Michael Hudson and Dr. Jeffrey Miron of Cato Debate Capitalism

Yves here. We thought having Michael Hudson take issue with a conservative stalwart, Dr. Jeffrey Miron of Harvard and the Cato Institute, would make a good accompaniment to a weekend coffee.

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Regan: Hello everyone, thank you for tuning into this episode of the Knowledge Problem Podcast. I’m your host Regan Ferrell [and I’m Alex Pilkington] on today’s episode we explore the merits and shortcomings of capitalism. [1:00] We have Dr. Jeffrey Miron speaking first, followed by rebuttals from Dr. Michael Hudson.

Dr. Jeffrey Miron is a senior lecturer and director of undergraduate studies in the department of economics at Harvard University as well as a senior fellow at the Cato Institute. His field of expertise is the economics of libertarianism. He’s advocated for many libertarian policies including legalizing all drugs and allowing failing banks to go bankrupt. He has written four books including “Drug War Crimes: The Consequences of Prohibition” and “Libertarianism, From A-Z.”

Alex: And Dr. Michael Hudson is a financial analyst and president of the Institute for the Study of Long-Term Economic Trends. He is a distinguished research professor of economics at the University of Missouri-Kansas City and professor at the School of Marxist studies at Peking University In China. Dr. Hudson’s written or edited more than 10 books on the politics of international finance, economic history and the history of economics. His trade [2:00] books have been translated into Japanese, Chinese, German, Spanish and Russian. He sits on the editorial board of Lapham’s Quarterly and has written for the Journal of International Affairs, Commonweal, International Economy, Financial Times, and Harper’s, and is a regular contributor to CounterPunch.

Regan: Alright, and to begin, we’re going to ask a sort of general question: What is capitalism? How does it differ from feudalism in classical antiquity or from socialism for that matter?

Professor Myron: So, let me start by saying I don’t think capitalism is a great label for what I would what I would like to advocate for or defend, because you can easily imagine an economy that doesn’t have any capital, it doesn’t have buildings or machinery, it simply has goods produced with peoples labor effort and I would still call it capitalist if it satisfies the other things I want to emphasize. So the term I prefer would be free markets, by which I mean the absence of regulations, rules, [3:00] any other prior restraints on voluntary actions taken by consumers and firms. And I emphasize that this definition free markets, this noninterference, applies very broadly. It’s not just to the standard sort of businessy things that we think of as part of commerce: making groceries or widgets or airplane seats and things like that. It would include alcohol, drugs, thought about appropriately includes legalizing gay marriage, it includes gambling, education, sort of any private activity would all come under the sphere of what I would call free markets.

Professor Hudson: OK, well I think industrial capitalism is antithetical to what today is called a free market. I think following Britain’s protectionist take off, the United States and Germany created mixed economies and their government supported profit levels by protective tariffs and subsidies and by infrastructure investment. That was all coordinated by government supported military, [4:00] heavy industry and banking working together. So, the result was a mixed economy and its structure went way beyond the market as such. Countries that did not develop protection and transform their market structures fell behind. So, I think the aim of industrial capitalist nations, and I think we should distinguish industrial capitalism from finance capitalism, industrial capitalist nations wanted to minimize the cost of living and doing business.

Which is the same thing that you’re claiming the free market does, but they wanted to do it by having governments bear the cost of providing basic services such as healthcare, education, pension, transportation, and communications. And to provide these services at a subsidized cost or even freely, not by a privatized market pricing. So, in this definition, industrial capitalism is more than just a market. Feudalism had a market, it was based on serfdom. Bronze Age Babylonia [5:00] is where markets and money and prices were developed under Palace leadership. And, I should say that since 1984 I was working with the Peabody Museum at Harvard, with the Anthropology Department, to convene six colloquia on the origins of markets and economic enterprise in the palatial economies of the ancient near East. Now, ancient Rome had a market, but the structures affecting and in shaping these markets were quite different.

And I think the problem with focusing the discussion on market structures is that this sidetracks what the topic is supposed to be, namely what is capitalism. And I think an analysis of markets tends to be microeconomic, and to understand capitalism you have to look at how it’s purposes have been changed since they were formulated in the [6:00] late 18th and early 19th century by Adam Smith and Ricardo and John Stuart Mill and the classical economists. I think that I would define capitalism as employing wage labor, it’s not only labor producing as a profit, it’s the capitalist employs the wage labor to make profits to sell products to sell it a profit. And the idea is to reinvest these profits in more means of production and hiring more laborers. And I think that in doing this capitalism transformed the structure of market and that was its great contribution.

The term free market is so abstract that it misses the whole meaning of all this. Free for whom? For crooks and junk mortgage bankers? They love the free market, but the rest of the economy suffers, as it did in 2008. Monopolists love being able to do what Adam Smith described in his doing: conspiring against their customers in society. [7:00] So, the key is what kind of a market are we going to have? is it going to be a market that provides healthcare and education and the post office as a human right? That’s different from one where the privatizes these functions. So, if we’re discussing capitalism, privatization is going to be higher costs and hence less competitive. So, calling mixed economies – unfree economies would be a simply a plea for privatized rent seeking and that really is the focus of what I have to say.

How do we characterize America’s long history of racially segregated redlined markets? Now, that was a free market, but it’s nebulous is calling an oligarchic economy a democracy. When the wealthy write the laws of the markets and basically shape them. The initial and revolutionary aim of industrial capitalism was to free economies from the legacy of feudalism [8:00] and it’s rentier classes, from hereditary landlords and banks and the monopolies they created. And this was to be done by taxing away land rent and other form of economic rent and it was to define the rent as unearned income, that Adam Smith, Ricardo, John Stuart Mill and their fellow classical economists developed value and price theory. And they defined rent as the excess of market price over intrinsic cost value. Britain and other capitalist economies sought to bring market prices as close to the cost value as possible, so as to minimize rentier overhead.

Now, I think Professor Myron says that that’s what free markets are supposed to do but I think that only a government strong enough to override the interests of the rentier class, the rent seekers, is going to be able to do it. [9:00] Sorry, let me get the breasts: a related task, I think industrial capitalism wanted to bring finance into the industrial system to finance tangible investment in the means of production. But since World War Two, industrial capitalism has evolved into finance capitalism and that funds the main opportunities for gain in rent seeking, not in productive investment and that’s what is change the market. So, from that perspective, the great market defect is rent seeking not government regulation.

Regan: And do you have a rebuttal to that Dr. Myron?

Professor Myron: Sure, so let me say that Professor Hudson both addressed the definition of what he means by capitalism, he also made a bunch of empirical claims about what’s true under a system of free market capitalism versus a mixed economy or [10:00] other systems. So, on the definitions I won’t argue, definitions are definitions. On the question of how to think about Professor Hudson’s definition, he’s emphasizing sort of the endogenous outcomes: what happens in different types of activities under different definitions. What I want to emphasize is, what are the policies, because that’s what government controls directly. It controls the policies, and by the policies, it may also affect the outcomes that occur in society. So, the free market view is that most attempts to make markets work better in terms of productive efficiency, most attempts to make the outcomes fairer in terms of the distribution of income, attempts to reduce rent seeking or reduce the amount of rents people get when they seek rents, to reduce the income of rentiers, or so on… That [11:00] in fact it’s government regulation which tends to promote all those bad things, okay? Not the free market itself, not competition, but that the regulation contributes much more to making it easier for people to get to earn something other than what they would get based on their productivity, based on what they contribute to the economy.

Professor Hudson: I agree with him. And so the question leads into the second question, what kind of a market are we going to have? Of course, we don’t want a market where government adds to the costs and does bad interference. My point is that there is a good intervention.

Professor Miron: So, one thing I like to explain when I talk about advocating for free markets, for minimal intervention, frequently referred to as laissez-faire, is that that position doesn’t assume government does absolutely nothing. It in fact asserts, it says, it’s very important for government to do a few, but in very narrow [12:00] sense. Specific things, namely, to enforce contracts and in some cases to internalize externalities. To create rules of the road, rather than simply abstaining entirely, because there are of course going to be disputes about whose property is what, and then needs to be enforcement of that. And so, I’m arguing against a whole range of regulations that go well beyond simply having the government that enforces tort liability, that regulates contradicting forces, contracts, and the like. And opposing the vast majority of all the other regulation that occurs in standard mixed economies.

Professor Hudson: Well, my point is that there’s some kind of contracts that shouldn’t be upheld. To the classical economists, a free market was one that was free from economic rent, which is, as I just said, was defined as revenue that was not economically or technologically necessary [13:00] for production. And this kind of rent is an extractive charge. It’s a payment for privileges and these privileges were built into the early market, into the post feudal markets, that were dominated by landlords and creditors writing the tax laws and property laws. And, it was these privileges that the classical economists wanted to get rid of.

Today’s free markets, I think, rationalize the market that is free for rent seekers to extract rents because they don’t distinguish between a good intervention and bad intervention, and the result reverses the early dynamic of industrial capitalism. So, we’re brought back to the idea of what kind of capitalism was thought to be successful or progressive and desirable by the classical economists. And, as I said, they develop price and rent theory in order to segregate what kind of prices, and what kind of contracts [14:00] are relationships, do we want to get rid of in markets to make them really free, and free of unearned and unnecessary income.

And, in my view, the historical task of industrial capitalism was to make economies more competitive. By backing Democratic reform to remove the ability of the landlord class like Britain’s House of Lords, to shape markets in a way that was designed to squeeze out land rent and interest charges to a rentier class that was basically predatory, and may added to the costs and made economies less productive.

And especially problematic with the banks, where do they fit in to the market? Maybe we should put the discussion of markets and perspective by asking, why are today’s economy so deeply in debt? And, should we enforce the debt contract? Why are bankruptcy rates and defaults rising? And, why do so many economies now have to impose [15:00] austerity? Does the market make him do this, or is the problem the financialization of markets, and real estate, and corporate management? All of this is contractual, so I guess we’re dealing with words again. What does regulation mean? What’s being regulated? And, at what purpose, and in whose interests?

I think historically markets are created, as I said, in Bronze Age Mesopotamia. Palatial economies were developing, money was developed, and they said well if we enforce the debt contracts, what’s going to happen when the crops fail? What are we going to do if we leave these debts in place? If they’re left in place, you’re going to have the population falling into debt to the creditors. They’re going to become bondservants, they’re going to lose the land, and you’re going to have a few predators taking over a society.

So, the rulers would proclaim clean slates. They would cancel the debts, and free the bondservants. [16:00] And make a clean slate to operate from outside the market system, from above, because they realized that every economy tended to get out of balance and they wanted to preserve the basic balance, that they thought it didn’t come naturally because of droughts, and military intervention, disease and epidemic.

So, I think that the problem is that free markets advocates exclude these debt obligations from the discussion. Often, these externality economists call them externalities, and often these externalities are larger than the economic surplus. Global warming for instance, destructive activities, crime even, or racism. I mentioned, redlining as part of the real estate market that limited credit only to white families for many decades. So, only the white families were able [17:00] to ride the wave of prosperity of rising real estate prices that sort of created the middle-class wealth in the United States. And, the result was a racially segregated market, impoverishing racial class, and government intervention was needed to overcome this.

What are the cleanup costs of all this? Global warming, oil spills, oil pollution, air pollution? How do you make these cleanup costs part of the market, part of market pricing? These are sort of external costs, but how do you take them into account? Crime is an externality. Criminals love free markets, because they are not held accountable or jailed or punished. When Alan Greenspan deregulated banking, bankers made a fortune on junk mortgage fraud and loans to buyers who couldn’t afford them and cheating. [18:00]

So, the question is whether looting is a free market activity? It certainly is a finance capitalist activity. Asset stripping, is it inherent to capitalism? How do you make it part of a marketplace where it doesn’t exist? So, any and all markets have rules and I think that was the point Professor Miron was making. Libertarians, I think advocate markets that tend to be without rules beyond the ones that you cited, and they claim that protecting society from predators is interference. And it is, but it also sometimes you want to interfere with crooks or fraudsters or thieves or rent seekers.

Professor Miron: So, let me respond to some of that and then move us ahead a little bit. I apologize, I accidentally jumped ahead in one of my bullet points. On the question of criminal activities and other things [19:00] that are not voluntary, those would certainly not be defended in my definition of free markets. My definition of free markets said that the government doesn’t interfere with voluntary exchange with mutually agreed upon activities.

So, if someone comes into my house and steals my TV set, or someone assaults me, or whatever. That is absolutely an appropriate venue for government. Nothing about free markets implies the government shouldn’t play a role in criminal justice enforcement.

You mentioned the idea of the topic of externalities, so that’s an important one to consider as part of a broader point. The argument that I make for free markets is not that laissez-faire is perfect. There of course is a standard textbook model in all Economics Principles books, that under perfect competition we get the optimal quantity from an economic perspective of all the various goods produced. But that model has strong assumptions that there’s no market [20:00] power, no externalities, no public goods, and so on and so forth.

My claim is not that most markets are perfect, or that any markets are perfect, it’s that regulation is also imperfect. So, the right question is always whether negatives of laissez-faire are better or worse than the negatives of regulation. And, my assessment is that most attempts to regulate end up causing more harm than good because they have unintended consequences, regulatory capture and a large number of related issues. So laissez-faire is usually better than imperfect regulation. Sorry, imperfect laissez-faire is usually better even than imperfect regulation.

Now, environmental issues may well be an exception, but they’re an exception in a way that fits very easily with the free market perspective. The free market perspective says that people own various things and that I’m not supposed to be able to damage your property, damage things you own, [21:00] unless I compensate you or have your permission in some way. Pollution, the standard externality, is where I might be making the air that you breathe worse, or the water that you want to drink from worse, without your permission and without compensating for the fact that I’ve damage your property. So, in principle, the free market perspective, the libertarian perspective, is okay with the idea that governments want to intervene with respect to many environmental issues. It nevertheless ask whether those particular policies are done at relatively low cost, if they’re done in an effective manner, whether the externalities that they are trying to reduce are in fact sufficiently large to merit a response, but in principle the libertarians and free marketeers should have no issue with well-designed, thoughtful, and appropriately focused environmental regulations to internalize those externalities which are not trivial.

Professor Hudson: Let me ask you, when you use the word voluntary, let me give you an example from Rome. [22:00] If a small cultivator had to pay money, owed money, or had to pay taxes and couldn’t afford it, then his patron would pay the tax or the money and then the debtor would fall into bondage and become a slave. There were several words for 200 years, in Rome, there was war over this. Followers of Douglas Norris say, “Well this was a voluntary contract, there was an official contract that the debtor signed something saying that ‘If I can’t pay this debt, I’m going to be your slave.’ And the result was slavery. That was a market phenomenon.

Professor Miron: I don’t think that slavery in the way that most people mean it. Okay, slavery the way it’s usually employed, means I went and used force to capture you, and put you in chains, and force you to work for me, and things like that. [23:00] There is an absolutely important point to think about, how policy should treat defaults on debts. So, certainly you’re right, free marketeers would not want to allow people to borrow, to take on debts, but recognize of course sometimes they’re going to default and that brings up the question of bankruptcy.

Should you allow someone to be permanently in debt and in effect sort of defacto economically enslaved to the lender, or should you allow people to discharge their debts under some conditions? And that’s what bankruptcy does, I don’t think libertarians have an issue with bankruptcy. It is an interference with… You’re right, it is to some degree interference with a totally free market, but there’s a very specific sort of externality for almost everyone. It’s seeing people who fall victim and become enslaved and so as a result of it and you would probably generate bad outcomes if people start not wanting [24:00] to use debt for reasonable things. Debt, I assume you agree, is very useful in millions of circumstances, you know all the time. So, I don’t think that bankruptcy is a major problem for the free market view.

As I said, we don’t claim that everything is perfect under laissez-faire, there are some cases where government needs to take some rules, not In addition to the enforcing contracts, and tort liability, no General Motors makes a car that turns out blows up in collisions then they should be sued by the people who were damaged, and the people who bought the crummy cars and have to pay damages for that. But, the set of interventions is very small and restrictive because much of the regulation ends up making things worse, in our assessment.

Professor Hudson: Well, let’s look at the coronavirus right now with about half of Americans, the Federal Reserve say, can’t come up with $400 in an emergency. Well, right now, here in New York and throughout the country, businesses are closed down so, and a lot of people have been laid off because [25:00] the business has been down.

So, how are they going to pay the rent? How are they going to pay the debts? There’s a big argument going on now is, whether the rents should just be forgiven? Well, of course if the rents are forgiven, the landlords, what do you do with what the landlords owe the banks? So, they have to be forgiven.

Somebody has to bear the cost of a crisis like today. How would you handle all this?

Professor Miron: So, I think libertarians would be… libertarians are uncomfortable, this is separate from free markets. I think the free market discussion is mainly about economic efficiency not about redistribution. But the redistribution question is perfectly reasonable. I think libertarians are somewhat uneasy with the idea of having government provide a social safety net. Okay, so let’s set aside covid for the moment, just in general circumstances because of recessions and it’s particular industries closing and all that.

And they are uneasy for two reasons: [26:00] first of all they would argue that private forces help create at least some degree of the social safety net, part of that is your family, or your relatives, part of that is benevolent societies, part of that is private charities more broadly and so on. Second they would say that, even if you think private charity is going to be insufficient, that as a whole society would like there to be more of a safety net, if you have the government do it, it has some tendency to grow and grow and grow and instead of having a relatively small social safety net that doesn’t involve huge necessity of taxes, that doesn’t create significant adverse incentives for people to rely on the social safety net, okay, if you could have that ideally designed: small and well targeted social safety net maybe that would be okay.

That doesn’t seem to be what we end up with. In addition, [27:00] once you admit that the government is going to help people out who are in “bad circumstances” we end up helping out a ton of groups that clearly don’t deserve it: that are rich capitalists, that are the banking system in 2008, that are the airlines in 2020, and so maybe the principle that we don’t bail people out full stop is useful, because on the one hand we don’t bail out some people who are sort of deserving of it (we don’t help them) but we also don’t have all the people who probably don’t deserve it. A huge fraction of the redistribution, under our current states in it goes to the middle class. It doesn’t go to people who are poor or genuinely in need. Social Security, Medicare goes to everybody and most of those people are middle or a class or above.

Regan: That would call into question whether the externalities created by the free market are necessarily worse than those created by regulation. Because you’re seeing the [28:00] externalities…

Professor Hudson: That brings up the 4th question about the role of the role of rentiers in this. You mentioned the government intervention tends to rise, but what rises more than anything else is the accrual of debt. Now, if you look since World War II ended, there’s been a constant increase in debt and this is not really, this is not necessarily, a capitalist phenomenon. This is a purely mathematical phenomenon of inherent interest, then it’s been measured and calculated ever since Mesopotamia in 2000 BC, we have Babylonian calculations. Now, at a certain point this growth of debt creates an economy wide crisis, not only personal bankruptcy, it grinds the economy to a halt and I think we’ve never really recovered from the Obama depression as a result of his failure to write down the debts [29:00] and punish the banks in 2008. So, I think a general crisis occurs when large parts of the economy no longer can pay the debts that are accruing, and it was to prevent these steps that you could call the financial market from impoverishing the population and reducing creditors out of bondage that Bronze Age rulers intervene from outside the market.

So, I want to return the discussion then to our topic which is “what is capitalism”? Somehow, industrial capitalism has turned into finance capitalism. Industrial capitalism, and I think that’s the model you use when libertarians and free marketers talk about the financial sector, the idea is you’re supposed to make a loan that I helps the borrower earn enough money to pay the interest.

But, that’s not what banks have been doing for the last generation. They make loans not to increase the means of production, they make loans to take over companies [30:00] and essentially increase the price of housing, increase the cost structure, increase the cost of buying a retirement income, and the result is an expansion of overhead – Not really the economy, that you want to, and the classical economists wanted to, help grow. And also expanding overtime were rents and Ricardo said capitalism is going to be threatened if we don’t do something about the rents, they’re going to be threatened by population grow rents it, by landlords are going to grow and all economies money is going to be paid to the landlords and there won’t be any money to buy the goods and services that labor produces.

And so, the industrial capitalist will face Armageddon, and the same thing that’s exactly what most people said well it may not be the landlords that benefit because today’s counterpart to the 19th century landlords [31:00] are the financial sector. And profits are really falling relative to interest and returns to property and the result is that the industrial corporate sector is being financially stripped as you have this financialization of the economy.

So, whether markets, now you mentioned that markets favor consumers and business owners but the way they are structured today, they favored creditors and financial operators. So, again we’re brought back to how markets are shaped by taxes and other rules in order to prevent a positive outcome.

Professor Miron: So, I disagree with some of the facts that you describe, but more generally to the extent that there are problems of debt, I think the issue is that government is subsidizing debt. Let’s take first of all the government’s own behavior for its own programs, the government wants to, because it’s politically [32:00] popular, provide retirement income and free/very highly subsidized healthcare for the entire elderly population, in many countries even more broadly, and what does it do to afford that it borrows and borrows and borrows. So, the US and other countries have large and growing debts.

I don’t see how that’s a fault of the free market, that’s a fault of some combination of the political process and people’s non recognition of the fact that everything has to get paid for, and the government taking advantage – politicians taking advantage of that. Likewise, characterizing most debt as having all these nefarious qualities and properties… a large fraction of debt is people borrowing for the mortgage and for buying a house, there’s nothing nefarious with that/about that. Its small businesses borrowing so they have enough capital to open a restaurant, or a drive through dry cleaners, or whatever.

So, I think we threw out the baby with the bathwater humongously, and ignored the fact that government keeps bailing people out [33:00] who take out excessive debts, way beyond just bankruptcy. It bailed out the big banks in 2008, it’s been bailing out the financial sector in various ways for decades, if not centuries. So, it’s the government that is encouraging the excess reliance on debt, okay, rather than the private sector. In the private sector, when people couldn’t pay their debts, they would have to eventually declare bankruptcy or just or pay back on the path of assets, if they had them. And that creates a natural discipline that people don’t do it too much, because going into bankruptcy is not great.

Professor Hudson: I think we’re in full agreement there. I would simply add that the problem is that the government has been part of the market, and why is it that the government favors the creditors and debt financing instead of equity financing. And, the reason is that the government has been put up for sale in the financial sector and the rentiers have turned their economic power into political power of taking over government [34:00] and that’s a natural phenomenon. Aristotle said that most democracies tend to evolve into oligarchies, and I think that’s what happened.

You’re absolutely right the government has been favoring of the financial sector, what do you do when that happens?

Professor Miron: Well, since I think that happens because people convinced politicians to adopt particular policies that favor the businesses or the rentiers or whatever you want to call them, I regard my role in life as convincing people to see the negatives of those policies, to not favor those policies, even the ones that sound good. There’re ones that sound good to the typical household. The government is going to create Fannie Mae and Freddie Mac etc, and do all these other interventions in the mortgage market so people can afford a home…

Well, that sounds like a perfectly nice goal, except that the only way you can do it is to end up creating entities which earn high profit, excessively [35:00] high profits, relative to the quality of what they’re producing and that means you’re redistributing in the wrong direction from middle class to high income, or from poor to richer, and so I think what you do about that is not have things like Fannie Mae and Freddie Mac.

It’s not that you have more regulation of the housing market or the mortgage market, it’s that you have less. All of that, in my view, all of the excess profits, all of the rents… most of the rents, I should say, occur because government has restricted competition, has restricted entry and so what I’m arguing against are those policies which restrict entry in competition.

Professor Hudson: Okay, so we’re both criticizing one end or the other of the Bell-shaped curve and I certainly admit a lot of the government regulations, especially when taken over by the financial sector and the rent seekers are bad. My problem is that most regulations are by the rent seekers, and it’s not the people [36:00] that are pushing politicians to do it, it’s the lobbyists with a lot of money that are pushing politicians to do it.

Now, you know Obama, Obama call his supporters he called his supporters the mob with pitchforks, and Hillary called them the deplorables, and they don’t count – the lobbyists count. That’s who the politicians look for, so we’re dealing with a politically corrupted market that’s corrupted by market forces of the wealthy people taking it and buying politics and making that part of the market.

Professor Miron: Alright, let me use that as a segue into one of the other points I wanted to make which is that free markets, as I’m defining them here is the government is not doing all the things we just discussed: it’s not creating all these programs which end up being captured by the relevant industry and used to create extra profits for that industry. So, if you don’t have any of those policies, that’s actually bad for businesses it means they have to [37:00] compete, it means new people can enter and compete away any profits a given firm might have from initially having created a new product or a new idea that customers want.

Under the free markets, the competition eliminates those profits relatively quickly, so consumers face the lowest quality adjusted prices and profits on average tend toward zero. So, I agree with you that the regulation gets captured and so it ends up not doing that but that’s why I’m against the regulation.

Professor Hudson: Okay, so in my mind, you would be throwing out the baby with the bathwater. So we both sort of tend to do that. I think the way to move towards agreement is to compare the market structures that are created by different political forms by oligarchies, which I think today’s market structure is; democracies, which I don’t find today’s market structure is; or I mentioned the palatial economies of the ancient near east, that were intervening [38:00] to save the population from bondage by canceling the debts and restoring a land that had been forfeited.

So, each of these political systems have a different kind of market. The question is, what we’re really talking about, is what kind of markets we really want to create, and I think any market is created politically. And it’s created either by as I said, oligarchy or democracy, and a market in which a credit and money creation is privatized, and I think that your for private investment not public investment is quite different rules from one of public banking or a mixed economy the steers credit away from unproductive uses by a more productive blending.

By the same token, a market whose tax system taxes- taxes are part of the market, how is the tax system going to shape the market? Right now, it does [39:00] what you just accused it of doing. It’s subsidizing absentee landlord’s monopoly rents, subsidizing the financial sector, and that’s quite different from what are the classical economists said industrial capitalism was going to evolve into.

So, you could say, how is our economy and market different from those of Rome? I worry that we’re going into the same kind of problems that tore the Roman Republic apart over indebtedness, the economy falling into debt, and every productive investment is just drying up. Rome enforce contracts…

Professor Miron: I agree with that, but it’s because we have too much government. We’re going into too much debt because we have Social Security and Medicare. We’re having a less productive economy because we’re overregulating lots of industries. So, I guess we’re agreeing on outcomes but we’re not agreeing on what’s the cause of those outcomes.

So, let’s take the investment question. [40:00] I think you’re a bigger fan of public investment for infrastructure then I would probably be, but libertarians would not say the amount of public infrastructure should be literally zero. Okay, roads, a few other things too probably are sensibly done by government. But, deciding what’s productive, which investments in say schools, or hospitals, or roads, or dams, and all those sorts of things which are productive is not trivial.

It’s easier to decide whether the market wants, whether people want to pay for them, if it’s only provided by the free market. Then, if there’s enough demand, a free market provides it and if there’s not enough demand, because it’s not an interesting or useful kind of infrastructure, the private market doesn’t. If we instead get in the position of saying we think the government is good at deciding how many roads to have and how many lanes and all that sort of stuff, it’s easy for those decisions to be captured by the companies [41:00] that build roads, and the unions that provide the labor for roads, and the governments to build a ton of roads to nowhere which is kind of what the Interstate highway system looks like in much of the country.

So, narrow arguments for specific, modest amounts, of public infrastructure… Okay fine, those are probably going to pass the cost-benefit test. But, relative to where the US currently is, libertarians would be very skeptical that we need much more since it’s mainly just an excuse to have government takeover more industries and play a bigger role in deciding what gets produced in the economy. And we think that that’s a bad idea.

Professor Hudson: I want to return this discussion to the role of capitalism, which I thought we were supposed to talk about. What you’re describing is antithetical to the way in which industrial capitalism developed. In the United States, the first professor of economics at the first Business School was Simon Patten at the Wharton School of Pennsylvania, [42:00] and he described public infrastructure not as something marginal like education but is a fourth factor of production and he said that as a factor of production in contrast to labor that earns wages, capital earning the profits, and landowning rent, the aim is not to make a profit or an economic gain, but it’s to lower the economies cost of living and doing business to make it more competitive.

And he said the way that we make America more competitive, and this is what the United States did in the 19th century – and it’s what terminated in the 19th century, to overtake England. He said that role of government is to provide basic needs and services at subsidized prices or freely, so that that will lower the cost of living and doing business. And, again, it’s not just education, it was roads, it was Public Utilities, in Europe it was communications, it was healthcare… It’s a very large part of the economy, probably about [43:00] 40% of the economy, and in 19th century most of the industrial capitalist economists anticipated a rising role of government. And, it was even called state capitalism in Europe because they said most of what should be in the government domain are natural monopolies: communications are a natural monopoly, phone systems are a natural monopoly (that’s why they were public so often), airlines and airports are a natural monopoly.

You want to keep all of these potential natural monopolies in the public domain, so you don’t charge what the market will bear, you don’t want them to be subject to market pricing, you want to provide them at as low a cost as possible or even freely, so that you can make the economy more competitive. And industrial capitalism was always a national capitalism that wanted to make its economy compete with other countries. [44:00]

Professor Miron: Second to last point. Talk about the distributional issue more generally. Free markets – that the libertarian view gets criticized – free market capitalism, for rewarding the rich relative to the poor. And, I think that’s empirically wrong in the following way: there’s no doubt that under free market capitalism some people will get very rich because they’re very talented, they come up with great ideas that they can sell, because they’re willing to work very long hours, all sorts of things like that.

But under free market capitalism, the differences in income and wealth across people reflect their productivity, not their insider connections or some side effects of regulation. So, if everybody can enter a particular industry, the fact that you happen to be in that industry first doesn’t do you very much good [45:00] for very long. Okay, because new people come in and they compete away your profits. Whereas if government regulates it, it increases the cost of providing that particular service. Then it’s hard for smaller firms to enter, they can’t operate on the same scale as the existing incumbents, and so the incumbents in that industry are going to earn more than normal rates of return – more than normal rates of profit, because entry has been restricted.

That restriction came from government intervening, and there are sort of zillions of other examples: if the government is not building schools or things like that, then there not any particular companies that get rewarded for selling enter into a contract to build those schools and getting paid particularly high returns for building those schools… instead, you have lots of individual schools built by lots of different companies, okay and no one is getting particularly rich. The same can be applied to all sorts of other activities that the government does, those activities create winners and losers [46:00] that are not related to productivity and that’s what most people regard as unfair. Not the fact that say, Michael Jordan earns a very high wage as a basketball player, but the fact that the banking sector as a whole got bailed out by the general taxpayer.

Because the banking sector took successive risk counting on the fact that the government would bail it out and therefore earning an extra high rate of return than they should have relative to their underlying productivity. But, again, that’s an effect of government doing bailouts and interfering with the marketplace rather than having just let those banks go out of business which would have reduced their returns and not have the adverse distributional consequences.

Professor Hudson: Okay, now this really brings us back to the whole focus on rent seeking. You mentioned productivity – Goldman Sachs, Lloyd Blankfein famously said that his firm’s partners were the most productive [47:00] workers in the nation based on how much money they made. So, the question is, what is productivity? Is it just how much money an individual can make without reference to whether or not this income is earned or unearned or obtained productively or unproductively?

This is where the tax system should come in, and you didn’t mention taxes, but I don’t know any other way of siphoning off and discouraging unproductive economic activities, such as Goldman Sachs that received the bailout that both you and I agree on should not have been paid. So, I think the way – my way to answer the question you pose is that classical value and price and rent theory was all about.

It was all about discussing markets but it’s confusing to discuss them without inquiring as to what the distribution is between rentiers and labor and industrial capitalists. Who gets what? You need to analyze [48:00] their role and also, as I mentioned, public investment which is part of the market in every mixed economy and I think it helps to think of all economies as being mixed economies, because the governments do so much in either, and that will focus attention on what governments should do that’s really productive and what’s not productive.

I think the problem I have with libertarian economists is they won’t make this distinction that was at the heart of classical economics.

Professor Miron: So, again, our position is that the rentiers wouldn’t exist if we had free market capitalism.

Professor Hudson: Yes! That’s exactly what the classical economists and what Marx would say, they were full agreement: a free market is one without rentiers. This is wonderful we’re in agreement.

Professor Miron: I want to be specific about what’s cause, and what’s an assumption, and what’s a result. We are claiming that as a cause of not having free market [49:00] capitalism you will not have rentiers. I’m not defining free market capitalism as not having rentiers, I’m saying there’s a causal link. Free market capitalism causes the absence of rentiers because you can only make significant rents if there’s restrictions on entry and the vast majority of restrictions on entry are created by government, not by private forces.

Professor Hudson: I think the main rentiers are finance, real estate, absentee landlords and monopolies – and I think rentiers are the market. And, that’s why I criticize the market, because the market is a rentier market in our society and in terms of the distribution you can look at since 1980, since Margaret Thatcher and Ronald Reagan, you had all the historical trends of income and wealth distribution made an abrupt turn. And, there’s been a greater inequality now since 1980, than at any other time in a century.

So, every [50:00] statistician of the US in Europe shows: as polarization of every economy between the financial and the real estate and insurance sector, the private sector versus the rest of the economy, so industrial capitalism, is being squeezed out by finance capitalism and by the unproductive sectors.

And, I think if you’re advocating a free market without distinguishing between productive and unproductive activities, then that just sort of leaves everything open in the private sector. Lobbyists get to take over and claim they’re productive, they’re the market and they’re running the economy instead of bleeding it dry.

Professor Miron: So, we’re going to have to agree to disagree on that. Again, I think that the reason those people can make very high returns, that they can earn a lot of rents, is because of the government and so if you want to reduce that you have to reduce the size and scope of the government.

Let me go on to my last point, I’ve sort of argued [51:00] that much regulation is undesirable because it reduces the economy’s economic efficiency, we’re going to get fewer outputs per unit of inputs and output per unit input is the way I would define productivity. Now, it turns out that advocates of my view have a slightly embarrassing fact they need to deal with: which is that if you look over the last 125 years or so the amount of regulation in US and most major countries have gone up very substantially. There was relatively little economic regulation until the Progressive Era in the early 20th century, and even for several decades after that, a large fraction of the economic regulation we have now of airlines, trucking, and Occupational Safety and Health, and on, and on, and on. Much of that is a post-World War II phenomenon.

If you then look at what real GDP has done in the US over the same period, over 125 years, if you look at [52:00] how the economy has grown, it’s actually very, very, very stable (setting aside the last three months) and so it doesn’t seem to correlate with the amount of regulation in society. Growth rate doesn’t get better as we had more regulation, it doesn’t get worse as we add more regulation.

So, that suggests that over some range, the kinds of regulation that libertarians don’t particularly like, maybe isn’t catastrophically bad for the economy, maybe it doesn’t have that big an effect on the economy. I have an obvious explanation, businesses are very good at innovating around the regulations, so whatever they’re told to do they find some way to do it at a relatively small cost, so it doesn’t have much effect on their economic efficiency.

Nevertheless, the regulation might still be having, and I believe does have, significant undesirable effect which is redistribution. Okay, those people who are willing to be dishonest and cheat on the regulations [53:00] are going to do relatively well compared to those people who feel they have to obey regulations and therefore do incur some additional costs and lower profit. So, that’s a very serious issue, I think that’s a lot of why there is polarization, there is anger, is that people are subjected to things which seem to arbitrarily affect them relative to people in the same line of business, people in the same occupation. A good example would be occupational licensing, if you happen to be lucky enough, you can get a license to become a plumber you earn a high wage, if you can’t get that license for some reason you earn a much lower wage even though your skills as a plumber might be very similar to the people who have the licenses.

So, even if we don’t find dramatic evidence for negative efficiency from regulation over the range that’s occurred so far, it doesn’t mean it’s not having a bad effect. I think it’s having a very serious bad effect in impacting the distribution of income, generating unhappiness with the political and the economic system, of [54:00] increasing polarization and related phenomena.

Professor Hudson: Well, you mentioned cheating… I think a problem that’s even worse than cheating is when people who are obtaining income unfairly or unproductively, manage to lobby to rewrite the laws to define cheating as legal. I think the financial sector is rewritten the laws and appointed judges to make cheating legal, and much of the way that the modern economy behaves… past critics and advocates of industrial capitalism would have said that’s not right, that’s not fair… somehow the market has become unfair and it’s become unfair legally, and this legal unfairness has been built into the market and it becomes not one of free choice but unfree choice.

Take the pharmaceutical companies, they can say your money or your life, we’re going to price this good, we’re going [55:00] to buy this company and increase the price of the drug from $10 to $1000 a week. You don’t like it, then you’ll have to die – well all that’s legal. That’s part of the market, and is that somebody is…

Professor Miron: It’s not part of the free market.

Professor Hudson: Well, how is it not?

Professor Miron: The reason that that company can raise that price is because the government granted that company a patent.

Professor Hudson: Right.

Professor Miron: You might think it’s good to have patents because they spur innovation, but it’s still a result of the government. We completely agree that all the regulation is rigged, it’s rigged in favor of particular interest groups, big business, and so on… but that’s a reason to not have the regulation. That’s what I’m saying.

So, where I think we’re just agreeing about a lot of the outcomes of regulation but somehow we’re drawing very different conclusions about whether to continue to have that regulation.

Professor Hudson: And, I think that’s because we disagree on how policy is made. I don’t think policy is really chosen by the voters, I think it’s chosen by a [56:00] smoke filled backroom by the financiers of the politics.

Professor Miron: So, I disagree that money plays nearly that big of a role in dysregulation. Let’s take, there are many, many examples of regulations which didn’t exist at all and they were created, but they are against the interest of the businesses. But they are created because people voted for politicians who wanted to impose those regulations. Elections count votes not dollars per say, and so we got environmental regulation in the first place, because the voters voted for it. We got Occupational Safety and Health regulation because voters voted for politicians who wanted to create it and so on and so forth.

So, I don’t think it’s just because of the smoke-filled rooms, even though I agree that once the regulation exists of course the people who are regulated try behind closed doors to tweak it in directions that are favorable to them.

Professor Hudson: Then, why do markets crash? Let’s put it that way. [57:00] Do they crash for natural- why did these crashes occur?

Professor Miron: Now you’re asking about macro and my short answer is, I have no idea.

Professor Hudson: My approach is macro, and this is exactly our difference. You’re looking at the micro and I’m looking at the macro and the fact that so many economies today are in austerity… and because I thought that we’re going to be talking about capitalism, has it failed or not, I think industrial capitalism failed to evolve into socialism and it evolved instead into finance capitalism. That’s macro… and socialism, most of the Socialists I know were very largely libertarian, even the following – take the followers of Henry George in America who wanted to tax land rent, they’re a libertarian group, they’re your Cato Institute supporters.

Professor Miron: Um, yes and no.

Regan: Are there any final thoughts?

Professor Hudson: There are many different kinds of capitalism and that’s why I don’t like [58:00] to use the term any more than Jeffrey did. Industrial capitalism failed in its historical goal, which was to, as understood by the classical economists, it failed a free society from these unproductive rent seekers, and financiers, and monopolists. They’re still with us.

That’s what you’re criticizing and it’s what I’m criticizing, and I think finance historically has been the main mother of monopolies. It’s not just in its financing the form of the accumulation of debt that builds up more and more until the entire economy is engulfed with debt. I think the way in which wealth is achieved today, is obtained mainly by financial means. It’s not made by industrial capital means, it’s not made by employing labor to produce goods and services to sell at a profit, it’s not by industrial engineering, or productivity. It’s by financial engineering, and rent seeking, not by industrial capital.

So, [59:00] what is failed is really finance capitalism, and you could say that well that was the failure of industrial capitalism was to do what the 19th century economists expected it to do. Which was to evolve into a mixed economy that would be balanced and not corrupt.

The libertarians are criticizing the corruption that the economy has fallen into quite rightly and that’s certainly what we agree upon, but the problem is that the kind of free market that is advocated by most libertarians is basically antigovernment, and it’s not only antigovernment, it turns out in practice to be anti-labor and basically endorsing austerity. Is a result of other kind of contracts that exists and this imposes very harsh contract rules that lead to austerity and the economy ends up shrinking [1:00:00] and we don’t think any society can survive under these circumstances that we have today. We’re in as much of an oligarchy as Rome was with its enforcement of contracts that subjected most of the population to bondage, and as Louis Brandeis said, “you can have great wealth or you can have democracy, but not both.”

And, I think that somehow democracy has suffered, and the voters aren’t doing uh the smart things that you would like to see them doing.

Professor Miron: So, I guess I will just conclude by saying, every economy we’ve observed has some mix of free markets and government intervention interference with those markets, government control. We have, to a reasonable approximation, data on which systems those with relatively much government intervention or those with relatively little do the best at having high economic growth. And, I think those data are strongly [1:01:00] suggestive, it’s social science – we don’t have a controlled experiment, so nothing is ever definitive proof… but, by the standard social science the evidence is incredibly clear.

Until we had something roughly like free market capitalism, starting in the early 19th century, 1800s, the world economy basically stagnated. And, as much of the world moved to something roughly like free market capitalism, the world’s economy took off and has grown persistently for 200 plus years.

So, the evidence, my assessment is very, very suggestive: free markets – freer markets, lead to more economic output and that’s good for everybody.

Professor Hudson: Well, I guess my point, I wrote a book for America’s protectionist takeoff from 1815 to 1914 – and certainly the takeoff of industrial capitalism that you talked about, was a very heavy government intervention. It was protective tariffs and government subsidies and now all of that is slow – we’re now in a slowdown of the whole western economy.

And the question is, how do we how do we get rid of that? We’re no longer experiencing this long take off that originally was largely government sponsored, we’re in just the opposite, we’re moving towards debt deflation and stagnation.

Professor Miron: We might be moving in that direction it’s over the period of a post-World War II where we’ve had more and more across the world, more and more government. But I guess we have to leave it at that, we’re not going to end up agreeing completely.