“Creating Wealth” through Debt: The West's Finance-Capitalist Road

• DOI: https://doi.org/10.13169/worlrevipoliecon.10.2.0171
• Published date: 01 July 2019
• Date: 01 July 2019
• Pages: 171-190
• Author: Michael Hudson
• Subject Matter: Capitalism,financialization,debt,crisis,rentier

World revieW of Political economy vol. 10 no. 2 Summer 2019

“CREATING WEALTH” THROUGH DEBT

The West’s Finance-Capitalist Road

Michael Hudson

Michael Hudson is President of the Institute for the Study of Long-

Term Economic Trends (ISLET), a Wall Street Financial Analyst,

Distinguished Research Professor of Economics at the University

of Missouri, Kansas City and author of Killing the Host (2015), The

Bubble and Beyond (2012), Super-Imperialism: The Economic Strategy

of American Empire ([1968] 2003), Trade, Development and Foreign

Debt ([1992] 2009) and The Myth of Aid (1971), among many others.

Email: michael.hudson@earthlink.net

Abstract: Volumes II and III of Marx’s Capital describe how debt grows exponentially,

burdening the economy with carrying charges. What policies are best suited for China

to avoid this neo-rentier disease while raising living standards in a fair and efficient

low-cost economy? The most pressing policy challenge is to keep down the cost of

housing. Rising housing prices mean larger and larger debts extracting interest out of

the economy. The strongest way to prevent this is to tax away the rise in land prices,

collecting the rental value for the government instead of letting it be pledged to the

banks as mortgage interest. The same logic applies to public collection of natural resource

and monopoly rents. The US and European business schools are part of the problem, not

part of the solution. They teach the tactics of asset stripping and how to replace industrial

engineering with financial engineering, as if financialization creates wealth faster than

the debt burden. Having rapidly pulled ahead over the past three decades, China must

remain free of rentier ideology that imagines wealth to be created by debt-leveraged

inflation of real-estate and financial asset prices.

Key words: Capitalism; financialization; debt; crisis; rentier

Western capitalism has not turned out the way that Marx expected. He was optimis-

tic in forecasting that industrial capitalists would gain control of government to free

economies from unnecessary costs of production in the form of rent and interest

that increase the cost of living (and hence, the break-even wage level). Along with

most other economists of his day, he expected rentier income and the ownership of

172 MICHAEL HUDSON

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land, natural resources and banking to be taken out of the hands of the hereditary

aristocracies that had held them since Europe’s feudal epoch. Socialism was seen

as the logical extension of classical political economy, whose main policy was to

abolish rent paid to landlords and interest paid to banks and bondholders.

A century ago there was an almost universal belief in mixed economies.

Governments were expected to tax away land rent and natural resource rent, regu-

late monopolies to bring prices in line with actual cost value, and create basic

infrastructure with money created by their own treasury or central bank. Socializing

land rent was the core of physiocracy and the economics of Adam Smith. That was

the path that European and American capitalism seemed to be following in the

decades leading up to World War I. That logic sought to use the government to

support industry instead of the landlord and financial classes.

China is progressing along this “mixed economy” road to socialism, but

Western economies are suffering from a resurgence of the pre-capitalist rentier

classes. Their slogan of “small government” means a shift in planning to finance,

real estate and monopolies. This economic philosophy is reversing the logic of

industrial capitalism, replacing public investment and subsidy with privatization

and rent extraction. The Western economies’ tax shift favoring finance and real

estate is a case in point. It reverses Ricardian socialism based on public collection

of the land’s rental value and the “unearned increment” of rising land prices.

Defining economic rent as the unnecessary margin of prices over intrinsic cost

value, classical economists through Marx described rentiers as being economi-

cally parasitic, not productive. Rentiers do not “earn” their land rent, interest or

monopoly rent, because it has no basis in real cost-value (ultimately reducible to

labor costs). The political, fiscal and regulatory reforms that followed from this

value and rent theory were an important factor leading to Marx’s value theory and

historical materialism. The political thrust of this theory explains why it is no

longer being taught.

By the late 19th century the rentiers fought back, sponsoring reaction against

the socialist implications of classical value and rent theory. In America, John

Bates Clark denied that economic rent was unearned. He redefined it as payment

for the landlords’ labor and enterprise, not as accruing “in their sleep,” as J. S.

Mill (1848, 630, book V, chapter II, section 5) had characterized it. Interest was

depicted as payment for the “service” of lending productively, not as exploita-

tion. Everyone’s income and wealth was held to represent payment for their con-

tribution to production. The thrust of this approach was epitomized by Milton

Friedman’s Chicago School claim that “there is no such thing as a free lunch”—

in contrast to classical economics saying that feudalism’s legacy of privatized

land ownership, bank credit and monopolies was all about how to get a free lunch,

by exploitation.