The Economics of Reality: How Finance Dominates Production and Rents Overshadow Profits

March 24, 2001
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The Economics of the Future

Wagner’s Music of the Future – his “total art work” – sought to integrate music and drama (along with art, dance and poetry). In a similarly broad way, the economics of the future will integrate finance and production, thereby restoring the lost link (as drama had been lost to most operatic music in Wagner’s day).

Therefore, the economics of the future will pick up the thread where it was broken off in the 1870s. While many social sciences extended themselves to include physical science, technology and history, academic economics underwent its Great Narrowing.

In an epoch of unparalleled social transformations, economics became marginalist rather than dealing with structural change. As politics was becoming radical, marginalism and its mathematics espoused the status quo implicitly, by not discussing the structural problem.

As science and technology were vastly transforming the world’s surface and multiplying the productivity of labor, economics adopted production functions based on diminishing returns. What is most ironic in hindsight is that the idea of diminishing returns was formulated first in agriculture. Yet down through the 20th century, agricultural productivity – that is, labor productivity – has increased more rapidly and over a more protracted period in agriculture than it has in any industry of the world at any time in history.

And as finance was freeing itself from the fetters of gold and silver bullion, credit was ignored. Monetary theory treated “money” as a “good” to be bartered against other goods.

Finance capitalism was transforming the world, especially through its links with government. But this is precisely what traumatized economics: Theories of government’s proper role in economic affairs had been radicalized by Marx (and also by Henry George). Post-classical economics became simultaneously a fight against Marx and George.

Marx denounced profits, George denounced rents. But nobody criticized debt. Attention was focused on the rate of interest, yet the volume of debt was left out.

This was part of the general ignoring of assets, as private property itself had come under attack by the radical impulses inherent in classical economics itself. (q. Terence McCarthy: Marx was himself radical.) Real estate – especially land – has been left out.

The Economics of the Future also will re-incorporate the historical dimension – that of economic history, as well as the history of economic thought.

The task of the Economics of the Future is thus to bring (drag?) economics out of its “mythological” stage and introduce modern financial rentier reality. I should say “re-introduce,” as economics at its outset in nearly every country was based on the awareness of such reality. This can be traced back to ancient Mesopotamia.

Post-classical marginalist economics became based on what it claimed to be psychological utility. But just as the physical production functions anachronistically were premised on diminishing returns, so British utilitarianism was based on diminishing marginal utility. The working hypothesis was that each additional “dose” of a consumption good (food was taken as a proxy for commodities and wealth in general) gave less psychic utility.

From this premise followed a great number of false generalities. For instance, it was assumed that as people (families and entire economies) became wealthier, they would consume less. Hence, Keynes’ worry about saving. (Yet all saving is debt. This should have been the real worry.) A diminishing consumption function was said to lead to underconsumption and hence, overproduction and crises, a drive for colonies and foreign markets – and hence, John Hobson’s theory of imperialism.

Yet already in classical antiquity it was recognized as a central element of social philosophy that wealth was addictive. In a psychic and indeed, physiological reaction that has become familiar to drug addicts in modern
times, each additional “dose” of wealth yields less pleasure. To seek more endorphins and dopamine, a larger dose is needed each time. This is the essence of addiction. And it was well recognized in Greece and Rome, and indeed as early as Bronze Age Mesopotamia in its “wisdom literature” that came to be incorporated into the Old Testament as well.

So ancient religion and social custom incorporated a broader world view than that taken by post-classical economics.

Why was so wrongheaded a path followed? The answer has everything to do with wealth and with its mirror image, debt. Society’s vested interests did not want to deal with it.

So they created a narrow-minded doctrine whose adherents would view economic reality itself as striking a chord of cognitive dissonance. Everywhere we turn, we have musical metaphors here. For what was the Music of the Future if not dissonance? The Economics of the Future accordingly will.

Today’s the most imaginative students who have started their graduate studies in economics tend to drop out when they find that instead of providing a key to analyze society, their studies merely engulf them in mathematical technicalities trying to think about the unquantifiable. This is not a new phenomenon. Already in the 1890s, American economists trained in Germany and who rejected the narrowness of the emerging British neoclassical economics helped create the discipline of sociology, hoping to broaden the subject. (Patten, etc.)

But that in turn narrowed (largely at the hands of the University of Chicago, which also led the narrowing of contemporary economics into monetarism).

The Subordination of Property Relations to Debt Relations

(and hence, the mathematics of compound interest as expressed on the broad social level)
Classical economics was based on the concept of economic surplus, over and above basic subsistence charges. All ancient societies condemned usury because it intruded into the subsistence economy, disenfranchsing the cultivator-infantry and hence depopulating the land. In the context of a low-surplus technology, the focus of ancient economics was on maintaining the subsistence base.

Classical economics based itself on definitions of the economic surplus. It ended by defining all forms of surplus as exploitation, whether earned (through profits, which Marx defined as the exploitation of wage labor) or unearned (rent and interest). It was the denial of the concept of surplus – and hence, presumably, of exploitation or a “free lunch” – that inspired the anti-classical reaction at the hands of the “neoclassical” utilitarian marginalists.

Yet as soon as we go back to the concept of property – that is, wealth – we see the extent to which its growth is to be understood not simply in terms of its physical ability to produce a surplus, or even its ability to produce surplus revenue over costs (profit, rent and interest or wage payments enabling labor to live above subsistence levels). Property and wealth have become subservient to financial debt claims.

The upshot has been to make the concept of property much more socially dangerous than was dreamed of in late 19th century theorizing. The financial wedge of debt is prying property out of the social domain and privatizing it – not privatizing it for use by owner-users, but by absentee financial owners. This problem began to be dealt with by Thorstein Veblen in his book on Absentee Ownership, but it now has taken on a more sinister financial context than was imagined. As late as the 1960s nearly all economists believed that the future would lie in socialism, which would lead to the final subordination of finance to simply a system of banking relations and means of payment. Money – and even debt itself – was viewed as a medium in which to
make payments. The financial system of debts was dismissed as a shadowy reality, not as a higher reality than would characterize “real” economic relations as they would exist if the economy operated on a barter basis – and indeed, on a debt-free barter basis at that!

Future chapters:
x. How Property has become Debt-Driven
The defining characteristic of property is the owner’s right to alienate it. Without the right to sell it, property in the modern sense of the term does not exist; it is “primitive,” which is another way for dismissing property’s original social context.

Historically, starting in Bronze Age Mesopotamia, it was debt that led to the alienation of property, through the processes of pledging and forfeiting it to foreclosing creditors. In time, the process was abbreviated into selling it under economic duress. (For most of history, people would only sell their subsistence lands as a last resort, as it was their means of subsistence. Without land, one fell into the unfree status of dependency on others for one’s livelihood, a condition that would culminate in wage-labor.)

You Can’t Get There From Here.
(Joe’s joke about the Irishman asking how to get to Dublin: “I wouldn’t start from here, if I were you.)

But we are here. The question is, do we have to go back to the core? And if so, what is (and was) the core and center? In one sense it was philosophy, but this today has become disembodied from social application. The entire academic spectrum has been divided into disciplines.

What we are talking about is basics. And the starting point for the “basic” is the whole, not the atomistic part. It is the system, not the operational technique within a given system.

Joe characterizes science today as being a cookbook of formulae, rather than a branch of natural philosophy and understanding.

The False Mathematization of Economics – Today’s Parallel Universe Economics

x. Beyond the Enlightenment (“Against Atomism”)
It trivialized thought by replacing the social whole with the individualistic atom. This no doubt was necessary to dissolve the wrongly-based, authoritarian whole created by the Roman Christian church. But it has left civilization in an interregnum for the past half-millennium. It is the task of the Economics of the Future to re-ground the society of the future.

x. The Economic Religion of the Future

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