RWER issue 57: Michael Hudson
How economic theory came to ignore the role of debt
Michael Hudson
Starting from David Ricardo in 1817, the historian of economic thought searches in vain through the theorizing of financial-sector spokesmen for an acknowledgement of how debt charges (1) add a non-production cost to prices, (2) deflate markets of purchasing power that otherwise would be spent on goods and services, (3) discourage capital investment and employment to supply these markets, and hence (4) put downward pressure on wages.
What needs to be explained is why government, academia, industry and labor have not taken the lead in analyzing these problems. Why have the corrosive dynamics of debt been all but ignored?
I suppose one would not expect the tobacco industry to promote studies of the unhealthy consequences of smoking, any more than the oil and automobile industries would encourage research into environmental pollution or the linkage between carbon dioxide emissions and global warming. So it should come as little surprise that the adverse effects of debt are sidestepped by advocates of the idea that financial institutions rather than government planners should manage society’s development. Claiming that good public planning and effective regulation of markets is impossible, monetarists have been silent with regard to how financial interests shape the economy to favor debt proliferation.
The problem is that governments throughout the world leave monetary policy to the Central Bank and Treasury, whose administrators are drawn from the ranks of bankers and money managers. Backed by the IMF with its doctrinaireChicagoSchooladvocacy of financial austerity, these planners oppose full-employment policies and rising living standards as being inflationary. The fear is that rising wages will increase prices, reducing the volume of labor and output that a given flow of debt service is able to command.
Inasmuch as monetary and credit policy is made by the central bank rather than by the Dept. of Labor, governments chose to squeeze out more debt service rather than to promote employment and direct investment. The public domain is sold off to pay bondholders, even as governments cut taxes that cause budget deficits financed by running up yet more debt. Most of this new debt is bought by the financial sector (including global institutions) with money from the tax cuts they receive from governments ever more beholden to them. As finance, real estate and other interest-paying sectors are un-taxed, the fiscal burden is shifted onto labor.
The more economically powerful theFIREsector (Finance, Insurance and Real Estate) becomes, the more it is able to translate this power into political influence. The most direct way has been for its members and industry lobbies to become major campaign contributors, especially in theUnited States, which dominates the IMF and World Bank to set the rules of globalization and debt proliferation in today’s world. Influence over the government bureaucracies provides a mantel of prestige in the world’s leading business schools, which are endowed largely byFIRE-sector institutions, as are the most influential policy think tanks. This academic lobbying steers students, corporate managers and policy makers to see the world from a financial vantage point.
Finance and banking courses are taught from the perspective of how to obtain interest and asset-price gains through credit creation or by using other peoples’ money, not how an economy may best steer savings and credit to achieve the best long-term development. Existing rules and practices are taken for granted as “givens” rather than asking whether economies benefit or suffer as a whole from a rising proportion of income being paid to carry the debt overhead (including mortgage debt for housing being bid up by the supply of such credit). It is not debated, for instance, whether it really is desirable to finance Social Security by holding back wages as forced savings, as opposed to the government monetizing its social-spending deficits by free credit creation.
The finance and real estate sectors have taken the lead in funding policy institutes to advocate tax laws and other public policies that benefit themselves. After an introductory rhetorical flourish about how these policies are in the public interest, most such policy studies turn to the theme of how to channel the economy’s resources into the hands of their own constituencies.
One would think that the perspective from which debt and credit creation are viewed would be determined not merely by the topic itself but whether one is a creditor or a debtor, an investor, government bureaucrat or economic planner writing from the vantage point of labor or industry. But despite the variety of interest groups affected by debt and financial structures, one point of view has emerged almost uniquely, as if it were objective technocratic expertise rather than the financial sector’s own self-interested spin. Increasingly, the discussion of finance and debt has been limited to monetarists with an anti-government ax to grind and vested interests to defend and indeed, promote with regard to financial deregulation.
This monetarist perspective has become more pronounced as industrial firms have been turned into essentially financial entities since the 1980s. Their objective is less and less to produce goods and services, except as a way to generate revenue that can be pledged as interest to obtain more credit from bankers and bond investors. These borrowings can be used to take over companies (“mergers and acquisitions”), or to defend against such raids by loading themselves down with debt (taking “poison pills”). Other firms indulge in “wealth creation” simply by buying back their own shares on the stock exchange rather than undertaking new direct investment, research or development. (IBMhas spent about $10 billion annually in recent years to support its stock price in this way.) As these kinds of financial maneuvering take precedence over industrial engineering, the idea of “wealth creation” has come to refer to raising the price of stocks and bonds that represent claims on wealth (“indirect investment”) rather than investment in capital spending, research and development to increase production.
Labor for its part no longer voices an independent perspective on such issues. Early reformers shared the impression that money and finance simply mirror economic activity rather than acting as an independent and autonomous force. Even Marx believed that the financial system was evolving in a way that reflected the needs of industrial capital formation.
Today’s popular press writes as if production and business conditions take the lead, not finance. It is as if stock and bond prices, and interest rates, reflect the economy rather than influencing it. There is no hint that financial interests may intrude into the “real” economy in ways that are systematically antithetical to nationwide prosperity. Yet it is well known that central bank officials claim that full employment and new investment may be inflationary and hence bad for the stock and bond markets. This policy is why governments raise interest rates to dampen the rise in employment and wages. This holds back the advance of living standards and markets for consumer goods, reducing new investment and putting downward pressure on wages and commodity prices. As tax revenue falls, government debt increases. Businesses and consumers also are driven more deeply into debt.
The antagonism between finance and labor is globalized as workers in debtor countries are paid in currencies whose exchange rate is chronically depressed. Debt service paid to global creditors and capital flight lead more local currency to be converted into creditor-nation currency. The terms of trade shift against debtor countries, throwing their labor into competition with that in the creditor nations.
If today’s economy were the first in history to be distorted by such strains, economists would have some excuse for not being prepared to analyze how the debt burden increases the cost of doing business and diverts income to pay interest to creditors. What is remarkable is how much more clearly the dynamics of debt were recognized some centuries ago, before financial special-interest lobbying gained momentum. Already in Adam Smith’s day it had become a common perception that public debts had to be funded by tax levies that increased labor’s living costs, impairing the economy’s competitive position by raising the price of doing business. The logical inference was that private-sector debt had a similar effect.
You may download the whole paper at: http://www.paecon.net/PAEReview/issue57/Hudson57.pdf
Why does no one consider the rent on money (interest) In terms of deadweight loss where the loss is always more than the rent itself?
What a despicable and inefficient way to make a dollar by costing some other person two dollars or more.
Even the hated taxes might in some way assist with the production of a product (roads, security, defense, ect).
Interest cost is almost exclusively unproductive and is spent on consumption or lent to create more debt.
The cost is passed to and paid by producers with the lowest elasticities.
Lenders should pay for all social security, welfare, food stamps, health care and most wars because they are the cause of all of these problems.
Thanks, Robert
Interest is not economic rent. Pure interest has no deadweight loss – it is based on voluntary action rather than an imposed cost. Pure interest is based on time preference, as most folks prefer to get goods sooner rather than later, and are willing to pay the interest premium to shift purchases from the future to the present day. What is misleadingly called “interest” today is mostly premia from inflation, taxation, risk, and privileges.
That is an interesting way to look at it but someone has to borrow or else the money supply leaves the productive economy and returns to the financial economy (lenders).
When borrowing slows, it creates a recession. People have to borrow to survive until better days.
Although it looks voluntary it is not.
Thanks, Robert
I should explain myself better. What you say is true for simple debt. We are dealing with “Lender Created Debt” which is caused by lenders (anyone with interest income) re-lending their interest instead of spending it (compounding interest).
When the total debt being serviced equals the total supply of money, all money has to be borrowed.
Wages are lowered because of interest, interest administration and interest deadweight loss in the cost of all products.
Money is kept in short supply by the Fed to combat inflation.
The debt proceeds to several multiples of the money supply until there becomes a shortage of qualified borrowers.
Thank God there is the irresponsible government to borrow money at lower interest rates spend it on anything and keep a workable level of money in circulation.
Lower quality debts are defaulted on until the debt is lowered and some balance is restored.
So now here is the situation.
My pay has been reduced to about 1/4 of what my product is worth.
Do I want to wait and save to buy a house or am I willing to sign any kind of note as long as I can make the payments.
In “Lender Created Debt”, interest is involuntary.
Thanks, Robert
It all started with hire purchase in the 1950s and from there has got so much worse. Borowing substituted for saving. New substituted for make do. Keeping up with the Jones’s became the advertising push. Mum had to go to work to help pay for the never never system. Yet still the centrak baks want to keep the borrowing rates low. Why? And why now?
“My pay has been reduced to about 1/4 of what my product is worth.”
Robert, why don’t you quit and become self-employed, and thereby quadruple your wage?
The profit of all producers is a fraction of what there product is worth,self employed or not. There is no way around interest.
Thanks Robert
It occurred to me this week on revisiting my ancient links to Club of Rome associates that Hudson provides an arrow that seems to have been hitherto missing from their quiver. An alliance is in order.
I’m lucky. I’ve got a pension, so I can work voluntarily at what needs doing. But Robert, it’s not the produce that is valuable, it’s the people …
Thanks, Michael Hudson, for an instructive and significant paper.
Great paper.
As it happens I am reading Keynes’ General Theory right now so I will keep your remarks about him in mind. If there is one point of criticism it is that you don’t mention Hyman Minsky (his book about Keynes is next on my list).
Michael Hudson
I see that I’ll have to clear the air from the Austrian school nonsense that Fred Foldvary spouts about interest being “time preference.” Many years ago (1994?) he invited me to present a paper on economic thought and I addressed this very issue. He refused to publish it – the only unpublished paper in his volume.
Subsequently, as a “Austrian-Georgist” (an oxymoron, I realize, but that’s what they call themselves) the very thought of interest being “economic rent” made any discussion of them with me anathema.
The fact is that from the 13th century on, the FIRST concept of economic rent WAS the theory of a Just Price – for banking services. Georgists insist on applying the concept only to land rent (hence, their former name “Single Taxers”). This is tunnel vision – backed by a censorial approach typical of “free market” theorists.
Viennese time preference for businesses is supposed to reflect the increasing capital-intensiveness of “roundabout” production. But this is not confirmed statistically. “Your money or your life” is not really the kind of choice that most people would deem to fall in the psychic utility range that “explains” consumer interest (as when you borrow to pay a hospital when an emergency arises, or to avoid starvation).
The Austrians and Chicago boys have contributed an important insight: The only way to get a “free market” Chicago style is to exclude or even assassinate (Operation Condor) everyone who disagrees with you and seeks to have the government shape the markets within which choices and especially coercion operate.
So if there’s a demand for it, I’ll publish my commentary on the Austrian school’s time preference theories of interest.
The reality, of course, is that interest rates are set today by the central bank. That’s what QE2 was about, at 0.25%. No “psychology” here – except the wealth addiction of the financial sector, trying to enable the economy to pay interest by lending it the money. To do this, it promotes asset-price inflation, so that it can pretend there is more collateral.
Michael Hudson
I’d be very interested in reading your commentary on the Austrian school’s time preference theories of interest. The Austrian school has been aggressively promoted especially on the internet and I think it’s important that people have access to critiques of the Austrian theories which are very dogmatic.
Occasionallly there is a comment that really nails it. Thanks to Micael Hudosn this time for this gem
“That’s what QE2 was about, at 0.25%. No “psychology” here – except the wealth addiction of the financial sector, trying to enable the economy to pay interest by lending it the money. To do this, it promotes asset-price inflation, so that it can pretend there is more collateral.
Yeah. Im a bit over the financial sector. So, it seems are a lot of people, whos money is involuntarily mixed up in the hype and nonsense. Here is an example…..
Three nights ago I was watching Skybusiness on foxtel for Australia and along comes this “financial sector expert” for an interview, who claims to have examined every stock on the ASX rigorously for a range of common indicators such as ROI, ROE, Dividend payout ratio, debt/equity ratio bla bla bla
He then concludes there are only 9 companies out of all 2400 odd that “met our strict criteria” and are really sound companies to invest in. So me writes them all down. In the morning I research all 9 of his recommendations on the ASX website to find that of the 9 stocks he chose only 7 have been actually listed on ASX longer than since March 2011..
Newbies..the lot of them.
But of course he did mention his firm owned a couple of the businesses…or did they own 7 out of the 9?
so, as for the other 2 out of 9 – I concluded whilst the names were known, they were too highly priced in their cycles.
That’s what QE2 was about, at 0.25%. No “psychology” here – except the wealth addiction of the financial sector, trying to enable the economy to pay interest by lending it the money. To do this, it promotes asset-price inflation, so that it can pretend there is more collateral.
Michael Hudson
That is exactly right. The money has to be borrowed or even pulled out of the lenders hat and given away to pay yesterdays interest. That is one of the reasons government borrows to pay for social programs. It assumes debt so lenders can be paid in a timely manner.
Look how much the private sector debt in the US contracted as people were unwilling or unable to borrow when housing lending slowed down. The money (liquidity) had to to be created by government borrowing to keep the interest payments flowing in.
Thanks, Robert
In response to Michael Hudson, I am personally in favor of analyzing and discussing interest as economic rent. Georgists agree that economic rent exists other than for land, and their opposition to taxing wages that are economic rent is moral rather than economic. The Austrian (Viennese) theory of time preference applies to all human beings, not just business. In my analysis, time preference is not based on roundabout production, but rather on consumers seeking to shift purchases to the present day due to the uncertain future and the limited human lifespan. Thus they are willing to pay an interest premium to e.g. purchase a car today rather than waiting years to accumulate savings. Most borrowing is not the urgent type e.g. hospital treatment (for which usually the payment is from insurance or a medical plan). I know of no Austrian-school economist who advocates assassination.
Yes, “interest” rates are today set by central banks. Time preference explains the natural rate of interest in a free market, and Austrian theory analyzes the distortions caused by the imposed rate being different from the natural rate, since we don’t have a free market. Time preference is still in effect, however, just as the desire of households to own cars exists, but their actual purchases are distorted by taxation and subsidies, hence the outcome cannot be ascribed merely to household desires. The Fed is in effect subsidizing “interest” rates to borrowers indeed to promote asset-price inflation as artificial collateral or to prevent greater asset-price deflation than has taken place in land values, and thereby also to prevent the greater loss of artificial bank-held collateral. The Fed-set rate of debt service is not pure interest but includes a subsidy discount from what would otherwise be the pure rate.
Why should anyone have to rent out credit notes printed by bankers when the real credit is given – from surplus is already available – by those who supply real goods and services?
Despite perhaps learning about compound interest at primary school, what economists are failing to see (or trying to prevent us from seeing) is that it is the percentage mark-up when charging for time that is logarithmic and causing our exponential monetary inflation. So much for all their hifalutin mathematics! Fair enough to pay 10 cents premium for a making a new dollar note “out of thin air”, but not ten cents a year.
“Why should anyone have to rent out credit notes printed by bankers when the real credit is given – from surplus is already available – by those who supply real goods and services?”
Dave Taylor
Now that is an excellent question that deserves an honest answer.
Quick answer:
Because the lenders own the money. They own the money because it has been paid to them as interest for the last several thousand years. All they have to do is not spend ALL of their interest and the productive people will have to pay more interest to rent it again and again and again.
Long answer:
The primary use of money is as a measurement tool. Rent on that money makes the measurement wrong.
There are some things that you should not rent.
1. Hamburgers. Because the only way to return a hamburger in usable form is to rent another one to return and then another one and then another one,ect.
2. Tuxedos to bury people in. Because the rent goes on forever.
3. Money. Because there is not an infinite amount of money in circulation, and if the lenders do not spent the interest, imaginary money has to be borrowed to pay the interest, again and again and again…….. The cost of that interest is included in everything that is produced.
Example, Bread = $1.00 = $.25 flour + $.25 labor + $.50 interest = price wrong by 50%.
It comes down to a choice.
Is it better to get full pay for your product or is it be better for some people in the economy to be able to borrow and lend?
Time preference doesn’t work.
Say a person needs an economics degree to get a position with the Obama Administration.
Why not just go to the university registrars office and pay the clerk to enter a degree on their transcript. Of course a promise must be given that a degree will be obtained within 4 years. It might work the first time and it might work again but eventually grades denoting competence in a subject will mean nothing at that institution.
How about the qualified economist that President Obama was denied the service of?
All “time preference” does is let one person jump place in line. The lender gets paid but not the others in the line that lost a turn.
Paying to fake a measurement doesn’t work with money or grades. all you get is bad measurements. Bad measurements = bad data.
Most loans are not positive sum.
The fact that the baker gets a loan to buy flour that allows him to bake bread is meaningless considering the opportunity cost that was lost when he didn’t get the full pay the last time he made bread.
Just because someone is willing to pay to jump place in line says nothing about his productive capacity or intentions.
Interest does not benefit an economy. It is just an ancient and complicated way to steal.
If the economics department could answer Dave Taylor, all society would benefit as we benefit from the disciplines of the engineering or chemistry departments.
Thanks, Robert
Michael Hudson’s article “How economic theory came to ignore the role of debt” has brilliant insights and superbly traces the economic history of debt. However, I question the statement that interest cannot be assignable to factors. If a worker borrows funds to get training that increases his human capital and wages, then his payment of interest is part of his wage that goes to the lender. If he borrows for consumption, the interest payment is a portion of wage that reduces his future consumption. If one borrows to buy land, the interest is land rent paid to the lender. Thus the factor that borrows pays the interest from the income of the factor.
As for Dave Taylor’s question regarding “exponential money inflation,” compound interest does not require exponential increases in the money supply. See http://www.progress.org/2011/fold710.htm
Having looked up Fred as well as the argument link here, his Universal Ethic (http://www.foldvary.net/works/ue1.html) gets to the root of where I respectfully disagree with him. (I respect his having tried to consider his position, though Locke’s argument was based on 17th century science).
In brief, he is seeing outcomes as the sum of independent actions, but actions change actors, who can respond only insofar as they are able to know what they are doing and how to respond. Thus, whereas Fred still sees actions as good, evil or neutral, I see actions as right or wrong, actors as good or bad, types of action as worthy or wicked, and actors able to lead OTHERS to become worthy as honourable, those and their creations evil whose lies create an ethos misleading OTHERS into performing wicked actions, thinking them good or even honourable.
That people can be permanently influenced by what is communicated to them by others destroys Locke’s assumption that people are independent, while our having four parts to our brain but characteristically using only three leaves us dependent on others for doing what we can’t do. Fred’s economic argument seems to work when he uses marginal quantities, but it doesn’t where couples are having to pay so much for interest on housing they are struggling to eat, so if one opts out the other has no “future consumption” left to forego. That is a neutral act in Fred’s vocabulary, a case of the evil of selfish usury in mine.
Michael Hudson’s article is very timely and provides a great foundation for further exploring the subject of debt which is on everyone’s minds today.
The RWEB is also great for its providing a platform for discussions of this kind between so many knowledgeable and intelligent people. I feel very fortunate to be allowed to comment.
Everyone should read Fred Foldvary’s link to debunking the “debt money fallacy’.
Fred, I agree with everything you say and you say it well. I wish I could write that well.
The problem is is that there are two kinds of debt:
1. Simple Debt
2. Lender Created Debt
In an economy that has no debt, the first loan that is made is simple debt. It works exactly like you describe. A person or firm gets a loan buys education or tools of production, anything that increases the efficiency in productivity of needed things. Increased productivity benefits everyone in society. The loan is paid back and the lender spends their interest on something that is produced. Everything is great.
In “Lender Created Debt” the lender does not spend his interest received but instead lends it again. He does it again and again and again (compound interest) until he owns the entire money supply of that economy.
The example that demonstrates this mechanism is very tedious for me and the reader. I will only begin it here unless someone asks for the full version.
The money supply is $100.00 in gold coins.
The lender lends $5.00 at 10% is paid back $5.50 at the end of the year.
Lends $5.50 and at the end of the second year is paid $6.05.
Lends $6.05 and is paid $6.65.
10 years payment is $12.96.
20 years is $33.63
32 years is $105.56
There is only $100.00 in money the payment cannot be made.
This problem is usually solved by the lender creating personal notes that take the place of money but of course, bear interest. From this point on all new money is created as an interest bearing loan.
There are many variations that could be explored but all are dead ends in that they provide no benefit to the productive economy. I will list a few of them here.
1. There could 2,3,4,5…… lenders. The “All of the money has to be rented date” occurs much in less than 32 years.
2. With multiple lenders, loan maturity can be staggered effectively lending the same money many many times. If staggered correctly, a one year $100.00 loan could be made on Monday. That same money could be lent to someone else on Tuesday. On Wednesday the holder of the money could lend it again, and so on. If lenders worked on weekend and holidays maximizing this scheme $100.00 could result in $36,000 of loans in the first year with $3600.00 due in interest. Productivity cannot possibly maintain this rate of increase. How much lending can any given economy support.
3. New gold could be found in quantities that could pay the interest. That is great, but the lender(s) still own it. If you want to use it you have to rent it.
4. Fiat money can be issued in any quantity.
5. The lender(s) could spend a portion of their interest income instead of compounding it.
Their choices are:
A. All of the interest income each year.
They could spend this forever and the producers would have to produce just to rent the money.
B. None of their interest income.
Their principle and the productive economies total debt increases.
C. A portion of their yearly interest income. (This is what really happens.)
Say they spend on average 50% of their interest profit every year. They could spend this forever because the rent just keeps coming in and the total debt still increases, although slower.
Quoted From Your “Debt Money Fallacy Paper”
No new money is needed for Charles to pay the loan plus interest. The payment comes from the reduction in his future consumption, as the loan shifts $100 of consumption from the borrower to the lender. The lender will consume $100 more while Charles consumes $100 less.
The lender could “consume” his interest on pizza, beer, a new computer or to help get his favorite public official elected. But if he decides to “invest” the money in creating more debt (rent seeking activity) someone will have to pay him to use his money.
Total debt is at the discretion of the lender(s).
Thanks, Robert
Regarding Robert and compound interest, in the $100 gold coin example, if there are no money substitutes and no fractional reserve banking and the loans are for investment, that would create more output. With a greater supply of goods and the same amount of money, the price level would fall. When the debt becomes greater than the amount of gold, then the borrower would have to pay with a promissory note. By necessity they would create money substitutes that would limit the further fall in the price level. Unless prohibited, the supply of money substitutes (bank notes) would increase with the introduction of fractional reserve banking. A free market in money is not limited by gold, as money substitutes convertible into gold will be expanded to match the demand for the money substitutes.
We are in total agreement concerning the mechanics.
It is the second and third effects where we diverge.
Fred said,
Regarding Robert and compound interest, in the $100 gold coin example, if there are no money substitutes and no fractional reserve banking and the loans are for investment, that would create more output. With a greater supply of goods and the same amount of money, the price level would fall.
Robert reply’s,
Higher efficiency of production means lower price per item.To that price is added the cost of the interest. This could be higher or lower than the original price depending on the % of efficiency increase vs the interest rate. That is the first effect. In the second effect we must consider that the capital purchase that increased the efficiency probably has a finite lifetime but the interest goes on forever until the lender spends all of the collected interest into the productive economy.
Fred said,
When the debt becomes greater than the amount of gold, then the borrower would have to pay with a promissory note. By necessity they would create money substitutes that would limit the further fall in the price level.
Robert reply’s,
Money substitutes can replace a shortage of gold but they all come into existence as an interest bearing note. That is what prompts the statements that “Today’s loan is necessary to pay yesterdays interest.” and “You can’t pay a loan with a loan.”
Also even though the deflation can be somewhat checked with money substitutes, the distribution is not uniform among all of the various producers in an economy. The lower wage producers supply curve is more inelastic than the higher wage producers so they get screwed.The problem in the US today is not total production but the distribution of that production.
Another thing is that we have not even begun to talk about the deadweight loss, negative externalities, ect from the paying of rent on the money. What would productivity be if not for Social Security. I have heard it estimated that playing the SS ponzi to replace workers wages lost to interest payments has reduced productivity increases by 1% per year for the last 80 years. 1.01 to the 80th power equals 2.22 times the productivity of what we have today. This would include medical productivity. Would you rather go to a doctor today or one that is 30 years ( just an estimate, put any number in here you like as long as it is positive) more advanced in medical technology.
Fred said,
Unless prohibited, the supply of money substitutes (bank notes) would increase with the introduction of fractional reserve banking. A free market in money is not limited by gold, as money substitutes convertible into gold will be expanded to match the demand for the money substitutes.
Robert reply’s,
Sometimes it does and sometimes it doesn’t. I understand that the idea of fractional reserve banking is to have a mechanism in place to coordinate the creation of money substitutes between lending institutions. The theory being the more money need in the economy the more loans will be taken out. At some production to debt ratio this might work but when this magic ratio is changed the economy cycles. If times are good too many loans are made on projects that don’t pay off. (remember each project must pay off and pay forever because the interest can go on forever.) When production doesn’t keep pace with loan payments that come due, some loans do not get paid so the lender gets screwed and has to go back to honest work.
Why are they giving people rebates on cars and credits on mortgages to get them trapped into a loan that they otherwise would not accept?
Interest bearing debt is a bad way to regulate a money supply. If it works at all it depends on someone getting screwed and taking it.
Thanks, Robert
@ #17. Whether or not compound interest requires exponential money inflation, we have it, and if Fred takes the trouble to count the year-by-year costs of interest charges on state, business and household mortgages, he will see why. Agreed, this is not logically required, insofar as those with the power to increase the money available choose (as they are now doing) not to do so; but really, we then still have what Fred says we have now: interest charges on past purchases going to ravenous bankers (and to those who as of now don’t need credit) from the already inadequate incomes of those who do, despite these earning their keep given half a chance. Hence the nursery rhyme:
The king was in the counting-house, counting out his money.
The queen was in the parlour, eating bread and honey.
The maid was in the garden, hanging out the clothes,
When down came a black bird and pecked off her nose.
@#19, Fred says, IF the loans were for investment then output would rise. But back in 1998 Anthony Giddens, then director of the London School of Economics, so he ought to know, pointed out that “Of the trillion US dollars’ worth of currencies exchanged every day, only 5% relate to trade and other substantive economic transactions. The other 95% is made up of speculations and arbitrages, as traders wielding huge sums look for rapid profits on exchange rate fluctuations and interest rate differentials”. I understand that proportion is still higher now.
The point is that buying and selling second hand shares isn’t productive investment, and these guys don’t usually gamble with their own money. Their huge short-term borrowings are more profitable to the banks than the relatively small amounts of long-term credit the rest of us need. Their interest charges and capital gains made on interest differentials are laundered by being paid as higher prices by the rest of us, to keep up the stock market profitability valuations on which banks rate the security of real and speculative borrowings alike. It is a moot point whether the best word for this is ‘complicated’ or ‘crooked’.
In light of this, UK Chancellor Osborne’s proposals for reforming the banks (in 2019!) look like window dressing.
Foldvary’s Austrian economics is a travesty of reality. Most loans are NOT productive.
Take the case he cites: education loans. These are in many cases bankrupting gullible students who went to technical schools. The effect of student loans has been to let colleges and universities raise tuition fees far further than was formerly possible — and to “privatize” public education.
Making the population take on a lifetime of debt to get a job enables the banks to siphon off wage and salary revenue.
It’s the same with mortgage loans: Easier credit terms have led to debt-leveraging, with home buyers able to afford loans only by paying the rental value (that used to be taxed) to the banks — forcing local government to tax labor instead of property.
that’s what Austrian economics is: disinformation that bank lobbyists use to depict a happy-face world where lending is productive, not parasitic.
Economists who promote this unrealistic picture are part of the banking system’s parasitic and destructive ideology.
Don’t let them get away with it!
Oh mi god – I have had three students cry o mne at the end of my class today downunder – they have failed micro not once but twice a nd one three times but are are paying $3000 $A each time (one subject one semester) at a private college that gives them uni entry if they pass diploma level. The Government of Australia has apparently booked their fees to Hecs – higher education contribution scheme and hey presto the govt has created the loan to the student.
The students dont have to pay back till they start earning money, so they tell me. Nice little earner for the government because its plus interest. We have an entire generation of uni students being impoverished by BS (double BS) high tuition fees and fake “low interest (ha ha) loans” and even the government is on the cheap loan provider bandwagon……
Curse the government for impoverishing a younger generation and turning the government itself into a cheap loan banker to our young who are only trying to get a real job while the government ignores bloody rising unemployment and marginal labour force attachment.
The students will do what it takes. They are slaves to this system of usury.
Sack the government I say, for the reason being that they have joined the profligate banks and are trying to profit intrusively (and this is no public service) from their citizen voters.
Out with them. What will it take? A revolution to stop them bleeding us dry?
Well yes, Michael. But are Fred’s evil Austrian arguments all his own work, or has he himself been taken in by the likes of the dishonest Hayek? (“The Road to Serfdom” perversely used Belloc’s “The Servile State” as an argument against socialism, only those who have read that knowing it was a seminal argument against BOTH liberal and state forms of Capitalism).
Better to cure Fred than condemn him?
Indeed better to sure Fred because he doesnt relaise that free markets are just as much a road to sefdom as his despised state control.
I just keep saying to myself “economics is all about equilibrium”. Shame so few economists recognise it. Ego in this profession always wants to model a brave new world yet ignores the world we live in.
In response to where I got my ideas, I studied Austrian economics in graduate school at George Mason University, where I read the works of Menger, Mises, Hayek, Selgin, White, Rothbard, Garrison and others. I had previously read the classical school works of Smith, Ricardo, and George, and I retained my Georgist ideas, so I was not easily brainwashed.
I have yet to read a warranted statist explanation of why freedom is evil. When I was an undergraduate, the Vietnam was was raging and the government wanted to force me to join the army and possibly get killed. I would like an explanation of why it was morally good for the government to kidnap me and force me to kill others. Also explain how central banking, income taxation, and the war on drugs are free-market institutions.
I never said that all loans are productive. I divide loans into those for productive investment and for consumption. Most of college schooling is consumption. Much of this schooling is probably a waste of resources. Note that students loans are a government program, part of the governmental push for college schooling (see my commentary http://www.progress.org/2010/fold678.htm)
In a pure market, labor would not be taxed, and enterprise not arbitrarily restricted, so that students would find ready employment in part-time jobs and not need student loans. Many students would get training in practical skills rather than spend huge amounts of funds for unproductive schooling.
If you want to cure me of Geo-Austrian ideas, please explain with logic and evidence why freedom is evil and why slavery is morally good.
In response to Dave Taylor’s arguments regarding ethics, I don’t see how “actions change actors” rebuts my categories of actions as good, evil, and neutral. The proposition that “actors are good or bad” is unclear, since in my judgment, ethics can only judge actions, not the actors. People engage in actions that are good as well as bad, so to label a person as “good” is essentially a poetic metaphor. Locke’s premise of human independence is that persons think and feel individually, not that we are socially unconnected.
Dave Taylor needs to analyze why people are paying so much interest for housing. The portion of interest that pays for land value is unproductive and a result of government subsidies to land value, including tax deductions, exemption for capital gains, and the generation of land value from public works. Governmental redistribution of wealth from workers to landowners is indeed an evil. Dave, do you advocate land-value taxation, and if not, why not? Do you advocate the elimination of taxes on labor? If not, why not?
Fred says
“Dave Taylor needs to analyze why people are paying so much interest for housing”
This sounds alot like “why are people paying do much for petrol? Why are people paying so much for electricity?”
Maybe its because they cant live without it (housing). Maybe because a permanent address is better than an impermanent address.?
Maybe housing its overpriced but people still need a roof over their heads Fred….and that beats sleeping rough.
Is Fred sure he has looked at all the costs and benefits when it comes to people paying a lot for interest on their houses and has he researched why people are paying so much interest for housing ??(and hey – poor people pay more interest than rich people as well – u know risk and all that ..)
Seems a strange request in these times/
Order, order, order!
Debt can, literally, lead to slavery – this even happens in our societies: http://rmfoundation.arsls.net/DebtBondage.HTMLHowever.
Which is nothing new: it happened already in Mesopotamia and even seems to be intimately connected to the develoment of money. See the fabulous new book: ‘Debt, the first 5,000 years’ by David Graeber. http://www.ritholtz.com/blog/2011/09/debt-the-first-5000-years-dr-david-graeber/
And all of us seem to have problems with the neo-liberal insistence on ever increasing private debt (mortgages, consumer credit, student loans) as a solution to all problems. And indeed: when asked, I advise my students to take side jobs instead of taking loans (except for international internships). It’s ridiculous that our society (indeed: read “the state”) burdens young couples who want to raise a family not only with two jobs, high study loans, the necessity of a taking a high mortgage as well as with high taxes and, increasingly, the care for their parents. While their parents could retire at 55, profited from the housing boom and inflation and somehow lived in a time when one income was enough to provide for a family.
All of us will probably agree that ‘debt’ should be an independent category in the textbooks – which it isn’t today. Such a section might include ideas like those of Steve Keen (a situation of literally exponential increasing private debt (as a % of GDP!) with Austrian ideas on ‘easy credit induced’ booms and busts, as well as some information on the importance of credit/boom induced value increases of collateral like ‘land’. In my view, this squares completely with Minsky-like ideas on speculation and the like! Debt can be quite toxic – on an individual as well as on a macro-scale.
But debts can be productive too. We borrowed money to finance the building of the house we live in. Companies often provide credit to other companies, to facilitate trade (and often for very good reasons: for instance in the case of farms the seasonal pattern of proceedings often differs quite a bit from the seasonal pattern of expenses). Or lok at tose sixteenth century farmers (my area of expertise) who borrowed money to invest in drainage windmills, to improve their lands…
I’m not an Austrian. Though I admit that markets can often work miracles (Australian aboriginals smoked tobacco, obtained via trade contacts with Indonesians, before they were ‘officially’ discovered… Note how fast this drug spread over the globe!) – I do think that they have limits. For one thing – not every service of commodity lends itself to ‘explicit pricing’ and I do think that the phrase ‘implicit prices’ used by many economists to get around this problem is the very negation of the essence of markets, which ‘by definition’ rely on ‘explicit prices’ and ‘explicit agreements’(well, ‘by definition’- try to find a definition of ‘markets’ in a standard textbook!). And I do think that governments so now and then have done something for the better during the last century – and might somedays even have to act as the spender of last resort (I’m afraid I’m something like a ‘Radfordian’ on such issues). But that does not mean that all Austrian ideas are necessarily evil – for one thing, thanks to Fred mentioning this, I read a little (a little!) on free banking. I do not have a final opinion on this – but we surely do need an alternative to the present situation, and such ideas might help (might there once be a kind of e-bay for households and companies who want to lend to other households and companies, therewith rendering the existing banks partly redundant?).
@#27,28. So, aren’t we all being brainwashed? How do we know when our teachers are deceiving us? My economics started with Catholic Social Teaching, with roots in Aristotle and Aquinas to contrast with the appalling economics of the new era (Leo XIII’s ‘Rerum Novarum’ of 1891). Awareness of alternatives is the necessary condition of being able to evaluate them, and thus the reliability of one’s teachers. So, my shelves are full not of the views of one school but of many, along with those of the philosophies of science which motivate them and the historic science and mathematics informing them. My own work has ranged from quantum physics to logic circuits to personality and communications psychology to the reliability of probability theory to the use of information processing languages in the mathematisation and organisation of scientific models and administrative systems. I have yet to meet an economist who understands the twentieth century developments in the understanding of logic, language, power and information flow systems and human diversity which have provided my bread and butter and (along with key insights gleamed from my studies) informed my own “revolutionary” systems analyses of political economics. That (alongside trade built on wage slavery and rank dishonesty like Hayek’s) is the reason I agree with a recent contributor that it is time to “scrap the lot and start again”. It may also be why Fred hasn’t understood my ethics, and wouldn’t immediately grasp the conditions of the possibility of ‘freedom’. Let us see, anyway, how far he can be answered in a few words
Nobody said it was morally good for the government to kidnap him etc; I say the answer involves reducing government to guiding rather than forcing. (Changing “commandments” into “commendments”).
Taxation and wars don’t have “free-market” origins, but nor do the existence of us flawed human beings. Central banking is another matter: Fred should take the trouble to watch and reflect on http://video.google.com/videoplay?docid=-515319560256183936#. Likewise schools: see Mill’s “On Liberty” for those whose parents could afford it, and Newman’s “Idea of a University”: on the need for liberal education as against brainwashing in conflicting traditions.
The logic of freedom (brain logic being equivalent to computer circuits) is not a given, it has to be learned. It has an input and an output, so is always “freedom from” [powerlessness or error] or “freedom to” [recreate and broadcast "freedom from"]. The trick of being free to do the right thing is to not do what you see/know is wrong until your impulse to do it has subsided; the right thing then has a chance of becoming conscious.
No-one has suggested slavery is good. What has been suggested is that its powerlessness can be nullified by willing service even in slave states, but not by killing communists.
Mu ethical arguments are based on the developments of language mentioned earlier. An action isn’t an OBJECT to which you can attribute goodness; it is right or wrong. Agreed the idea of a good person is fuzzy, but if you study fuzzy logic you will find one can still draw firm “more or less” conclusions with it, where all things are not “equal”.
Fred, I analysed why people are paying so much interest on their mortgage thirty years ago, and paid mine off as soon as I could. I was sympathetic to land-value taxation until I realised how it is possible to eliminate taxation altogether (not just tax on labor). The answer is to live on credit and pay it back by regenerating (and improving) what we use. Since money used represents debt, “of those who have more, more should be expected”. Tax is one way of achieving that, freely given service is another.
In response to the comments by Alice on why people pay so much interest for housing, we need to understand that we lived in a mixed economy, so any outcome has to be analyzed as to the extent to which it is caused by the market or by governmental intervention. In the case of real estate costs, government subsidies puff up land values, and then folks have to borrow that much more to pay for this higher price of land. If the market price of land were near zero, with no subsidies, then folks would not have to borrow so much, and they would pay much less interest.
Now hang on a minute Fred…you state “In the case of real estate costs, government subsidies puff up land values,”
I really have to make a comment about the woeful (woefil at their job) and semi corrupt US ratings agencies here, the enormous funds under the command of the enormously powerful financial sector etc. Now you want to talk about government subsidies to a sector – then lets talk about taking life savings away from individuals hands and handing it to the financial sector in the form of superannuation.
Right now Id like mine back in my hands.
Then lets talk about cheap finance offered to people who cant pay. It wasnt the cost of land that got overblown in the recent housing bubble Fred – it was the cost of the bricks on it.
But sure Ill grant you this…the government has been protecting one sector of the economy way too long (the financial sector) and in true human quirkiness it is this sector that cheerleads for the most “market freedoms” to be applied to the rest of the sectors in the economy.
Lovely how some crow about whats good for the rest of us while they are making a killing.
Alice, I’m glad you reacted so fiercely to this. A kindly government lowers the price of land for the poor, bankers and estate agents on the make (your rating agencies?) see an opportunity to “make money” (not profit the community) by pushing up land values, and Fred blames the government, not those enlarging their cut by persuading owners to sell their property at “puffed up” prices!
Fred was, however, defending George’s land value tax on the ground that it would reduce land prices. I argue it wouldn’t: sellers simply pass Value Added Tax on to customers. Therefore I deny his big IF, which makes his truism into a red herring. But when it is virgin land which is sold it can’t be the bricks on it which “puffs up” prices. Quite apart from puffed up prices, there are real differences in land value, and you are nearly right, but your figurative “bricks” are those on NEIGHBOURING land.
An increase in value comes from costs avoided because of local value previously added by and at the expense of government, local government and businesses providing infrastructure and services satisfying the local community. It is these (which may, of course, include the land owner) which deserve recompense for adding value.
Going back to Michael’s original questions in light of what Fred is saying, one factor he hasn’t considered is the use of interest as both “carrot and stick”: to encourage the provision of credit and punish those who use too much of it. Tax (such as Fred’s land tax) is naively envisaged as having the reverse effect, though when applied to the USE rather than the hoarding of money, it has the effect of discouraging the supply of the land, labour etc the credit was supposed to be buying. (Gesell had a better idea: taxing the HOLDING of land or money, so hoarders will be glad to get rid of their excess at lower prices). What Fred is not admitting is that interest is simply privatised taxation, that what is credit from one is debt to another, and that those who can’t afford to pay tax can’t afford to pay interest either.
Logic doesn’t work reliably if variables are eliminated or terms ambiguous. An important requirement in theorising is the separation of variables. It is, however, in the interest of thieves and other free-riders to prevent our getting at the truth. Besides keeping debt charges off our agenda, they deliberately conflate variables, as when toxic debts were sold on by bundling them with sound investments. That’s Michael’s “How economic theory came to ignore the role of debt”.
So how should we react to this? Maybe retribution is due, but it seems to me much more important that independent thinkers get together to perform a proper systems analysis of economics. Codd’s relational algebra and Algol68 logical types are already available to account unambiguously for all the variables. Until that is done, we will have no way of refuting the reduction of economics to freedom for financial traders to manipulate supply and demand, no way of re-establishing an honest economy.
Dave – you are dead right. Metaphorical bricks – yet it never ceases to amaze that the old grandfather of current policies coined a phrase once…for inflation “too much money chasing too few goods”.
Yet the world is awash in pumping money now precisely because too much money was pumped to the financial sector in the first place. We wonder why house prices got so high. We sit and wonder how company shares could possibly have PE ratios in the stratosphere. We sit and wonder why there is so much volatility (read pumped up prices and the pumping goes on) in stock markets. There has been too much money chasing too few goods but it has been the financial sector doing all the chasing and the great majority of the rest of us are just paying the high prices for what could be termed “fairly importants” if not quite “necessities” Im damned if I know how they come up with low inflation figures – they must have dropped the basket and everything fell out). If we were supposed to save for our retirements …well we have all been conned on the grandest of scales.
So the mainstream remedy – global austerity measures to save the banks?. Sounds a lot like global oppression to me.
Michael below comments “Taxing the land would leave LESS rental income to be capitaiized into bank loans. That is the key here.”
Its not the main key. Property investment came after the redirection of labour wages into money to play with (“invest”) in the financial sector (super). So how to develop a tax that effectively leaves less super funds available to banks? Its quite clear that cheap credit is a massive part of the problem of instability in financial markets and methinks you are looking in the wrong place by suggesting a tax on land.
A tax on land value is equivalent to taxing the rent, and that cannot possibly reduce the supply of land, since space cannot shrink. A land-value tax also does not reduce the supply of lots offered for rent or sale.
Those who cannot afford to pay a tax on land rent would also not be able to afford to pay the rent to a landlord. They would not buy the land in the first place. Someone who lost his job and had no savings would indeed no longer be able to pay rent, but that is not the fault of the tax on rent. He would also not be able to afford to pay a landlord.
I am not admitting that pure interest is privatized taxation because taxation cannot be private.
I watched part of the video you provided the link for, and it seems like the usual conspiracy theory proposed by monetary cranks.
Your proposition “The answer is to live on credit and pay it back by regenerating (and improving) what we use” seems like my category of loans for productive investment. Credit implies interest.
At any rate, I think our dialog here has reached diminished returns.
You can take a horse to water but you can’t make it drink.
Other bloggers may be interested in a discovery I’ve just made. Michael started “from David Ricardo in 1817″, so I was curious what Adam Smith (moral philosopher and student of David Hume) had to say. Smith’s argues for interest (on gold – he has no time for paper money) along the lines of a share in trading profits.
So what of my bogey-man Hume (not just in my opinion the source of perverse mainstream economic morality)? Reading his 1751 “Inquiry”, he asserts that “All reasoning may be divided into two kinds, namely demonstrative reasoning, or that concerning relations of ideas, and moral reasoning, or that considering matter of fact and existence”. A footnote adds that in later editions Hume said “moral or probable”. It turns out the word ‘moral’ came from a Latin word meaning tradition or custom, and the French ‘morale’ dated from 1752! So Hume had no time for either conscience or intuition, dissolving the Christian connection of morality with ethics (you won’t want to offend those you love) and spreading the virus which has reduced most of our generation (including Fred, and despite Copernicus) to mistaking what they will probably see for demonstrable economic law.
As a matter of fact, the brain has four parts, which in combination produce four, not two ways of thinking, while selecting an object creates a context, both of which need to be represented in relational thinking. The omission of context is perhaps why the Freds of this world don’t see the reality behind monetary debt and the realists tend to trivialise the role of money. Hume, therefore, was wrong – not surprisingly, since it was 1938 before it was realised that logic is performed by electric circuits, which have parallel (many things happening at once) as well as serial (sequential) forms, but only when switched on (motivated).
Wait a minute. You know that I hate to defend Fred, but he is right on this point.
The concept of economic rent is of critical importance to this group’s endeavor to provide an alternative to post-classical neoliberalism and junk economics.
Economic rent — the excess of market price over cost-value — CANNOT be passed on. This is basic classical economics.
I think that what you are thinking of is that if someone NOW taxes land whose rent ALREADY is being paid out as interest to the banks, something will have to give. Fully mortgaged holders can’t afford to pay the land’s site-value rent twice.
But what has occurred is that the past half-century’s replacement of land taxes by income and sales taxes has left MORE rent free to be pledged to banks.
A return to land tax seeks to reverse this. And by taxing the “free lunch,” enable taxes on labor and industry to be cut.
Taxing the land would leave LESS rental income to be capitaiized into bank loans. That is the key here.
What you are missing, Michael, though I accept your interesting point about the shift to income and sales tax, is that basic classical economics is static but reality dynamic. Also, I am thinking of the 80% owned by the 5% super-rich rather than banks and mortagees. Set a tax now based on the excess of market price over cost-value, and as of now wealthy landlords will try to up their rents to pay it, tenants will have to up the prices of his produce to pay the landlord (or go out of business), and the consumer (with inelastic necessities) will have to pay the the higher price (or go out of life), on average by going deeper into debt and allowing the banks to profit by printing more money. As the landlord is letting his surplus land, if at whatever level someone baulks he can afford to leave it idle until desperation encourages them (or the government) to borrow and pay up. The value of the necessities to the consumer does not change but the price does, and insofar as the necessities get bought the the excess of market value over cost-value has not much changed, but it HAS been passed on. As I suggested, the same is true of VAT, but starting lower down the chain. The point being that the theories of not only neo-classical but basic classical economics are wrong, satisfying those at the top of the food chain but at the cost of desperate injustice to those at the bottom, and indeed to Nature, which is our ultimate support.
So what exactly do you mean by “junk economics”, Michael? Economies selling junk, or economists selling what Fred called (doubtless without following up the evidence referred to) “the usual conspiracy theory proposed by monetary cranks”?
I have a great respect for Henry George, and having fortuitously opened him at exactly the right point will let him state his position himself. However, having finally understood the reserve banking system, how 95% of our money is circulating uselessly in the stock exchanges, how VAT taxes the poor and how tax enables governments to wage wars, I have come agree with Keynes that Gesell was about right.
Says George: “Taxes on the value of land not only do not check production as do most other taxes, but they tend to increase production, by destroying speculative rent. How speculative rent checks production may be seen not only in the valuable land withheld from use, but in the paroxisms of industrial depression which, originating in the speculative advance in land values, propagate themselves over the whole civilised world, everywhere paralysing industry, and causing more waste and proably more suffering than would a general war. Taxation which would take rent for public use would prevent all this; while if land were taxed to anything near its rental value, no-one could afford to hold land he was not using, and consequently, land not in use would be thrown open to those who would use it. Settlement would be closer, and consequently, labor and capital would be able to produce much more with the same exertion. The dog in the manger who, in [the US] especially, so wastes productive power, would be choked off” [Progress and Poverty, Book 8 Ch 3].
Thinking of land value taxes having to be paid year on year, almost he persuades me! But wouldn’t the value of unemployed land go down, like that of unemployed labour?
Dave and Alice are right.
I had never studied the Georgist stuff very seriously. Always gave them the courtesy of the benefit of the doubt. Looks like they are nuts. The claim that one tax on land will not hurt anyone is crazy. Of course the tax will be added to the cost of anything produced on the land. An extra charge will also be added. to cover times of slow or no production ( going into business changing product lines ect). Anyone that can not afford their “land rent” for even a short period of time would be evicted becoming a transient along with the rest of their family or dependents. Losing any investments or improvements they had made on the land. (houses, gardens, buildings ect) Any land not abandoned would be owned by big business or bankers.
In Texas where I am at, the property tax is about 2.6% of the total value of the property and everything on it each year. Even at this rate many people have to sell their homes because they can not afford the tax. In some counties to avoid foreclosure which is always politically unpopular, they let the tax accrue if you are over 65 years of age or disabled until you die, then seize the property leaving your heirs nothing.
Everyone deserves a place to call home especially if they have worked all of their lives to pay for it.
Why not charge a single tax on anything rented including money. Total credit market debt in US is approximately 50 trillion dollars. An annual 10% tax on lent money paid by the lender not the borrower would yield 5Trillion a year. No one would be subject to the tax if they did not lend their money. If they wanted to “invest” for a return, it they would have to use it to produce something and only get paid if they actually did produce something of value..
Total local, state and federal taxes in the US are about 5 trillion so all other taxes could be eliminated. Sure interest rates would be about 25% but that just means less debt and insures that the money is borrowed for a really productive purpose.
No taxes. No unproductive or consumption debt. I would go for that.
Still would like to see Michael’s critique of the Austrians. They are on Fox News all the time talking about Austrians says this or that. Are they nuts too.
Thanks, Robert
Responding to Robert Dunlin, rent is set by supply and demand, and a tax on rent does not change supply or demand, so it cannot raise the rent. If a lazy landlord was not charging what the market can bear, then an increase in the tax could make him raise the rent paid by the tenant, who in effect was taking some of the economic rent.
The Texas property tax includes a tax on the buildings and other improvements. That is bad, and a land-value tax would exempt these capital goods. If you want to argue about Georgist stuff, I suggest you first study it.
Fred, To get a perspective on the land tax proposal I am going to say that all land (not improvements just the land and not government owned land) in the US is probably worth about 20Trillion. All local state and Federal taxes are about 5Trillion. To pay all taxes now collected would take 25% of that land value a year.
Unless you have a Walmart , auto plant or other super productive facility on your property you couldn’t afford to to pay the land tax. Good corn land can be $6000.00 per acre. It might produce 150 bushels per acre but the average is about 115bpa. $1500.00 divided by 150 = $10.00 plus the $5.00 it now cost equals $15.00 a bushel corn. Even if by some rent shifting magic the $5.00 was reduced to $1.00 we are still talking $11.00/ bushel corn. Prices are set by comparison to their alternatives. What will people eat? Federal Reserve Notes? We know that they don’t print those unless someone is on the hook for the interest. Just that added interest makes the proposal a non starter.
Thanks, Robert
Michael, I didn’t see your post until after I had posted mine. I still do not get the concept of a cost that can not be passed on. Do you mean that if I had a farm and grew potatoes the land tax could not be paid with the proceeds of potato sales? Do I have to get another job on the side to pay the land tax?
I think economics needs to look at the concepts of Yours, Mine,Their, and Ours concerning who gets the product that the property produces. We also need a money that enables Yours, Mine Theirs and Ours to be exchanged without a rent on that exchange.
Thanks, Robert
Suppose you wanted to grow potatoes but did not own land. You rent the land from a landlord. A tax on the rent would reduce the rent kept by the landlord, but not affect the rent paid by the farmer tenant. If instead you own the land, you would have paid almost nothing for the land, and instead of paying the landlord, you just pay the same amount to the government. So the farmer pays the rent from his output just as we would pay rent to a landlord.
Fred, the structure of this is government allowing landlords to charge rent, then taking it back again. Surely it is much better to dissuade them from charging rent (as against expenses) in the first place? Gesell’s idea (which was tried out and worked) was to tax the holding of money, so people wouldn’t want to accumulate it in the first place.
As a scientist I wanted to understand exactly what was happening here, and eventually realised that the banks were making money out of nothing, which added nothing to the real value of the world. Yet we act as though someone with $100,000 and $100,000 worth of land was himself worth $200,000! Even if he had earned the $100,000 rather than borrowed it, stolen it or won it in a lottery, that was water under the bridge: his past value, not his future value.
My first conclusion was that trading with gold was barter, but trading with paper money is a con trick which now works by people being persuaded it is valuable: initially by misrepresentation (“I promise to pay…” gold?), then by custom, and in succeeding generations by what they see happening. Persuasion is not about value, it is about linguistic communication, so the relevant questions are, whether allowing gold to be valuable makes bankers’ monetary reference to it valuable and bankers honest. Since it turns out that money is generated by authorising (not giving) credit, the use of which creates debt, the value of both money and misrepresentation are arguably both negative rather than zero.
The negatives both cancel by being honest, trusting Adam Smith’s butcher to give us credit and return our paper money to the banker, whose accounts constantly remind us of our debts. Governments should automatically authorise the credit we all need to live on, leaving banks to vet and advise on business loans and businesses to provide for necessary and satisfying work.
@ #37 you say “Your proposition ‘The answer is to live on credit and pay it back by regenerating (and improving) what we use” seems like my category of loans for productive investment’. Credit implies interest”.
I agree with your first comment. The AUTHORISATION of credit, however, doesn’t imply interest, nor does the GIVING of credit imply monetary interest, any more than my giving a hitch-hiker a lift implies my having a right to his giving me one back. I already have the satisfaction of making his world a better place, and my interest in the future is that his gratitude will encourage a graceful chain reaction. “Imitation is the sincerest form of flattery”.
“Fred, the structure of this is government allowing landlords to charge rent, then taking it back again. Surely it is much better to dissuade them from charging rent (as against expenses) in the first place? Gesell’s idea (which was tried out and worked) was to tax the holding of money, so people wouldn’t want to accumulate it in the first place. ”
If you extract all the land rent for public benefit the only people who would want to own land would be those who want/need to use it. Who would be a landlord if someone else was extracting the rent.?
LVT corrects the land market which otherwise does not allocate to best use.
This is the most basic economics and it’s really depressing that so few economists cannot work this one out for themselves and want to cling to what they have been fed by the neoclassical school who have written land out of the text books (almost). Certainly there is no clear definition of what land means in economic terms, let alone a discussion about its attributes.
Have you all become just bean-counters who understandably conflate land and capital?
Carol, as I said earlier I have a lot of time for George and LVT and perhaps I should be persuaded. However, I was trying to work out what would happen, from knowledge of human nature, in the absence (since 1880) of experience with LVT in practice. Lets just say there’s more than one way of skinning a cat. So far as I can see, what Keynes INTENDED at Bretton Woods (as against what happened besides progressive taxation and currency controls, i.e. the US oil dollar and throw away society rather than maintainable products and an international currency) would have worked. Likewise an even stronger Catholic (“for everybody”) emphasis on local self-sufficiency and international cooperation rather than competition (as was intended in post-war Europe but powermongers have turned into the EU). Likewise (as Keynes anticipated) free credit along the lines of Gesell, though being a thinker, I’m aware of all the work which goes into pre-production (paid for one way or another on credit), and believe market price competition should be for quality, with patents replaced by prizes for developing products worth producing.
As for LVT, there is a saying, “an engineer can produce for a penny [cent] any fool can produce for a pound [dollar]“. LVT might get the cost of the present foolish system down to a shilling [dime], but using credit cards with generous rations of credit and responsibility would do away with the costs of acquiring, hoarding and insuring ourselves against theft and loss in the belief that money is scarce and has real (rather than notional) value.
I certainly don’t “want to cling to what [I] have been fed by the neoclassical school who have written land out of the textbooks (almost)”. On the contrary, I don’t count that as economics (household management), for it is at best only a theory of free trade determined solely by supply and demand. In human terms my analysis of economics takes account of the biological cycle of dads and mums providing for the kids by helping nature regenerate what they have used, with those not so tied up trying to make life easier for them and bankers accounting for what they have had and so what they need to replace.
There are some who consider LVT as a panacea. I don’t. But it is an extremely simple solution to a complex problem. Yes, Gesell was correct to see both money and land as the source of trouble but I think that neither of his solutions are sound; land nationalisation was, I believe, one of them. Fixing the land problem, with LVT, would largely solve the credit problem because, as Hudson tells us, most loan collateral is land. If all land rent were collected for public benefit the market price of land would tend to zero and the banksters would have to work for their bread.
Even accepting that LVT will work, my problem with it is that it still takes money at face value, sustaining the illusion that money rather than human good will is what is really valuable in life and our ultimate collateral. This diverts attention from the love of money being the root of all evil, and from not all that glitters (or in the case of paper money, proclaims its equivalence) being gold.
In a way, what I am objecting to is governments and usurers taxing people, sending out the message that money is valuable. The message Gesell’s “free money” sends out is that money is neutral, but holding it bad. Prior to the Reformation, Christians simply banned usury. Mohammedans still do, and in Britain are thriving compared to the rest of us because they finance each other and don’t gift half their income to bankers to waste by betting on the prices of second-hand shares.
@ #37. I would like to thank Alice, the only person so far to see I am “dead right”, presumanbly about the need to do a proper systems analysis of all this so that we “independent thinkers can get together to perform a proper systems analysis of economics. … Until that is done [and it is not difficult], we will have no way of refuting the reduction of economics to freedom for financial traders to manipulate supply and demand, no way of re-establishing an honest economy.”
It is a bad workman who blames his tools, so I would like to apologise for all the typos I’ve been delivering lately, as I struggle with a “leave a reply box” which from time to time gets superimposed with invitations to log in to twitter etc.
My last bit should have begun: ‘… I am “dead right”, presumably about the need for us ‘independent thinkers to get together to perform a proper systems analysis of economics’…”. As I said, that is not difficult.
I regret the important topic is discussed in a partly polemic way.
I would offer another way to look at it, different, but simpler, with staying much more on the grounds of elements we know and not claiming they all behave in a different way than economic theory tells us – just combined in a way, that macoeconomists not seem to be interested in.
Interest is nothing but a price for exchanging future dispositive rights against present and vice-versa. The price evolves from the last one buying and the last one selling agreeing on the price.
The problem with the public debt is external effect. Politicians elected for one period in time make a deal with lenders. The politicians are in competition to please the majority of voters. The external effect is, that they do damage to non-participants in this deal – FUTURE taxpayers, voters, old workers that need pensions, medical treatment and a return from their savings.
The equilibrum with external effect is, just like standard economic teaching, where the external effect has done so much damage, that its effects cancel themselves out. That means, where the advantage for politicians of having additional funds to please THEIR PRESENT voters is giving as much as the imbearability of the debt causes crisis, damage and bad feelings already with the present voters majority.
That’s where it is heading.
And to say it with Douglas Adams: And some people think, this has already happended.
I’m coming into this conversation rather late, but that turns out to be a good thing.
I believe this thread is confused on the nature of money.
Money is NOT debt. Debt-money (or, credit-money from the lender’s POV) is a form of money, but not the only one, despite the desire to meet double-entry accounting rules.
The government produces debt-free money in the form of coins all the time, wherein every quarter simply adds to the money supply. It has also done so historically with United States Notes, not borrowed into existence from a Central Bank, but simply created by Treasury (though, very tellingly, NOT counted, by LAW, against the national debt – which is in that “alternate” currency, Federal Reserve Notes).
Modern Monetary Theorists argue that taxes then, are used to contract the money supply (and not to raise revenue, which, they argue, is raised by credit-money expansion whenever the “government” (which they mis-classify the Fed as being part of) determines to do so). This is incorrect, as I have a 1928 United States Note which has yet to be taxed away. Just how long is one supposed to wait for the “adjustment”? Also, and this should be so obvious as not to need stating, but perhaps it is to those who still insist that money is a “thing” that can be run out of, if Government truly reclaimed its sovereign right to “coin Money” (Art. 1, Sec. 8 – U.S. Constitution), it would not need to tax anything. (We should still tax Land as a matter of fairness, to discourage Land monopolies and encourage true production – this would be better done on the state and local level anyway. People have a right to Land to live on, yes, but they don’t have a right to live on Park Avenue, NY! And the value of the Land should be returned to those who created it in the first place – the community).
It is, therefore, not DEBT that needs to expand to fuel a growing economy, but MONEY. Right now, aside from the Fed-favored 1% FIRE sector, we have money (or, if you prefer, credit) contraction for the 99%. This creates the worst of all worlds: asset inflation and wage deflation. This displaces the middle class, further impoverishes the poor, and leads to the “Ponzi economy” Steve Keen writes to eloquently about:
“There isn’t a one-to-one link between accelerating debt and asset price rises: some of the borrowed money drives up production (think SUVs during the boom), consumer prices, the fraction of existing assets sold, and the production of new assets (think McMansions during the boom). But the more the economy becomes a disguised Ponzi Scheme, the more the acceleration of debt turns up in rising asset prices.”
This is no way to run an economy, and can only result in more extreme and frequent booms and busts.
Coming back belatedly to this thread (having commended Michael Hudson’s article at http://groups.yahoo.com/group/distributism/ and re-read it to remind myself of what it was all about), I first want to say again how valuable I found it (and now the subsequent discussion). What I am a little disappointed about is the lack of response to my argument at #36 and #52/3 about the need for a systems analysis of economics so that we “independent thinkers can get together”, i.e. argue constructively within an agreed framework instead of destructively disagreeing. I would of course have particularly liked Michael’s reaction to this.
As I said at #52, this systems analysis is not difficult. It starts by listing relationships within the system, then studies the processes necessary to sustain these relationships, then the life history of each relationship to account for the creation, elimination and interaction of processes. What simplifies it is its reliance on logical rather than numerical quantification, i.e. the distinctions between all, some, one and none. In ordinary “family tree” logic, Levi-Strauss pointed out, all mankind is accounted for by mothers, fathers, girls and uncles. Similarly, at the “all” level, a dynamic analysis containing just four types of entity, though virtually empty, can be complete and necessarily true.
The necessary biological economy can be characterised as Dads and Mums feeding the Children by producing and managing distribution to feed the Children, with older Uncles contingently helping them develop education, technology and economics. Insofar as is necessary such analysis proceeds from the all to the individual level by cross-indexing related groups or individuals, as suppliers and customers are cross-indexed through the existing hierarchy of trading records. This analysis resolves ambiguities and picks up relationships which, though logically necessary, are at present missing. In the subsequent redesign phase, an audit trail is added to pick up errors in the operation of the system.
When re-reading Michael Hudson’s piece, I found it tremendously helpful how he explained the origin of Ricardo’s ideas, this putting them in historical context enabling him to emphasise the significance of what they DIDN’T say. This sort of thing happens in SSADM when cross-checking the understanding of relationships and procedures with entity life histories. Analysts with different backgrounds tend to pick up different things.
Ugh, typos! My apologies. “My eyes are dim, I cannot see …”. Please delete “feeding the Children by”!