The latest instalment to the Insider’s Economic Dictionary.
Race to the bottom: A term for dog-eat-dog competition by which countries compete by cutting wage levels so as to produce in the cheapest market, not by raising wages and labor productivity. The effect is to shrink the circular flow between producers and employee-consumers, leading to declining living standards. Under these circumstances productivity is increased only by working the existing labor force more intensively and cutting back medical insurance, old-age pensions and other social welfare expenditures. (See Free Market.)
The state of Alabama shows the inner contradiction inherent in this policy. When the state cut back educational and health spending in order to minimize taxes, ostensibly to attract business, global companies pulled out on the ground that its labor force was too low-skilled and in too bad health to compete in the modern high-technology world.
Racket science; racket scientist: A mathematical economist creating sophisticated financial instruments so complex that buyers do not realize they are being defrauded with no reasonable chance to come out ahead.
Reaganomics: An economic slogan for the policy of cutting taxes for the wealthy (and especially for real estate) while increasing the Social Security tax on employees. (See Tax Shift and Laffer Curve). The effect was to quadruple the public debt during the Reagan-Bush administration, 1981-92. In addition to tax cuts, Reaganomics dismantled environmental regulations and deregulated industry in general, producing a stock-market and real estate boom that was the precursor to the economic bubble of the 1990s. See Chicago School and Asset-Price Inflation.
Real estate: Originally “royal” estate, reflecting the idea that property is held on behalf of the ruler, who in turn is charged with responsibility for steering society’s forward evolution. As property has become privatized, however, real estate has been turned into an economic cost for society at large, as its members are obliged to pay tolls for access to the land in the form of groundrent, while real estate investors and speculators seek capital gains.
Reality economics: A term for the study of economics subject to verification by empirical evidence rather than a body of abstract deductive assumptions by neoclassical and neoliberal economics that do not seek to be realistic. As Arthur Schopenhauer observed: “All truth passes through three stages. First, it is ridiculed; second, it is violently opposed; and third, it is accepted as self-evident.”
Reform: Just as Newton’s Third Law of Motion states that every action produces an equal and opposite reaction, so the political pendulum swings from one extreme to the other, so that one century’s flawed reform thus becomes the policy against which the next century fights. Whereas the classical aim of modern reform was to strip away unearned privilege and free lunches, today’s post-modern reform is retrogressive, taking the shape of an economic counter-Enlightenment. In Russia, for example, the “reformers” have been denounced as kleptocrats, while similar privatization and client oligarchies in third-world countries are being supported by Neoliberals and the Washington Consensus.
Regressive taxation: A tax policy that falls primarily on the lower wealth and income groups rather than on the highest. (See Tax Shift and Trickle-down Economics.) As such, this policy is the opposite of progressive economic policy.
Regulation: From semantic roots meaning to rule. A ruler or government sets rules for the economy, creating a regulatory system that, in principle, is supposed to maximize welfare and prosperity. Every economy and society is regulated in one form or another. In practice, deregulation by government relinquishes the regulatory power to the financial and property sector – primarily finance in today’s world. Although this mode of regulation tends to be more centralized than public regulation, it has much narrower goals (rewarding rentiers, with the effect of polarizing society). Advocates of regulation of the economy by the FIRE sector call it deregulation.
Rent: Literally a periodic payment, from French rente, a government bond paying interest on a regular calendrical basis at a specified rate. The concept was extended to property rents, whose payment also is periodic and specified.
Rent, economic: The classical term for income that has no counterpart in necessary costs of production, and hence does not add to price, as no out-of-pocket costs are attached to its supply. In Ricardo’s model, landlords possessing the most fertile and best situated soils receive the largest groundrent. It is a free lunch, paid out of prices either set at the high-cost margin accruing to producers producing at lower costs, or as monopoly rent. Its reduction does not lead a production input such as land to be withdrawn, because it is supplied by nature or otherwise extraneously to its recipient’s own efforts.
Rent, monopoly: Unlike the case with economic rent, monopoly rent adds to price. In agriculture, the idea that landlords receive a monopoly rent as a result of the scarcity of soil (over and above Ricardian economic rent) was formulated by David Buchanan in his notes to Adam Smith’s Wealth of Nations, although denied in principle by Ricardo.
Monopolies such as the royal trading companies created by Britain from the East India Company to the South Sea Company were empowered to impose an artificial scarcity. In modern times this is done by technology companies such as Microsoft, which obtains a monopoly rent on software exclusively installed on millions of computers around the world. A similar monopoly rent has been incorporated into intellectual and copyright property law. Today, monopoly rent and groundrent are the major revenue flows that creditors seek to transform into a flow of interest and dividends, as well as to achieve capital gains.
Rent, tenant: In colloquial speech, people pay rent to their landlords, who use the money to cover the property’s expenses, including the cost of buildings (which strictly speaking is profit), and usually mortgage payments for credit borrowed to buy the property.
Rent of location: The groundrent resulting from favorable location. In Die isolierte Staat the 19th century economist Heinrich von Thünen distinguished this type of rent from Ricardian rent attributed to inherent soil-fertility differentials. Today, this rent results not only from location as such, but from zoning permission to shift land use from agriculture or “brownfields” to more remunerative forms of commercial or residential suburban use, as well as from public transportation facilities that raise rent on hitherto outlying sites, and lower rents elsewhere by increasing the supply of readily accessible sites. The Erie Canal lowered rents on Western grain-producing lands, while raising rents on upstate New York properties. Railroads likewise increased land prices, as do subway lines, roads and other public transport infrastructure.
Rentier: Someone living on a fixed income, such as the French rentes, government bonds. What Keynes called a “functionless investor” in his recommendation for “euthanasia of the rentier” (General Theory, p. 376 1961 Papermacs edition, MacMillan & Company). Property rents and interest are the two major modern forms of rentier income. (See Adam Smith, Economic Rent and FIRE Sector.)
Rentier income: The essence of classical political economy was that no outlay of living or embodied labor is needed to obtain rent and interest. (See Labor Theory of Value.) This analysis offended the vested interests, which sponsored a post-classical reaction by applying the maxim, “If the eye offend thee, pluck it out.” (See Neoclassical Economics.) The ensuing marginal utility theory ignored the wealth addiction that historically has gone hand in hand with rentiers and the tendency for their compound interest demands to approach infinity.
Ricardo, David (1772-1823): A bond broker, Member of Parliament and political lobby for Britain’s financial sector, his Principles of Political Economy and taxation (1817) defined economic rent as rising as crop prices rose as a result of diminishing returns, providing a windfall to farmers on existing lands with higher fertility. This rent was expected to rise as population grew, raising subsistence wage costs and hence channeling revenue from industrialists to landlords. The way to make Britain the workshop of the world, Ricardo explained, was to repeal its Corn Laws (agricultural tariffs) and adopt free trade so as to buy its food and raw materials in the cheapest markets, in exchange for other countries removing their own tariffs against Britain’s industrial exports.
As a Bullionist (an early equivalent of today’s Chicago School monetarists), Ricardo claimed that a balance-of-payments deficit would set in motion self-stabilizing reciprocal flows that would prevent any financial crisis from resulting from a general inability to pay. Hence, neither money nor the balance of payments could cause a serious debt problem, as economies would settle at a new equilibrium permitting domestic and international debts to be paid.
Risk: The rationalization for interest and profit by the 13th-century Schoolmen. However, the aim of business is to minimize risk or, if it must be undertaken, to demand government bailouts. (See Moral Hazard.) Inasmuch as interest on government bonds is risk-free, the risk premium applies only to rates above the yield set by the central bank for public borrowing.
Road to Serfdom: An economic policy in which society relinquishes or loses its choice to centralized planners. During World War II Frederick Hayek wrote The Road to Serfdom to depict all government regulations and planning as leading inevitably to centralized bureaucratic planning. The book became the ideological bible for subsequent neoliberals such as Margaret Thatcher to dismantle government authority and privatize the public domain. But inasmuch as every economy is planned, their efforts left a political vacuum, which has been filled by large financial institutions operating globally. Their mode of planning via the IMF, World Bank and Washington Consensus has turned out to be the new road to serfdom by loading down economies with unproductive debt, imposing economic austerity, and using the resulting financial crisis to assert dictatorial powers over government.
Democratic government policy was supposed to lead the world away from the vestiges of feudalism, but financial planners now impose client oligarchies, economic austerity and debt deflation, replacing the public Treasury with a central bank. Whereas governments plan to uplift living standards, protect the weak, promote greater economic equality and tax wealth in ways that promote rising productivity and prosperity, financial planners reverse this program in an economic counter-Enlightenment by untaxing wealth via a tax shift of the fiscal burden onto labor and pursue related anti-labor policies. (See Labor Capitalism and Race to the Bottom.) And whereas progressive governments aim at maximizing domestic employment and economic potential, financial planners aim at maximizing the price of real estate, stocks and financial securities relative to wage levels. The danger of an economy following a road to serfdom thus lies more in dismantling government and turning its planning power over to the financiers than in empowering democratic governments pursuing progressive economic policy, tax policy, fiscal policy and monetary policy.
Rule of 72: The Rule of 72 provides a quick way to approximate the number of years needed for debts, savings or prices to double at a given compound rate of increase, by dividing 72 by the interest rate. The result is fairly accurate up to a rate of 20 percent. To double money at 8 percent annual interest, divide 72 by 8. The answer is 9 years. In another 9 years the original principal will have multiplied fourfold, and in 27 years it will have grown to eight times the original sum. A loan at 6 percent doubles in 12 years, and at 4 percent in 18 years. But as Herbert Stein famously quipped: “Things that can’t go on forever, don’t.”
Ruler: Applied to the Bronze Age predecessors of hereditary kings ruling as alien conquerors, the word connoted society’s political coordinator who set rules by taking measures. The basic idea of measure is standardization, traditionally in the form of the basic income needed for self-support. Rulers accordingly proclaimed Clean Slates to preserve basic economic equilibrium.