Michael Hudson: Neoliberalism, Industrial Capitalism, and the Rise of Debt

Yves here. A year-end treat from Michael Hudson, via Robinson’s Podcast” a meaty historical discussion of the Chicago School, of compound interest dynamics, classical economics and rentierism, and industrial versus financial capital.

By Robinson Erhardt. Originally published at Robinson’s Podcast

Robinson: I’m from Chicago, and when I saw that you went to the University of Chicago Lab School, which I know quite well, and then the University of Chicago, which I also know quite well—and when the Chicago School of Economics was promoting the free market and probably in its heyday….I immediately found myself wondering: When you’re in this environment, how did you come to believe that what was ostensibly a libertarian ideology was in fact becoming a tool for financial interests to manipulate the government and cheat the 99%?

Michael: I was there from 1955 to 1959. I never knew anything at all about the economics department; I didn’t know anybody there. On one occasion, I met somebody at a party who was in the business school and he was very awkward. Some girl asked for her phone number—and you could see she didn’t like him—and she gave it to him. And then, this was I think a Deutsch-Tisch, German table. So I knew him from the German group there, and my degree was in Germanic history and philology actually. He said, “That girl was really stupid, so attractive, but so stupid, that she didn’t even know her phone number.” I said, “What do you mean?” She said, well, that was the phone number of the fire department. He didn’t get it, but he was being set up.

That was my first introduction to how free market economists think. They take everything on the surface. There’s no understanding of the structure and back of it all. But I never knew anybody from the business school. My interest certainly was not in Chicago economics. The reason I took German was because the German teachers were in charge of all sorts of other departments. Harry Yolas was in charge of the history of culture department. And that really was what I wanted to study. History of culture enabled me to take any course I wanted, cafeteria style. So I was taking art history and I was studying music at DePaul University in Roosevelt simultaneously. And Germans were in charge of the comparative literature department. So that just meant I could take everything cafeteria style basically. And my contacts were largely with humanities professors, literature professors, historians. That was what I was studying. Nothing about economics. I never had any idea at all of studying economics until I came to New York in 1960 and 61.

Robinson: That was a better and a funnier answer than I’d bargained for. So was it then your time at NYU that opened you up to the alternatives to praising the free market without looking at a deeper level?

Michael: No, they didn’t discuss free market either. We were told some I had one of the stupidest professors I’d ever had, Stephen Rousseas, who was teaching monetary theory and he was just sort of a neoclassical neoliberal and everything he said was wrong. I got a C plus in the money and banking course because the question was supposed to be about Hyman Minsky who at that time was not known what he later became known for modern monetary theory. But this was in 1963 when he’d written something about savings banks actually aggravating the financial cycle because his theory was that savings banks put some of their money, their savings, into commercial banks. And his theory, abstractly enough, was that the commercial banks would lend out into the regular economy, personal loans, mortgage loans, et cetera. What neither Minsky nor the professor knew was that I worked for the central bank for the savings banks, the savings banks trust company for three years from 1961 to 64, and all of the New York state savings banks kept all of their reserves in the savings banks trust company, which invested it only in bonds, including World Bank bonds, government bonds, but didn’t make any loans at all into the general economy. That wasn’t what it was set up for. So to think that, yes, here’s a saving, a commercial bank, it must act like the other commercial banks—that’s called correlation without causality. And Rousseas said that I didn’t understand the theory and that reality had nothing to do with theory—that I was there to learn theory, not reality. And that was my introduction to magnate monetary theory.

The good thing about NYU was it didn’t want my brain. All it really wanted was my money to pay for the tuition. I tried to take all 20 courses in the one semester, but they were very hypocritical and insisted that I couldn’t understand, that the understanding was slow and would take, you know, one year for the MA and two years for the PhD, not realizing that you can compress nothing into nothing, you know, three years into nothing. So basically, I got my degree as a union part because at that time I was working first in the savings banks and then in 1964 in December on at Chase Manhattan. Hmm.

Robinson: Well, one question that I wanted to ask before we get to the meat of your writing and particularly your book, The Destiny of Civilization, is how you think of or define debt and debt inflation. And since debt is so vital to what we’ll discuss, I thought it would be a good idea to determine to what extent this is a term of art for an economist that has more nuances than it does in our colloquial usage?

Michael: I don’t think I’ve ever used the term debt inflation. What does it mean?

Robinson: Well, that’s why I was asking you, but I think it’s in the book, but debt inflation is the increase of debt over time.

Michael: I think that I call that the exponential growth of debt at compound interest. I thought we were going to talk about Killing the Host. It’s okay if we don’t. But in killing the host, I have a whole chapter on compound interest. The volume of debt multiplies simply by mathematical principles of compound interest, not by any relationship to productivity or the ability to pay, or the real economy. The financial system of credit and debt is imposed on the economy of production and consumption, but does not reflect the relations of production and consumption, profits and wages and earnings and the ability to pay. It merely intrudes upon them. And the exponential growth of debt at compound interest always tends to exceed the economy’s ability to grow through national income, GDP, or the ability to pay, which goes up and down, whereas compound interest does not have a downturn, it just goes upward steadily.

And one of the reasons that economies turn down is because the debt overhead grows so much that it deflates. I talk about debt deflation, not debt inflation. And the term I use again and again is debt deflation. And that is that paying creditors, paying debts to the financial sector removes purchasing power from the consumer spending and from corporate spending on industrial capital formation. So we have debt deflation, there’s credit asset price inflation, very often debt finance, but asset price inflation is achieved at the cost of debt deflation.

Robinson: Is this concept of debt deflation and credit inflation, what contributed or something that contributed to the housing market crash a decade or so ago?

Michael: Yes. And in fact, when I was at the savings bank trust company, my job was to trace deposits and mortgages because savings banks were supposed to lend all of their money out to mortgages in a circular flow. Well, the deposit trend for each bank would be a zigzag. It would jump every three months when interest on the accounts was credited. Obviously, people weren’t really increasing their savings very much, but the increase came just from the accrual of interest that banks would pay out of the mortgage interest that they charged on the loans that they made to the home buyers.

So I realized that as the volume of savings banks increase, assets increase, they were going to recycle it, lend it out, yet more mortgage it. And politically, the savings banks were advocating more and more deregulation so they could make more and more mortgage loans. They wanted to loan outside of New York State. When I got married, my wife and her family had been depositing at a local savings bank for over 20 years. And you’d think that I would have qualified for getting a loan. But the bank said, no, we can make more money by lending to Florida, where interest rates are deregulated and the demand is, so we’re not really lending the New York City people anymore to our depositors. So I thought, well, there goes the whole idea of mutual savings banks. There’s something mutual there. It’s mutually antagonistic savings banks. And I ended up getting the mortgage in Chase Manhattan, instead, since I was working there, it was fairly easy.

So you have the exponential growth of debt, recycled into more and more loans and the mortgage market. And in the 60s, when I was watching how the savings banks and the commercial bank market worked, there was a rule of thumb by bankers. The mortgage loan that you would give out to borrowers couldn’t absorb more than 25% of the borrower’s income. And this would be for a loan that was repayable over 30 years, self-amortizing. And there had to be at least a 10%, preferably a 30% deposit down payment so that you knew that the bank would be able to be repaid. Well, the banks made more and more money and the commercial banks, just like the savings banks, ended up making 80 percent of commercial bank loans in the United States, Britain, and other countries are mortgage loan.

The commercial banks then during the Reagan era, raided and essentially emptied out—they merged with the savings banks, took all the money, didn’t pay the depositors any of the supposedly gains that the depositors made. They stole. They stole all the savings of New York savings banks. Sheila Bair explained some of the details of just how this was done from Wall Street’s aim to me one day, but I was watching it happen while I was even at the savings banks. Most of the directors of the savings banks were people who deposited in the savings banks. Some were plumbers, some were restaurant owners. They weren’t financially sophisticated enough.

And Sheila Bair said, well, tnow we’re going to increase the professional management and the savings of the savings banks. What they did was they closed down the savings banks and the poor areas, areas with minorities lived or the low income areas. It was just a total travesty of the whole thing. But at any rate, for your question, yes, the commercial banks loosen the terms of mortgage loans so that by 2008, when the crisis came, you could buy a loan with zero down payment. And actually, you would borrow more than the value of the house, typically 101 or 102%. So you’d have enough money over the payment for the house with no money, you could afford to have it painted and pay for the insurance dots and the brokerage fee and the other things. And the mortgage, instead of being limited to 25% of your income, went all the way up to 43% of the income. So today you have the Fannie Mae, the government mortgage insurance agency, guaranteeing mortgages that no bank will lose any money on a mortgage as long as it doesn’t absorb more than 43% of the borrower’s income. And in the United States, now housing costs are about 40% of the income. Another problem in 2008, in addition to the low down payment, in addition to the increase in income that absorbed, there were false appraisals of the buildings. They used crooked appraisers because then you could lend more money. And the fourth factor was, you would have no guarantee that the buyer had any income at all. The banks would work would conspire with the brokerage companies to make up a fictitious income statement to pretend that the buyer could afford it, even though they had no job, even if they were making no income, they would falsify the price of the house. And then they would look for a sucker. And the biggest suckers, I guess as always, were the Germans, the local state German savings banks. I’m told today Germany thinks that Russia or Ukraine blew up the Nord Stream lines, you know, that was the kind of mentality. Never question an American. American says that it’s got to be right. They bought all the junk, were broke.

Wall Street would bribe pension funds to buy these package mortgages. And basically the mortgages were junk mortgages. And that’s why the newspapers, even before 2008, were using the term “junk mortgages” and “ninja borrowers”. So yes, it was the deregulation that led to the mortgage crash. As my UMKC colleague Bill Black described, this was basically criminal fraud. And Bill Black had been in charge of prosecuting the savings and loan fraud in the 1980s. And what happened under Greenspan was the much greater commercial banking fraud that nobody went to jail, but Obama punished the victims. He punished the victims of the junk mortgages. He evicted 8 million American families so that they would default, creating a bonanza of purchase of buying distress sale buildings and turning America from a homeowner’s economy into a rental economy. Homeownership rates plunged as a result of the crisis and that was the objective and remains the objective of the Democratic Party today, to replace homeownership with a rentier society, a landlord society, to sort of roll back the economy so that it looks like it did in Europe before the 19th century. It’s the kind of neo-feudalist.

Robinson: Yeah. Well, that was very helpful. I think that the story points to a concept that we’ll get to shortly, and that’s the financialization of the economy. But before we get there. I think that was really helpful because I find it very useful to pin down key concepts at the beginning of these conversations. And you just mentioned the rentier society. And the other concept that I wanted to pin down was rent. And so how does rent differ in principle from other forms of income like profit or wages?

Michael: The entire focus of classical political economies from Adam Smith, the Ricardo and Malta, John Stuart Mill to Marx, the Thorstein Veblen was a value in price theory. They realized that not all prices for goods and services, or for assets, actually had cost value, that rent was the excess of the price over and above the actual cost of production. It was imposed on the economy, just like debt and finances imposed on the economy, property ownership in the form of a hereditary landlord class. The heirs of the Nordic Northmen who conquered England, who conquered France, and assigned themselves land rent were basically for 800 years burdening the economy with land rent. The entire political focus of classical economics was to get rid of the fact that there was a landlord class that anybody who occupied a building or lived in it or owned it had to pay rent to this hereditary landlord class that didn’t play any productive role at all that made money in their sleep.

That’s the terminology John Stuart Mill used to describe the landlord. A landlord is a rent recipient who makes money in his sleep without working. So rent is a payment to either a landlord or a monopolist or to a mineral miner, to an oil company, or to a banker in a financial institution, that doesn’t play any role in production at all. Well, if you have a class of rentiers, of landlords and monopolists, whose price does not reflect any necessary cost to production, that’s economic rent. And more and more, what is called GDP or national income, does not take the form of wages and profits made by producing goods and services by industrial companies, it takes a form of economic rent—Mainly land rent, most of the increase in the cost of housing and commercial property in the United States, the rising site value of the land that’s inflated by credit, whatever a bank will lend defines the price.

What they mean by profit inflation is when a company, a monopoly, will decide simply to raise prices because there’s no competition, nothing to stop it. So this is reported as profits, but it’s really rent. The problem is that since about 1890, really for the last 130 years, the economic statistics have stopped recording rent. The landlords fought back, and the bankers backed the landlords in fighting back. The anti-classical, anti-regulatory, anti-government approached economics that there is no such thing as unearned income. I give all of the citations from John Bates Clark and other people in my book, Going the Hope, but there’s the denial in modern neoclassical economics that all income is earned, all wealth is earned, and if somebody’s a billionaire, they’ve made it by earning it, by playing a productive role in the economy. There’s no concept in the national income accounts of rentier income. Everything is counted as profit or providing a service. For instance, you may wonder why, if you look at the statistics, you find people falling behind in their credit card accounts, and their credit card interest goes up from the normal 19 to 23 percent interest charge to over 30 percent. And if you want to know where did this increase out of the national income account treat these penalties. Credit card companies are making more money on penalties than they’re actually making an interest. Well, all of that is counted in the national income accounts under providing financial services. It’s a service when you increase the penalty on depositors. This is the kind of gray area you get when they won’t acknowledge that the phenomenon of rent is unearned income whose payment becomes a cost of living and a cost of doing business and a cost to companies that have to pay labor to pay various forms of economic rent, but it’s not part of the production. So the statement that American GDP is growing overlooks the fact that the actual product is tapering off or shrinking. All this growth is from the wealthiest 10% that are making their money through rent extraction. It’s an extraction activity, a zero-sum activity. The money that the financial sector or the landlord or the monopolist gets is not adding to the product. It’s a transfer payment from the consumer or the renter or the debtor to the rentier at the top. Our economic statistics pretend to be empirical, but they are not describing how the world really works at all. They’re describing a kind of parallel universe.

Robinson: Hmm. Well, hopefully I don’t have the numbers wrong, but I believe that a few minutes ago you said that in much of the 20th century, the structure of the economy in the United States was shifting back to a mode from before the 18th century and earlier. And this of course suggests that something else was going on in the 19th century when the Western world was also still capitalist. And people typically use the word capitalism, I think, as if it’s a univocal concept.

Michael: The word capitalism came from the German Werner Sombart.

Robinson: I don’t know if this stems from the origin of the word where it was just meant to reflect that some take capital from others or that some-

Michael: Capital was used, but nobody turned the idea of capital into capitalism.

Robinson: My point though is that you distinguish a variety of versions of capitalism that are not equal and I think the right place for us to start is with industrial capitalism. So what was the system and what was its purpose, if it can be said to have one?

Michael: It was really Marx that described how capitalism was basically different from feudalism and from the ancient mode of production. Mark said every era has its own form of creating a surplus ultimately from labor. In feudalism, you serfed them. The serfs were tied to the land. They had to turn over the crop to the landowner, to the local lord. The ancient mode of production was slavery and usury. But the capitalist mode of production was free labor. Labor could work and live wherever it wanted. It wasn’t tied to the land. In fact, it was driven off the land into the cities to seek employment as wage labor. A

And the industrial capitalists differed from the land the landowners and aristocracy, who were the basics of feudalism, because the industrialists employed wage labor to produce a product. The industrial capitalists obtained the money to employ labor, buy capital, buy a factory in order to produce the goods, to buy machinery, to buy the fuels to run the machinery. He would organize the economics of production to produce goods that he would serve at a higher price than it cost to employ labor and buy the raw materials and that bought the production.

So Marx said that all forms of exploiting labor were in one sense or another, exploitative. Slavery of antiquity exploited labor by just giving it the bare minimum. Feudalism exploited labor by just tying it to the land, taking what it produced. And this was purely exploitative. Capitalism exploited labor in the sense that, yes, the capitalist made a profit by employing labor, but the capitalist, unlike the landlord and unlike the slave owner, actually played a productive role in organizing production. The capitalist organized industry and made possible growth. And as the American economists pointed out, especially in the 19th century, they said an intelligent capitalist is going to realize that high wage labor is more productive than low wage labor. So the intelligent capitalist is going to do two things.

Number one, he’s going to pay labor enough to be healthier, to be well fed, well clothed and well educated so that labor’s living standards will be uplifted in capitalism instead of the feudal, rentier mentality, to pay them as little as possible and take all the profit. The capitalist had to be part of an expansion, but also the capitalist didn’t want to have to pay for many of the costs that labor had. So the capitalist wanted an increasing role of government. Outside of England, the capitalists wanted industrial tariff protection so that the prices would be high enough so that domestic industrialists could afford to make the capital investment in plant equipment to rival that of England. That’s what Germany did. That’s what America did. Protectionism.

Secondly, they wanted the government to bear as many of what are now called the external costs of production as possible. As much of the labor’s consumption that the employer did not have to pay should be paid by government. So, England, America, Germany, all the enlightened capitalist economies said, well, we’re going to want government to provide certain basic needs that are not monopolies, like public health. And it was the conservatives, it was the capitalist class fighting for this. In England, it was Benjamin Disraeli that advocated health, health is everything, and advocated public health for England. Another thing would be education. America was laid out geographically in terms of school districts, where each district would finance its own public education. The government in Europe especially would treat any inherent monopoly as something that the government should produce because the government would provide these services not at cost, but either freely, like education or health care, or at a subsidized rate. So the governments in Europe would have public telephone systems, public communication, public transportation, public water and sewer. Every industry that could be monopolized was held to be appropriately in the government so that it would minimize the cost of living, and by minimizing the cost, the labor, of having to pay for health care and education basic needs, they would minimize the cost of doing business to the employer and to the economy.

So, Marx said the tendency of industrial capitalism—the law of motion of industrial capitalism—was to move towards socialism, to move towards an increasing role of public capital investment. Also, industrial capitalism needed financing. And Marx said that capitalism had revolutionized finance—at least in Germany it was. The old financial system in England, Holland, America was purely predatory. It was not productive. Loans were made for war financing. Ever since the 13th century crusades, it was the Vatican that had taken the lead in organizing a European financial system to finance the crusades and wars, not to play any kind of a productive role.

But Marx said, finally, industrial capitalism has a use of credit that doesn’t involve war, it doesn’t involve corruption, it doesn’t involve making loans to unproductive governments. Industrial capitalism is going to make governments themselves productive. And for that, it’s going to make not only transportation and health care and education of public utility, it’ll make banking in effect the public utility. And that’s what you had in Germany developing up until World War I, so that by the time World War I broke out, even in England, economists wrote articles and economic journals, other publications saying that they worried that Germany was going to win World War I because it had productive banking as a public utility that could finance actual capital investment, whereas British and European banking and American banking simply was asset stripping. It wanted to have profits paid out in dividends to make money for the stockholders and for the bondholders, not to reinvest in expanding production.

So capitalism was basically a transition towards socialism starting with a mixed economy. All of the capitalist economies were mixed economies. But being a mixed economy, the political fight was to take control of the government away from landlords and away from the rentier class and put it in the hands of the industrial class that allied with the wage-earning class together against the landlords. And that was basically what the 1848 revolutions were all about: the labor and capital against the landlords, monopolists, and the banks. And that was the basic political orientation of capitalism.

Well, obviously this entailed: how do you take over the governments of England, France, and other countries that are controlled basically by the House of Lords? And the House of Lords fought against any attempt to tax the land, any attempt to get rid of the protective tariffs that had raised food prices in England from 1815, when the Napoleonic Wars ended. Finally, 1846, when the Corn Laws, the protective tariffs were put aside. They wanted free trade and not protecting other landlords, but bringing the cost of food in England down to the cost of production in the cheapest market, which was basically the United States. So you had the objective of industrial capitalism was to compete with other countries by lowering the cost of production, including the cost of hiring labor, by having governments pick up more and more of the cost of production through public infrastructure investment.

Robinson: Well, let me try to summarize just a little bit before we move on because there was a lot there and you can correct me where and if I’m wrong. So the wealthy’s primary mode of extracting capital in feudal times was essentially slavery and then usury. And actually, it’s worth noting you had a really nice phrase that I’d never heard before in your book and that was “predatory usurious finance”. I’d never heard or read the word usurious before and I liked it. But then after the industrial revolution, the capitalist played a productive role, which he hadn’t before by organizing labor. And then now restricting ourselves to the United States there was a swing back to usury and the rentier economy after World War I. And this leads me to ask what it was that caused this change. Was it the loans you mentioned that had always financed wars, but in this case, it coincided with the rise of the military industrial complex?

Michael: The landlord class saw that industrial capitalism was succeeding in creating governments who look at their task as sponsoring economic growth and raising living standards—meaning the productivity of labor—and in promoting industry at the expense of the rentier class. The landlords, the monopolists, the mining companies and oil extractors, and potential monopolies. The rich people, the dominant rich, all saw this as the dynamic of capitalism and being at their expense.

When the United States created the income tax in 1913, beginning right after 1914, only 1% of Americans had to pay the income tax because you had to have income over a certain level in order to be taxed. Most Americans didn’t make enough to even file an income tax report. And almost everybody who paid an income tax, the rich people, the rich families, either made their money from real estate or in banking and finance or by having some kind of monopoly like John D. Rockefeller in oil or Andrew Carnegie in steel. Banks were looked at as the mother of trust. Banking in the United States and England always played a reactionary role. The bankers did not help industrial capitalism. Their loyalty was to their class, which was the rentier class. They supported the fight against classical economics. They financed bad universities like Columbia University, which is one of the centers of the rentier class. And Columbia University, which was, I think, at that time, the largest landowner in New York City, did everything it could to fight against land taxation. And they were fighting against Henry George, who was not a good economist, but a popular journalist, who was advocating a land tax. The wealthy families all got together and said, “We don’t want to be productive. It’s really hard to be productive. If you’re a capitalist, you have to organize the production of an industry. You have to advertise, you have to create markets. You have to use your brain. We don’t have brains. We don’t have to have brains. We inherited the money. So we want to run the economy without brains, just purely predatory. It’s our mentality. That’s what we do. That’s where our ancestors gave us all the money by being predatory.”

And there was a hatred of actual enterprise. People had to actually work for a living. It was in a way very much like ancient Rome. If you were an aristocrat, you didn’t want to dirty your hands by actually making money and playing a productive role. You wanted just to live off the fat of the land, to be a parasite. And that’s what the rich want to be. It’s not that they don’t want to be called parasites, but they want to be parasites. They want to call themselves the most productive class that there is, but they’re the most predatory class and they play no role in production. And actually by increasing their gravitation of land rent, they are responsible for deindustrializing the American economy and now the European economy as well. So that…basically that I hope that answers the question.

Robinson: Mm-hmm, it does. And maybe this is where we end up inadvertently returning to the beginning of our conversation and the Chicago school. But in connection to everything we’ve just been discussing, how do you think of the phrase “neoliberal ideology”? And if I’m right to interpret you this way, why is it in fact antithetical to the free market and instead favorable to the wealthy rentier class that we’ve been discussing?

Michael: Well, the word neo very often is antithetical. It was Thorstein Veblen who coined the word neoclassical. And you think, what neoclassical mean? Are they saying what the classical economists said? And what Veblen actually meant was, no, it’s the opposite of classical economics. It was the new mainstream. It was the new official economics. Neo was the status of this anti-classical economics. You used to think of liberals as being for infrastructure investment and social productivity but neoliberal is really neo-feudal or neo-fascist. Neoliberal means the opposite of everything that uh the free market meant the classical economics.

The classical liberals were the physiocrats, Adam Smith on the classical economics. What they wanted to do was free the economy, meaning free markets, from economic rent. They wanted freedom from predatory taxation, from predatory landlord rent, from predatory monopoly rent, from predatory finance. Their neoliberalism was to actually free economies from unnecessary costs of production, unnecessary expenses of labor and industry. But today neoliberal means anti-government. Neoliberal in the 19th century was against governments controlled by the landlords through the House of Lords in England and their counterparts in other countries. Neoliberal today means against productive government, any kind of government regulation. Neoliberal means don’t tax rentier income, tax labor and capital, tax income earned industrially or productively, but don’t tax parasitism because we’re the parasite class and we’re against government taxation, we’re against government regulation. Don’t have anti-monopoly laws, let the monopolists make money. That’s how we make money. We’re the financial class.

So neoliberal means “dismantle the whole edifice of government that’s been put in place over the last two centuries and replace it with what they call a free market”, meaning a market without any active role at all, a market of central planning. Neoliberal means centralized planning shifted away from Washington, and other political capital into the financial center, away from Washington to Wall Street, away from London’s government to the city of London, and in other countries away from their industry towards the international banking. To them a free market is a market where the wealthy people are free to do whatever they want to the renters, to the consumers, to the debtors and exploit them without any government interference with their extraction and predatory behavior.

Robinson: Or to the extent that policy is still done in Washington, it’s heavily influenced by financial and corporate interests.

Michael: Yes, neoliberalism is privatized, but has been socialized for the last few centuries. It privatized healthcare instead of public health. It’s privatizing the educational system through getting rid of public education. And it’s privatized government. That was the Citizens United ruling of the Supreme Court. The campaign donors decide which politicians will have the money to buy the TV time and essentially the pay in the Democratic Party, the Democratic National Committee. The Democrats appoint the heads of every government committee by how much money can you contribute to the Democratic National Committee, which is a group of ultra right-wing rentiers, very much the same people who finance the Republican Party. They’re the same party basically. And they contribute to make sure that labor and industry do not have a representation within the Democratic Party, but only the the rentier class, especially what I call the FIRE sector: finance, insurance, and real estate, along with monopolies in the military and the real estate. That’s the core of the campaign contributors who dominate both the Republican and the Democratic parties, but most blatantly through the Democrats.

Robinson: So do you explicitly then view the two-party system in the United States as something that the rentiers have managed to co-opt into the service of perpetuating their interests?

Michael: Yes. Basically the extremist rentier deregulatory party is the Republican, and the Democrats by pretending to be pro-labor, by pretending to be liberal, keep moving further and further to the right. Their job is to protect the Republican extremists rentiers from any criticism by labor unions or by the left. It’s the Democrats’ job is to detooth any attempt that socialism or really industrial capitalism taking on the dynamic movement that it was evolving into socialism a century ago.

Robinson: Since time is starting to slip away from us, I wanted to give voice to what I think is probably a common criticism of this view. And since half the country—maybe this is an exaggeration believes in trickle-down economics—just why is the concentration of wealth in the hand of rentiers specifically so bad? Is the idea that if this were industrial capitalism, as you’ve already laid out, and the money were going into investments in labor production and organization, then it might not be horrible, but the fact that it’s just going toward pure wealth increases—and as you read in your book, increasing wealth is addictive—but maybe through stock buybacks and land acquisitions, this means that the capital just doesn’t benefit anyone who doesn’t own it.

Michael: Well, obviously it’s not trickling down. It’s being sucked up. The pretense is that the rent extractors are part of the economy. That’s why all of the money they extract is included in the national income accounts and product accounts, the NIPA, as product. The product is taken out of the production and consumption, and the zero sum, zero product activity is all sucked up.

Financial wealth grows exponentially, as I mentioned, by compound interest and by asset price inflation. The recycling of finance into more and more purchase of stocks, bonds, real estate, and rent-extracting resources makes American wage earners pay much more for housing. It used to be that Americans would pay less than 25% of their income for housing. This is in the 1940s and 50s. Now it’s over 40%. All this extra money for housing gets paid to the financial and real estate sector. Basically anybody can buy a house, but you have to pay all of the rent to the banker in order to get the mortgage to buy the house. Your only hope is you can come out with a capital gain, which is really an asset price gain, as the price of that real estate asset is inflated on credit.

The pretense is that, well, don’t all these landlords spend their money back into the economy? Don’t the bankers actually spend money back in? Well, they absolutely, no, they don’t. Bankers do not make loans to build factories or for machinery and other capital investment. What they do is they make loans to corporate raiders who will buy an industrial corporation and then loot it. That’s what private capital does. Private capital will simply take over, do to a company what it did to Toys R Us, Sears, or any of the other companies that are going bankrupt. It’ll buy a company, it’ll do what Samuel Zell did with the Chicago Tribune, and they will begin to pay back the bankers that have lendt the money emptying out the employees’ stockholding in the Tribune. So the employees thought they were sharing in the part owners of capital. But being a minority investor does not give you many rights. And so that was looted. The private capital raider will then say, well, let’s just sell some of the assets, the real estate, and then we’ll sell off our buildings and then we’ll lease them back. And then we’ll take the sale price that we get for selling the building and we’ll pay ourselves a special dividend. All of a sudden, they’ll pay themselves a dividend and the company will now have to begin paying rent to the party to whom it sold the building and is then taking a lease back on. Or the capital investor will go to a bank and said, well, look, we’re gonna raise our prices, we’re gonna make the profits. Make us a loan again, and we will promise to pay you this scheduled flow of rents and profits from our real estate and industry and monopolies and chemical companies that are manufacturing companies. And so they’ll take out a loan and then they’ll use the loan proceeds not to increase the production, but to pay themselves a special dividend and all of a sudden the bank has debts to just about everybody that it’s borrowed from, but this money has not been spent.

England right now has been going over the problem of Thames water. If you want to see how the process works look at Thames water that Margaret Thatcher decided to privatize. The buyers of Thames water simply borrowed money and they took all the money that was borrowed, paid themselves the dividend, and did not fix the pipes that are leaking sewage into the water systems, beaches…they didn’t fix the pipes from leaking, they didn’t really put much investment in at all. Their role was to destroy the English water system and loot it and leave it a mess while taking out a huge amount of money pretending to spend the money back into the real economy. So the fact is the money didn’t trickle down from the owners of Thames’ water or from the corporate raiders in the United States. That’s why they’re called raiders. They pay themselves and they then raise prices if they can. As I mentioned earlier, they call that profit inflation and it’s merely monopoly rent power.

The Biden administration right now pretends to be pro labor against monopoly. It has Lisa Kahn trying to fight monopoly, but it’s fighting like hell to prevent Google from being subject to monopoly breakup. It’s really the protector of monopoly. It says one thing and does another. That’s, I guess, politics throughout the world, but it’s practiced to an unprecedented extent in American politics today. And the pretense that the rentiers are productive is the assumption underlying all economic models and all economic statistics, but just because it’s in the statistics doesn’t mean it’s empirical reality. It’s a parallel universe. It’s science fiction.

Robinson: Well, setting the rentiers aside for a moment, is China, which has been booming industrially for some time, and a region I know that you’ve done a lot of writing about, is it an example of an economic situation where the wealth has and does trickle down?

Michael: When people say trickle down, they usually mean trickle down from wealthy people to the rest of the population. There are a lot of billionaires that have emerged in China. I don’t know whether their wealths have actually trickled down. It does through companies like Huawei, which is owned by the employees there. But what has created the wealth in China is largely government spending. Just like the wealth in America was created since the 1930s, very largely. So the assumption that if the economy is getting wealthier, it’s trickling down, misses the point that most of the wealth is created by government capital investment itself, and by governments. And in China, the money creation and central banking is a public utility, unlike the case in the West.

To the extent that China does have billionaires, this is not something that is supposed to be Marxist. You do have people like Jack Ma, who became very wealthy by being an entrepreneur in creating his company. But the government then said, well, you’re going to really have to turn your money over to government to spend much more. The problem is that wealth trickles down from the wealthy Chinese to the extent that the government can lean on them to say, you know, you’ve got to do something with your wealth. Otherwise we’re not going to let you keep it or make the kind of profits you’ve been making in the past. So China’s government has really taken the lead in organizing industry, just as Germany’s government did in a mixed economy. China is a mixed economy. It’s not simply a communist or a totally socialist economy. It’s a mixed economy. That was what made it so much more productive than the Stalinist economy, Soviet Russia. Soviet Russia didn’t really have a private sector, so you didn’t have private entrepreneurs developing new things. The Chinese approach was to let 100 flower bloom. Of course, we’re going to let people see an opportunity to produce something that people need to be productive and make a fortune. It has to be a decent sized fortune. The problem that China’s coping with now is so much wealth in China is made simply on real estate and on real estate financing. How do they avoid the problem? That’s what they’re dealing with daily, right now. But that’s a different problem.

Robinson: So if the wealth of the poor has been produced by government in China, and historically, the same in the United States, how does this point the way to the key reforms that would need to be instituted to get, let’s just restrict ourselves to the United States again, to get us out of the rentier economy?

Michael: Well, if most wealth is created by the public sector… Suppose you’re a predator looking at this and you’re thinking, like the bank robber, why do you rob banks? You say, well, that’s where the money is. If you’re a predator, then you say, well, I can get wealthy by taking what the government has created and putting it into my own hands. I’m going to get wealth by doing what the English did under Margaret Thatcher. I can privatize it all and I can say, have the government give me Thames water, sell it to me for a dollar and I’ll make a billion dollars off it. They can get wealthy the way the kleptocracy did in the Soviet Union after 1991, when it dissolved. They gave oil extraction, electric utilities, private companies, just to individuals. All of this private wealth of Russia came by turning over the wealth that the government had created to privatize it.

Well, America is following the same plan that America imposed on Russia under the kleptocrats. It’s privatizing as much wealth as possible. They’re turning roads into toll roads. In Chicago, for instance, it privatized the sidewalks and the parking meters. So now it’s privatized, the parking spots are way up. In America, already in the 19th century, mining companies and oil companies didn’t have to pay a penny for minerals that they extracted on government lands. And there’s a whole tendency to try to privatize as much of the government as you can right now, culminating in privatizing the Republican and Democratic parties, the political system itself, and essentially shifting all of the wealth away from government into private hands. And once it’s in private hands, the aim of private wealth is not to increase overall public prosperity, but to minimize it. A privatized wealth creates poverty and debt. That’s how it makes its money. By creating poverty and debt, it sucks the income, the economic, the land rent, the monopoly rent, the interest charges…It sucks it all up into the rentier class. So privatization essentially shifts planning itself into the hands of the rentier sectors.

Robinson: But I’d like to talk about some, some specific reforms and how they might be instituted. So one thing, how do you think the tax code would need to be shifted to make sure that rent payments benefit the public rather than just the wealthy?

Michael: That’s what everything that Adam Smith, John Stuart Mill, the whole 19th century wrote about. They said the basis of taxes should start with the land tax because the landlords are the people who have been running the economy for the last thousand years. And they don’t play a productive role, just an ownership role. If you tax the increasing land value of real estate, then this rental value right now is paid to the banks. The economy gets more prosperous. The public sector builds parks and museums to improve in the neighborhood. That increases the land value. When New York City extended the subway line along Second Avenue, property prices rose by three times what it actually cost New York City to build the subway. New York City could have had a land tax or unexplained increase in value. They could have taxed this increase in the price of real estate on the lower east side so that New York taxpayers didn’t have to pay for the subway at all. But instead, they increased the property tax on people who had to pay the property taxes. And they raised the cost of taking a subway on the bus to New York. Essentially New York subway riders and tax payers paid to create a huge increase in land prices for the landlords in the Upper East Side. Land tax would have avoided that. The land tax is part of the Economic Rent Act that classical economics advocated.

Oil and minerals were provided by nature. There was no profit reduction there. So appropriating them does entail a cost of paying landlords, paying lawyers, and I think you have to pay a couple of assassins to kill the local people who want to protect the environment. Basically, the mineral wealth should be the patrimony of a country and be taxed instead of sold off to American and European investors who don’t pay a tax because they pretend they don’t make any money from the mining or the oil.

Either you would tax finance, but that’s hard to do because the financial sector is basically a criminogenic sector that avoids that. You have to retake natural monopolies headed by the financial sector into the public domain. You have to make finance and banking a public utility. Ironically, it was the Chicago school in the 1930s. The Chicago plan was indeed to have 100% reserve for commercial banks. You don’t let commercial banks create any more credit because they create credit for predatory reasons, for takeovers, for increasing real estate price inflation. You’ll have the government create the credit. If you do have the local bank saying, “Well, we don’t have enough reserve to make a productive loan. We have a customer, want to build a factory…” the government will then provide a deposit in the bank to enable it within the reserve system to lend out. The government will be the depositor of last resort in all of this. And this Chicago plan was what Dennis Kucinich was advocating in 2016. And that was University of Chicago. That was when they still had an idea of what a free market really was before they were all elbowed out by monitor of the Milton Friedman and Hayek Dan. The taxes are key and retaking rent yielding resources into the public domain.

Robinson: So increased taxes and then shifting their basis. I see how it would lessen the burden on the poor and also increase the wealth of governments, both municipal and national going forward. But beyond freeing up the poor’s capital, I don’t see how it would have an immediate effect on the mountain of debt that the poor have in the form of mortgages or student loans or credit card and medical payments. And this leads me to wonder whether you think there ought to be massive debt write-offs or debt payments made for citizens on the behalf of the government?

Michael: That is the most controversial part of my policy. Yes, if you do not write down the debt, then you cannot re-industrialize the United States. The debt reached such a critical mass that the American economy is going to begin to look more and more like Germany in the 1920s under its reparation debt or England and France under their inter-ally war debts to the United States for which they depended on German reparation to pay.

There’s no way in which this idealized free market economy can be created, a real free market economy, without not only taking away the property rights for rent extraction, but you have to have a clean slate. That was the German economic miracle in 1948. They canceled all of the debts. It was easy for them to do politically because most of the debts in Germany were owed to the former Nazis and nobody wanted them to have the money. Hard to do in the United States. And you’re having Congress even fighting against writing off the student debt. But not only student debt should be written off, but suppose you wrote off all debts. The advantage of writing off debts is not merely to free the debtors from having to pay. It’s if you wipe out the debts, you wipe out the savings of the 1%. It’s the 1% that are the parasites. The 1% are the new feudal lord of the society. You want to wipe out the savings that are the counterpart to these debts.

So there are two parts to the balance sheet. They’re the assets and the liabilities. By wiping out the liabilities of homeowners, you wipe out at the same time all of their debts. Now, obviously you wouldn’t want this to create a new absentee ownership of landlords, make them venerate. So the debts that are written off for the mortgages in the houses would be replaced by a property tax that would absorb not 43% of the homeowner’s income, but let’s say 20, 25%. You would reset the debt in proportion to the ability to pay. So by writing down the debts, the aim of any reform to make an economy resilient has to lie in bringing debts back within the ability to pay. That cannot be done bit by bit. It has to be done in a quantum leap. And that requires certainly an intellectual revolution. And given the fact that the 1% is now highly militarized and vicious, it requires a political revolution as well. And it may be in other countries of Europe, this usually is involved force.

That’s what people don’t want to recognize, that if you view the economy in the way that I viewed it, and the objective of economic reform is to get rid of economic rent, and the economic rent has been siphoning off, transforming wages and industrial profits into interest payments and financial wealth of the creditors into creditor claims on the economy. Now the problem is not like the 19th century. It’s not landlord claims on the economy, it’s hereditary financial claims on the economy. You have to do for finance what the 19th century did for the landlord class. You have to get rid of the property rights of finance that have resulted in privatizing the financial and the banking system in a predatory, unproductive way. And that requires a death cancellation. You can see that most clearly for the global South countries, Latin America, Africa, Southeast Asia. That’s what they’re talking about in de-dollarization today. But it’s also needed for the United States and Europe itself. Without a debt breakdown and a debt cancellation, economics in the West have come to a dead end.

Robinson: Well, all of this to me points to one question that you just briefly mentioned and that’s how can these issues actually be resolved? And so if powerful financial interests in effect control the government as we witness through lobbying efforts all the time, and they would stand to lose tremendously if the government shifted the tax code the way you proposed and writes off debt the way that you’ve proposed, then what chance is there for change? Is the only realistic chance of a violent revolution? I mean, you just said force, but they’re the same thing.

Michael: Right. Well, in the short term, this is not going to happen. But let’s look at 10 or 20 years ahead. Suppose that the BRICS plus China, Asia and its economic revolution that it’s trying to bring to South America and Africa…. Suppose that the United States and the West see that the mixed economy, the socialist economy is growing way ahead technologically living standard, culturally, while they’re shrinking in the United States and Europe, they will have the same choice that Europe had. Somehow Europe, despite being dominated by the feudal landlord class, ended up reforming itself and moving towards socialism up until World War I. It was able to do it in the 19th century. That can happen again in the West. The revolutions after World War I were violent in Europe. Even the 1848 revolution was somewhat violent. The Paris Commune was violent. There will be some violence.

Basically, the United States is at the root of violence. The United States has said is the head of the CIA put it, murder, ink. The University of Chicago free market made it very clear in Chile. They said you cannot have a free market unless you close down every university that teaches economics in Chile and replace it with us. You have to be willing to assassinate and kill every labor union leader. You have to kill every land reformist. You have to kill every university professor that says there is an alternative. You have to kill every progressive. If you’re not willing to kill the intellectual elite of the population, if you’re not able to have a mass murder, such as we worked in Chile, Argentina, and all throughout Latin America, then you’re not going to have a free market, making it free for us to take whatever we want from the economy and smash it to pieces.

Robinson: Well, Michael, you have superbly, concisely, and also I think comprehensively answered all of my questions and we really covered a lot of material. So thank you so much for taking the time and having this conversation with me.

Michael: Well, I can see you prepared very well. You’ve understood my writing and what I’ve been saying. So I’m very happy to have this discussion with you and I look forward to seeing it transcribed.