For Economic Truth Turn To Michael Hudson

Guest Post by Paul Craig Roberts

Readers ask me how they can learn economics, what books to read, what university economics departments to trust. I receive so many requests that it is impossible to reply individually. Here is my answer.

There is only one way to learn economics, and that is to read Michael Hudson’s books. It is not an easy task. You will need a glossary of terms. In some of Hudson’s books, if memory serves, he provides a glossary, and his recent book “J Is for Junk Economics” defines the classical economic terms that he uses. You will also need patience, because Hudson sometimes forgets in his explanations that the rest of us don’t know what he knows.

The economics taught today is known as neoliberal. This economics differs fundamentally from classical economics that Hudson represents. For example, classical economics stresses taxing economic rent instead of labor and real investment, while neo-liberal economics does the opposite.

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An economic rent is unearned income that accrues to an owner from an increase in value that he did nothing to produce. For example, a new road is built at public expense that opens land to development and raises its value, or a transportation system is constructed in a city that raises the value of nearby properties. These increases in values are economic rents. Classical economists would tax away the increase in values in order to pay for the road or transportation system.

Neoliberal economists redefined all income as earned. This enables the financial system to capitalize economic rents into mortgages that pay interest. The higher property values created by the road or transportation system boost the mortgage value of the properties. The financialization of the economy is the process of drawing income away from the purchases of goods and services into interest and fees to financial entities such as banks. Indebtedness and debt accumulate, drawing more income into their service until there is no purchasing power left to drive the economy.

For example, formerly in the US lenders would provide a home mortgage whose service required up to 25% of the family’s monthly income. That left 75% of the family’s income for other purchases. Today lenders will provide mortgages that eat up half of the monthly income in mortgage service, leaving only 50% of family income for other purchases. In other words, a financialized economy is one that diverts purchasing power away from productive enterprise into debt service.

Hudson shows that international trade and foreign debt also comprise a financialization process, only this time a country’s entire resources are capitalized into a mortgage. The West sells a country a development plan and a loan to pay for it. When the debt cannot be serviced, the country is forced to impose austerity on the population by cutbacks in education, health care, public support systems, and government employment and also to privatize public assets such as mineral rights, land, water systems and ports in order to raise the capital with which to pay off the loan. Effectively, the country passes into foreign ownership. This now happens even to European Community members such as Greece and Portugal.

Another defect of neoliberal economics is the doctrine’s denial that resources are finite and their exhaustion a heavy cost not born by those who exploit the resources. Many local and regional civilizations have collapsed from exhaustion of the surrounding resources. Entire books have been written about this, but it is not part of neoliberal economics. Supplement study of Hudson with study of ecological economists such as Herman Daly.

The neglect of external costs is a crippling failure of neoliberal economics. An external cost is a cost imposed on a party that does not share in the income from the activity that creates the cost. I recently wrote about the external costs of real estate speculators. https://www.paulcraigroberts.org/2018/04/26/capitalism-works-capitalists/ Fracking, mining, oil and gas exploration, pipelines, industries, manufacturing, waste disposal, and so on have heavy external costs associated with the activities.

Neoliberal economists treat external costs as a non-problem, because they theorize that the costs can be compensated, but they seldom are. Oil spills result in companies having to pay cleanup costs and compensation to those who suffered economically from the oil spill, but most external costs go unaddressed. If external costs had to be compensated, in many cases the costs would exceed the value of the projects. How, for example, do you compensate for a polluted river? If you think that is hard, how would the short-sighted destroyers of the Amazon rain forest go about compensating the rest of the world for the destruction of species and for the destructive climate changes that they are setting in motion? Herman Daly has pointed out that as Gross Domestic Product accounting does not take account of external costs and resource exhaustion, we have no idea if the value of output is greater than all of the costs associated with its production. The Soviet economy collapsed, because the value of outputs was less than the value of inputs.

Supply-side economics, with which I am associated, is not an alternative theory to neoliberal economics. Supply-side economics is a successful correction to neoliberal macroeconomic management. Keynesian demand management resulted in stagflation and worsening Phillips Curve trade-offs between employment and inflation. Supply-side economics cured stagflation by reversing the economic policy mix. I have told this story many times. You can find a concise explanation in my short book, “The Failure of Laissez Faire Capitalsim.” This book also offers insights into other failures of neoliberal economics and for that reason would serve as a background introduction to Hudson’s books.

I can make some suggestions, but the order in which you read Michael Hudson is up to you. “J is for Junk Economics” is a way to get information in short passages that will make you familiar with the terms of classical economic analysis. “Killing the Host” and “The Bubble and Beyond” will explain how an economy run to maximize debt is an economy that is self-destructing. “Super Imperialism” and “Trade, Development and Foreign Debt” will show you how dominant countries concentrate world economic power in their hands. “Debt and Economic Renewal in the Ancient Near East” is the story of how ancient economies dying from excessive debt renewed their lease on life via debt forgiveness.

Once you learn Hudson, you will know real economics, not the junk economics marketed by Nobel prize winners in economics, university economic departments, and Wall Street economists. Neoliberal economics is a shield for financialization, resource exhaustion, external costs, and capitalist exploitation.

Neoliberal economics is the world’s reigning economics. Russia is suffering much more from neoliberal economics than from Washington’s economic sanctions. China herself is overrun with US trained neoliberal economists whose policy advice is almost certain to put China on the same path to failure as all other neoliberal economies.

It is probably impossible to change anything for two main reasons. One is that so many greed-driven private economic activities are protected by neoliberal economics. So many exploitative institutions and laws are in place that to overturn them would require a more thorough revolution than Lenin’s. The other is that economists have their entire human capital invested in neoliberal economics. There is scant chance that they are going to start over with study of the classical economists.

Neoliberal economics is an essential part of The Matrix, the false reality in which Americans and Europeans live. Neoliberal economics permits an endless number of economic lies. For example, the US is said to be in a long economic recovery that began in June 2009, but the labor force participation rate has fallen continuously throughout the period of alleged recovery. In previous recoveries the participation rate has risen as people enter the work force to take advantage of the new jobs.

In April the unemployment rate is claimed to have fallen to 3.9 percent, but the participation rate fell also. Neoliberal economists explain away the contradiction by claiming that the falling participation rate is due to the retirement of the baby boom generation, but BLS jobs statistics indicate that those 55 and older account for a large percentage of the new jobs during the alleged recovery. This is the age class of people forced into the part time jobs available by the absence of interest income on their retirement savings. What is really happening is that the unemployment rate does not include discouraged workers, who have given up searching for jobs as there are none to be found. The true measure of the unemployment rate is the decline in the labor force participation rate, not a 3.9 percent rate concocted by not counting those millions of Americans who cannot find jobs. If the unemployment rate really was 3.9 percent, there would be labor shortages and rising wages, but wages are stagnant. These anomalies pass without comment from neoliberal economists.

The long expansion since June 2009 might simply be a statistical artifact due to the under-measurement of inflation, which inflates the GDP figure. Inflation is under-estimated, because goods and services that rise in price are taken out of the index and less costly substitutes are put in their place and because price increases are explained away as quality improvements. In other words, statistical manipulation produces the favorable picture required by The Matrix.

Since the financial collapse caused by the repeal of Glass-Steagall and by financial deregulation, the Federal Reserve has robbed tens of millions of American savers by driving real interest rates down to zero for the sole purpose of saving the “banks too big to fail” that financial deregulation created. A handful of banks has been provided with free money—in addition to the money that the Federal Reserve created in order to take the banks’ bad derivative investments off their hands—to put on deposit with the Fed from which to collect interest payments and with which to speculate and to drive up stock prices.

In other words, for a decade the economic policy of the United States has been run for the benefit of a few highly concentrated financial interests at the expense of the American people. The economic policy of the United States has been used to create economic rents for the mega-rich.

Neoliberal economists point out that during the 1950s the labor force participation rate was much lower than today and, thereby, they imply that the higher rates prior to the current “recovery” are an anomaly. Neoliberal economists have no historical knowledge as the past is of no interest to them. They do not even know the history of economic thought. Whether from ignorance or intentional deception, neoliberal economists ignore that the lower labor force participation rates of the 1950s reflect a time when married women were at home, not in the work force. In those halcyon days, one earner was all it took to sustain a family. I remember the days when the function of a married woman was to provide household services for the family.

But capitalists were not content to exploit only one member of a family. They wanted more, and by using economic policy to suppress pay while fomenting inflation, they drove married women into the work force, imposing huge external costs on the family, child-raising, relations between spouses, and on the children themselves. The divorce rate has exploded to 50 percent and single-parent households are common in America.

In effect, unleashed Capitalism has destroyed America. Privatization is now eating away Europe. Russia is on the same track as a result of its neoliberal brainwashing by American economists. China’s love of success and money could doom this rising Asian giant as well if the government opens China to foreign finance capital and privatizes public assets that end up in foreign hands.

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Austrian Peter

A most excellent post, thank you so much for a stunning summary of the status of this sad world that neoliberal economics has created.

I believe that a crisis event is due in the near term – some 2-3 years max. I have written a book (100,000 words) and have an e-copy available, trying to explain the why and how of our dysfunctional global financial system to ordinary people, although this author has achieved it in somewhat less words!

I have yet to get a publisher interested although I have emailed 100s of literary agents. The feedback generally advises that the subject is too controversial for them to publish.

I am offering my book (PDF) free on request to those who are interested: [email protected]

AS the article correctly argues, the assumption that the USA and world in general have been expanding for the last 10 years is based on the false premise of GDP. Since real inflation rates (taking commodity and assets together) far exceed nominal growth rates per the GDP deflator formula, we have in fact suffered negative growth or a prolonged, hidden global depression for 10 years. We have actually seen the end of growth as we have known it and evidence is everywhere to be found, not least of which is the oil energy resource or EROEI. My book explains all this and much more, here’s a list of subjects:

Preface
Introduction (to a Bank Robbery)
Money
Commercial Banks
Credit & Debt
Central Banks
Government Finances
European Union
Markets
Financial Engineering
Inflation & Deflation
National Economies
Macroeconomics101
The End of Growth
The New Emergent Economy
Epilogue

Just thought you should know that we are all being fooled by fudged statistics and QE/ZIRP.

Austrian Peter

I had a look for the book: J Is for Junk Economics on Amazon. They want £40 for used paperback copies – what! Think I’ll wait until they get cheaper and live in ignorance.

RHS Jr
RHS Jr

In simple English, Congress can skin and enslave the common people forever to pay the Banksters or We The People can make Congress skin the Banksters just once and for all; and start American Banking over according to the Constitution, the way Banking ran before 1913 (when Congress legalized the Rothschild Federal Reserve).

MN Steel
MN Steel

Hmmm…

And I wondered why I took Econ101, didn’t have a clue as to all the BS the Prof was spouting, exam questions had nothing to do with lectures, and escaped with the ol’ D For Done.

Ended up with a 3.3 and figured out economics later…

To the extent any economics make sense anymore.

wholy1
wholy1

PASS. The time/cost better spent growing GM/chem-free edibles on a portion of UNaddressed, UNencumbered, inland, rural dirt while being very “neighborly” and living . . . S-I-M-P-L-I-F-I-E-D while the “coasters/citYzens” eventually go beserk killing each other over the left-overs of the goose carved up by the PTBs that have bugged out to their remote, highly fortified and provisioned redoubts.

Chubby Bubbles
Chubby Bubbles

It’s slowly (verrrry slowly) sinking into mainstream comprehension that “the economy” runs on actual stuff, like fossil fuels, clean air, clean water, readily-available materials, etc., rather than running on “money”, which is a chit representing that stuff, except only in the future and diluted by how many ever chairs the people in the Musical Chairs Game feel like adding this week and how many humans religionists and growth-oriented politicians desire we poop out. [Right now it’s something like 200 net per minute.]

Only the most marginalized of economists know what is really going on.. even Hudson is just skimming the surface. You don’t even want to waste time with the “Ecological Economists” who try to run the same Ponzi game whilst factoring in “ecosystem services” which they randomly assess in dollar form.

Check out the BioPhysical Economists, eg. Charles Hall:

Chubby Bubbles
Chubby Bubbles

The End of Growth is happening right on schedule, and (like its Siamese twin, ecological collapse) it Breaks All the Stories. All the narratives of investing, of compounding interest, all the stories of human and social progress… are rendered meaningless as we return to a (JHKunstler) World Made By Hand, to the extent that the planet will even provide us that, given our numbers and the devastation already wrought*.

We are in a phase of De-Growth .. a decline in net available energy per capita, which will not end in our lifetimes, if ever.

*Check it out: this is the reality:

https://oceanportal.tumblr.com/post/75925769261

Austrian Peter

You are so right Chubby Bubbles, I have a Chapter in my book: “The End of Growth” which deals with the subject exactly as you say. Happy to send you a copy PDF : [email protected]

Rainwaterrunningdog
Rainwaterrunningdog

How the bloody hell can you, type into the very end of the educational story, Capitalism is faulted. Businesses, millions of dollars worth, regularly subsidized. Corporate welfare, mass public welfare, bail out, bail in, foreign welfare and the list goes on. All of the sudden it is Capitalism ? America has not had it for OVER A DECADE! Lets blame it on………..Bush or Clinton! That’s it!

Chubby Bubbles
Chubby Bubbles

Oh yes, Capitalism has been tried and it has made a lot of money for a lot of people. It just doesn’t work in a world of declining per capita energy and resources.

“Capitalism” is basically a shell game by which people ostensibly “invest” Inside the System, but rack up gains funneled in from Outside the System (think Spain and New World gold, Italy and Eastern silks and spices, England and the East India Co., modern-day banks and the last 100 years’ blowout in fossil fuels, etc.).

When anyone loans at interest, no matter how low the rate, that extra percentage NEEDS TO COME FROM OUTSIDE THE SYSTEM. When the system is fully globalized.. when Nixon goes to China and you can’t replicate that again.. there is no place else to *get* that 4% or whatever per annum (why ancient societies outlawed loaning money at interest, and/or held regular debt jubilees).

We cannot expect a yield greater than that which the real solar economy can provide. As fossil fuels decline at a rate approaching 6%/year (Exxon, HSBC), the “interest” which is falsely reckoned as magically appearing from Within the Capitalist System in all its Wondrous Beneficence is going away.

Hence the End of Growth.

It’s a pretty simple concept yet not at all on the radar of any regular economist or financial bloviator.

========
Laws of Thermodynamics:
– You can’t win.
– You can’t break even.
– You can’t get out of the game.

There will still be individual winners and losers, but overall global industrial society is on a losing streak which won’t end in our lifetimes, if ever.

There never has been any way to “grow the pie higher”.

Austrian Peter

Well said, we are being confused by refering to our current systems as ‘capitalism’. It is nothing to do with true capitalism because the markets are fixed, the money system is a ponzi fraud and the politicians are all corrupt beyond all help.

Only the coming collapse can perhaps sterilise TPTB and allow an emergent new system to prosper – we can but hope.

hardscrabble farmer

It’s actually much simpler than that.

Economies only exist in human terms, they are a theoretical construct based on observed behavior and they are an exclusive creation of man.

Mankind only has two methodologies in passing between birth and death; Freedom and Slavery.

All economies are either free- each individual/family/clan/tribe/community/state/nation may use the available ideas, creations, labor, skills and resources that they possess to improve their general condition for their benefit, or they are enslaved, either by individuals/families/clans/tribes/communities/states/nations in order to extract their ideas, labor, skills and resources to improve their general condition at the expense of the enslaved.

2 economic models exist and all we are talking about is the myriad details of how to operate in either of the two.

I have yet to see any kind of economic model that does not fit in one of those two states.

Freedom/Slavery.

You know which one we labor under.

Greenhead
Greenhead

Brilliant!

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