Michael Hudson
It’s good to be here. I’m looking forward to it.
Jonathan Brown
Michael, I think you have one the most
extraordinary upbringings and journeys into
economics. And I just wanted to give our
listeners just some sense of how you got from
being the godson of Leon Trotsky all the way to
what I consider to be probably the most
important economist in the world today.
Michael Hudson
00:23
There’s no direct causality there that could
have been anticipated. I never studied economics
in college, because I went to school at the
University of Chicago. We know that there were
some students at the university who were at that
business school. They were such strange people
that we never even thought of going near them,
because there was something otherworldly about
them, something abstract.
My degree was in German
language and history of culture, because the
head of the History of Culture Department was
Matthijs Jolles, a German professor and
translator of von Clausewitz, On War. And in at
the time, my intention was to become a musician.
And I had to learn German in order to read the
works of Heinrich Schenker. In music theory, my
teachers were German. And for the History of
Culture, most of the books that I was reading
were, were all in German. And the German
professors were also heads of the Comparative
Literature Department and other departments.
That meant that I could take all the courses
cafeteria style at the university that I wanted.
I had to go to work when
I graduated. I went to work for a while for
direct mail advertising for the American
Technical Society, a publisher a block away from
the university, and then went to work for Free
Press that was headed by Jerry Kaplan, a
Trotskyist follower of Max Shachtman. And he
wanted to send me to New York to help set up
Free Press there.
Soon after I came to New
York, Trotsky’s widow died. And Max Shachtman
was the executor of her estate. He thought I
should go into publishing by myself. And I had
already had the copyrights for George Lukacs,
the Hungarian Marxist and I thought tried to get
funding for a publishing company with Trotsky’s
works and other works. I’ve been writing a
history of music and art theory. And needless to
say, I didn’t get any funding because nobody was
at all interested in publishing the works of
Trotsky. I even tried to get Dwight Eisenhower
the write the introduction to his military
papers, wouldn’t work.
I was urged to meet
Terence McCarthy, the father of a girlfriend of
one of my schoolmates, Gavin MacFadyen. He was
the first English-language translator of the
first history of economic thought that was
written: Karl Marx’s Theories of Surplus Value (Mehrwert),
reviewing the value theory of classical
economics. Terence said that he would help guide
me in economic thinking if I’d get a PhD in
economics and go to work on Wall Street to see
how the world works. But I had to read all of
the bibliography in Marx’s Theories of Surplus
Value. So I had to begin buying the books, and
ended up working as a sideline with one of the
reprinters, Augustus Kelly, who was reprinting
many of the classical economists. He was a
socialist. There were other dealers in New York:
Samuel Ambaras, Sydney Millman. I began buying
all of the 19th-century classical economic books
that I could, sinse that was the only way that I
could get copies.
I took graduate classes
in the evening while working at a bank for three
years, the Savings Banks Trust Company. It was a
commercial bank, but was acting as a central
bank for the savings banks that in America
finance mortgages. All their savings are
reinvested in mortgages. So for three years my
job was to track the real estate market, the
mortgage market, interest rates, the funding of
mortgages, the growth of assets by the savings
banks, all growing at compound interest. All the
growth in savings in the New York savings banks
in the early 1960s was simply the accrual of
dividends. So you’d have a step function at
dividend time every quarter, going up
exponentially. There was hardly any new savings
inflow. It’s as if you’ve just left a given
amount of savings in 1945, and let the amount
rise exponentially. All this increase in savings
was recycled into the real estate market.
The New York banks wanted
to extend their market so they couldn’t just
keep bidding up New York housing prices. They
won the right to lend out of state, especially
the Florida. So my job was basically seeing that
real estate prices were whatever a bank would
lend. At that time, banks would not lend you a
mortgage if the debt service exceeded 25% of
your income. And you had to put up usually 30%
of the purchase price as a down payment, but
possibly 10%. So housing was affordable. You
could buy a really nice house for you know, $20
or $30,000. Now, it costs $400,000 to buy just a
one room apartment in a condominium.
I bought a house for $1
down – it was $45,000 total. I took out a
mortgage from Chase for half the price, and the
other half was a purchase-money mortgage. So it
was easy. Anybody could get a house in New York
at that time. Housing was readily affordable.
After I finished my PhD
courses, I changed jobs. My real interest at the
time was international finance and the balance
of payments. So I went to work at Chase
Manhattan as their balance of payments
economist. This was at a time when the balance
of payments and even balance-sheet analysis was
not taught in schools. It was very specialised.
I realised that what I was taught, especially in
monetary theory, had nothing at all to do with
what I was learning in practice.
In monetary theory, for
instance, that was the era of Milton Friedman in
the 60s and 70s. He thought that when you create
more money, it increases consumer prices. Well,
I thought that obviously was not how things
worked. When banks create money, they don’t lend
for people for spending. About 80% of bank loans
in America, as in England, are mortgage loans.
They lend against property already in place.
They also lend for corporate mergers and
acquisitions, and by the 1980s for corporate
takeovers.
The effect of this
lending is to increase asset prices, not
consumer prices. You could say that money
creation actually lowers consumer prices,
because 80% is to increase housing prices. Banks
seek to increase their loan market by lending
more and more against every kind of real estate,
whether it’s residential or commercial property.
They keep increasing the proportion of debt to
overall real estate price. So by 2008 you could
buy property with no money down at all, and take
100% mortgage, sometimes even 102 or 103% so
that you would have enough money to pay the
closing fees. The government did not limit the
amount of money that a bank could lend against
income. The proportion of income devoted to
mortgage service that was federally guaranteed
increased to 43%. Well, that’s a lot more than
25%. That’s 18% of personal income more in 2008
than in the 1960s – simply to pay mortgage
interest in order to get a house. So I realised
that this was deflationary. The more money you
have to spend on mortgage interest to buy a
house as land and real estate is financialized,
the less you have left to spend on goods and
services. This was one of the big problems that
was slowing the economy down.
Well, it was obvious to
me that rent was being paid out as interest.
Rent is for paying interest. If I talked with
various developers about buying buildings, they
said, “Well, we try to buy our buildings without
any money at all. The banks will lend us the
money to buy a building, and they calculate how
much is your rental income going to be? That
rental income will carry how much of a bank loan
at a given interest charge, and lend the money
to buy it.” That is how real estate rent was
financialized.
Democratization of real
estate on credit means turns rental income into
interest, not taxes
This meant that the role that had been played in
the 19th century by landlords is now played by
banks. In the 19th century, the problem was
absentee landlords, the heirs of the warlords
who conquered England or other European
countries in the Middle Ages. You had hereditary
rent. Well, now our rent has been democratised.
But it’s been democratised on credit, because
obviously, the only way that a wage earner can
afford to buy is is on credit. For an investor
you can buy whole buildings on credit.
Finance has transformed
real estate into a financial vehicle. So that
that’s what rent is for paying interest means.
There’s a symbiotic sector, Finance, Insurance
and Real Estate – the FIRE sector. It’s the key
to today’s financialised economy. Most real
estate tax in America is at the local level,
because after the income tax was introduced,
commercial real estate was made tax exempt by
the pretence that buildings depreciate in value,
as if they don’t in fact rise in price. The
pretence is that they wear out, even though
landlords normally pay about 10% of the rental
income for repairs and upgrades to keep the
building from wearing out.
Today in New York, and
I’m sure in London too, the older a building is,
the better it’s built. Real-estate developers
have crapified building codes so that the newer
the building, the more shoddily it’s built. They
call shoddy buildings “luxury” real estate,
meaning is built with really not very thick
walls. I think the junkiest building in New York
is Trump Tower, which is sort of the model of
shadiness which they call luxury. It’s very
high-priced.
The academic economics
curriculum finds unproductive credit to
embarrassing to acknowledge
While I saw the importance of finance and real
estate, none of that was discussed in the
university’s economics courses at all. The
pretense is that money is created by banks
lending to investors who build factories and
employ labour to produce more. All credit is
assumed to be productive, and taken on to
finance productive investment in the form of
tangible capital formation. Well, that that was
the hope in the 19th century, and actually was
the reality in Germany and in Central Europe,
where you had banking becoming industrialised.
But after World War I, you had a snap back to
the Anglo-Dutch-American kind of banking, which
was really just the Merchant banking. It was
bank lending against assets already in place.
I realised that the
statistics that I worked on showed the opposite
of what I was taught. I had to go through the
motions of the PhD orals. and avoided conflict
by writing my dissertation on the history of
economic thought, because anything that I would
have written about the modern economy would have
driven the professors nutty. Needless to say,
none of the academic professors I had ever
actually worked in the real world. It was all
very theoretical. So that basically how I came
to realise that the 19th century fight for 100
years – we can call it the long 19th century,
from the French Revolution, up to World War I,
and from the French Physiocrats, to Adam Smith,
Ricardo and Malthus, John Stuart Mill, Marx,
Simon Patton and Thorstein Veblen – was the
value and price theory of classical economics to
quantify economic rent as unearned income.
The purpose of value and
price theory was to define the excess of market
price over actual cost value. The difference was
economic rent. The essence of classical
economics was a reform campaign – that of
industrial capitalism. It was a radical
campaign, because the basic cost-cutting dynamic
of industrial capitalism was radical. It
realised that in order to make Britain, France
or Germany, or any country competitive with
others, you had to get rid of the landlord class
and its demands for economic rent. You also had
to get rid of monopolies and their economic
rent. You had to get rid of all payments of
income that were not necessary for production to
take place. The aim was to bring prices in line
with the actual cost value of production, to
free economies from this rake-off to
unproductive investment, unproductive labour and
economic rent – land rent, monopoly rent and
financial interest charges. Those were the three
basic categories of rent on which classical
political economy focused.
To translate classical
rent theory into practice, you needed a
political reform, You had to get rid of the
landlord class’s political power to block
reform. It wasn’t enough simply to say that
economic rent was not a necessary cost of
production, not part of real value. The landlord
class would simply say, “Well, what are you
going to do about it?”
The proponents of
industrial capitalism saw that the constitution
of England, France and America required giving
governments the power to pass laws to free
economies from economic rent. in order to do
that, they needed democratic reform of the
political system. In England they needed to
empower the House of Commons over the House of
Lords. That effort led to a constitutional
crisis in 1909 and 1910, when the House of
Commons, Parliament, passed a land tax. That was
rejected, as I’m sure you know, by the House of
Lords. The crisis was resolved by saying the
Lords could never again reject a Revenue Act
passed by the House of Commons. That political
reform was part and parcel with classi9cal
economic theory defining rent as an unnecessary
cost of production.
But where did this leave
the interests of labor – the majority of the
population? As a broad social reform, classical
economics began to falter by 1848. You had
revolutions in almost every European country.
These revolutions were not fully democratic in
the sense of they weren’t really for wage
labour, which was the bulk of society. They were
bourgeois revolutions, including land reform.
They were all for getting rid of the landed
aristocracy and the special privileges that the
aristocracy held. But they were not very
interested in helping consumers, and labour’s
working conditions, shortening the workweek,
shortening the workday and promoting safety.
There was nothing really about public health, or
public social infrastructure spending. So things
began to falter by 1848.
But they still made
progress through the balance of the 19th
century. By the time World War I broke out in
1914, it looked like the world was moving
towards socialism. Almost everybody in the 19th
century, across the political spectrum, whatever
you were advocating was called socialism.
Socialism and strong
government as the program of post-rentier
industrial capitalism
At the broadest level, socialism meant
collecting economic rent and getting rid of the
landlords and the aristocracy, either by taxing
away rent or nationalizing land and natural
monopolies, in hope that that by itself would
create a viable industrial economy. you had
libertarian socialism, Marxist socialism,
anarchist socialism, industrial socialism and
Christian socialism. Almost every reformer
wanted that as a label. The question is, what
kind of socialism were are you going to have?
That was what the
aftermath of World War I was fought about. The
fight was largely shaped by the Russian
Revolution, which unfortunately went tragically
wrong under Stalin and gave socialism and
communism a bad name. But it still had a good
name in England after World War II. And also in
America in the 1930s, as a result of Franklin
Roosevelt’s New Deal that saved capitalism by
investing in public infrastructure.
I can give you an example
of where pro-capitalist theory was in the 1890s.
In the United States. The industrial interests
in America faced a problem once the Civil War
ended in 1865. They wanted to create an
industrial society – ideally, a fair society
with rising living standards. How do you do that
without training people to administer such an
economy? You need to train people in a
university. You have to teach them how economies
worked. But the main universities in America
were religious colleges, founded to train the
clergy. Yale, Harvard, Princeton and most taught
British free-trade theory, which trivialized
economic theory.
So the business interests
and the government saw the need to teach
reality-based economics. They saw that there was
little hope in trying to reform the existing
universities. Their economics departments –
called moral philosophy – were unreformable. So
it was necessary to create new universities. All
through America, each state was given a land
grant to enable it to create a new university
and teach reality economics. They also would
teach economic history and how the world
actually works. Most of all, they would teach
protectionist trade theory and how to create a
society and economy that is more efficient than
other economies?
Well, the first business
school in America was the Wharton School at the
University of Pennsylvania. Its first economics
professor was Simon Patton, a protectionist. And
he explained that if you’re going to make
industrial products at prices that outcompete
those of England, you need public infrastructure
spending. You need as much of the cost of living
as possible to not to be paid by the employers
to factor into the price of their products, but
to be paid by the government.
Patten cited public roads
and canals to lower the cost of doing business.
He also noted that every time you build a road
or railroad, you’re going to raise the land
value along these routes – and lower land prices
for areas replaced by the now-more-accessible
producers. You can simply self-finance the cost
of these by taxing the rent.
You also need public
education, and that should be free so that you
don’t have like today, to earn enough money to
pay an enormous student debt – and receive a
high salary to afford to pay that. If the
government would provide free education, you
wouldn’t have to pay workers enough to pay this
student debt, so they wouldn’t need such high
wages simply to break even.
Today 18% of America’s national income is from
medical insurance. If you have a public health
system and socialized medicine, as England had
after World War II and as Bernie Sanders
advocates today, then you wouldn’t have to pay
workers a high enough salary to afford this
enormous medical expense. England realised this
already in the 1870s and ‘80s, when Benjamin
Disraeli campaigned as a conservative for
health.
So the movement towards
public infrastructure towards government
spending was led by the industrialists. It was
they themselves who wanted strong government.
The common denominator of politics from Adam
Smith through all of the 19th century was to
free economies from the unnecessary economic
rent, to free them from unearned income, from
the free lunch. To do that, you have to have a
government strong enough to take on the vested
interests – first the landlord class in the
House of Lords, and then the financial class
behind it.
Jonathan Brown
26:00
Well, just to clarify that, Michael, I think
what you’re, what you’re saying is, I know in
some of your writing you talk about the view of
government or the public sector was it was a
fourth means of production. So you got land,
labour, capital and the public sector.
Michael Hudson
26:16
That was the term that Simon Patten used.
Government infrastructure is a fourth means of
production. But what makes it different from
profits and wages is that if you’re a wage
earner, you want to make as high a wage as
possible. If you’re a capitalist, you want to
make as high a profit as possible. But the job
of public investment is not to make an income,
not to do what was done under Thatcher and Tony
Blair, not to treat public utilities, education
and health as profit making opportunities.
Instead, Patten said, you should measure their
productivity by how much they lower the cost of
doing business and the cost of living for the
economy at large.
Jonathan Brown
27:03
And what that allows a country to do, so if
you’re good at it, is to get together and ask
how to educate our people, lower the cost of
transportation so we’ve got we’ve got a mobile
workforce, all those things. We can then start
to compete against other nations who are ahead
of us, who may have more expensive means of
production, and we can maintain that advantage.
We’re not stuck in a lower level of the economy
where we’re basically working for someone else.
We’re able to develop ourselves as a nation. And
I guess the benefit of us doing it collectively
is that we can minimise the cost, then use a
natural monopoly power in government hands to
provide efficient services across the board. Is
that right?
Michael Hudson
27:46
Yes, but they went further. Protectionists in
America said the way to minimise costs – and it
may seem an oxymoron to you – the way you
minimise costs is to have high-wage labour. You
raise the wages of labour, or more specifically,
you want to raise the living standards, because
highly paid labour, highly educated labour, well
fed labour, well rested labour is more
productive than pauper labour. So they said
explicitly, America’s going to be a high wage
economy. We’re not like Europe. Our higher wages
are going to provide high enough living
standards to provide high labour productivity.
And our higher labour productivity, shorter
working day, better working conditions, healthy
working conditions, public health, well educated
labor will undersell that of countries that
don’t have an active public sector.
Jonathan Brown
28:45
and Henry Ford being the poster boy for that
approach, of doubling his employees’ salaries
and so on.
Michael Hudson
28:53
Yes.
Jonathan Brown
28:54
Amazing.
Michael Hudson 28:55
Needless to say, the fight for the kind of
democracy that will free economies from economic
rent was not easy. By the late 1880s, and
especially the 1890s, you had the rentiers
fighting back. In America the fight was led by
John Bates Clark. There was a movement, which
today is called neoliberalism, to deny the
entire thrust of classical economics. Clarke
said that there is no such thing is unearned
income. That meant that economic rent does not
exist. Whatever a businessman makes, he is said
to earn. Whatever a landlord makes, he earns –
so there was no unearned income.
This came to a head
around 1890 the Journal of Ethics. Clark wrote
the first essay, and it was refuted by Simon
Patton. There was a fight against the concept of
economic rent by academic economics, especially
in New York City at Columbia University, where
Clark ended up, This is really the dividing
line: You recognise that much of the economy is
unearned income and you want to get rid of it.
To do that, you have to pass laws that will tax
away the unearned income, or better yet, you put
land and other natural resources and natural
monopolies in the public domain where the public
sector directly sets prices. That was what Teddy
Roosevelt did with his trust busting.
Jonathan Brown
31:13
Michael, I just want to say reading your work is
something of a revelation. I’ve got a degree in
economics for what it’s worth. And I would say
the only valuable thing that I found from a
getting a degree in economics is that I know,
resolutely when an economist is talking
bullshit. How do you know that? It’s when his
lips move.
Michael Hudson
31:32
If it’s an economist, they’re talking bullshit –
let me make it easy, right!
Jonathan Brown
31:36
And then the thing is, that reading your work,
for example, going back to Thorstein Veblen, his
work, which only made it into the mainstream
when I was getting a degree in the 90s, was
conspicuous consumption. It had nothing to do
with absentee landlords or, and the profound
importance of that, and then I’m looking in J is
for Junk Economics, and you talk about the free
lunch, and how Milton Friedman said that there’s
no such thing as a free lunch.
When you look at your
work, you prove that actually there is, and that
he’s having it! And you say, “Most business
ventures seek such free lunches not entailing
actual work or real production costs, and to
deter public regulation or higher taxation of
rent-seeking recipients of free lunches. They
have embraced Milton Friedman’s claim that
there’s no such thing as a free lunch”.
And you talk about: “Even
more aggressively rent extractors accused
governments of taxing their income to subsidise
freeloaders, pinning the label of free lunches
on public welfare recipients, job programs,
beneficiaries of higher minimum wage, when the
actual antidote to free lunches is to make
governments strong enough to tax economic rent,
and keep the potential rent extracting
opportunities and natural monopolies in the
public domain.”
Michael Hudson
32:51
Veblen was indeed was the last great classical
economist. He coined the term neoclassical
economics. I think that’s an unfortunate term.
When I went to school in my 20s, I thought
neoclassical meant ‘Oh, it’s a new version of
classical economics’. It’s not that at all. What
Veblen meant was there used to be the old
classical economics of Adam Smith, John Stuart
Mill and Marx, all about economic rent and
exploitation. “Neo” means there’s a new body of
completely different, post-classical economics
aiming to make classical economics obsolete.
That is the new mainstream economics of today,
trying to make itself “classical.” So Veblen he
should have used the terms post-classical or
anti-classical economics.
Jonathan Brown
33:44
Or even pseudo classical?
Michael Hudson
33:49
It’s antithetical, because the root of classical
value and price theory was to isolate and define
economic rents statistically. To deny economic
rent is to deny the whole point of classical
value and price theory. That is where economics
became untracked.
Unfortunately, it became
untracked largely by Henry George, who rejected
classical economics and very quickly followed
J.B. Clark and accepted his mushy value and
price theory. Removing all elements the cost of
production from value theory, analysing prices
simply in terms of consumer demand and what
people want, and not analysing what determines
land and other asset prices, loses focus.
George became very
popular as a journalist. He wrote wonderful
journalism to expose the railroads in California
as landlords, and he wrote a wonderful book on
the Irish land question. But when he tried to
talk about the whole economy, he didn’t want any
competition. He said, in effect, “Economics
begins and ends with me. Forget everything, Adam
Smith and classical economics.” He’s sort of an
early Margaret Thatcher. There’s no such thing
as society or the economy. Only “tax the
landlords.”
Jonathan Brown
35:35
What are you doing? You’re destroying my view of
Henry George! He’s an early Margaret Thatcher?
How, how could that possibly be?
Michael Hudson
35:47
Well, in two ways. The first way is that in the
19th century, in order to tax the land rent, you
had to take on the most powerful vested
interests of all: the real estate interests and
the financial interests. But Henry George was a
libertarian. He was for small government. He
broke with the socialists, because he warned
that socialism had a potential for
authoritarianism. Well, we know that he was
right in that warning, because we saw what
happened in Stalinist Russia. But obviously,
what you want is a government that is strong and
democratic, and with enough authority to tax and
regulate the vested interests. (That term is
Veblen’s, by the way.) That was the ideal in
America, but it needed a strong enough
government so that Teddy Roosevelt could come in
and be able to bust the trusts.
The government was strong
enough in 1913-14 to impose an American income
tax that fell just on 1% of the population,
almost entirely on economic rent, on land rent,
mineral rent on monopoly rent of the big
corporations. If you’re a libertarian, your
government is too small to take on these vested
interests. And you’ll never win. You’ll end up
like the Social Democrats or like today’s Labour
Party under Mr. Starmer, not able to be very
efficient. So that was George’s first problem.
The second problem was
when he said that all you have to do is tax the
land and everything else will take care of
itself. Well, as you know, he was nominated as a
celebrity candidate by the socialist and labour
groups in New York City in 1876 to run for
mayor. They gave him their programme – safe
housing, workers housing, safe working
conditions, food laws that protect people from
poison, like you don’t want to use chromium for
cake frosting to make it yellow.
Well, George threw out the whole labour
programme and said that there’s only one thing
that mattered: If you tax the land rent, the
cakes will take care of themselves, worker
safety conditions will take care of themselves.
You don’t need socialism; just tax land rent.
Well, the word “panacea”
came into popular use in the English language at
that time, because George didn’t see the economy
as a whole. That was a tragedy. He was great as
a journalist describing rent and the
machinations of the railroads. But once he tried
to talk about the economy, without really
describing how it worked as a system, saying
there really isn’t any economic system, it’s
just about land rent. That separated him from
the other reformers.
By the 1890s you had many
of reformers in America, who had been inspired
by George’s journalism in the 70s and early 80s,
including attacks on the oil monopoly and the
Rockefellers. They asked what happened to
George? Well, he became a sectarian. He formed
his own party and said, we’re only going to talk
about land rent. This diverted attention away
from how the overall economy works. And if you
don’t understand how the economy is all about
providing a free lunch in one way or another,
not only to landlords but to the financial
sector primarily, then you’re really not going
to address the interests of most of the
population.
So his sectarian party
shrank. Still, in the first decade of the 20th
century you had followers of Henry George and
socialists going around the country debating
each other. They had great debates, they spelled
out the whole problem. I wanted to reprint all
these debates somewhere, what both the
socialists and the Georgists said: “One thing we
can agree on is that society is going to get go
either your way or our way. We’re talking about
how is the future of the political system and
the economic relations and taxes that follow
from this system. How are they going to evolve?”
The socialists focused on
labour’s working conditions, because these were
getting worse and worse. In America the fight
for labour unionisation got quite violent, and
corrupt. The abuse of consumers, the growth of
monopolies, all these were growing problems. The
socialists focused on these problems – and
decided to leave the discussion of rent to
followers of George. I think that was very
unfortunate, because George had pried the
discussion of economic rent away from the
classical value theory and its political
dimension, which was socialist.
I find little interest in
today’s socialist movement or the socialist
movement 50 years ago about land rent. They are
more concerned about international issues, about
war, about almost everything except land rent.
And today I find the greatest interest in rent
theory as a guide to a tax system in the context
of an overall economic system to be in China. So
that’s really where the debate over how to keep
the price of housing down by keeping the
financial sector from trying to capitalise the
land rent into a bank loan.
That’s a big fight in
China today. It should have been also in Russia.
Fred Harrison, in the early 1990s, brought a
group of people including me over to Russia. We
made two trips to the Duma and did everything we
could to explain that Russia could have a great
advantage to rebuild its industry into a
productive economy. The first thing that it
should have done was to keep housing prices
down. It could have given everybody their
houses, free and clear, without any debt. Of
course, some places would be more valuable than
others, but Russia would have had the
lowest-priced economy in the world. In America,
the rent can take up to 43% of a home buyer’s
income.
Well, there was pushback
from the Russians. They had no rent in a
socialist economy. Ted Gwartney, an American
real estate appraiser, walked down the streets
of St. Petersburg with the local mayor, I think
on a fall or winter days. He pointed out that
one side of the street was very sunny. The other
street was in the shade. That’s how the sun is
in the northern latitudes in the winter. Most
people were walking on the sunny side of the
street. That means that if you’re going to have
a store, whether it’s a bakery, a food store or
a restaurant, the store on the sunny side of the
street is going to be able to attract more
customers. Their site has more economic rent
than the dark side of the street. Same thing
with buildings near a subway. They will be worth
more than sites far away from transportation.
The mayor said understood
the point, and asked how to actually make a land
value tax so to collect this rent? Ted explained
that St. Petersburg’s layout was much like that
of Boston, where a land map was easy to make. It
showed that there was a peak centre of values
near the subway, with rents tapering off further
away. He suggested to apply Boston as a scale
model to St. Petersburg. Just plug in a few
prices, and you have a land-valuation map.
Russia could have been a
low-cost economy. It could have kept the oil and
gas, Yukos, GazProm, nickel and platinum
resources all in the public domain to finance
investment in re-industrialization, to become
independent of the West. But as we all know, Ted
and the people that Fred Harrison bought were
completely overwhelmed by the billions of
dollars that U.S. diplomats spent on promoting
kleptocracy and shock therapy in Russia. Its
officials and insiders worked for themselves,
not Russia.
And it wasn’t only Russia
that missed opportunities. I brought Ted
Gwartney and his mathematical model-maker to
Latvia, where I was Economic Research Director
of the Riga Graduate School of Law. I was asked
by the leading political party of Latvia, the
Centre Party – basically the party of Russian
speakers, with 1/3 of the population and votes –
to draw up a model for how Latvia could
restructure its post-Soviet economy and
industry. Ted met with the tax authorities and
housing authorities and explained how to use
land rent as the tax base. They were amazed and
said, “This is great. We can hire a separate
appraiser for every single building. This will
create a lot of employment”. No he said. He had
been the appraiser for Greenwich, Connecticut,
the state’s wealthiest city. He said, “We can do
a whole city in about one week.” They couldn’t
believe this in Latvia.
Around the time of his
visit there was a meeting in Boston of the
Eastern Economics Association. It was largely
created by John Kenneth Galbraith to go off the
economic mainstream. I think the Schalkenbach
Foundation had a session on political critics of
Henry George, so there were a lot of Georgists.
Other people who came to the Eastern Economic
Association meeting were socialists, including
Alan Freeman who was the assistant to Ken
Livingston, the Mayor of London.
When everybody was having
lunch after the economic meetings, I brought
Alan over to sit down with Ted Gwartney. Ted
explained what he did, and Alan said, “Oh, I’ve
never heard of this! I’ve got to come and meet
you some more.’ So he came to New York and we
went up to visit Ted in Connecticut. He
explained how to make a land value map. Alan
said, “You should win the Nobel Prize for this!
This is amazing! There’s nothing like this in
England.”
Ted explained that there
are about 20,000 appraisers in America that do
what he did. There are abundant statistics.
Every city has a map of land and building
appraisals: here’s the value of the building,
here’s the value of the land. So smoothing out a
land value map is pretty easy to do. Alan could
hardly believe it.
Well, I went back to
London shortly and met with Alan. It turned out
that political pressures in England, especially
from the Labour Party, led London to hire
Weatheralls, a real estate company, do
appraisals. So we never got to do our version of
a real estate appraisal of London to calculate
land rent.
But this is what all of
the theories of the Physiocrats, Adam Smith,
Ricardo, John Stuart Mill, Marx, Veblen, Alfred
Marshall, all of them were focusing on. Yet this
idea is so alien that from London to St.
Petersburg, they don’t have any idea of how the
simple concept can be done. The economics
profession is in denial. It’s followed the idea
that there’s no such thing as unearned income,
everybody gets what they make.
The National Income and
Product Accounts treat rent as a product, not a
subtrahend
A byproduct of this value-free doctrine is how
countries calculate their national income and
product accounts. And if you look at the GDP
accounts for the United States (and I’ve
published a number of articles on my website and
in major economic journals), rent is counted as
part of GDP.
This is easiest to see in
real estate and finance. The Bureau of Labor
Statistics sends its employees around to ask
homeowners what the rental income of their home
would be if they had to rent it. If you were a
landlord and rented yourself how much rent would
that be? This appears in the NIPA statistics as
“homeowners imputed rent.” That’s 8% of GDP. But
it is not really income, because it is not
actually paid. Nobody gets it. But value-free
designers of GDP want to describe all of the
income that landlords make as contributing to
GDP. They say that landlords provide a
productive service, they provide housing to
people who need it, and they provide commercial
properties to businesses that need it. Well,
that’s not exactly how John Stuart Mill put it.
He said that rent is what landlords make ‘in
their sleep’. So how can you rationalize how
productive landlords are?
Another element of
American GDP is financial services. I called up
the Commerce Department where they make the NIPA
statistics and asked what happens when credit
card companies increase their interest charges.
And where do penalty charges for late payments
appear? Credit card companies in America make
billions of dollars in interest a year and even
more billions in fees, late fees and penalties.
Most of the income that credit card companies
make are actually on these fees and penalties.
So where does that appear in that GDP? I was
told, in “financial services.’ So the “service”
of calculating how far the debtors must pay for
falling behind in their payments. They typical
charge 29%. That’s all counted as a contribution
to GDP. But in reality it is a subtrahend,
leaving less to spend on real “product.”
This raises the question
of just what income and product actually mean.
Well, this brings us back to what classical
economics is all about. The “product” should be
measured by what its actual necessary cost of
production is. But there’s a lot of income over
and above this necessary cost of production.
Namely, economic rent, that’s unearned income.
But the income and product accounts don’t say
how much is “earned” and how much is “unearned”
land rent, monopoly rent, natural resource rent,
interest and financial charges.
A classical economic
accounting format would show how much of the
prices for what our society produces is actually
necessary, and how much is a subtrahend.
Classical economists treat the land rent that
you pay, interest charges and monopoly prices as
a rake-off. So not all of your income is income
equals “product,” because only a portion of that
income represents a real product.
In America, the head of
Goldman Sachs a few years ago said Goldman Sachs
partners – a financial management firm – make
more money than almost anyone else in America,
because they’re the most productive. If you make
a lot of money, by definition, you make it by
being productive. That’s the false identity.
Jonathan Brown
55:25
That’s really the John Bates Clark idea that if
you make the money, you’ve earned it. And it’s
not just because you control the gate. You’re
the gatekeeper, to stop people and make them pay
the toll. You’re the troll under the bridge,
taking people’s money as they cross, which is
essentially what financial economics is about.
Michael Hudson
55:48
Right. I have spoken with a number of political
advisors, many of whom were followers of Henry
George. They’ve described to me how political
all of this definition of the economy is. A
number of friends of mine have been trying to
show how much of what the United Nations
calculates as income and product is actually
economic rent. Steve Keen, Dirk Bezemer and
Jacob Assa are in this group. There are a number
of others who do it. We publish in places like
the Review of Keynesian Economics, Journal of
Economic Issues and other not-mainstream
journals. A lot of this was taught where I was a
professor for decades, at the University of
Missouri in Kansas City.
Our graduates had
problems getting jobs, because in order to get
an appointment at a university, you have to
publish articles in prestige journals. The
University of Chicago, the Milton Friedman boys,
the Chicago Boys control the editorial boards of
all these prestige magazines, just like they
control the Nobel Economics Prize Committee. The
prize basically is given to Chicago Boys every
year for not explaining how the economy works.
A precondition for
what you call an economist, especially a Nobel
Prize winning economist, is not to understand
how the economy works. Because if you understand
that, you’re going to threaten the vested
interests that are getting the free lunch. You
have to say there’s no such thing as a free
lunch, everybody earns whatever they can get.
Robbers and criminals like that idea. “Yeah, we
stole it fair and square!”
Crime pays, and rent
seeking also pays.
You can get much more
money quicker by extractive means – by rent
extraction – than you can by investing in plant
and equipment and developing products and
marketing them and making a profit over time,
and spending on research and development. That’s
why in today’s United States, 92% of corporate
revenue, called earnings, (although not all of
it is earned – that’s a euphemism) is spent on
stock buybacks and dividend payouts, not on new
capital investment.
So the way that the
economy works today is no longer industrial
capitalism; it is finance capitalism. Instead of
Industrial Engineering, making society produce
more with all of the environmental protection
cost included, you have financial engineering,
making wealth by increasing stock-market prices.
Wealth is not achieved by earning it. You don’t
save up your earnings and get wealthy. I think
half of Americans are unable to raise $400 In an
emergency. They have no savings at all.
For most people it’s very
hard to save up money, especially if they have
student debt, credit-card debt, medical debt and
mortgage debt. After paying this, there’s really
no income left to be saved. So you have the 1%
of society, the rentier portion that had to pay
income tax back in 1914, getting huge amounts of
income and the rest of the society getting less
and less. The result is economic polarisation.
The dynamics of society are financial and
basically rely on rent seeking that has been
financialized.
I’ll give you another
example of the GDP. One of the problems that
makes GDP statistics meaningless is
depreciation, the idea that buildings
depreciate. When Ronald Reagan came in, the real
estate interests and their banks basically took
over the government. Henry George and the
Libertarians oppose central planning by elected
democratic governments, and that leaves central
planning to Wall Street’s financial interests.
Every economy is planned, and if you don’t have
a government strong enough to do the planning,
then the planning is done by the financial
sector and the real estate sector, and they were
given free rein under Ronald Reagan.
Under Reagan’s 1981 tax
“reform” you could pretend that if you buy a big
commercial building, you can write off 1/7 of
the entire costs every single year as tax
deductible income. At the end of seven years,
you change your ownership from one name to
another name, and you start all over again. The
same building can be re depreciated again and
again and again.
Donald Trump wrote in his
autobiography, he loves depreciation, because he
said thanks to the pretence of depreciation, his
buildings are all going up in value, but he gets
to pretend they’re falling, and deduct all of
that fictitious over-depreciation from his
taxable income. It’s actually economic rent. But
if you look at the national income statistics,
you can’t find economic rent in them at all. I
was able to piece it together by adding up what
goes into economic rent: Real estate taxes are
part of economic rent, and also interest
payments, because interest is paid out of
economic rent. But fictitious depreciation tax
loopholes also should be there.
But nowhere in the
national income statistics is a report of how
much income real estate owners actually claim as
depreciation. They haven’t done that because if
they showed this, people would think, ‘Wait a
minute, this is a giveaway. This is utterly
unrealistic.” So they only put in a figure for
how much they [think] buildings are actually
depreciating over a period of decades. So you
have a fictitious national income accounting
format that makes it impossible to calculate
what land rent is – and that was the major focus
of classical economics.
How are you going to get
a statistical system that actually reflects
this? Well, one associate of mine, Jacob Assa,
has written a few books on this criticising
economic rent. He worked in the United Nations
here in New York until quite recently. But as I
said, our graduates can’t publish in the
University of Chicago economic journals whose
party line is that ‘there’s no such thing as
economic rent’, just like there’s no such thing
as society is beyond “the market.”
I wanted to publish
statistics on this and in 1994 the Henry George
School in New York asked me to calculate what
rent was and the land value. I found out that
the value of land, the market price of land in
the United States was twice what the government
reported.
The government pretends
that real estate prices rise mainly because
buildings keep growing in value, even though
they’re supposed to depreciate. They pretend
that buildings grow in value by taking the
original cost of the building, and multiplying
it by the Construction Price Index. Whatever is
left is reported as land value. Well, in 1994
the Federal Reserve reported that the land value
of all of the commercially owned real estate in
the United States was negative $4 billion. This
is crazy.
The statistics are drawn
up by a methodology that the real estate
interests lobbied for. When I calculated this,
the Georgists in America got furious. They said
that I was showing that land value and rents
were much higher than they thought. They worried
that this might lead people to want to tax real
estate. Lowell Harriss of Schalkenbach explained
that Georgists today represent mainly real
estate developers, and that their major audience
was local mayors, whose biggest campaign funders
are the real estate interest.
These Georgists called
themselves “two raters,” wanting to keep overall
real estate taxes unchanged (“revenue-neutral”)
but shift the tax from commercial landlords onto
homeowners by taxing land, not buildings – e.g.,
electric utilities, office buildings and other
capital-intensive structures.
By representing the
developers, Georgists proposed to save society
by having the developers build up those slums,
build up those vacant lots. Like George, they
said that there was no need to worry about
ecology or any problem except cutting property
taxes for large real estate owners. You don’t
need to worry about workers conditions or
anything else. Let’s just give an economic
incentive (i.e., a tax cut) to help contractors
build up those vacant lots.
I was told if I published
a new explanation of my statistics showing that
most rent was paid out as interest, I could
never have any relations with Schalkenbach and
the Henry George school again. So I published
them in a Harper’s Magazine cover story and have
lived happily ever after.
Jonathan Brown
1:06:13
And was that “The New Road to Serfdom”?
Michael Hudson
1:06:22
Yes. I chose that title because the purpose of
industrial capitalism was to free economies from
the legacy of feudalism. And the legacy of
feudalism was the landlord-warrior class
collecting hereditary rent and the predatory
banks that were not making loans for industry.
None of the industrialists got their money to
invest in banks. The inventors of the steam
engine couldn’t get loans except by mortgaging
their houses. Banks don’t lend money to create
capital, only for the right to foreclose on it.
Jonathan Brown
1:07:02
This is all included in your in your latest book
that just came out, The Destiny of Civilization:
Finance Capitalism, Industrial capitalism, or
Socialism, which I gather was a series of
lectures to a Chinese University. Is that
correct?
Michael Hudson
1:07:16
Yes. There were 160,000 viewers for the first
lecture, and there’s a huge interest in this in
China, because they realise that higher housing
prices make them poorer and more highly
indebted, not richer. What is pushing up housing
prices in China is the amount of credit that
banks will lend against the property.
A land tax would keep
housing prices down, because the rent could not
be available, to be capitalized into a bank
loan. As China gets more productive and more
prosperous, people obviously are going to be
able to afford housing, which is how most people
define their status. If a site gets more
valuable because of public investment in
transportation, or schools or parks nearby,
that’s going to make it more valuable. But if
you tax this rental income, then you’re going to
keep the housing price down.
I think Fred Harrison and
Don Riley wrote a book Taken for a Ride where
they show that the money that London spent on
extending the Jubilee Line increased real estate
prices by twice as much as the line cost. London
could have simply collected the land’s increase
in rental value that this public investment
created and made it self-financing.
Instead it was a
giveaway.
They ended up taxing
labour and business, and the effect was to
increase Britain’s cost of living and hence the
cost of production, which is why Britain is
de-industrialising. It’s been de-industrialising
because despite the attempts through 1909 and
1911, to free itself from landlordism, the
bankers have taken the place of the landlords.
They are the class today that the landlords were
in the 19th century. So we’re back on the
revival of what really was feudalism – a
rake-off by a hereditary privileged class.
<h4>America’s monetary
imperialism coming to an end with
de-dollarization</h4>
Jonathan Brown 1:09:47
I’m wondering where we go
next. I want to get into the conversations that
you started with the 1972 first edition of
Super Imperialism. I know we had a
third edition fairly recently, with your
prescience of the predictions in analyzing the
situation for America, and how the balance of
payments deficit was a result of U.S.
expenditure by the military. Getting into the
current manifestation of the de-dollarization
challenge that seems to be accelerating through
the Ukraine and Russia crisis, I wonder what
background we need to give the listeners just to
tell them about how that system works.
Michael Hudson 1:10:39
One of the things that most people don’t
understand is money, largely because of the
academic discussion confusing matters. Until
1971, countries running a balance of payments
deficit would have to settle it either in gold
or by selling off their industry to investors in
the payments-surplus countries. Well, beginning
with the war in Korea in 1950-1951, the U.S.
balance of payments moved into deficit. The
entire U.S. balance of payments deficit from the
Korean War to the 1970s was a result of its
foreign military spending.
By the time the Vietnam
war was ending, the Americans had to sell its
gold every month. Vietnam had been a French
colony, so the banks there were French. As
America spent more dollars in Southeast Asia,
these dollars were sent from local French bank
branches to their head offices in Paris. The
Paris bank would turn over these dollars to the
central bank for francs, and the central bank,
under General de Gaulle, would cash in these
dollars for gold.
Germany was doing the
same thing, using its export proceeds that were
paid in dollars to buy gold. So America’s gold
stock was steadily going down, until finally it
had to withdraw from the London Gold pool and
stop making the dollar gold convertible. Back in
1950 when the Korean War began, the American
Treasury had 75% of the world’s monetary gold.
It had used this monetary power to control
diplomacy in other countries. The basis of
America’s political power was its gold stock.
Once they left the
gold-exchange standard there was hand wringing.
How was the United States going to dominate the
world if it didn’t have gold anymore, if the
military spending abroad had made it run out of
gold? My Super Imperialism pointed out that
henceforth when foreign central banks got more
dollars, what were they going to use them for?
Well, there’s only one thing that central banks
at that time did: That was to buy government
securities. So the central banks of France,
Germany and other payment-surplus countries had
little option except to buy U.S. Treasury bills
and bonds. Some of these were special
non-marketable bonds that they couldn’t sell,
but they were stores of value.
So the money that America
was spending abroad was simply recycled to the
United States. It didn’t mean that America had
to devalue the dollar through running a
balance-of-payments deficit, like today’s Global
South countries do, or do as England had to do
with its’ stop-go policies, always raising
interest rates to borrow when its deficits
threatened to force the pound sterling to
depreciate.
Jonathan Brown
1:13:57
Michael, this insight was that was that when you
were working at Chase Manhattan, and you were
advising the State Department on what to do with
the fact that they were having these balance of
payments problem, because of military spending?
Michael Hudson
1:14:07
My job at Chase was to analyse basically the
balance of payments of Third World countries and
then of the oil industry. I had to develop an
accounting format to find how much does the oil
industry actually makes in the rest of the
world. I had to calculate natural-resource rent,
and how large it was. I did that from 1964 till
October 1967. Then I had to quit to finish my
dissertation to get the PhD. And then I
developed the system of balance-of-payments
analysis that actually was the way it had been
calculated before GDP analysis.
I went to work for Arthur
Andersen and spent a year calculating the whole
U.S. balance of payments. That’s where I found
that it was all military in character, and I
began to write in popular magazines like
Ramparts, warning that America’s foreign wars
were forcing it to run out of gold. That was the
price that America was paying for its military
spending abroad.
I realised as soon as it went off gold in 1971
that America now had a cost-free means of
military spending. Suppose you were to go to the
grocery store and just pay in IOUs. You could
just keep spending If you could convince the
owner, the grocer to use the IOU to pay the
farmers and the dairy people for their products.
What if everybody else used these IOUs as money?
You would continue to get your groceries for
free.
That’s how the United
States economy works under the dollar standard,
at least until the present. This is what led
China, Russia, Iran and other countries to say
that they don’t want to keep giving America a
free ride. These dollarized IOUs are being used
to surround them of military bases, to overthrow
them and to threaten to bomb them if we don’t do
what American diplomats tell them to do.
That led already a few
years ago to pressure to de-dollarize the world
economy and make it multipolar, not simply an
extension of the U.S. military, U.S. investors,
mining and oil companies. The post-dollar aim
was for other countries to keep their economic
surplus among themselves to promote their own
economic growth, instead of imposing IMF
dictated austerity programmes to impose
austerity so that they can pay foreign
dollarized bondholders.
Just about everybody
thought that it would take many years for China,
Russia, Iran, India, Indonesia and other
countries to get their act together and create
an alternative. But this year the Biden
administration itself destroyed America’s free
ride for the dollar. First the United States
grabbed Venezuela’s foreign exchange, then Biden
grabbed all of the foreign exchange of
Afghanistan, just confiscated it. And then a
month ago he confiscated $300 billion of
Russia’s foreign exchange reserves. He said, in
effect, that we are the leading democracy in the
world, and global democracy means that America’s
military gets to appoint foreign presidents.
And so we don’t like the
person you’ve voted in as president for
Venezuela. We’re going to hire this little
nitwit that we bought out, Juan Guaido, and
appoint him president. To force you to accept
this, we’re going to take away all of your gold
reserves held in the Bank of England, and we’re
going to give it to Mr. Guaido as our nominee
for the bastion of democracy, to do what a
democratic regime is supposed to do: hiring
terrorist groups to kill all land reformers and
labour leaders, to finance a neo-Nazi takeover
like we did in Chile under Pinochet, and just
like we’ve done in democratic Ukraine with our
funding of neo-Nazis to fight against the
Russians there.
This confiscation of
foreign reserves and foreign money held in U.S.
banks shocked the rest of the world. Nobody had
believed that countries would actually grab
other countries’ financial savings. If you go
back to the wars in the 19th century, the
Crimean War and others, countries would continue
to pay their foreign debts.
All this was ended by
President Biden rejecting the international rule
of law. He said that “We have a ‘rules-based’
order, in which we can make up the rules. Number
one, we are exempt from the rules. Only you have
to follow them. Number two, the rules or
whatever we say.” China, Russia and India would
have taken years by themselves to denominate
their trade in their own currencies. Biden’s
money grab has impelled them to create a new
economic order independently of the United
States and Europe, whose euro and sterling are
satellite currencies of the United States.
Jonathan Brown
1:19:54
So Michael, this is a crazy situation that we’ve
got. Even If you have deposits in a bank, the
deposits don’t really belong to you, but they
used to be respected.
Michael Hudson
1:20:07
Well they belong to you, but they can be stolen.
Jonathan Brown
1:20:09
Yeah, but then they don’t belong to me, do they?
They’re kind of mine, but not. Likewise, if I
annoy the wrong person, I could have my car
impounded, because I’ve just annoyed the local
politician, which is essentially what’s happened
to a Russian oligarch. Now, whether or not the
oligarch deserved that $500 million yacht,
obviously, they didn’t, but it was technically
theirs. So what Americans are doing is showing
that if you piss them off, they will take all
your resources, which has happened in other
countries, right? We’ve stolen it.
The British did that,
right? We appropriated resources and stole
resources from other nations. If you want the
best example of that, you can just go into the
very beautiful British Museum and see all the
artefacts that we’ve appropriated, one of which
was a Rosetta Stone, which I know you write
about.
So we’ve got this
situation now that the Americans have declared
the most profound economic war on Russia,
threatening China that we can do the same.
China’s got trillions of U.S. dollars. And one
of the things that I don’t quite understand,
looking at your philosophy and Super
Imperialism, was in demonstrating that the
Americans can have a free lunch by getting
people to buy U.S. Treasury bonds. How is it
that the U.S. dollar has gone up against all
currencies pretty much other than the rouble
since declaring war in Ukraine?
Michael Hudson
1:21:43
Europe has committed economic suicide, United
States offered its leaders a lot of money in
their offshore accounts, and made sure that
their kids got free education in the United
States. But in return, they would have to
represent the United States, not Germany, France
or other countries. The Americans have been
meddling in European politics for years.
European politicians do not represent their own
countries. They represent the American State
Department and American diplomacy. And they were
told to lock their countries into the U.S.
economy.
For instance, European businesses had a hope
that Americans really hated. The Europeans hoped
that after 1991, now that communism was over,
they could invest in Russia to make money. They
could sell exports to Russia and make mutual
gains from each other. But the Americans wanted
to make all the money off Russia for themselves,
mainly by using the kleptocrats they backed to
sell the natural resources that they grabbed to
U.S. investors. The Harvard Boys wanted to make
sure that rent-yielding natural resources were
given the kleptocrats – who could only make
their money in hard currency by selling shares
abroad in the assets they grabbed, keeping their
payments in England or the United States.
So they’ve asked Europe
not to buy Russian gas, but to spend seven times
as much buying American liquefied natural gas,
and spend $5 billion to build the ports to
accept this gas – while going without gas for
about three or four years…let their pipes
freeze… stop making fertiliser… Don’t feed your
land, we’ll take it on the chin for America.
Your standard of living is going to have to drop
by 20%, but it’s all for American democracy. And
the European heads said that’s fine.
America said that you
Europeans are bothering them by trying to stop
global warming. That’s a direct attack on a
major arm of U.S. diplomacy, the oil industry.
American companies control almost all the
world’s oil trade. It’s the highest
rent-yielding sector in the world. And it’s
income-tax free. It’s politically powerful, and
as long as America can control the oil trade, it
can talk to Latin American countries or African
countries and say if they elect a leader that
U.S. officials don’t like, it can impose
sanctions and stop exporting oil to them to
freeze them out. They won’t get fertilizer, so
the U.S. can starve you out. It can put a
sanction on their food trade. Agriculture is
Americans biggest trade surplus.
Jonathan Brown
1:25:14
That’s what they’re doing with the conflict in
Ukraine to Russia, and also China as well. Are
there other major sources of grain, wheat and
rice?
Michael Hudson
1:25:26
Yes. But President Biden has blamed Putin for
creating a world food shortage and threatening
to cause a famine, because Ukraine can’t export
its grain. Ukraine, at American direction, has
put mines all over the Black Sea. So the Black
Sea’s ports have mines around them. If a ship
hits them, it’ll blow a hole in the hull and
will sink.
As a result, if you’re a shipping company and
want to transport grain, you have to get
insurance, because if you don’t have insurance,
then you’re in danger of going bust if your ship
goes under. But no insurance company will insure
it until the Ukrainians remove the mines that
they put. You need minesweepers for that.
Needless to say, Russia doesn’t want American
minesweepers in, because they may very well
attack as there’s a war on.
So you have the United
States blocking Ukrainian grain exports, which
was a huge export. You’ve had the American
dollar area, the NATO countries, refusing to
import food from Russia, which is the world’s
largest agricultural exporter. This is creating
a crisis for Global South countries, for Latin
America and Africa.
Meanwhile, global warming
is causing droughts that are reducing the
harvest. The Green Party in Germany has a
pro-war policy that is making global warming
rise faster. By supporting military warfare
against Russia, and U.S. military adventurism in
general, they are becoming major lobbyists for
the air polluters. The largest air polluter is
the American military. The Green Party in
Germany advocates fighting Russia more,
providing it with more arms, and thus supporting
the military that is now the largest new
contributor to global warming. In effect, this
means that Europe is willing to say, ‘Okay, we
are willing to have the sea levels rise another
10 feet, as long as we can help America dominate
Russia’.
Europe even is letting
America keep the Trump tariffs on its exports,
in place, so it can’t export more for America.
It looks like Europe will have to
de-industrialize, maybe we’ll go back to the
19th century and become a country of farmers.
That basically is the situation that its
subservience is imposing.
Jonathan Brown
1:28:49
I’d like to come back to the just what China and
Russia can do, given their reserves. They
understand they’ve got… they’ve got lots of
reserves of gold, and also large grain stores,
China having the most as I understand it, but
can you help me understand why all these nations
around the world have U.S. dollar reserves in
some form or other, most of it in bonds? Why is
the dollar still increasing at this moment in
time?
Michael Hudson
1:29:28
Because the Euro was going down. The Japanese
Yen is going down. The Yen is the worst
performing currency, because they’ve held their
interest rates very low. Their aim is for banks
to make money by borrowing low at low rates and
lending to foreign countries at a higher rate.
Europe is also keeping its interest rates low.
The American Federal Reserve is raising the
interest rate, and that is money from low
interest rate countries. Capital from Europe and
Japan is flowing to America.
Currency values are
primarily set by relative interest rates and
capital flows. They’re not set by the cost of
production for imports and exports. They are not
caused by trade, unless there’s a radical
breakdown of trade. All these zigzags that you
see are short-term capital movements. America
tells other countries to keep their interest
rates low, so that money will flow from their
banks and financial to the United States to buy
American securities that yield higher returns.
As long as the Euro is a satellite currency to
the dollar, it’s going to continue to go down.
So the both the euro and the British Sterling
are now moving towards $1 per pound and $1 per
euro.
Jonathan Brown
1:28:49
That’s a short-term measure. The long-term
measure is that countries have to start selling
the bonds that they’ve got in U.S. currency. So
long term, it has to come down. Is that right?
Michael Hudson
1:29:28
Yes. They’re going to hold each other’s
currencies. Especially now that Russia is
denominating its exports, in roubles instead of
dollars. The American banks have lost the trade
financing of the world oil trade, certainly
Russian oil and agricultural trade. Instead of
holding dollars, countries will hold rouble
reserves to stabilise their currencies via the
rouble, China is holding rouble reserves, and
Russia is holding Chinese yuan reserves.
The balance will be held
more in gold and some kind of assets without a
liability attached to them. I think the logical
direction in which this is moving is that the
non-dollar countries will create their own
version of the International Monetary Fund,
their own World Bank, their own trade
organization. So there will be one set of trade
and financial and development organisations and
military organisations in the U.S. and Europe,
in NATO, that is, in the white countries, and
another set of relations and the non-white
countries that are actually developing while
America and Europe shrink.
Jonathan Brown
1:33:06
So what’s your idea of how much gold China
actually holds, because there’s the published
numbers [which] are really extraordinarily small
aren’t they for an economy that’s so big.
Michael Hudson
1:33:18
I don’t know. Governments can hold gold not only
through their own treasury, but through some
subordinate agency. I no longer go into the
financial statistics like I used to, because it
takes a whole year to do a balance sheet that is
comprehensive. All I know is that they saw how
America simply grabbed Russia’s dollar holdings,
and they don’t want the same thing done to them.
President Biden has said China is America’s
number one long-term enemy, and he wants to
destroy the Russian economy first and then
attack China after prying them apart.
Obviously, China is
reading the newspapers and wants to avoid that
fate.
Jonathan Brown
1:34:16
The other thing that I find utterly remarkable,
for example, is that Biden in his speech said
that he wants to get rid of Putin. I think if it
was a U.S. Defence Secretary or Secretary of
State saying that he wants to arm Taiwan……. If I
ran China and I said I want to arm Mexico, or if
anyone in South America wants any weapons then
my doors open to you, I would expect the
Americans to be very upset with that because I’m
breaching the Monroe Doctrine. Can you help me
understand, having been in the corridors of
power, whether Chase Manhattan or the contacts
you’ve got, how can …. how can politicians be so
delusional to think they can say stuff like that
without having a negative consequence?
Michael Hudson
1:35:18
Well you know who’s really upset by that? The
Taiwanese! They say, Oh, they want to make
Taiwan into another Ukraine, to fight to the
last Taiwanese, just like the Ukrainians have
been used. They see two choices before them. If
they do arm and get weapons that can hit China,
then China is likely to bomb them. On the other
hand, I’ve met Taiwanese officials for 40 years,
and many have said that their long-term hope is
to be reintegrated. They want to be investors in
China, but they want to merger under terms where
they can be sort of like Hong Kong, able to have
a merger that will make them prosperous too.
So Taiwan’s choice is
between following the Americans and becoming the
Ukraine of the Pacific, or joining with China.
Given the fact that China is growing and America
is shrinking, what are they going to choose?
Well, I would imagine that you will see a
strong, peaceful integrationist movement with
China. But China remembers that Chiang Kai Shek
massacred the communists in 1927.
Jonathan Brown
1:36:47
So what are we looking at then, who is in
charge, President Biden or other people?
Michael Hudson
1:36:56
President Biden is a front man. They’re all the
front men for the faceless people in the State
Department, the neocons who are controlling
things. Biden has always been right-wing, just a
corrupt party politician. He does what he’s paid
to do. He’s unimaginative. He’s brought in some
real Russia haters – people who have a visceral
hatred of Russia because of their family
background under the tsars or under Stalin.
Blinken said that his family was Jewish and lost
under the tsars, and maybe under Stalin. He
wants to kill Russians because he’s so angry at
what they did to his ancestors. That is the
neocon mentality in a nutshell. It’s a crazy
mentality.
The Federal Reserve and
the Treasury officials say they were not
consulted in the political moves that Biden and
Blinken and the neocons are making. There is the
kind of single-minded tunnel vision at work.
They really are Russia haters and China haters.
There is a lot of racism you’re seeing in New
York, where it’s very dangerous for Asian women
to take a subway. Almost every week, the lead
news item is yet another Asian woman attacked or
pushed in front of a subway. There’s a there’s a
new race hatred in America. And they are
treating Russians as the Ukrainians do, as if
Slavic speaking people are a separate race.
Jonathan Brown
1:38:49
Extraordinary. So Super Imperialism came out, as
I understand it, and was used by the State
Department to figure out how to continue running
their economics …
Michael Hudson
1:39:04
At first U.S. officials thought that going off
gold was going to be a disaster. Herman Khan
told me, “You’ve shown that we’ve run rings
around the British Empire.” He hired me for the
Hudson Institute, which is a national security
institute, and brought me to the State
Department for meetings and to Army War colleges
and Air Force war colleges to talk about it. I
guess I shouldn’t be surprised that the main
people who wanted to learn how imperialism works
were the imperialists themselves. I had thought
that the anti-imperialists were going to be my
main audience, but the imperialists really
needed to know what was new.
Jonathan Brown
1:39:50
They took your book, Super Imperialism and they
read it as a love letter, right.
Michael Hudson
1:39:56
Not a love letter. They saw it as a “how to do
it” book. I was a technician.
Jonathan Brown
1:40:04
Right. And working for Herman Kahn, he’s a
powerful guy that people don’t talk about so
much anymore, but he was, he was extraordinarily
influential at the time, right?
Michael Hudson
1:40:14
Yes, he had a great sense of humour. He was a
great speaker. He was absolutely brilliant. He
wrote a book on thermonuclear war, saying that
even if there were to be a war, somebody would
be left to survive. That made him one of the
models for Dr. Strangelove in the movies. I
would sit and hear Herman talk about military
strategy, and was awed by how he thought it all
through. He was a brilliant military tactician.
He would bring me and sit down with generals,
and they would explain things. I don’t have a
good military sense, or any military training at
all. He wrote that, personally, he wanted to be
right under the first hydrogen bomb. He didn’t
want to live in the post-nuclear world. But
there would be some survivors somewhere. That
made him notorious. He was so reviled for even
having brought up discussion of the topic that
needed to be discussed, that he wanted to have
ideas that people liked. And that was the
corporate environment study. That was what I was
pretty much in charge of. I was the economist,
he was the military. We had the same salary
there.
We would go around the
world disagreeing with each other. It would be
like a show. He’d talk about the world being a
cup half full. I talked about the cup being
half-empty, as he put it. I talked about the
debt overhead, and how debt was growing and
would ultimately stifle the economy. He talked
about how productivity would be sufficient to
pay debt, although productivity doesn’t
necessarily give you the money to pay the debt.
Productivity does not grows exponentially, but
tapers off. As debt grows, any rate of interest
is a doubling time. And it doubles quicker than
the economy can double.
Jonathan Brown
1:42:24
And this is really coming back to one of your
initial questions from Terrence McCarthy, which
was to focus on productivity, wasn’t it?
Michael Hudson
1:42:33
Yes. And the idea was focusing on productivity,
you realise that it all comes down to labour
ultimately. How do you make labour more
productive? How do you make industry more
productive? You get rid of what is unproductive
– and the unproductive overhead is rent. So how
much corporate spending is just plain overhead?
How much is unnecessary for corporate industry
to take place? That line of questioning brings
you back into the classical economics.
Marx is really the last great classical
economist who pushed it all to its logical end.
His contribution was to explain that just as the
landlord exploits by taking rent, the industrial
capitalist exploits labour by charging more for
the products of labour than it costs to hire
labour to produce.
However, unlike the
rentier, unlike the landlord, the capitalist
uses this economic surplus value to expand
production, to build yet more factories, to
employ yet more labour. This is an expanding
society, whereas the rent paid to landlords is a
kind of exploitation that is pure overhead and
shrinks industrial capitalism. That’s why Marx
said that the political aim of industrial
capitalism was to free society from the
landlords, predatory bankers and monopolists.
That’s why the Communist Manifesto‘s program
begins with collecting rent for the public
sector. You can tax the land as a transition to
socialising it. That was the Communist
Manifesto’s classical economics.
Jonathan Brown
1:44:26
You have these views, and yet you were still a
valued member of the team at the Hudson
Institute.
Michael Hudson
1:44:33
Yes, because I was explaining how the world
worked. Herman and I disagreed so much, we were
genuine friends. I liked him, and we couldn’t
believe that the other would actually believe
something so different. But we said okay, if the
arguments that we’re having is the “big
argument,” it’s going to determine where the
economy is going. Either he’s right or I’m
right.
This is like the debates between Henry George’s
followers and the socialists in the early 1900s.
It was going to be one world or another.
What is the key to
analysing the economy? Is it to focus on rent
and finance, or on technological potential? My
point is that technological potential can be
smothered by so much overhead paid to the
rentier class via the FIRE sector – finance,
insurance and real estate – that there’s no
money left to invest, no income left for wage
earners to spend on buying the goods and
services that they produce.
Jonathan Brown
1:45:48
And yet the technology sector in my opinion is
actually the new monopolist. Instead of having a
competition, in that sense they’re the new
landowners. So Google is a spectrum landowner.
If I want to host these videos, then I’ve got to
negotiate or accept the terms of the landowner
YouTube. I’m posting them there, but I won’t be
making any money on it. Because I’m one of the
serfs on YouTube.
Michael Hudson
1:46:16
This is the problem that China is dealing with
in its own way. What do you do when Jack Ma and
other IT specialists end up as billionaires?
Well, China did not have an anti-monopoly group.
It let 100 flowers bloom and let billionaires
develop, but would then have them transfer their
money to the government in one way or another.
They haven’t done this in the way that Western
economies do, by an anti-monopoly tax, but by a
political consensus way.
In countries like Russia,
I’m trying to get them to formalise this into
formally calculating the magnitude of economic
trends. You want innovation to take place, you
want people to make the fortune, but at a
certain point they can’t somehow make so big a
fortune that it ends up crashing the economy.
Jonathan Brown
1:47:37
But looking at your writing from the Byzantine
times and the ancient Near East, is the
importance of the leader of that particular
economy or society to make sure that no one got
so rich that they could overthrow the leader?
Which is really what you’ve got with someone
like Zuckerberg, the power that he was able to
wield in the election, whether you agree with
him or not, was extraordinary. And likewise, if
you look at the fight that’s currently going on
with Elon Musk and Twitter, is to recognise that
actually we want, we want our people to own
these resources that we pretend are private, but
actually have tremendous social power.
Michael Hudson
1:48:24
Yes, they financialized politics in America, by
the Supreme Court’s Citizens United ruling.
Anyone can contribute as much as they want, if
you’re a corporation. The rentier interests give
to pro-rentier politicians to act as their
puppets. The money goes for advertising airtime
on television and the media to overwhelm all the
people who normally would want to minimise the
rentier class. So essentially, you’ve
financialized politics in America much more than
has occurred in Europe. But in Europe, it’s the
right wingers who basically control the press,
commercial television and media. So if the media
are controlled by the right wing with their own
agenda, they frame the economic issues from the
vantage point of the rentier class instead of
from the vantage point of how an economy
actually develops and grows wealthier in a fair
manner.
Jonathan Brown
1:49:48
I know we need to need to wrap up. Just thinking
about the scenarios for Russia and China
currently. Everybody who is part of the original
white economies of Europe, realises that if they
don’t side with America, they get overthrown.
But also right now they have a short-term
challenge that the Americans are going to let
them starve because they’re stopping wheat
exports coming through the European ports. But
then you’ve also got Russia with resources,
you’ve got China with grain resources.
So there is a potential
that when people start to starve, and you look
at the challenges in Sri Lanka, with politicians
being murdered and people running out of food,
there’s a chance for China to step in and say,
we can send you grain exports. And by lucky
coincidence, because of the all the lock downs
that China’s got right now, a lot of the world’s
boats and ships are currently waiting outside
ports in China.
Michael Hudson
1:50:54
[Missing part here] Computer chips are part of
the problem. And that’s probably going to make
them friendlier with Taiwan. Taiwan has the
computer chips.
Jonathan Brown
1:51:03
And by your assessment, because Taiwan do not
want to be another Ukraine, American actions are
likely to accelerate the reintegration.
Michael Hudson
1:51:12
There’s a bell shaped curve, I haven’t met with
the Taiwanese in quite a few years so I don’t
know, up to date what the dynamic is. But just
by logic, you can see the international
environment in which they’re operating. You
wonder how they are going to calculate the
plusses and minuses of the U.S. versus China?
What economy do they want to attach themselves
to so that they can get richer fastest?
Jonathan Brown
1:51:46
And also stay safe and not get involved in
unnecessary wars. When you look at the tragedy
in Ukraine, all these people dying when you’ve
got such a strong opponent in Russia, how can
you go to war with them for any period of time?
Michael Hudson
1:52:07
Well, that’s what the world is divided into. The
U.S. and European society is built on war. It’s
the only foreign policy they have, because they
don’t have an economic power anymore. They’ve
de-industrialised and the rest of the world that
is trying to industrialise and trying to feed
itself. China, Russia, India, the Global South
are the anti-war part of the world. So the world
is dividing into two parts: a rentier part
supporting finance capitalism [that] is trying
to impose it on other countries, to financialize
China and Russia to make them put a Margaret
Thatcher or Boris Yeltsin in charge of China.
While they try to put their own candidates in
charge, a la General Pinochet, the rest of the
world is trying to defend itself against this
terrorism.
So the Western world that
calls itself democracy is the terrorist military
world. The nations that it calls authoritarian
are any authority strong enough to control and
tax the financial interests – that is, any
government strong enough to regulate finance and
real estate. Such an economy is by definition
authoritarian as opposed to a democracy, where
Wall Street and the financial centres are the
democratically elected central planners. So
what’s at issue is who’s going to plan society:
the financial sector, or the people as in China
and other countries.
Jonathan Brown
1:53:41
I think that says it. From a Western lens it’s a
different type of democracy.
Michael Hudson
1:53:48
Yes. But democracy really means an economy run
to benefit the great bulk of the population, who
happen to be wage earners? Or is it going to be
for the 1%? Is the economy run for on behalf of
the 99% and the 1%? Well, the 99% need a strong
government to run it in their own interests and
cope with the counter-revolutionary policies,
the neo-feudal rentier policies of the 1%.
Jonathan Brown
1:54:22
Okay, so knowing China, then your take on its
zero-COVID policy that the authorities are
implementing in some parts of the country?
Michael Hudson
1:54:32
The more I read about long COVID here, the worse
it seems. I’m 83 years old, so my wife and I
have not gone to a restaurant since 2020. We
haven’t even gone to our friends’ houses for
dinner. We’re isolating ourselves. China has
isolated itself at great cost, but it saved the
population not only from having COVID itself,
but from having long COVID. There are now a
million Americans with long COVID. They also say
that long COVID lowers your, your IQ by 10%.
It’s almost as dangerous
is inheriting a trust fund when it comes to
impairing your IQ. It’s debilitating.
My webmaster in Australia
and his family have COVID. So I’m very
sympathetic with what China’s doing, even though
it means that I can’t go there, because I’d have
to be isolated in a hotel room for two weeks
just to give a few days’ meeting – and then be
isolated again when I come back. So China is
making a huge effort not to sicken its
population with COVID. And now of course, since
the Russians have began to publish all their
findings of the US bio-warfare labs in Ukraine
that were designed to spread a COVID like
diseases by migrating birds and bats and manmade
aircraft over Russia.
Now, they’ve reopened the
question ‘was COVID a US bio-warfare from the
very beginning’? And the Chinese are looking at
it and saying ‘was it engineered’? If the
Americans are trying to engineer COVID to affect
mainly Slavic population and their DNA
signatures, could they have been doing the same
thing against Asians? So all of this is suddenly
opened up. The World Health Organisation has
refused to divulge any of the USA biowarfare
efforts, and the U.S. has stonewalled all
efforts to find out about the bio-warfare. This
is isolating America and Europe.
If American Europe is
left with its current foreign policy, biowarfare
and atomic bombs, NATO will be shunned by the
civilised world. As Rosa Luxemburg said a
century ago, the choice is between socialism or
barbarism. NATO, Europe and America represent
the new barbarism. The alternative is socialism.
That is how the world seemed to be developing in
Europe and America until World War I untracked
everything. The rest of the world now has a
chance to get back on track. I don’t know what’s
going to happen in the West.
Jonathan Brown
1:57:47
Michael, as always, you always get more into
your stuff than I expected. Are there any things
that you’d like to say to our listeners, before
we finish up,
Michael Hudson
1:57:56
I’ve probably said too much. And I hope you can
edit out anything that’s embarrassing.
Jonathan Brown
1:58:01
I may get thrown off YouTube for publishing some
of your comments. So you may have to go back and
review a few of them. But as always, Michael,
thanks so much your time what we’ll do is we’ll
send a link to everybody for the website and
also for the new book, as well which I think and
those series of lectures when I was researching
for this conversation were the single best
economic lectures I’ve ever listened to – truly
extraordinary levels of insight and real
economics rather than theoretical or textbook
stuff. So as always from ShepherdWalwyn, thanks
so much for your time and for your contribution.
Michael Hudson
1:58:41
Well, if you transcribe it all in will be worth
it.
Jonathan Brown
1:58:45
That’s, that’s our promise 100%. So thanks very
much.
Michael Hudson
2:00:05
Thanks a lot.
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