more cost-efficient than finance capitalist economies. There are hardly any industrial economies anymore, except for the socialist economies. And if you want to say, what is a socialist economy? It’s an industrial economy free of the rentier class.
RADHIKA DESAI: Well, exactly, and this reminds me of a point that I made earlier, and this is very, very important. Just as you pointed out, these days, bank credit is designed to inflate the value of already existing assets. And in fact, in doing so, it tends to strangulate the production of new goods and services, which people need. So I call this a form of necromancy, the love of the dead, because the already existing goods whose values are being inflated, whether they are houses or fine wines or pictures or what have you, this is dead labor. And in order to inflate the value of dead labor, you are strangulating the exercise of living labor without which no economy can prosper. So that’s one point.
And before we move away from the issue of monetary policy, I just wanted to also share my screen once again and just remind people of how absolutely awful monetary policy has been for such a long time. So this is just a graph of U.S. interest rates and historically from 1955 onwards. And you see that there have been various periods of very high interest rates. This is us right here with the big increase in interest rates.
And all these increases in interest rates have been designed to strangulate the economy, to induce recessions, so that the value of existing money and of existing assets will be preserved rather than being undermined in any way. And this is precisely what we have to avoid.
And this type of policy is followed because it is believed, as Milton Friedman claimed, that inflation is everywhere and every time is always and everywhere a monetary phenomenon. That is to say, it results from creating too much money. So you have to stop creating money. You have to decrease money supply, increase interest rates and essentially strangulate the economy.
In reality, inflation is a supply problem. And if prices of certain things are going up because there is not enough supply, the best thing a government can do is to organize the supply, either incentivize the private sector to produce it or go into the production of those goods and services on its own. And this is the way to deal with inflation, not by strangulating the economy, as has been done in the past.
And as we are continuing to do so, one of the things you will have noticed is that even today, Jeremy Powell has said that he would like to decrease interest rates, but he’s not sure exactly when. Why? Because the U.S. economy is doing too well. I mean, consider the absolute, how can you say, obscenity of this. But that is what monetary policy is doing right now. And again, in the kind of economy we are talking about, the economy which will solve these problems, we will not have that kind of monetary policy. We will instead recognize that inflation is not always and everywhere a monetary phenomenon, that it is a phenomenon bound up with production and it will be attacked as such.
Michael, do you want to add anything else to the monetary policy matter before we go on to the next question?
MICHAEL HUDSON: Yes. The reality is just the opposite. The deflation is everywhere a monetary problem. The function of Milton Friedman and the Chicago School is to make sure that people are confused and do not understand how the economy works. You want to produce students that end up like Paul Krugman, not people who understand what Radhika and I are taking.
You can say just as well that increased money creates deflation. How does this work? If most bank credit is created to increase the price of housing, to lend against houses and raise the price of housing, that is going to increase the amount of money that people have to pay for housing.
From 1945 to 1980, 25% of American income was what you would pay for a mortgage or for rent. Today it’s up to 43%, guaranteed by the government and even higher for many people. If you have to raise the amount of your income from 25% to 43% to pay the banks for mortgage credit, you’re going to have to cut back your spending on goods and services accordingly.
In the 1930s, this was called debt deflation. Everybody knew what it was. Irving Fisher wrote a great article on debt deflation. My book, Killing the Host, describes debt deflation. The banks try to say, no, no, money inflates the economy and our credit helps employ labor and raise wages, but when we create too much, meaning when wages go up, then we have to step it back down. The worst thing that can happen to an economy for a banker is for wages to go up. The banker wants wages to go down, so the banker wants all the money to be paid as interest in the economy.
Somehow they can turn everything upside down. What you get in the press and the politician speeches is an inside-out economics, not realizing that bank credit deflates the economy, causes unemployment, and that’s how the Federal Reserve manages the banks to make sure that wages don’t grow, that housing prices grow, that rents grow, that money paid to the banks grows, but not money paid to labor or to industry. Because if you had industrialization, if America was still a manufacturing economy, there would be higher employment for labor, and that’s not what the class war is all about in a financialized economy.
RADHIKA DESAI: Exactly. Just one side point, Michael. You and I were discussing this a few days ago. You had written a book called Junk Economics, and you were doing a search on whether you were the first to use the term junk economics, and you found, no, somebody else had used the term before, and guess who that person ended up being? It was me.
The reason I’m bringing this up is because I wrote this book, Geopolitical Economy, in which a large part of my narrative actually rests on reading the economic reports of the president. As the U.S. economic policy became more and more essentially neoliberal, financialized, etc., which could not be justified on any sane basis, the economic discourse emanating from the highest places of the administration could be seen to be visibly deteriorating. It made less and less economic sense. I used the term junk economics when I was giving a presentation based on chapter 9 of that book, which covered the George Bush Jr. period, and I said that by this time the level of irrationality of economic policy had risen to such a great extent that essentially what was essentially a bubble economy was justified as being just perfectly fine on the basis of what I call five tall tales, that the highest, best-paid economists of the country were telling Americans and the rest of the world why they should keep investing. This is essentially when you create a junk economy, then you need junk economics to justify it, and that’s what we’ve had so far.
Having said that, Michael, you already have touched on our third question, which is how do we redesign taxation? I think you have some really important things to say about this, so go ahead.
MICHAEL HUDSON: As I said, should I repeat myself? You want to tax economic rent, not value. Value is created by labor. You don’t want to tax labor, because if you tax labor, the employer has to pay a higher price, and if the price of labor is what determines what goods industrial products are sold for, the more you tax labor and the more you tax industry, then the less competitive you are in the world, and you lose out to countries like Asia or countries that are not post-industrialized, but continue to industrialize. That’s basically it.
Interest is an element of cost. Debt service is an element of cost. If you have to pay higher interest, then, of course, this is the cost of production, and the American economy, by being taken over by the banks, has made itself so high-cost an economy that that is what has de-industrialized the economy. The only way that you can re-industrialize the economy is to prevent all of this unearned income, this free lunch income, the land rent, the interest charges, the monopoly rent. You want to prevent that from being subsidized by the politicians that are put in place by bank contributions so that all of this rent can be paid to the banks.
If there is unearned income, obviously some houses and some locations are going to be better. You want this to be the tax base. If it’s the tax base, it’s not going to be capitalized into higher prices.
RADHIKA DESAI: You mean a land tax?
MICHAEL HUDSON: Yes, a land tax primarily.
Also, you don’t want to charge for student loans. You don’t want students to say, OK, I want to get a job, I’ll go to college, I’ll pay $40,000 a year, and I’ll come out owing so much money that I can’t afford to buy a house and I can’t afford to buy many of the goods and services I produce. They’re not even producing many goods and services because those are basically industrial services and they’ve all been moved offshore.
It’s not that foreign countries have stolen this industry. It’s that America said we don’t want industry that employs labor because you’d have too high employment and you’d have high labor prices and we’re running the economy and we want the money, not labor. We bankers and monopolists and billionaires want all the money for ourselves, not labor. That’s why we’re moving it offshore to keep wages down because we want a low-wage economy. That’s what we call an efficient economy, an economy where people can’t afford higher education, an economy where people can’t afford housing because they’re paying us. They take out student loans that we get the money from. That’s the kind of economy that economists say is efficient. Another word for it is race to the bottom, and that’s the kind of economy we have.
RADHIKA DESAI: Absolutely. And just one final point on redesigning taxation. What Michael is saying essentially is that instead of taxing earned income, particularly labor income, what should be taxed is land, and that should be the main basis on which— and the rationale for this is very simple.
Basically, land becomes more valuable not because of anything you’ve done. Imagine I own a piece of land. I have absolutely no idea. Maybe it’s in a sleepy, faraway place in the country, and it’s really worth very little. And then somebody discovers that there is some new mineral that can be found on my land. Well, with me having done nothing to earn it, suddenly I become the beneficiary of a vast inflation in the price of my land. And ideally, since this discovery itself is a result of broader social processes, society as a whole should benefit from the increase in the value of the land, and that’s why the land tax makes sense.
I mean, you can have other scenarios as well. You can have a scenario in which imagine that I bought a piece of land for next to nothing, and then 10 years down the road, the government decides to put a bus route near it or put a railway line near it. Suddenly the value of my land would go up for my having contributed nothing because of broader social processes. So on the whole, the value of land tends to fluctuate as a result of this. And so neither should people not unduly benefit from such increases in valuations, and nor should they suffer from decreases in valuation. And that’s why a land tax makes sense, because the increases and decreases in the value of land is a result of broader social processes for which the government should take the benefit and also the hit. So I think this is one thing.
And the only other thing I would say about taxation is that, of course, in the first instance, we want progressive taxation. That is to say that the absurd and obscenely high incomes and wealth of the people we have become so rich on the basis of the last 50 years of economic policy should, of course, be taxed.
But in the long run, the aim should be to depress the differentials in wages as well. There’s absolutely no reason why somebody should make hundreds of times more money than somebody else. It simply doesn’t make sense. They’re not a hundred times better. They’re not hundreds of times more intelligent. They’re not working hundreds of times harder, etc., etc.
Michael, please.
MICHAEL HUDSON: Modern monetary theorists, as you know, say that it’s not necessary to tax, that the government can simply create money without taxing. But even if the government could create money, there’s a good reason for taxing. Some taxes are necessary because taxes prevent unearned wealth from being created.
For instance, here in New York, they spent a few billion dollars on extending the subway on the Upper East Side a few miles in a very high-rent, high-housing district where a lot of wealthy people live. When the subway was finally built along 2nd Avenue, housing prices and rents went up all along the line. So all of a sudden, the landlords got a free lunch. Radhika was just talking about landlords getting money for nothing. This is an example. They got a free lunch. The city could have said, OK, by building this subway line, we’ve created a much higher valuation for rents because people now don’t have to walk so far to the subway and they’re willing to pay for that. But instead, the transit authority raised the fares and stopped paying money to maintain the switches throughout the system. The system throughout all the rest of the city decayed. Fares went up, and the city did not recover this money from the absentee landlords who made a killing off the $2 billion that America paid.
You don’t want people to make money that way. You don’t want money to be taken by people who will then bribe the politicians or not bribing, but contribute to their political campaigns and mounting attack ads on their opponents and distort the economy. So the failure to tax economic rent, the failure to tax land rent and bank financial gains is you let a class develop whose economic interests are in fighting against the economy as a whole and turning the economy into getting wealth by unearned income, getting wealth by financial maneuvering and by rent-seeking, as economists say, not by actually producing labor and raising living standards, not by industry and improvements in productivity, but essentially not reinvesting in long-term development, research, and the kind of investment that the countries that are actually growing.
And if you look at what the Asian countries are doing, they’re avoiding this. The Asian countries are doing exactly what Adam Smith, John Stuart Mill, Marx, and the other classical economists defined as a free market. America’s going back towards the kind of 17th, 16th, 13th century. We’re going back to feudalism, not moving out of it.
RADHIKA DESAI: Yeah, I’d only say, by the way, that I personally tend to avoid using the term feudalism for our economic system, because it tends to let capitalism off the hook. I mean, this is what capital, senile capitalism looks like. And so we should, you know, but it’s a terminological problem.
Now, our fourth point was nationalization of land and elimination of rent. And I think we’ve kind of covered that as much as possible. I just wanted to make one small point, which is that, you know, which matters for ordinary people, because a large part of our lives are dominated by things like long commutes. Long commutes happen precisely because of the unfair process of some people benefiting from the increase in the value of land, which again, they have nothing to do with, and essentially pricing people out of living near where they work. And a rational land policy, which would be possible if you had nationalized land, would actually enable people to live near where they work and not suffer from this kind of long commutes and all the distortions of life that that brings, and of course, distortions of productivity that that brings. So it would also be a solution that you’d have a rational location policy, rational location of workplaces, housing, and of course, a rational transportation policy, as a consequence as well.
MICHAEL HUDSON: This is exactly what’s happened in London. Now they can’t afford to live there anymore.
RADHIKA DESAI: Exactly. Okay, so our fifth point was financial regulation to prevent speculation and predatory lending. So do you want to start off with anything there?
MICHAEL HUDSON: Well, basically, speculation is a function of how much credit will the Federal Reserve let banks lend against. Donald Trump could buy huge swaths of real estate for putting down no money at all. And most of the private capital companies are able to say, here’s a profitable company like Sears Roebuck, or Toys R Us, lend me the money to buy it, and I will pay you interest on it, and I’ll buy it, and I will immediately essentially break it up into parts, sell it off, fire the labor force, squeeze labor more, and then leave a bankrupt shell, but you, the banker, and I can get rich off this. That’s basically speculation.
Speculation is making money financially by dismantling an industrial economy. Speculation is taking over a company, borrowing money, using the money to pay out as dividends, using the money for stock buybacks. Speculation is when you buy a company and say, well, look at a company like Boeing. Why is this company spending so much money on engineering aircraft? Let’s not develop a new aircraft. Let’s just take the money that we’re getting already and pay it out as dividends, make stock buybacks, pay it to ourselves, and of course the company is going to go bankrupt and end up crashing in time, but that’s not our problem because we’ll become billionaires by the end of that. We’ll make the banks rich. We’ll get rich. Who needs investments? Let’s just run it all down to the ground.
The whole economy is looking like Boeing right now, and what they’ve done to Boeing, what they’ve done to General Electric has become the model of how to de-industrialize and wreck an economy. They call it speculation, but it’s really debt leveraging. It’s really loading a company down with debt and using its income to pay debt service, not to invest in new capital formation.
RADHIKA DESAI: You know, you say such an important thing about Boeing. Honestly, I remember reading in the Financial Times recently, just as these scandals are coming out about Boeing, that for the last several decades, actually engineers have been refusing to work for Boeing because it’s no longer an engineering firm. It’s a firm that values extraction of value out of whatever carcass is left of that firm and does not emphasize engineering good airplanes as it once used to do. So, this is really quite an interesting point you make.
Several other quick short points. Number one, you know, just a very basic thing, you know, you were talking about how this speculative activity, it happens in a kind of club-like environment. And that reminds me that one of the things I always like to say is that people think that credit relationship is a market relationship. It’s not a market relationship. A credit relationship is effectively a social and political relationship in which you give credit to those who you know. And every model that has been created to try to replace that has essentially either not been practiced by the financial institutions or it has led to huge problems. So, I think that’s the first thing I want to say.
The second thing I want to say is that the best way of preventing speculation was already found and it was found in the United States and it was called the Glass-Steagall Act. And the Glass-Steagall Act said something very simple. We are going to back those parts of the financial system that do not engage in speculation with federal deposit insurance. And if you want to engage in speculation, fine, you can do that. We’ll let you do that, but you do it on your own dime. You do it at your own risk. If you lose money, the Federal Reserve is not going to come and the Federal Deposit Insurance Corporation is not going to come and rescue you. And I think that was fair.
And they didn’t stop speculation, but it sure contains speculation to a very, very small number of people and a very small amount of money, et cetera, et cetera.
But beginning with the repeal of Glass-Steagall, and before it was repealed, it was also softened up quite a bit, beginning with the repeal of Glass-Steagall, the Federal Reserve has created a situation in which the big banks, which sit on your and my money, the billions and billions and trillions of dollars, which are made up of your and my small deposits can be thrown into the market for speculation. And as a result of that, what most people don’t realize is that in 2008, all the small boutique banks that used to be the speculative banks, not protected by the Federal Deposit Insurance, were wiped out by the big commercial banks, which were now backed by the Federal Reserve, even though they were engaged in speculation.
I mean, so we know how to do it. We can do it. And I think that it would be not that difficult to do it.
A final point I want to make, you know, we’ve always emphasized that the problem with the financial system is predatory lending and speculation. And I think that, you know, we have had two very distinct periods in the history of neoliberalism and financialization. In the 1980s and 1990s, interest rates were relatively high. And there, basically, you just made money if you had a lot of money, because essentially, you were being paid lots of money just to sit on it with high interest rates. So in that sense, that was one type of, and of course, those who borrowed money paid through the nose for borrowing that money. So it was an era where predatory lending was much more, I mean, still happens, but it was sort of in the lead.
In the, after 2000, what you got were long periods of very, very easy credit, easy monetary policy. And that is what essentially fueled speculation, because it was easy to borrow money. And you, you know, if the margin was, you know, 0.0001%, on that margin, if you just put in a few thousand dollars, you’re not going to make more than a couple of bucks. But if you could throw in millions and millions and billions of dollars into the trade, then you could make a lot of money. And that’s the two different types of economies we had. And all of this is easy to regulate. It’s just a question of finding the political will to do so.
MICHAEL HUDSON: Well, you use the word market, and that people don’t realize that every economy is some kind of a market. Ancient Babylonia had a market. Briggs and Rome had a market. China has a market. Even Stalinist Russia had a market. The question is, what kind of a market are you going to have? And what’s the relation between prices and the cost of production? And who gets the income? Labor, capital, landlord?
And today, almost all the economists say a market is something where the bank, where the government doesn’t do anything. It’s a free market, meaning the billionaires control the economy. The government will not regulate them. The government will not try to steer credit to be productive. The government will not help the people. It will help the 1% exploit the people. A free market is an economy won by the 1% in an oligarchy where democracy has either no role to play, or if you let the people vote, they don’t understand how the market works and how to create an economic alternative.
So what we’re really talking about in this broadcast is, what kind of a market do you want to have? And where does finance fit into this market? Where does tax policy fit into this market? And how do you then create an alternative?
Well, any economist, Paul Krugman or the New York Times or the entire Council of Economic Advisers will say, with Margaret Thatcher, there is no alternative. But of course there’s an alternative. And that’s what our program is all about. Every few weeks, we’re trying to outline an alternative that it doesn’t have to be this way. Economists say it has to be this way if you want a free market, a free market for the 1% to take whatever they want, to control the banks, to control real estate, to create monopolies, and to extend this all throughout the world so that there’s no country in the world that has a different kind of a market to show that there is an alternative. That’s really the geopolitics of our analysis of how an economy works. And every economy is a market. The question is, do you want an oligarchic market, a democratic market, a productive market, an industrial market, or a financialized market?
RADHIKA DESAI: Exactly, Michael. So well put.
Okay, so our sixth point is expansion of income in place of debt. And my point here is a very simple one. At the moment, we have, over the last five decades and more, we have created a financial system which prioritizes, which strangulates ordinary people’s income and instead invites them to expand credit, to become debtors instead. The kind of economy we are talking about would not do that. It would in fact leave the government free, either to encourage private enterprise or itself engage in the types of investments that will be necessary to increase the incomes of ordinary people. You have what you have by right. The government creates the kind of conditions in which you are able to make a contribution and make a good income, the kind of income you need for a decent standard of living. And the root and branch reform of the existing financial system is the conditio sine qua non of this kind of system. We have to eliminate it if we want to have a kind of economy in which we are capable, every society is capable of producing what it needs, employing its labor to good effect, and so on. So to me, that’s the most important thing to say about this point. Yeah, you agree.
So a final point is the point about international money, moving from the dollar disorder to an international monetary system based on the kind of proposals that Keynes had made. So essentially, maybe just to start us off on the discussion of this, these are the main elements Keynes had proposed to create. Let me just begin with the center and then we’ll move to each one of these things.
But essentially, Keynes proposed to create a new currency. It was not going to be the currency of any country. All countries would continue using their national currencies. But this bancor would be used among central banks to settle imbalances. So if one country imported more from another country over a given year, at the end of that year, if you are clearing the balances, then that country owed a certain amount of bancor to the other country, et cetera, and so on. So bancor was the key thing I want to emphasize here is that bancor was not to be used in ordinary daily transactions. For that, every country would continue using its own currency. Bancor was only international currency to be used by central banks.
MICHAEL HUDSON: Yes. Obviously, something like that should be used today. There are two alternatives. One is the International Monetary Fund special drawing rights. They created an artificial currency, and they did it because the United States said, we’re running a budget deficit because we have 800 military bases all over the world, and we can’t afford them. Give us enough money. But of course, you can’t give us money. In order to give us money to have our military bases to control the world, to make sure there’s no alternative to our kind of free market, you have to give other countries the ability to special drawing rights, too, so that the IMF can lend money to Argentina and the global south so that they can pay for the banks for the balance of payments deficit from following the kind of warped economic growth that the World Bank sponsors, privatization and dependency on American exports.
What we want is indeed an international currency to be used, but it’s not going to be to enable debtor countries to pay the American and European banks. It’s not going to be a currency to finance American military spending. It’s going to be a currency that people will not have to keep their money in dollars anymore.
Imagine you’re Saudi Arabia, and you’d say, we’re getting a lot of pressure from our Palestinian population to support Gaza. But if we support Gaza and don’t support the United States, they’re going to grab all of the money that we keep in the United States. They’re going to do to us what they did to Russia. The United States can grab any country’s foreign reserves if they support a policy that the United States doesn’t support militarily. We need an alternative that is not controlled by the American military and by the American neoconservatives.
Countries do need credit, just like the economy needs credit that we’re urging should be created by the Treasury. What Keynes suggested is the equivalent of an international treasury, but that would lend money for the things that treasuries are supposed to create money for, to promote economic growth, not military spending, not trade dependency, and not a debt-ridden international economy, which is now breaking apart as a result of the last 75 years of IMF and World Bank lending.
RADHIKA DESAI: Great points, Michael. Let me just emphasize one quick thing, though, about SDRs, special drawing rights of the IMF. The problem with SDRs is that while in some respects it looks like a bancor, in a key respect, it is not like bancor, maybe in two key respects. Number one, because it is issued by the IMF, it is still under US control because the US still retains a veto in the IMF. So that’s the first thing.
And the second reason is that, of course, thanks for historical reasons, the IMF and the World Bank are deeply implicated precisely in the US-based financial system, whereas a proper bancor would be extricated from the extremely unproductive, predatory, exploitative, speculative US-type financial system.
You also mentioned, Michael, not creating trade dependency. And another feature of the principles that were embedded in Keynes’s idea of a bancor was the principle of creditor adjustment. Today, we have a situation in which if you are a trade deficit country, you are the one who is forced to adjust. If you owe money, if you’re a debtor country, you are the one that is forced to adjust. But Keynes said that one person’s deficit is another person’s surplus. One country’s deficit is another country’s surplus. And therefore, the two are co-responsible for that situation, and the two must cooperate in order to get out of that situation.
So, for example, take Germany and Greece as a classic example of a persistent surplus country and a persistent deficit country. Germany and Greece have to come up with an agreement to end these persistent imbalances, deficits on the one hand and surpluses on the other, either by Germany investing in Greece, in the Greek economy, in a way as to make it capable of producing more things, which Germans can then buy from them, or by reducing its deficit. Have one way or the other. So, creditor adjustment for both trade flows and capital flows was a very, very important principle.
MICHAEL HUDSON: Well, we’ve just solved the world’s problem.
RADHIKA DESAI: Well, we still have a couple of other points here. So, anyway, let me just discuss the rest of this and then give it over to you, Michael, for whatever else you want to say. So, a third principle was, of course, that there should be capital controls. That is to say, governments and central banks should be able to monitor and control the inflows and outflows of large amounts of money with a view to ensuring that what was happening would not harm the economy.
So, for example, the kind of inflows of hot money that gave rise to the East Asian financial crisis in 1997-98 would not happen, would not be permitted, etc. So, capital controls were a very, very important principle and that would have to be accepted. And all capital flows that are flowing in and out of the country would be based on what is good for that economy.
The price of Bancor, the value of Bancor was to be set on the basis of the 30 most traded commodities. Today, we may expand the list, maybe 50, 60 commodities, but whatever. The idea being that the prices of commodities, that is to say, primary commodities like wheat or copper or gold or what have you, these were the prices that were the most volatile. And if the value of the currency was based on that, oil, of course, was based on that, then this would provide a kind of stable and acceptable value to the commodities.
And finally, the whole system was to be run — Michael mentioned the equivalent of a treasury. That equivalent was to be the International Clearing Union, which would be a multilateral agency agreed by all countries on the basis of, you know, and whose principles would be to prevent persistent surpluses and deficits and where there were surpluses and deficits, essentially to tax them, both surpluses and deficits, in order to provide financing for development. So, these were some of the principles that Keynes brought to Bretton Woods.
This, if they had been implemented, they would have actually led to the creation of a permanently expansionary world economy because it would have allowed every country to govern its economic fate. But of course, precisely because of that, the United States essentially nixed his plans. And every time there’s a big economic crisis in the world, people recall the sensibleness of Keynes’ ideas.
MICHAEL HUDSON: Well, these ideas that we’ve discussed were all discussed 75 years ago. And there were big political arguments about them. I’ve summarized them in Super Imperialism, a chapter on this. And the result of the way that the world economy was malstructured by rejecting Keynes’ idea was the United States did not want to have economic balance. It wanted all the money for itself. The United States said, we’re the world banker. What does a banker do? The banker impoverishes the rest of the economy to get rich. That’s why you’re a banker. And that’s what we’re going to do. We’re going to create an economy, especially to the World Bank, through diplomacy, through military spending, and especially by regime change, so that raw materials prices go down. We’re not only fighting labor, we’re fighting the third world raw materials exporters. We’re fighting the copper producers. We’re fighting the agricultural producers of warm climate tropical crops that we import. We’re fighting everybody who supplies us with what helps our economy so that we can get rich, not them. We can get rich in America and our satellites in Europe by keeping the global South poor, and by keeping Asia poor. There’s not going to be any kind of bancor. There’s not going to be any creditor responsibility for not monopolizing the world gains, because the economic system we want is all about monopolizing the world gains, and that’s what the dollar standard has become.
All of this was foreseen 75 years ago, and because of America’s power after World War II, it was able to establish this regressive, exploitative, unfair economic system that finally today, for the first time, the world is looking back at these principles and saying there is an alternative, while the United States educational system tries to convince economic students that there is no alternative, and the military and the neocons want to say, hey, if you got an alternative, we have some people who can take care of you and have a regime change.
RADHIKA DESAI: Quite so, and you mentioned imbalances, Michael, and one of my favorite points, you reminded me of one of my favorite points about Keynes’s bancor system and the current dollar system. The dollar system relies on imbalances. The greater the imbalance is, the more there will be a demand for dollars, etc., etc. Whereas the genius of Keynes’s — and of course, imbalances create volatility, create crises, and all these things we’ve discussed, all these things in previous shows — the genius of Keynes’s idea was actually that if you reduced imbalances, then the actual amount of bancor that would be needed to make the system work would actually be as little as possible, you know, because ideally, think about it, if you buy $100 worth of goods from me and I buy $100 worth of goods from you, there is nothing, we don’t need money to settle imbalances. The only reason you need bancor is when there are imbalances, and the idea was to reduce imbalances, and the purpose of this was that, again, with credit adjustment, Keynes basically said that, look, if you’re in a stronger position, you should be able to help your partner who is in a weaker position to become productively stronger. That was the whole point, and I would say that it still makes a lot of sense, as you just said, Michael.
So here we are, we’ve dealt with actually all our seven questions, and I hope that we’ve given you something to think about, about the kind of economic system we could have, we could easily have. The most important difficulty is not intellectual, it is political, and as the political legitimacy and power of those who are running the system, particularly in the United States, is visibly declining, cracking, etc., now is the time to strike, now is the time to raise demands for an alternative system, much as, by the way, Jill Stein is doing in her campaign, and I should add that Michael and I are both part of her advisory team, and so please look out for it. We hope to have her on one of our shows very soon, as soon as she is able to find some time, so that we will discuss the kind of economy that the U.S. needs, and I would say if the U.S. turned around, boy, so many other problems would be solved.
So, on that note, unless Michael, you want to add anything, we will end for now, and see you again in a couple of weeks. Meanwhile, please like, please share, please give us our comments, please subscribe, and look forward to seeing you next time. Thank you. Bye-bye.
The post Pathways to Solutions first appeared on Michael Hudson.
Efficiency is Hilarious
Dialogue Works, January 18, 2024.
First part: https://youtu.be/ifnCakYJNVM or https://www.youtube.com/watch?v=ifnCakYJNVM
Second part:
Dialogue works (Nima): when it comes to capitalism, they’re talking about that capitalism is by far the most effective and productive economic system. Ohio Senator, James Vance, just recently said that Russia produces as much ammunition in a day as the U.S. does in a month. what’s the problem with the U.S. economy that they’re not capable of producing enough ammunition to help Ukraine?
Richard D. Wolff: Well, let me begin with a comment. I do not believe it is an exaggeration to say that the spokespersons for every economic system in the history of the world have included people who say that whatever system they are, the spokesperson of is the best and the most efficient and the most equitable and the most and the most fill in the blank with positive adjective.
This is childish, and yet you would imagine that a reasonably mature people would get beyond this kind of cheerleading if they’re involved in a serious conversation. It is actually very easy to show whether you are looking at an ancient tribal economy or village economies or slave economies or feudal economies that they had their areas where they were remarkably efficient side by side with areas where they were remarkably inefficient.
Assuming that there is a standard that enables you to distinguish between them, which frankly, I don’t believe there ever was or is.
Let me explain briefly,
When you notice that there’s profitability in a particular industry and the CEO, all of the CEOs in that industry are asked, why are you profitable? And they give that wonderful answer that they should have outgrown in fourth grade.
We’re a very efficient company here. The only appropriate response is laughter. Why? Well, what does efficiency mean conventionally in economics? Efficiency purports to do the following thing. It looks at the consequences of some act. Let’s take a, for example. Is it sufficient to expand the hospital to add a new wing to that hospital or for a company?
Is it efficient to buy a fleet of trucks or to hire 50,000 more people or whatever, whatever the issue is? Here’s what you taught. You look at all the benefits that flow from this act and you look at all the costs of this act and you compare them. If the benefits are larger than the cost, why then it’s efficient and you go ahead and do it.
And if the costs are better than or larger than the the total of benefits, well then it’s inefficient and you don’t do it. Okay. All right. Now, here are two simple problems. And here I’m simply talking basic philosophy. Or if you like, basic mathematics. How do you know all of the costs or all of the benefits of anything that has ever happened or that could ever happen?
And the answer is, you cannot do that. And no one ever has. Part of the reason is that costs and benefits lie in the future, and it’s kind of hard to get a good number on what they will be. And if there is an economist who knows what the costs will be. Well, then that economist is going to become very rich because they have figured out how to tell the future, which of course is a scam.
They can’t do that. Number two, the costs and benefits are infinite in number and variety. To go back to my example. Suppose there’s a hospital considering building a new wing. Well, if they build that new wing, it will change traffic patterns in that area. Change traffic patterns will alter, real estate prices change, traffic patterns will change. The number of people that get injured or die in automobile accident.
How in the world can you know in advance what all the costs from doing this are? And the answer is you cannot. So here is what all cost benefit analysis has in common. They are frauds because they cannot do what they claim to do. What they actually do is look at a selection of the costs that you can do and a selection of the benefits that you can do.
But then the only interesting thing is the principle of selection, because it isn’t a comprehensive comparison. Long story short, if you do any serious investigation, then you cannot evaluate the efficiency of any economic system and the people who claim that it is the most efficient are giving you the use a technical term total bullshit. And they ought to be called on the carpet for doing that.
There is. It really is kind of childish. CBS did the report 60 Minutes back in May of last year, and in that report, they showed that the Defense Department of the United States is a place that doesn’t have enough ammunition because the company is producing defense equipment, you know, planes, ships, missiles, guns are engaged in. And you can see the statements there from all the relevant officials.
Price gouging and the price gouging is not modest, but price gouging is outrageous. And they give you the figures. They’re a price that’s 100 times what it ought to be or more. Here is the irony. It’s not that Russia can produce what we can produce. My guess is the United States cannot produce Russia. Let’s remember the GDP with all the problems which we have discussed about what the GDP means.
But the GDP of the United States is 21, $22 trillion, and the GDP of Russia is one and a half trillion dollars. We are talking about vastly different industrial systems. And the reason why the United States doesn’t have enough ammunition and by the way, that is part of the reality of why Russia is doing as well in the war in Ukraine as it is.
It’s not because they produce more or better, it’s because they don’t have and this has going to affect a lot of Americans if they take this seriously. They don’t have the level of corruption that we do. We have outdone them. And you know what this is like. This is the same story that has afflicted every empire in human history.
This is the story of why the Romans could not defeat the barbarians in the fifth century. It’s why medieval kingdoms fell apart. It’s not because they couldn’t produce enough knives and guns and spears and all the rest of it, but that the internal mechanisms of the system made it no longer functional and bullshit like efficiency calculus is part of the mental corruption, if you like, these make-believe categories.
We look back on the Middle Ages and we smiled to one another when decisions were made by kings and queens who consulted their advisers, who read the appropriate passage in the Bible to find the answer. We think we’re better than that. The Bible, we say, was a book. There were lots of books. I picked that one. Yeah, well, the notion that you can do the right thing by following Jesus is exactly on a par with the notion that you can do the right thing by choosing the official alternative, as if you were in a position to do that.
I used to tell my students all the training in the world will not enable you to leap over the Empire State Building. You just can’t jump over it. So you don’t bother training to do what you know you can do. Why do we train people in cost benefit analysis? It is a mirage. It is an ideological exercise in order to sanction whatever decisions are made for altogether different reasons by pretending they have been authorized by an objective outside absolute, totally true arbitrator.
Well, in medieval times that was called God. Today we call it efficiency analysis. It is the same fantasy.
Michael Hudson: Well, I think that you don’t have to look at the future in order to make projections. I think efficiency is in the eye of the beholder. Boeing, for instance, is much in the news. And Boeing found it very efficient.
Instead of making airplanes that were adjusted to new fuel-efficient engines, it found it more efficient to the executives to make airplanes that crashed. That was efficient because they could use their money instead of changing the engineering around, instead of building a new airplane. They could use the revenue that they were getting simply for stock buybacks and to pay out of dividends.
So that was very efficient, you know. And in terms of prices, of course, you can forecast prices if you’re in a monopoly position and you can charge whatever you want. You decide what price you’re going to charge. It’s at your will. And you can have control over costs, especially if it’s the government. That’s what the Pentagon capital system is.
That I think was really what the interview was talking about under Pentagon capitalism. I think a decade ago it was making a toilet seat for $20 and charging $500 for it. But now they’re even more egregious overruns. It’s very efficient if you’re a Boeing or another military contractor. It’s not efficient for the whole economy. So, I think the real question, since our talk is about capitalism versus socialism, is what’s efficiency under capitalism and what’s productive and productivity?
Well, the textbook presentation of industrial capitalism says it’s very efficient and it was efficient in the 19th century. It was more efficient than feudalism. And that was really what industrial capitalism set out to be. To cut it, not to raise the costs of Pentagon capitalism and what you’re talking about, but to cut costs in it and cut the economy’s overall costs by getting rid of the landlord class.
So instead of paying land rent to a hereditary aristocracy, you would use that as the tax base. You would essentially get rid of monopoly rent and you’d get rid of financial rent. In other words, what made capitalism efficient was that it was moving toward socialism and it was moving toward socialism by having the government take the lead in providing basic needs. ….For the cost of living and for the cost of doing business so that the employers didn’t have to pay them. These costs were to be paid essentially by progressive taxation of the wealthiest property owners and the wealthiest finance shell operators. And I think as we discussed the last time, the income tax in America in 1913 fell only on the wealthiest 1%.
So, in the 19th century, industrial capitalism certainly looked productive to the extent that it was supporting a mixed economy, a private public economy that was moving towards the government, producing all of the communications, education, health services, transportation that could otherwise be monopolized or that labor would have to pay for and hence the employers would have to pay for.
So, the question is, you know, what went wrong was that the the rent recipient class fought back and they fought back for the last century, ever since World War Two and especially since the 1980s. We don’t have industrial capitalism anymore. Sometimes it’s called monopoly capitalism, but I prefer to call it finance capitalism because banks are the mother of monopolies and it’s the financial sector that has promoted monopolies because they can efficiently make money much, much easier simply by charging whatever they want and not having to take the customers into account, not by producing good materials.
Efficiency today is a race to the bottom. If the race to the bottom is in employment, it’s a race to the bottom for inequality. It’s a race to the bottom for Boeing making airplanes that suddenly don’t really have much oversight and regulatory control and their doors blow open and they crash. So, again, we’re living in a world where the whole concept of efficiency changes and productivity is no longer simply the physical productivity of output per man hour.
It’s how do you create wealth – do you create wealth and be productive in the way that Goldman Sachs said they are the most productive workers in the United States because they make the most money financially, they make the most money by taking over companies, breaking them up, smashing them down, and then slowly de-industrializing them.
So today, the most efficient capitalism is post-industrial capitalism or finance capitalism. You say it’s corrupt and they say, no, we’ve just made politics a free market. And if Boeing and other military spending people have the ability to back the campaigns of the congressmen on the military committees and the monopoly committees and if they don’t back what we’re doing, if they criticize us, we’ll just use the free market to back their political opponents in the next primary election. So, again, what is efficiency? It’s no longer what it used to be.
Richard D. Wolff: There’s a point that Michael made that is recognized, at least in the textbooks in economics. It’s one of those topics that you blow through in 10 minutes of some lecture and never return to it, because it is embarrassing if you return to it, since it invalidates most of the rest of the semester’s work.
It’s a distinction between private profitability and social profitability or private costs and social costs. And the argument is really very simple. Let’s take a situation where a capitalist decides it is, quote unquote, more efficient. I am going to buy this new machine, and that will allow me to fire 50 workers because the new machine can do what those 50 workers used to do.
So, our capitalist compares the machine which only costs 100 and the money he saves by firing 50 workers is 200. So, he’s ahead if he buys the machine and fires the workers. So, he does. There’s a net gain to him of 100. The difference between the money he had to lay out for the machine and the money he saved from firing the work, though, is simple, very logical.
Now the question, are we done? Have we now seen an efficient act, as are capitalists pursuing the profitable outcome made the right decision? Well, to do that, we’d have to look at the costs and the benefits. And let me tell you about the costs. They are not just the buying of the machine by Mr. Capitalist. The costs are everything that happens to those 50 workers, their spouses, their children, the neighborhood they live in, the real estate values of the homes they occupy, the viability of the stores they used to patronize.
I could go on. We know from a thousand studies that those 50 unemployed people will have higher rates of alcoholism, spousal abuse, mental physical injury and illness. All that costs society is going to have to bear those costs. The doctors, the social workers, you know, the difficulties, the fired workers children are now going to have in school because there’s turmoil at home, because a mother or father are out of work, nobody can say it because capitalism refuses to take any responsibility for those 50 workers.
We in the world of analysis, thinkers, professors, whatever we are, we are supposed to somehow blindly go along with complete bullshit that we are finished when we compare the cost of the machine that automates with the loss of those jobs. And the minute you don’t do that, the minute you admit that their social costs are not exhausted by those private costs that are counted by the capitalist, remember, he only counts what he has to pay for.
The only thing he has to do is pay for the new machine. He doesn’t have to pay for the mental health counseling of the children, of the fired workers. Not his responsibility. So, for him, that cost does not exist. But for those of us that are interested in the community as a whole, the costs do exist, and a system that constantly pretends otherwise is going to mean making one decision after another.
That is the end of vision, because if you look at all the costs, they far exceed the benefits. And here’s what’s worse, the benefits flow to one part of the community and the costs are borne by another part of the community, making it a political explosion of what’s going on here. Automation is profitable to the employer class, and it is an enormous burden and cost to the employee class.
And because of that, it comes back and bites the employer in the rear end as well. It is a social economic disaster, and if you were honest in economics, you’d know that, and you wouldn’t teach the rest of the course on the premise that profit as an incentive is some successful mechanism. It isn’t. It’s idiotic.
Michael Hudson: Well, when you talk about social costs, you’re really talking about the long run costs in the sense of what are the results of this automation you’re talking about.
But finance lives in the short run, and if you have corporations controlled by the financial sector, they live in the short run and they don’t care about social costs. And even more they try to make the government pay the cleanup costs. You can take for instance, oil for fracking. It pays for the oil frackers to pump chemicals into the ground to force the gas or oil up to the surface.
And the result is to pollute the water supply so you can light a match to the water that comes out of your tap and it catches on fire. For the oil companies and for the banks and the financial investors, this is a very high productivity you can take. And if you have the financial sector writing the laws that shape the marketplace, you have something like the Trans-Pacific Partnership.
That said, suppose you have an oil company that pollutes the land. For instance, of Ecuador or in Kazakhstan. If a government passes a law saying now the oil company has to pay the cleanup costs of cleaning up the pollution that it’s caused in the waterways or in the land, they have to reimburse the company for the entire fund because that’s an external economy.
Well, what you’re talking about, Richard, is, though, the external economy is society, so that if a government imposes a cost that benefits society at the cost of the American foreign investor or any other foreign investor, that’s against the law legally and no government end up receiving any money for the clean-up costs that it doesn’t have to immediately pay right back into the company.
So in effect, the role of government is to protect the polluters and to protect what you call profits, and I call economic rent, because increasingly, the profits of oil companies and mining companies and monopolies are unearned income. They’re not producing value. They’re producing a right to charge whatever you want to charge so that you don’t have to project the value of something in terms of the costs, the labor costs and the raw material cost.
Again, you’re getting a free lunch without working, without producing value just by collecting rent. And of course, the GDP accounts, the national income accounts calls all of this earnings. But they’re not really earned income, they’re not profits. Again, they’re economic rent. And that’s the kind of rent seeking economy that we’ve come into. It’s a tunnel vision of the economy.
You call it corrupt. The economics are corrupt. They’re really tunnel vision. They don’t want to take in the social costs because that would reduce the returns to the financial owners of the companies that are imposing these costs on society at large.
Richard D. Wolff: If I could add, I agree completely, but I want to take it kind of another step, if I could. There is a bizarre phenomenon going on here that we should understand.
When Michael says that the government is called in to clean up, the government is called in to protect, the government is called in to serve, whether it’s the cap, the employer class as a whole or a subdivision of it that gets into a dominant position like finance capital in recent decades.
Here’s the remarkable thing about that. Not only is the government called in to bail out the failed capitalist system. Let’s all remember in 2009, all of the major banks in the United States, the big ones were bankrupt by the definition of liabilities relative to assets. They were busted. They didn’t trust each other to give each other overnight loans the way they normally do every day because they weren’t confident that Bank of America or Citibank or Wells Fargo would give back in the morning what was lent to them the night before, because they might do on Lehman Brothers or a Bear Stearns or any of the others that folded.
Okay. Okay. Here’s the wonderful part about that. At the same time that the government is the servant, the faithful, desperate servant of the employer class, it develops an ideology which says that capitalism is a perfect system, except when the government messes up. We call these people libertarians but have nothing to do with liberty.
It’s an ironic Aldous Huxley kind of inversion of the word meaning. This has nothing to do with liberty. This is a hustle. This is a person selling you a major interest in the Brooklyn Bridge. Blame the government. Brilliant. Every flaw that capitalism has. You can now admit and use it to beat up on the government with the effect that all the government is left with the responsibility of doing is bailing out capitalism’s failures.
Because otherwise it has been beaten to death with demonization as if it were the problem. Most of the people who will become powerful in the United States if Donald Trump wins the election, it will be libertarian infused policy makers who are going to act on this lunacy with, by the way, the predictable results, which are not pretty.
Michael Hudson: I’m glad you mentioned the concept of liberty and libertarians.
You’re absolutely right. Libertarianism supports a centrally planned economy, much more centrally planned than a mixed economy. More centrally planned than an economy like China. But the central planning is done not by elected government officials, but by Wall Street and the financial sectors. So when people say they’re a libertarian, they say they want liberty from government regulation so they don’t have to follow rules to protect society.
They want liberty from being taxed so that it’s labor and the productive sectors that are taxed, not the corporate sector and the financial sector that owns the sector. So, the question is liberty from whom? And this is what again, the language has been inverted from what it was during the heyday of industrial capitalism from Adam Smith and John Stuart Mill and Marx into just the opposite.
The way to respond to these guys is, again, the meaning of words. And that’s what made George Orwell discussion of double think and double speak so great.
Richard D. Wolff: Enormously important, this topic, because these are not just pathological behaviors. These are not just the objects of what Michael and I can say critically.
These are symptoms of a system that is done, that is overreach, peak, that is in decline. Holding on to these nonsensical ideas becomes irrational because the system is spinning out of control. Here you have a again, I’m going to use Ukraine, even if it provokes some people. On one side, the United States, the G7, Britain, France, Germany, Italy, Canada, Japan and the United States.
I come blind to GDP and again, without lauding that statistic, it’s just a very rough measure. But a combined GDP, by my count, about $32 trillion in a war in Ukraine with a country, Russia with a GDP of one and a half trillion dollars. This is a joke. What kind of war is this? This is David and Goliath.
That we’re Goliath is ridiculous. And the fact that the Russians have actually won the war, at least so far, tells you that something is terribly amiss. Mr. Zelensky is explaining that they don’t have enough ammunition. They’ve used up the shells, the tanks, the missiles, not just from the United States, but from Britain, France, Germany and so on.
What in the world is going on? How does a one and a half trillion-dollar economy find itself inadequately producing, what, $32 trillion worth of economy is? Right. Something is crazy here. And I think that is where people ought to take this kind of thinking. If a university is teaching people that there is an efficiency, you learn how to count costs and benefits.
This is the exact modern equivalent of having taught medieval scholars how to count the number of angels that dance on the head of a pin. Angels have no dimensions. The head of the pin is very small. But how many angels can a very small pin accommodate an infinity if they have no dimensions? Those And then what?
And we think it’s funny, but I can assure you in the future there’ll be people who look back on this nonsense about efficiency and the nonsense about libertarianism shaking their heads in disbelief that reasonably educated adults got caught up in this sort of stuff.
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