Michael Hudson — Innocuous Proclaimations

This is a transcript from Meet the Renegades with economist Michael Hudson and interviewer Ross Ashcroft.

MH: If you’re teaching economics, you should begin with the relationship between finance and the economy – between the buildup of debt and the ability to pay. That should be the starting point if you realize that the problem of our time is how can society cope with the debt buildup that has occurred.

Since "money" is a credit-debt relationship, money creation results in the creation of either bank credits in deposit accounts and corresponding debts in loan accounts or in tax credits issued by government with no corresponding debt in the private sector.

The law of reflux states that money created flows back to the creator.

Repayment of bank loans extinguishes the bank credits that were created by crediting deposit accounts. These credits are extinguished the loan is reaped and the corresponding deposit accounts are debited.

Use of tax credits to pay tax obligation or other obligations to the currency issuer extinguishes those credits as the tax credits flow back to government.

The total flow of credit issuance and extinguishment constitutes the money supply available to non-government. That flow is held as various stocks in the interim.

Note that the public debt is non-government net financial wealth and the debt is cancelled with tax collection.  When government runs fiscal deficits they increase non-government net financial wealth since there is no corresponding debt in non-government. A currency issuing government can always generate more tax credits than flow back through taxes in order to increase the net financial assets of non-government to meet saving desire.

Therefore, the issue is never public debt in the case of government that is sovereign in its currency and doesn't borrow in currencies it doesn't issue or promise to convert its currency to real assets like gold or silver at a fixed rate.

Governments that either don't issue their own currency, such as US states, or governments that limit their currency sovereignty voluntarily like the nations of the EZ or countries that peg like China, are constrained financially.

Debt deflation pertains to privately issued credit. Debt deflation occurs when borrowers are unable to repay loans and the demand for money rises faster than money creation. Then a financial crisis occurs that spreads to the real economy as demand contracts. Recession sets in. If the situation is not addressed by increasing money flow, then the recession can develop into a debt deflationary depression.

There are also several paragraphs on economic rent.

This was the basic classical economics of Smith, Ricardo and John Stuart Mill. They all looked at what the landlords got – and what banks got – as socially unnecessary overhead. The economy could function technologically without a landlord class, without a banking class.

Economic rent is socially unnecessary costs imposed by those in positions of power whose power enable them to do so. "Socially necessary" costs are the costs of factors of production, chiefly cost of labor in terms of labor time multiplied by labor power based on knowledge in skill in work performance in excess of unskilled "brute" labor. Those in positions of power are able to extract more from the economic process than they actually contribute, owing to unearned reward based ownership of means of production and financial resources rather than productive economic contribution. This is financial and economic "rent" that is "socially unnecessary since the same output of production could be obtained in the absence of it.

Hudson is claiming that neoclassical is anti-classical economics in that it denies the role that economic power and economic rent play in modern monetary production economies because neoclassical economics is based on the assumption of a barter economy, where money is neutral and doesn't affect the economic process. In this view, everyone receives their just deserts based on marginal productivity.

Note that Michale Hudson is assuming quite a bit of knowledge of finance, economics, and history economics in these remarks on money and rent. It is a broad brush cursory treatment of two of the most controversial concepts in economics.

Michael Hudson

Innocuous Proclaimations

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

See also

Orwellian doublespeak.

Michael Hudson
Golden Tongues

Sharmini Peries interviews Michael Hudson

Merijn Knibbe — The return of ‘land’ in macro economic discourse. Wonkish

Summary. One of the most influential critics of the ideas of Piketty is Matthew Rognlie – who, to be able to write down his criticisms and following the national accounts, reintroduced the idea of ‘land’, or unproduced inputs like land and natural resources including land underlying buildings, in a neoclassical world. Herewith he undid the work of John Bates Clark, who purged ‘land’ from the concept of capital of classical economics, therewith enabling the rise of neoclassical economics. But this is not the only example of the return of land into economic discourse – land has made quite a return.…

Real-World Economics Review Blog
The return of ‘land’ in macro economic discourse. Wonkish
Merijn Knibbe

Noah Smith — A misguided attack on Land Value Taxes

Noah doubles down on the LTV after his Bloomberg View post generated some critical response.

Henry George rules. Take that John Bates Clark.

John Bates Clark (January 26, 1847 – March 21, 1938) was an American neoclassical economist. He was one of the pioneers of the marginalist revolution and opponent to the Institutionalist school of economics....

In 1888 Clark wrote Capital and Its Earnings. Frank A. Fetter later reflected on Bates' motivation for writing this work:

"The probable source from which immediate stimulation came to Clark was the contemporary single tax discussion. ... Events were just at that time crowding each other fast in the single tax propaganda. [ Henry George's ] Progress and Poverty... had a larger sale than any other book ever written by an American. ... No other economic subject at the time was comparable in importance in the public eye with the doctrine of Progress and Poverty. Capital and its Earnings "... wears the mien of pure theory .... But ... one can hardly fail to see on almost every page the reflections of the contemporary single-tax discussion. In the brief preface is expressed the hope that 'it may be found that these principles settle questions of agrarian socialism.' Repeatedly the discussion turns to 'the capital that vests itself in land,'...[6]"

Tax away the land rent.

Noahpinion
A misguided attack on Land Value Taxes
Noah Smith | Assistant Professor of Finance, Stony Brook University

Matt Bruenig — The Rise of New Capitals

In his 1776 book Wealth of Nations, Adam Smith provided the classical definition of capital:

When the stock which a man possesses is no more than sufficient to maintain him for a few days or a few weeks, he seldom thinks of deriving any revenue from it. He consumes it as sparingly as he can, and endeavours by his labour to acquire something which may supply its place before it be consumed altogether. His revenue is, in this case, derived from his labour only. This is the state of the greater part of the labouring poor in all countries. 

But when he possesses stock sufficient to maintain him for months or years, he naturally endeavours to derive a revenue from the greater part of it; reserving only so much for his immediate consumption as may maintain him till this revenue begins to come in. His whole stock, therefore, is distinguished into two parts. That part which, he expects, is to afford him this revenue, is called his capital

Under this classical definition, capital refers to surplus wealth employed to provide non-labor income to its owner. It is from this definition, which was repeated for centuries, that we get such political-economic dichotomies as capital versus labor, capital's share versus labor's share, and earned income (wages, salaries, farm income, self-employment income) versus unearned income (rents, dividends, interest, capital gains).…
In the last few decades, this centuries-old idea of "capital" has been stretched to the point of unrecognizability by the rapid proliferation of things being newly branded with the word capital. We have, of course, the heavy hitters among newly designated capitals: human, social, and cultural,…organizational, institutional, … intellectual, … gender capital.… 

I am not going to argue that these things aren't really capital because capital can mean whatever you want it to mean. But it's clear these things are not capital in the sense that Smith, Marx, and basically everyone prior to 1950 used the word (and the way Piketty used it). Whereas old capital referred, basically, to wealth that provided its owners passive (non-labor) income, these new capitals, taken as a whole, don't coherently describe anything more than things that provide economic advantages.… 

…one of the problems with the late 20th century academic fad of calling everything capital is that it can and does generate some serious confusion via category errors.…
…the phrase "human capital" literally swallows the entire capital versus labor distinction. 

When slaves existed, you really did have "human capital" in the old sense of assets that provided passive income to their owners. But that's not what "human capital" in the Gary Becker sense refers to. In the Gary Becker sense, "human capital" is essentially just the present value of one's future labor income. And since labor's share of the national income is greater than 50%, capitalizing labor income into the present and calling it "human capital" renders the conclusion that most capital is "human capital."…

And this is the point of the exercise — to render "capital" ambiguous if not meaningless as an economic term by making it synonymous with economic advantage. Similarly, rent is conflated with earned income.

Demos
The Rise of New Capitals

Matt Bruenig

Polly Cleveland — Piketty’s Model of Inequality and Growth in Historical Context, Pt 2

Neoclassical economics was designed for the purpose of eliminating economic rent from consideration.

Mason Gaffney has shown how many individuals helped construct neoclassical economics, often with financial support from the robber barons and their successors. I will focus on two: in the United States, John Bates Clark (1847-1938), and in Europe, Vilfredo Pareto (1848 to 1923). 

Recall from Part I that the classical economists divided society into three classes: Owners of land and other natural resources received unearned income or “rent” from their holdings—often derived from conquest or inheritance. Capitalists (who often overlapped with landowners) owned physical capital (like factories or ships) and received interest or profit from investing. Workers received wages. Also recall that the classical economists favored taxing “rent” by taxing land values; Henry George crusaded for this tax. 

John Bates Clark of Columbia University, for whom is named the prestigious John Bates Clark Medal, transformed economics into an inequality-free abstraction.Writing in the 1890’s, Clark merged land into physical capital, thus obliterating the classical understanding of land. In the new neoclassical world, capital (including land) originates solely from productive investment. There is no unearned “rent”, only legitimate “profit.” (Ironically, Marx merged rent into profit because he considered both illegitimate.)

Power rules.

In my view, Piketty’s and Solow’s models are both fundamentally flawed in that they rest on the same ahistorical, apolitical, two-factor neoclassical foundation. As the classical economists understood, inequality derives from power, ultimately the power of conquerors to extract tribute from the conquered. And as the Progressives, the New Dealers, and the civil rights activists have demonstrated, democratic societies can counter that power with well-designed tax and regulatory policies supported by an aroused public. We are not prisoners of a mathematical model.

Dollars & Sense
Piketty’s Model of Inequality and Growth in Historical Context, Pt 2
Polly Cleveland | Executive Director of the Association for Georgist Studies