Interview with Vlado Plaga in the German magazine FAIRCONOMY, September 2017.
VP: You are advocating a revival of classical economics. What did the classical economists understand by a free economy?
MH: They all defined a free economy as one that is free from land rent, free from unearned income. Many also said that a free economy had to be free from private banking. They advocated full taxation of economic rent. Today’s idea of free market economics is the diametric opposite. In an Orwellian doublethink language, a free market now means an economy free for rent extractors, free for predators to make money, and essentially free for financial and corporate crime.Good one.
Counterpunch
Putting an End to the Rent Economy
Vlado Plaga interviews Michael Hudson, President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and Guest Professor at Peking University
Michael Hudson is always the best.
ReplyDeleteNo exploitation, no classes
ReplyDeleteComment on Michael Hudson/Counterpunch*/FAIRCONOMY** on ‘Putting an End to the Rent Economy’
For most people economics is a story about wealth and riches, the conflicts between capitalists and workers, the fraud and deception of the corrupt one-percenters and the hardships of the honest and exploited/alienated 99-percenters. This is the soap opera view of economics.
The scientific view is not focused on the human drama/farce but on the functioning of the economic system as a whole. Economics leaves all questions about Human Nature/motives/behavior/action to psychology, sociology, anthropology, history, political science, biology, etcetera.#1, #2
Because NO way leads from the explanation of Human Nature/motives/behavior/action to the explanation of how the economic system works all behavioral approaches have failed. The actual state of economics is this: Walrasianism, Keynesianism, Marxianism, Austrianism are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong. Fact is that the Walrasian approach = microfoundations and the Keynesian approach = macrofoundations have already been dead in the cradle.
Therefore, economics has to undergo a paradigm shift. Economic analysis has to be based on entirely new macrofoundations and the fundamental questions have to be put again at the top of the agenda and answered with the help of better analytical tools. The key concepts of classical economics were profit, capital, exploitation and classes. So let us, first of all, revisit profit.
The pure consumption economy is defined with this set of macro axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.#3
Under the conditions of market clearing X=O and budget balancing C=Yw in each period the price is given by P=W/R (1), i.e. the market clearing price is equal to unit wage costs. This is the most elementary form of the Law of Supply and Demand. It translates into W/P=R (2), i.e. the real wage is equal to the productivity. For the graphical representation see Wikimedia.#4
Monetary profit is defined as Qm≡C-Yw and monetary saving as Sm≡Yw-C. It always holds Qm+Sm=0 or Qm=-Sm, in other words, the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law.
In the pure consumption economy, labor gets the whole product according to (2), and profit for the business sector as a whole is zero because C=Yw. All changes in the system are reflected by the market clearing price. As a matter of principle, the pure consumption economy can go on indefinitely at any level of employment L. The living standard of the workers is defined by the productivity.
Now, the business sector is split into two identical firms and firm 1 is supposed to cut the wage rate W1 by half. From this follows that the market clearing price P declines if all other variables are unchanged. Firm 2 is affected because total income Yw falls and with it consumption expenditures C and the market clearing price P.
The reduction of the wage rate W1 increases the profit of firm 1 and produces a loss in firm 2. When we look alone at firm 1 we see what Smith, Mill, Ricardo, and Marx have seen before, to wit, wages down – profit up. This fits the time-honored stereotype of wages and profits as antagonists.
See part 2
Part 2
ReplyDeleteHowever, this situation cannot last for long if profit has been zero in the initial period. In this limiting case firm 2 makes a loss which is exactly equal to firm 1’s profit. The arbitrary wage rate cut of firm 1 does not increase the profit for the business sector as a whole but only REDISTRIBUTES it.
Seen from the perspective of a single firm, the antagonism of wages and profits is absolutely real. This, though, is parochial realism. The complete picture reveals that firm 1 is better off to the disadvantage of firm 2 and the workers of firm 2 are better off to the disadvantage of the workers of firm 1 because at a lower market clearing price they absorb a bigger share of output O with their unaltered income. The situation of the business sector as a whole is unchanged and the same is true for the household sector as a whole. If there is exploitation it happens within the sectors. A partial wage rate change leads only to a redistribution of profits between the firms and of output between the workers.
For the economy as a whole, the classical antagonism of wages and profits is an optical illusion. This has a bearing on the political notion of classes. There is no distributional conflict about output between profits and wages. When classes are defined according to these economic categories the actual conflict materializes within the classes.
When, in the limiting case, there are two groups of workers and two groups of capitalists and the first group of capitalists exploits the first group of workers by slashing the wage rate, then the exploiters OBJECTIVELY act in the interest of the second group of workers whatever their own subjective motives may be. The second group of workers has no economic interest to overcome the wage discrimination of the first group, yet the second group of capitalists has indeed because its profit is indirectly affected. On a deeper level, the relation between the two groups of capitalists is antagonistic. The same holds for the two groups of workers. What looks like exploitation is in fact cross-over exploitation WITHIN the Marxian classes.
The myopic agents, workers and capitalists alike, are blind to these interdependencies and therefore prone to the fallacy of composition. The generalization of partial effects has the compelling logic of the profit and loss account and the irrefutable empirical evidence of firm 1 on its side. Indeed, what could be more convincing? Wages down, profits up. It works. The invisible redistribution of profit and output is anonymously effected behind the agents’ backs by the market clearing price. Neither capitalists nor workers understand how the market system works. Neither do economists since Smith Ricardo,#5 and Marx.#3 Neither does Michael Hudson.
Egmont Kakarot-Handtke
#1 Economics is NOT about Human Nature but the economic system
https://axecorg.blogspot.de/2017/05/economics-is-not-about-human-nature-but.html
#2 Economics is NOT a social science
https://axecorg.blogspot.de/2016/08/economics-is-not-social-science.html
#3 For details see ‘Profit for Marxists’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301
#4 Wikimedia, Pure Consumption Economy
https://commons.wikimedia.org/wiki/File:AXEC31.png
#5 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1932119
* https://www.counterpunch.org/2017/08/16/putting-an-end-to-the-rent-economy/
** http://www.inwo.de/uploads/media/FAIRCONOMY/ausgaben/ausgabe-2017-3.pdf
E.K-H,
ReplyDeleteAs far as I'm concerned, you muddle macro- and microeconomics; at least, you muddle American microeconomics in with American macroeconomics.
Wages, profits—as you specifically define them—and the market clearing price are functions here of our microeconomic world(s), which include the Fed’s monetary policies.
E.K-H,
ReplyDeleteWhat do your bêtes noir, wages and profits, have to do with sectoral balances and fiscal policies—US macroeconomic issues the latter of which have not been properly instituted in this country for over 35 years?
As a result of the lack of fiscal policies that should have responded responsibly to the needs of our middle class (in the US, that’s Congress’ job and legal responsibility) wages since 1980 in this country have not only stagnated but fallen precipitously since then. Yet profits for those engineering them have soared.
So big whoop. They don’t affect the overall domestic private sector balance amount, but they do affect, and have affected, the distribution of each within it to the great detriment of the majority of our society over the past three decades. What does affect the overall domestic private sector balance amount is fiscal policy and managing the real economy from a macro Point-of-View (POV), which government economists did to great effect starting in 1939.
P.S. When commenting here, could you quit with the cat’s cradle of mathematical equations and symbols and just write them in English? We use different symbols in the US for what you appear to use in Germany. Just link to your website.
MRW
ReplyDeleteYou say: “As far as I’m concerned, you muddle macro- and microeconomics; at least, you muddle American microeconomics in with American macroeconomics.”
I clearly state in Sec. 3 “Fact is that the Walrasian approach = microfoundations and the Keynesian approach = macrofoundations have already been dead in the cradle. … Economic analysis has to be based on entirely new macrofoundations.” In Sec. 5 the MACRO axioms are enumerated.
The muddle is in YOUR head.
You ask: “What do your bêtes noir, wages and profits, have to do with sectoral balances and fiscal policies—US macroeconomic issues the latter of which have not been properly instituted in this country for over 35 years?”
Wage income and profit are the fundamental concepts of economics and economists do not understand the difference between them since Adam Smith and Karl Marx. This has NOTHING to do with US macro. Just like there is no law of gravitation for the US, France or China there is NO national Profit Law.
The Profit Law reads in the most elementary case Qm=-Sm and it holds for the world economy as a whole and every single country no matter whether it is capitalist or communist. The scientific concept of law implies universality.
The problem of US macro policy is that US economists do not understand what profit is and how the market economy works. Scientifically, US economists are at Trump University level. The problem of economic policy is always and everywhere the lack of sound scientific foundations.
Egmont Kakarot-Handtke
Fact is that the Walrasian approach = microfoundations and the Keynesian approach
ReplyDeleteI’m not confused, or muddled. I throughly agree with you about the Walrasian approach, courtesy of Paul Samuelson who admitted to never finishing Keynes’ General Theory before he declared that he had. It’s just that I agree with Paul Davidson who says that no US economist has a clue what the Keynesian approach is, that it has never been taught in American universities, and what what passes for the “Keynesian approach” is not. It’s in Davidson’s latest book of which there are two versions, (1) the general public version, and the (2) economist version, which you would appreciate more.
If you ever get your mitts on Davidson’s book, be sure to read the Appendix.
E.K-H
ReplyDeleteThe problem of economic policy is always and everywhere the lack of sound scientific foundations.
How about sound mathematical foundations?
Economics ain’t a science. It does not function like astronomy. it’s a guessing game.
The Davidson book came out in 2010.
ReplyDeleteMRW
ReplyDeleteYou say: “It’s just that I agree with Paul Davidson who says that no US economist has a clue what the Keynesian approach is, that it has never been taught in American universities, and what passes for the ‘Keynesian approach’ is not. It’s in Davidson’s latest book…”
(i) You are right, of course, with regard to Samuelson’s synthesis and all that followed from it.#1
(ii) Keynes’s approach, though, has been already formally defective in the GT.#2
(iii) Davidson has not realized Keynes’s foundational blunder until this very day.#3,#4
Egmont Kakarot-Handtke
#1 The father of modern economics and his imbecile kids
http://axecorg.blogspot.de/2016/11/the-father-of-modern-economics-and-his.html
#2 How Keynes got macro wrong and Allais got it right
http://axecorg.blogspot.de/2016/09/how-keynes-got-macro-wrong-and-allais.html
#3 Why Post Keynesianism Is Not Yet a Science
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1966438
#4 Post Keynesianism, too, is proto-scientific rubbish
https://axecorg.blogspot.de/2017/06/post-keynesianism-too-is-proto.html
"MH: They all defined a free economy as one that is free from land rent, free from unearned income. Many also said that a free economy had to be free from private banking. They advocated full taxation of economic rent. Today’s idea of free market economics is the diametric opposite. In an Orwellian doublethink language, a free market now means an economy free for rent extractors, free for predators to make money, and essentially free for financial and corporate crime."
ReplyDelete"For most people economics is a story about wealth and riches, the conflicts between capitalists and workers, the fraud and deception of the corrupt one-percenters and the hardships of the honest and exploited/alienated 99-percenters. This is the soap opera view of economics."
How about, instead of trying to define economics, how about we define an economic act. An economic act is an act where I sacrifice one thing for something else. Most political, social, and even religious acts are economic if their intent is to sacrifice one thing for another. Even one who acts as a good Samaritan, purely for the reason that it will get them to heaven is an economic act. Contrast this to helping a fellow purely for the sake of the fellow completely unconditionally, and then we cease being economical.
There can be no 'free' economy because the word free in this context is misleading. How can one say there is a free economy just because we don't treat land as a commodity but yet we will still treat our labours as a commodity? Treating anything as a commodity is an economic act in itself. A bit confused by this.
Most political, social, and even religious acts are economic if their intent is to sacrifice one thing for another. Even one who acts as a good Samaritan, purely for the reason that it will get them to heaven is an economic act. Contrast this to helping a fellow purely for the sake of the fellow completely unconditionally, and then we cease being economical.
ReplyDeleteVery insightful. The view that one thing must be sacrificed for another is basic to opportunity cost, which underlies rational choice, and is the basis for the utilitarian approach. The strict utilitarian approach rejected deontological (categorical) ethics based on rules such as Kant's philosophical reformulation of the Golden Rule, or virtue ethics as developed by Aristotle.
The answer lies in the level of collective consciousness. The lower the level of consciousness the more emphasis on the limited self and the less on the universal self, and the more emphasis on the universal self and the less on the limited self, the higher the level of consciousness. This applies to individuals and it is revealed in behavior. This also influences the level of collective consciousness that is revealed in groups and societies culture and institutions.
The level of collective consciousness can be influenced by education in the broadest sense of the Latin root meaning "to lead from."
This is the meaning of the inscription of the Delphic Oracle: Know thy self.
The technique based on the expansion of love is given in Plato's Ladder of Love passage, a soliloquy of Socrates in The Symposium.
This teaching is found throughout perennialism. Conversely the dominant view of liberalism is based on "low" utilitarianism, which one of the chief voices of classical liberalism condemned:
"It is better to be a human being dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied. And if the fool, or the pig, are a different opinion, it is because they only know their own side of the question."
— John Stuart Mill, Utilitarianism
Traditionalism opposes liberalism on this. But there are two major views of traditionalism. One is dogmatic and involves the imposition of tradition, e.g., based on longstanding custom like an institutional religion. The view is actually knowing the inner import or a tradition. This is the spiritual view that is opposed to materialist humanism, warning against the outcomes if pursued individually and socially, that is, brutishness.
As a fourth way student I was also taught the difference between lower and higher self. I was taught that consciousness itself doesn't exist at the lower self, it is essentially a machine which eats or is eaten. As a student I was also taught that the key to understanding begins with self-observation. For all the analysis of economics that swills around, 99% of my understanding of it came from self-observation as an economic agent. Whatever arguments put forth by people regarding what is the nature of people etc doesn't hold up to pure self-observation.
ReplyDeleteAs an observer I observed that for all my BS regarding how nice a person I think I am and want people to think I am, when it comes to being an economic agent, all that is utter BS, and once I saw it in myself I began to see it in everyone else. As an economic agent, my children 'are' more important than everyone else's children, and if anyone else threatens my ability to provide for my children, they are just that, a threat. There is no other way to view them unless i life myself out of the lower self and realize that all of society is one big fight over control fueled by fear.
I wrote these riddles as a result of my observations.
Con the Fruiterer
Con the fruiterer scorns welfare recipients so much that they decide to set up a fruit stall next to him driving him out of business, now Con hates them even more.
Job Network Providors
The job network providers did such a great job of finding jobs for all the unemployed, that they now find themselves unemployed.
The 100% volunteer
A man decided to devote all his time, money, and resources to helping those less fortunate than him that eventually he died of starvation.
The Good Samaritan
A man, who was on his way to a job interview, sees a cyclist with a flat tyre, and decides to pull over and help. “It’s ok” the cyclist says, “I can sort this out myself”. The good Samaritan replies, “I am here to serve God and thus I am here to serve you”. “No problems” the cyclist says and permits him to help. An hour later, the cyclist finds that he is going for the same job as the good Samaritan, and after all applications have been heard discovers that the job was awarded to the good Samaritan. Seeing the cyclist the good Samaritan then says “better luck next time buddy” and walks off.