The Democracy Collaborative

By Permalink

The Next System Project’s Adam Simpson sat down with renowned economist and economic historian Michael Hudson to discuss economic deceptions old and new. Michael Hudson is Distinguished Research Professor of Economics at the University of Missouri, Kansas City and a prolific writer about the global economy and predatory financial practices. Among his latest books are Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy and its follow-up J is for Junk Economics: A Guide to Reality in an Age of Deception.

The transcript below has been edited for clarity.

Adam Simpson: So, Michael, I’m really glad to talk to you today. First, I want to get to know a bit more about you before we dive into your new book. I’ve heard you referred to as a heterodox economist. What does that mean? How did you become heterodox?

Michael Hudson: “Heterodox” is a recent term coined mainly by the University of Missouri at Kansas City where I’m a professor along with Randall Wray and Stephanie Kelton and other members of the Modern Monetary Theory (MMT) school of thought. The term simply means not mainstream. We’re basically classical economists. We do what classical economics used to do, which is to distinguish between earned and unearned income. and between productive versus unproductive labor. And we see that banks create credit – which governments could create just as easily, along more socially and economically productive lines. We see budget deficits as providing the economy with money to fuel growth. That’s why Stephanie calls us “Deficit Owls” instead of the Republican and Clintonite Deficit Hawks who prefer commercial banks to provide the credit that the economy needs.

We look at how the economy, goods and services and labor, exists within the context of wealth and assets and debt. And this is how people looked at the economy before there was anti-classical reaction in the 1890’s. We look at how land ownership, banks and credit shape the framework within which the economy operates – at interest.

So we’re classical economists. Hyman Minsky was the main modern monetary theorist. Heterodox meant that he got his ideas largely from Marx. You can say classical political economy reached its logical conclusion with Marx. Capital was the last great work of classical economics, and showed where its logic was leading. Marx showed that capitalism itself was revolutionary. Capitalism was a continually self-transforming system. And so we’re looking at how the economy changes, not how it might settle at equilibrium without political change. It evolves, in what Marx called the laws of motion. So we’re putting the political back into what used to be political economy – before the “political” was stripped out a century ago and it moved toward today’s more tunnel-visioned “economics.”

Adam Simpson: Interesting. I also want to know about your own personal history. I didn’t know that was a deliberate term coined by the people who called themselves heterodox economists.

Michael Hudson: Others called ’em Commies!

Adam Simpson: Ha! But I’m wondering about your own personal trajectory into this field. I understand that ‘heterodox’ is not something unique to you within your family. I myself am actually the black sheep of a very far-right leaning household. But I understand that’s not your own background—you come from a family that’s always been engaged in activism and left politics. Is that correct?

Michael Hudson discusses J is for Junk Economics at Busboys and Poets in Washington, DC. February 21.

Michael Hudson: I was born in Minneapolis. That was probably the only Trotskyist city in the world – the center of Trotskyism in the 1930’s. It was the only city where becoming a Trotskyist was a career advancement prospect. My father, Carlos Hudson, had graduated in 1929 from the University of Minnesota Business School with an MBA degree and wanted to become a millionaire. I think he wanted to go into mining in Latin America. Then the Depression came and he decided that capitalism wasn’t fair. He joined the Trotskyists, the Socialist Workers Party. And when Trotsky was exiled to Mexico, most of his bodyguards and co-workers came from Minneapolis.

That was really the center of organizing the Teamsters Union, highlighted by the great Minneapolis general strike in 1934. Charles Rumford Walker wrote American City about Minneapolis. There were Scandinavian radicals. Jewish radicals and others. The main opponents were the Stalinists. They sought to stop the Trotskyists from organizing the teamsters and other labor unions.

The upshot was the Smith Act trials of 1941. Most people think of the Smith Act as being used against the Communists after Word War II, but actually it was first used against the Trotskyists. The Communist Party urged the death penalty for the Smith Act, ostensibly for advocating the overthrow of the government by force and violence. The criterion for that was whether people had books by Lenin and Marx in their homes. So the act was called a “gag act.”

The Attorney General under Roosevelt, Francis Biddle, wrote in his autobiography that the one thing he was ashamed about was prosecuting the Trotskyists, because by no stretch of the imagination were they a threat to the government. As a matter of fact the Farmer-Labor governor of Minnesota, Floyd B. Olsen, called in the national guard after the police force broke up the marches and demonstrations by shooting strikers. The police were the ones using force and violence; the strikers were not. Olsen said that he hoped capitalism would go right to hell.

My father and the rest of the Minneapolis 17 were convicted the day before Pearl Harbor. That probably was lucky because the next day they might have got the death penalty. My father was in jail for a year with the others, said it was the happiest year of his life. He learned a lot of languages. They spent most of their time recruiting Jehovah’s Witnesses, who were also in federal prison for refusing to go fight in the war.

Adam Simpson: Enemies of the state!

Michael Hudson: Yeah. But when he got out we moved to Chicago. I grew up in the framework of many socialists who had moved there. They’d come to the house and tell stories, so I grew up sort of like an African griot, being told how they stormed the statehouse and about revolutionary strategy and tactics. Al Goldman also moved to Chicago. He was the attorney for the Minneapolis 17, and one of the defendants. He spent much of his life trying to find out who was behind the gang that killed Rosa Luxembourg and Karl Liebknecht. I knew members of the Third International when Lenin was in power, and they would tell me what the revolution was meant to be.

Adam Simpson: It seems like the kind of radical history of the United States you almost never hear. Almost a “heterodox” history of the United States, the notion of there being a town that so closely identified with Trotsky and other far-left movements.

Michael Hudson: Unfortunately, most radical histories have been written by former Stalinists. The one thing that held them all together even when they left Stalinism was their hatred of Trotskyists.

Adam Simpson: Well perhaps we won’t go back to Russia, but we will probably end up going back to even further to Sumer and other places. But I do want to get to your book, which is why I wanted to talk to you today.

Your book seems to me to be about challenging and clarifying the Orwellian language that’s deployed by mainstream economists. If I ask you “what does mainstream economics obscure,” in a certain sense I’m asking you “what does your book say,”—which is a bit absurd. But what ay are the key concepts that mainstream economics obscures?

Michael Hudson: I have a model of the economy, both in J is for Junk Economics and Killing the Host. I if you’re looking at how wealth is accumulated, people think of it in the way textbooks describe: as earning income and saving it up to get rich. That’s all most wage earners can do. But that’s not how it happens at the top of the pyramid.

Most wealth takes the form of capital gains. They’re inflated on credit, so it’s really asset price inflation that’s financed by debt leverage. Most of the gains end up being paid out as interest, so the bankers – that is, the bank owners and bondholders – end up with most of the rise in wealth.

If you’re a financial manager, you look at what’s called total returns. You add the capital gain to your current income. Most capital gains are obtained in the economy’s largest sector, which doesn’t appear in the academic curriculum: real estate, followed by oil and gas and other natural resource extraction. But to look at academic economics, it’s as if the whole economy is about making things – as if manufacturing hires labor to produce goods and services that everybody gets rich from, by being more productive. Savings are supposed to finance growth, increasing stock prices because profits go up from employing more labor to produce more goods and services.

But that’s not really what happens. Most money is made by financial engineering, not by industrial engineering. It’s made by what the classical economists called unearned income. 80% of bank loans are to the real estate sector. The more loans banks make to the real estate sector, the more their credit bids up real estate prices. People think that real estate goes up because population growth and people getting richer to afford paying more. But that’s not really why housing prices are rising.

The value of a home or commercial office building is worth whatever a bank is willing to lend against it. As banks loosen their lending standards, they lend more and more. The result is debt pyramiding – and this is true not only for real estate, but for the economy as a whole.

When I first bought a house in the 1960s, the rule of thumb was that banks would lend 75% to 80% of the value. The buyer had to have the 20% to 25% of as a down payment. And the mortgage could not absorb more than 25% of the buyer’s income. Also, the loan would be self-amortizing over the course of 30 years. So by the time you spent your working life to pay it off, at least you would have a house free and clear. But by 2008 these standards were loosened – to the point where mortgage loans were called junk mortgages. It was these looser lending standards that had been pushing up housing prices for many decades. By 2008 you didn’t need any down payment at all. Some banks even lent more than the property was worth, and even lent the down payment to help the new buyer fix up the house. The loans would only be to carry the interest charge, not to pay off the loan. Bankers don’t want loans paid off, they want interest. If you don’t pay the loan, you just keep paying more and more interest. At the end of 30 years you would still have the same mortgage balance – unless you kept borrowing more and more against the rising debt-inflated market price of the home.

People talk about the economists who “forecast the crisis of 2008.” The Financial Times cited me as one of the 12 economists, as if there were only 12 people in the world who knew that there was going to be a crisis (and only 3 with actual economic models, including my own). But the fact is, everybody on Wall Street knew. All the bankers knew. If you look at any of the newspapers from that time, they talked about “junk mortgages.” They talked about NINJA borrowers: No Income, No Job, No Assets. The FBI warned in 2004 that they saw the largest wave of financial fraud and banking fraud that ever occurred. So everybody knew it was fraudulent. But they thought they could get out in time.

The idea was, how do you get rich by real estate promotion? Back in the 1920’s, Thorstein Veblen wrote Absentee Ownership. He talked about how, if you want to understand the economy, you should look at small towns in America, whether it’s in the South or out west. The kind of towns that Hollywood would make movies about in the 1930’s had a crooked banker, a crooked politician and a crooked lawyer trying to hijack public roads to their property or get a railroad by their property all trying to use the public spending to increase the value of their own property so that they could then resell it to some suckers at a higher price. Veblen wrote about how it’s all about trying to find a bigger sucker to buy your property – hoping that they will be able to sell it to the proverbial greater fool.

Everybody knew the system had to end. But you never know just when it will end. Usually the trigger is discovery of a big fraud, or a bank making a bad loan or bet. In 2007I published a lead article in Harper’s forecasting this, showing a chart on why the Bubble Economy couldn’t go on for more than a year. And it didn’t. It ended just as everybody thought it would. If you look at the growth of debt compared to the growth in the ability to pay it, you see that many economies already have passed the point of intersection. At the point where debts can no longer be paid, you have a break in the chain of payments. That’s what causes a crash. In the 19th century nobody talked about business cycles, but about sudden crashes and slow recoveries.

Marx saw that there was a cycle. But like everybody else at the time he saw the business upswing ending in a crash. It’s like a ratchet effect. A curve rises like a Hokusai wave, and then there’s a quick crash. This is not a smooth sine curve cycle like Schumpeter depicted in Business Cycles. And it’s certainly not self-caring. The expansion leads to a crash because of over-indebtedness. Usually, crashes result from a fraud or insolvency, or somebody makes a bad bet for a big bank, or an environmental crisis causes a break in the chain of payments.

Adam Simpson: It’s interesting that you begin with real estate. When we talk about the FIRE sector versus the real economy, I think it’s odd for people to think of real estate, their house, as something that we wouldn’t consider as part of the “real economy.”

Michael Hudson: There are two ways of thinking about the economy. The school textbooks only talk about producing goods and services for wages and profits. They don’t talk about rent or unearned income. That’s what I mean by “unreal” – not grounded in production. And they don’t talk about interest either, or the framework of debt and property rights. There’s a lot of talk about what seems to be the circular flow between producers and consumers. That circular flow is called Say’s law. For example, Henry Ford said he paid his workers $5 a day so that they could afford to buy the cars that they produced. Workers are depicted as paying their wages to buy what they make.

All that seemed to make sense, but the economy of production is different from financial and property wealth. Who owns the assets, and who owes debts to whom? If you look at the economic framework in terms of assets and debt, you find that the 1% makes its money by holding the 99% in debt. Or at least, you could say that the 5% make its money by holding the 95% in debt.

The trick is to get other people in debt. How do you do that? You make them think that they can gain. They’re willing to borrow to buy a home, because they think that since 1945, the way that most American families have gotten rich – indeed, the way the middle class was created throughout most western countries – was by the increasing price of real estate they bought on credit. What they didn’t realize was that the price of real estate was being bid up in two ways. Number 1: By more bank lending, on easier terms. Number 2: By public infrastructure spending. Cities, states and federal governments built parks, museums, roads, railroads, water and sewer systems, and electric utilities. But this began to come to an end with Reagan and Thatcher in 1980. You have had a privatization of public infrastructure – goods that the public sector provided for free, saving people from having to pay monopoly prices.

Instead of financing public investment by progressive taxation, it was financed by borrowing. Banks got more and more aggressive and reckless in creating new credit, because they felt they were guaranteed against loss. That was the essence of financialization. Financial engineering replaced industrial engineering. What people thought was wealth turned out to be a rentier overhead.

This confusion between real tangible wealth and financial overhead claims on the economy was recognized already over 100 years ago by somebody who won a Nobel Prize: Frederick Soddy. But he won the Nobel Prize in chemistry. He wrote many books saying what people think of wealth— stocks and bonds, bank loans and property rights —are virtual wealth. They are financial claims on real wealth. A stock or bond is a claim on the income that real wealth can make. So it’s on the opposite side of the balance sheet from assets. It’s on the liabilities side.

Economists used to talk about land as a factor of production. But land rights are really a property claim, like a monopoly claim. It’s as if you’d say Walt Disney’s patents on Mickey Mouse or movies that Walt Disney makes are a factor of production. They’re really a property right to charge a monopoly price. The right to charge a monopoly price for a cable service isn’t really a factor of production. It’s extractive. It’s what economists call a zero-sum activity. So classical economics has a different idea of what national income is from today’s idea. A monopoly right is not an addition to national wealth or income just because monopolists make more. It’s a subtraction from the economy’s circular flow.

Think of the circular flow between producers and consumers. If wage earners have to spend more to obtain housing, or to pay a bank loan or education loans, they have less to spend on buying the goods and services they produce. They’re not paying to the producers of goods and services. They’re paying to the bankers or the real estate sector – the property sector. When you said the FIRE sector, that’s Finance, Insurance and Real Estate. For many years, national income economists and statisticians couldn’t even separate which income belonged to which, because they’re so symbiotic and interwoven.

This is not really part of the production economy or what people call the real economy. But the FIRE sector’s rent and interest are the first things you have to pay out of your paycheck. That’s more real – in the sense of being most pressing – than goods and services. So when a family gets its paycheck, the taxes and the bank credit card debt they owe, and either their rent or their mortgage payment, often are automatically taken out of their check or bank account right off the top. Out of what remains, the average American wage earner only has maybe 25 to 30% of their income available to actually spend on the goods and services they produce.

So there’s a diversion of this income to pay the FIRE sector – a sector that classical economists hoped to minimize. They wanted to get rid of the rentier class. They wanted to nationalize the land, or at least tax away its rent. They wanted the government to be the public creditor, or at least for banks to make productive loans, not finance corporate share buybacks, corporate takeovers, or lend just to inflate real estate prices and make home buyers take on higher and higher debt levels in order to obtain housing.

The economy’s been turned inside out, yet people don’t really realize it because the vocabulary they use has been turned into a kind of euphemism. You said Orwellian and it’s really Doublethink, using words to mean the opposite of what they used to mean. I wrote J is for Junk Economics largely to discuss misleading terminology. If you look underneath the vocabulary, you realize what’s really happening instead of accepting euphemisms like “earnings” instead of unearned rent. You can build up a different, less unrealistic picture of the economy.

Adam Simpson: One of the fascinating threads your book keeps raising is the fact that a lot of the deception that you point out in the modern economy is somewhat recent. There are references to Confucius and to Sumer in your book. What does your perspective of economic history and archeology tell you about the economic system we have today?

Michael Hudson: The remarkable thing is how stable economies grew from the takeoff in Mesopotamia in the fourth millennium BC all the way down to the first millennium. You didn’t have the classical usury problem polarizing society. Economies were still “anthropological” enough, still low-surplus and communalistic enough with the mutual-aid ethic that the acquisition of wealth was viewed as something improper if it was gained by exploitation. You had an increasing specialization of labor but you also had a cancellation of debts when they grew too high – at least, personal debts. You had a distinction in practice between productive and unproductive credit.

Every ruler of Hammurabi’s Babylonian dynasty, like the Sumerian rulers before them, started their rule by proclaiming a Clean Slate to cancel the debts. In Babylonian times this was called ‘andurarum.’ It’s a cognate to the Hebrew term deror, the word for the Jubilee Year. The new ruler would cancel the debts, free the debt bondservants and return anyone put in bondage to the creditor – including the house slave – to the original family owners. Also, they would return the self-support land that had been forfeited to creditors. But rulers wouldn’t return town houses, which were part of the surplus. They didn’t cancel commercial debts, which were silver debts. But they would cancel the barley debts to enable people to survive.

The reasons rulers did this was that if you let creditors make loans to cultivators and say “Now you have to work off your loan for us,” the cultivators would not be able to fulfill their duties of corvée labor. Taxes were paid in the form of labor, corvée service. That’s how from 11000 BC onwards, civilizations built their big monuments. Monuments like Stonehenge but even bigger, like Göbekli Tepe in Turkey to the Egyptian pyramids, Mesopotamian Ziggurats, and city walls. This basic cultural, military and economic infrastructure was built by public labor. The question is how did you get the people to work for this?

If people didn’t want to build these cultural monuments and defense works, they would have run away, as they did after about 1600 BC. But when archeologists dug up the remains of the labor camps for building the pyramids and the temples, they found they weren’t built by slave labor working for porridge rations. There was a lot of meat in the diet. There was a lot of beer at the parties. They arranged it as a socialization process, working on public projects during the time labor was not necessary for planting and harvesting. You find rulers depicted on iconographic, either on murals or on cylinder seals carrying baskets of earth on their head. Backbreaking work, but they got to party afterwards. Socialization and mixing.

In antiquity, you’d have revolutions pressing for Clean Slates. But you didn’t need a social revolution in the Bronze Age, because you had the central authority of the ruler larger than the private oligarchy that began to grow up (largely by making money through foreign trade, and then lending out their gains at interest). You were making money by privatization in the Bronze Age, for instance, by the temples which supplied beer to the beer women to sell to retail customers, who would run up a debt with them. But when the crops failed, these debts of drinkers and the ail women were annulled.

The same thing happened in Japan in its Medieval period. Sake was manufactured by the temples. And it was to the temples that most people ran up debts. There was a revolution against the temples as creditors in Japan. And in classical antiquity, in the 7th century BC, you had the most prosperous cities from Sparta to Corinth overthrow the oligarchies, redistribute the land and cancel the debts. But later, oligarchic historians called these populist leaders “tyrants.” But they were only tyrants because they threw out the oligarchy and redistributed the land.

After the 7th century, you didn’t have that anymore. Solon of Athens banned debt bondage in 594 BC. But by the 3rd century BC, you had the kings of Sparta—Aegis and Cleomenes, followed by Nabis—canceling the debts. The oligarchs called on Rome to fight against Sparta. They overthrew Sparta. From then on, you had the Roman oligarchy become the first society not to cancel personal debts. That meant that gradually, you had debtors reduced to permanent bondage, not merely temporarily, not merely 3 years as in the laws of Hammurabi, or 50 years in the periodic Jubilee Year in Israel. You had permanent bondage and economic polarization. That’s the same kind of debt peonage that you are seeing develop in today’s economies.

Today, families entering the labor force are going to have to spend all their life working off the debt they need to take on in order to get an education to get a job, as well the debt they need to buy a car to drive to the job, and the mortgage debt for the house they need to live in to avoid rents going up and up. They have to spend all their life merely to pay their creditors, not to live better with more goods and services. Unlike serfdom, today’s workers can live wherever they want. But wherever they live, they have to produce value not only for their employers but also for the bankers.

These bankers (and bondholders) are the main exploiters today. So finance capitalism is overwhelming industrial capitalism. Instead of industrial capitalism evolving into socialism as was expected, it is retrogressing back to neo-serfdom and neo-feudalism. This is mainly because of the inability to bring debt within the industrial capitalist system to evolve into a socialist economy. That is what neoliberalism is sponsoring by financialization and privatization.

The inability to make debt productive.

Adam Simpson: Two things I’m wondering about: Was there a political or social innovation that allowed oligarchs to avoid the threat of a revolution seeking to cancel debts? Was there a way that they found to negotiate society or a new economic innovation to make debt something that people weren’t demanding to erase? How were these oligarchs able to escape pressure for this demand?

Michael Hudson: Initially, armed force did the trick, making war on countries that cancelled debts. By Roman times, creditors simply murdered pro-debtor politicians, from the Gracchi after 133 BC onward (including Jesus in Judea). But in today’s world, creditors have had to change people’s perception, to make people think that they’re not being exploited. Around 1890 creditors and landlords sponsored an anti-classical reaction saying that there’s no such thing as economic rent, no such thing as a free lunch or unearned income. John Bates Clark in America, and the marginalists abroad, said that whatever anyone earns, they produce – by definition (that is, by circular reasoning). So if you’re a Goldman Sachs partner and earn $22 million a year, that’s considered adding to the economy’s GDP. People think, “Well, the rich really earn it. They’re much more productive than I am.”

If you believe this “meritocracy” patter talk, you’re not going to resent predatory wealth. You’re going to resent yourself. The oligarchy has made debtors and the middle class subject to a Stockholm Syndrome. They blame themselves. They think that “If only we can cut taxes on rich people like Donald Trump wants to do, they can have enough money to hire us and we’ll get richer.”

But that’s not what the rich do with their money. They don’t hire workers here. They get richer by taking over a company, firing the workers, downsizing it, wiping out the pension fund, and moving their production to non-unionized Indonesia, Vietnam or some other low-wage economy.

The economic textbooks don’t acknowledge this. They depict a parallel universe backed by Orwellian euphemistic economics to make people think that somehow they’re going to get rich by borrowing money to buy a home that may rise further in price. The dream is to be a Donald Trump in miniature, to make money on the home as a real estate investment. Make money in the stock market by turning their money over to financial managers like Citibank, Goldman Sachs or other companies that have paid tens of billions in fines for financial fraud. Now you have Donald Trump trying to get rid of Elizabeth Warren’s Consumer Financial Protection Agency. The Republican argument is that just like we have to give people the right to buy bad food, junk sodas and McDonald’s burgers, they have to have the right to buy financial products from Wall Street sharpies that are going to cheat them.

That’s now called a free market. But it’s not the kind of free market that Adam Smith and the classical “free market” economists had in mind. The rentier sector’s lobbyists have taken over peoples’ mind. This is what Killing the Host is all about. It’s the basic intellectual dynamic of parasitism. In nature, parasites don’t simply attach themselves to a host and suck out blood, or take the surplus in an economy. In order to do that, they have to numb the host. They need an anesthetic so that the host doesn’t realize it’s being bitten. Then, biological parasites in nature have an enzyme that they use to take over the brain. The brain of the host is tricked into thinking that the parasite is a part of its body, to be protected. That is what the parasitic sector, the FIRE sector, has done in modern economies. It makes Wall Street the planning center, not the elected government. That’s how the rentiers have taken over the economy.

But of course, the aims of financial planners are not the same as those of government planners. The financial aim is to strip assets, to make money in the short term, not to plan for the long term as governments are supposed to do. Taking long-term survival and sustainability of the economy into consideration is not done anymore. We’re entered the asset-stripping phase of finance capitalism.

Adam Simpson: So the financial sector becomes not just a parasite that’s leeching off blood, it becomes the master. This is how we get to the neo-feudalism argument, which is entertaining to me because I’m also aware of the Austrian economist Frederick Hayek, who claimed that the road to serfdom was intervention into the “free market” rather than letting predators bilk the public.

Michael Hudson: Hayek turned classical economics on its head. Adam Smith, John Stuart Mill and the other classical economists who are supposed to be icons of the free market meant a market free from land rent, monopoly rent and financial interest. But for Hayek, a free market meant one free for these rentiers. Free for landlords, bankers and monopolists. That’s why his group, the Von Misians in Austria, spent their time fighting against public spending and the “threat” of socialism. He said that socialism leads to fascism. But actually it’s his Chicago school that does this. It’s the “free market” Chicago Boys who led to fascism in Chile by overthrowing the government.

So Hayek called freedom fascism, and he called fascism freedom. The first thing that the Chicago boys did in Chile was to close every economics department. Because they realized that you can’t have a Hayek-style free market unless you’re willing to kill everybody who disagrees with you. They had to kill labor leaders and tens of thousands of intellectuals. They closed every economics department in the country except for the Catholic University where they taught. There was mass murder. If you’re not wiling to kill everybody who has a different idea than yourself, you cannot have Frederick Hayek’s free market. You cannot have Alan Greenspan or the Chicago School, you cannot have the economic freedom that is freedom for the rentiers and the FIRE sector to reduce the rest of the economy to serfdom.

Hayek’s saying that the way to create serfdom is to make people think that freedom is serfdom. So we’re back with Orwell: Freedom is slavery, war is peace. That is the Orwellian economics now taught by mainstream orthodoxy. You no longer have the history of economic thought being taught, as it was 50 years ago when I was getting my PhD. It’s been stripped out of the curriculum. If people really read what Adam Smith said after he traveled to France and met with the Physiocrats – and was convinced that there should be a land tax and that economies shouldn’t have free riders – you realize that what he said is the exact opposite of today’s ostensible free-market ideology. John Stuart Mill defined rent as what landlords make “in their sleep,” without working. These classical economists were on the road to socialism. Only half-way there, but on the road to it.

So the history of economic thought has been replaced by mathematics, to mathematize a fictitious parallel universe model. The result is what computer operators call Garbage In: Garbage Out (GIGO). You’re mathematizing something fictitious. If you look at the introductions to Paul Samuelson’s or Bill Vickery’s textbooks, they won the Nobel economics prize for writings that came right out and said that economics is not about reality. It’s about the internal consistency of assumptions. It’s to build a beautiful system that, if it really worked, would be so appealing that students will be willing to suspend disbelief. That is what a good science fiction writer would do. The trick is to make readers willing to accept the assumptions that they’re given at the outset. Free-market tunnel vision is simply about logical consistency of unrealistic assumptions.

These people appear as entries in my dictionary as “idiot savants.” They’re very smart in an abstract, autistic way, but they don’t know what to be smart about. They’re willing to use their smartness to be deceptive, to become financial lobbyists. Their work is then turned over to focus groups to find out what kind of rhetoric is best going to trick people into thinking that poverty is wealth. The aim is to convince people that they can get rich from going into debt to buy a house and become part of the middle class economic treadmill, and to believe what Ralph Nader made fun of: “Only the rich can save us.” If you can get people to believe that, you’ve won their hearts and minds

Adam Simpson: I want to move on to one of the issues people have been thinking about today: in light of this new political context, I want to ask you about the chapter in your book “K is for kleptocrat.” The new Trump administration has done a number of things that people are concerned about. With regard to the financial sector, they’ve rolled back the feeble regulations of Dodd-Frank. The Republican Congress is looking into an infrastructure project that largely looks to be a giveaway of public funds to the private sector. This is to say nothing of the president’s direct business interest, but I’m wondering what your reaction is to the new administration. Also, there’s this idea that the Trump administration represents something new.

I was wondering what you see that is new, versus what is more or less ‘business-as-usual’?

Michael Hudson: What’s new is that Trump said the emperor has no clothes. He said, “You think you’re getting rich under Obama? You haven’t got rich.” So when Hillary told her supporters to look and see how much better off you are today than when Obama was elected, she made herself look blind, referring only to the One Percent. All the growth in the American economy from 2008 to 2016 accrued only to 5% of the population – the richest. 95% of the population were worse off. Trump saw the obvious – which you would think that any member of the 95% would have seen. When Hillary tried to convince people they were better off, Trump simply said, “Let’s look at reality: You’re worse off.”

Voters thought that if he could see that they’re worse off, he must know how to cure it – instead of knowing how to make them even more worse off. People wanted prosperity and Trump said NATO’s obsolete. There’s no reason for us to maintain it—Russia’s not going to invade Europe. Why should they invade? There’s no way any European country is going to militarily invade another.

The new mode of warfare isn’t military anymore, it’s financial. Russia and China realize that the United States is dissipating its ability to conquer countries financially by spending its economic surplus on military and the FIRE sector. Trump realized that as a real estate developer, he’d been fighting banks all his life. There’s no love there for the banks.

So the neocons are out to get him. They’re saying it is treason to want peace instead of war. We need an enemy sufficient enough to justify giving all the surplus to the upper 5% and spending it on the military. If you don’t advocate doing that, you’re a traitor – to their fortunes. So they’re out to get rid of him.

Adam Simpson: As I understand it, he has promised to increase military spending even without perhaps the enemy that Hillary would have painted Russia to be.

Michael Hudson: On the one hand, he did say that. On the other hand he said look we’re not going to spend so much money on Air Force One, you’re overcharging it. We’re going to get rid of the F-35 fighter—it’s cost almost a trillion dollars. He said that is a waste. We’re going to get rid of the waste. But if you get rid of the waste and what’s not necessary, you’re going to have lower military spending. So I don’t see what Trump is going to spend more military money on.

The Democratic Party 50 or 60 years ago had labor union support, and claimed to support the working class. But now if you look at how the party’s been in the last 25 years – since the Clintons and Robert Rubin – it’s hyphenated. It’s gone for identity politics. And the identity politics you have is, for instance, the national association for women for Wall Street and the Cold War, you have the LGBTQ also led by a Wall Street neocon leader for the Cold War. So you’ve had women, LGBTQs, blacks, all led by neo-cons and neoliberals. But the one group you don’t have is wage earners. Workers. Hillary depicted them as homophobic racists. And if you’re a wage earner, a member of the working class, you’re a homophobic racist. That was the image she had, and that drove them into Donald Trump’s court.

So it was really Obama and Hillary that made Donald Trump their legacy.

Adam Simpson: This is a very big debate on the left right now, about intersectionality – about including people of color and different gender, sexual background, et cetera, while trying to maintain the class consciousness aspect. For instance, some wish to say “We won’t push on for trans rights, or we won’t push for women’s rights or whatever. We’re only going to focus on class as the key issue.” There’s a big part of the left that really pushes back against that notion.

I’m just wondering—and surely Hillary is not the candidate that could have done this—but isn’t there a way to have class consciousness as well as protect people of marginalized and abused communities?

Michael Hudson: Sure there’s a way. A lot depends on how the political party is going to be organized. There are two ways: One is to get popular support of voters in a democracy; the other is to get funding from big donors and fundraisers. The fundraisers are on Wall Street. The Democratic Party strategy – and you saw this by members running for the head of the Democratic National Committee on February 21 – they were saying the key to funding is television. Buying television time to control people’s minds takes big contributions of money. The money comes mainly from Wall Street, from the 1%. So if you’re dependent on the 1% to give the money to buy television time and to pay for focus groups, then the 1% surprisingly enough are only going to represent their own interest, not that of the 99%.

Once you have a strategy that the party is geared towards what candidates and platform can raise the most money for television from big contributors, you’re going to become the party of these big contributors. Of Wall Street. That’s why Bernie said, “Wwe don’t need the big contributors. We’re appealing to the small contributors.” Hillary replied, “Get out of the party. My backers don’t want you. We’d rather appeal to right-wing Republicans.” But the Republicans didn’t want her. So if you structure a party not around voters or what’s good for the 99%, but about what’s good for the 1%, then you’re never going to win elections. The 1% realize how to sterilize the 99% from having a thought that would actually help them, not the 1%. It’s by the Junk Economics of neo-liberalism.

You need a demagogue such as Obama to package this and makes it sound as if he’s favoring the people but actually turns over the economy to his campaign contributors on Wall Street. That’s what he did with the Treasury under Tim Geithner, and the Justice Department that has not thrown any crooked banker in jail. Obama said he’d do one thing, but actually did the opposite. That’s the secret for being a politician: to deliver your voting constituency to your campaign contributors. That’s what the Democratic Party is now all about.

Adam Simpson: Speaking of campaign contributors, I want to talk about the banking and financial institutions. One of the key questions that the Next System Project is investigating is about the relationship between the creation of debt, specifically between the financial sector and ecological harm. We’re wondering if there’s a relationship between the creation of money through creation of debt and this necessity of keep paying interest and causing ecological harm. In your mind, is there any connection between these?

Michael Hudson: Sure. Suppose you organize a public utility to be run on atomic power. You organize that in a private-sector way, designed to make money for the electric companies that invest in atomic power by borrowing from the banks and building interest charges into the rates they charge. If you’re going to make atomic power able to create a profit for stockholders and interest for the financiers, you have to cut costs. The easiest costs to cut are those of environmental protection, because they’re not enforced or even well written.

I knew many of the physicists who designed the atom bomb at the Manhattan Project. They felt pretty bad about having worked on the bomb. Many of them had gone into physics because they found it beautiful, and they found atomic power beautiful. They wanted to show that it could do something good and have a practical peacetime application. So after Hiroshima and Nagasaki they tried to turn their talents to developing nuclear power as a clean power. The problem was that the cost of doing this was so large that it couldn’t be done if you built in brakes. It’s like building cars without brakes. The cars would cost too much.

They couldn’t make atomic power provide energy at a competitive price, given the cost of disposing of the depleted uranium. You had a huge problem of disposing of uranium. You’ had to build atomic power plants without safeguards. Like Fukushima. Tepco, the Japanese electric utility owner, know it would cost a bit more money to bury the backup diesel generators below ground in case of a tsunami. Despite warnings, they chose to save money by making it above ground and simply hoped there would not be an earthquake until they’d left the company and collected their salaries and bonuses. They probably shouldn’t have built it near a earthquake fault. Once in a while there’s going to be a tsunami. But they were into making money in the short term, because that’s what the corporate financial mindset is. They built Fukushima deliberately unsafe, thinking that future generations would pay, not them.

When consultants and engineers told Tepco that the plant would be unsafe, the managers overruled them. They’re in business to make money for their stockholders. Milton Friedman said that the obligation of corporate managers is to make money for the stockholders, not society. So for them, Fukushima was a success. They made money all these years without having to spend the extra money it would have cost to build a plant and its backup generators safely.

Same thing with British Petroleum. It would’ve cost $2,000 extra to have put in safety valves in case of a blowout, to prevent the leak in the Gulf. Their managers decided to save $2,000 – having lobbied against environmental rules that Canada, for instance, insisted on. That was simply a business decision. The environment is not on their balance sheet. It’s what economists call an “external economy.” Important for society, but not for corporations and their investors.

Such external economic effects often are larger than the corporate balance sheet profits. But they don’t appear on the private sector’s balance sheets. So companies cut back to make more money, and compete with other companies to undersell them by not building safeguards. You can go right down the line, from the coal industry to all other polluters with working conditions that endanger workers. Their corporate balance sheets do not include the cost of environmental pollution.

Environmental costs that don’t appear on the balance sheet were recognized already in the 1840’s in the Untied States. What was to become the Department of Agriculture, embryonically within the Patent Office more than ten years before it was created under Lincoln, was promoted by protectionists in the North. They wanted to show the soil depletion that resulted from plantation agriculture such as the Southern slave states growing cotton and tobacco. They wanted to show that this depleted the land. They said, “You say you’re running a trade surplus in the South. But what you’re actually doing is depleting the land, so you have to continually move west. You had to have a war with the Indians and kill them. And now you’re pressing to move into Mexico and California, because you’re depleting the land. So you have to include environmental soil depletion in trade analysis.”

The South fought against this until the Republicans took over after Lincoln was elected. 100 years later the Department of Agriculture wanted to write a centenary volume about itself. So I wrote an article – which I include in America’s Protectionist Takeoff – about how the industrialists wanted to warn against environmental pollution. The farming interests, meaning the Slave Interest, the plantation interest, fought against it. I got a reply saying they didn’t want to publish my research because this is not the direction the Department was going. They were all into plantation exports abroad.

There’s a fight to exclude environmental considerations from national balance sheets. The theory is, if you don’t see the damage that’s being done, you won’t act politically to stop the damage. If it’s invisible, it won’t be regulated, and it also won’t be taxed.

Adam Simpson: Interesting. In your mind, given your background looking at the financial sector, what do you think needs to change to get us where the financial system functions in a rational, sustainable and ethical way? Does it start with J is for Junk Economics, a cultural mindset shift? And do you have an ethical model in mind?

Michael Hudson: It all has to go together. Certainly the way you think about the economy working – and the way you quantify it statistically – is going to shape your perception of what needs to be done. Just like I think you need a public option in health care (which is also something that Donald Trump said in his campaign speech; of course it’s the most efficient), you need a public option in banking. For instance, one of the most crooked banks for many years was Citigroup, which my colleague Bill Black at the University of Missouri at Kansas City said was basically a criminalized organization. (He used the term “criminogenic.”)

When it went broke in 2008 from fraudulent loans, Sheila Bair wanted to take it over for the Federal Deposit Insurance Corporation. of which she was the head. She was fought against by Obama backing Tim Geithner as Treasury Secretary. Citibank, the largest crook in the financial system, dominated the Treasury and the financial regulatory system. That’s an example of the parasite taking over the brain. The financial system lobbied to save the crooks at Citibank and keep the debts on the books. That was Obama’s most fateful act.

2008-09 was a historical economic turning point for America. The government should have written down the debts to the market price of the real estate, and set the carrying charge of home mortgage debt to the equivalent rental charge. That was long the definition of equilibrium in home mortgage lending. But the junk loans were left on the books to be foreclosed on, mainly by crooked junk foreclosers. Imagine if Sheila Bair could’ve taken over Citibank. You could have used it as a public option. You could have issued credit cards at cost instead of with the heavy monopoly fees as they now levy. You could have made loans for productive reasons instead of making corporate takeover loans and the kind of loans they’re making.

You could have stopped falsifying junk mortgages and stopped writing liars loans. The liars were led by Citibank and its representatives – which means by Bill Clinton’s former Treasury Secretary Robert Rubin, mentor to Geithner as Citigroup bagman. These were Obama’s main campaign donors and supporters. He was protecting the liars, and told them that his job was to stand between them and the mob with pitchforks wanting to lock them up. You could have created an honest banking system that would make loans to do what textbooks describe banks as doing: making productive loans that the debtor is able to pay, instead of loans that you know the debtor can’t pay and which you make in order either to sell to a sucker, to a pension fund here or a state bank in Germany, or simply to foreclose on property.

So the ethic would have been public banking, with a different lending philosophy from that of commercial banks. It would lend at much less expensive rates. It would not manage pension funds and savings by lending to corporate raters to end up downsizing and outsourcing the labor force, but to companies that actually want to expand employment. That is why you need a public option in banking.

Instead of withdrawing banking offices from low-income red-line areas, you could use post offices as public banks to provide basic check-cashing services, “vanilla” banking accounts and money transfer services at costs to areas that now are forced to engage in pay-day loans. Instead of these rip-offs, you would have an alternative. The payday lenders are funded by the big banks like Citibank and Chase-JP Morgan. It doesn’t have to be this way. You could have loans to finance economic growth, not for asset stripping.

Adam Simpson: The final question: You write about rent as it relates to land. I was curious – this is kind of my own personal self-indulgent question – but I’ve seen, for instance, Thomas Paine associated with ground rent and its obvious inequality, the notion that someone has a right to a piece of land that obviously no one can really “own.” He argues for distributing that to everyone in the form of a universal basic income. That seems to be a popular idea now, particularly in Silicon Valley as well as other places. I wanted to know your perspective on universal basic income.

Michael Hudson: I think it’s a misnomer. There’s no problem with giving more people enough income to live. Even archaic societies operated on the mutual-aid principle. There’s a lot of pressure for the Federal Reserve to create a trillion dollars by giving everybody an extra $500. Why are they willing to do that? Because most people would use the $500 to pay the banks – so the banks wouldn’t have to lose money and default as a result of their reckless and unproductive lending. The problem’s not only income, but what people have to spend it on. Paine didn’t talk about universal income, he talked about everybody should have the right to a place to live, a means of their own self-support. That’s independent from income. Once you economize and financialize it, you put in a distortion.

You don’t want to give people income to buy what really should be public goods and services outside of the market. You don’t want to give people more income simply to pay monopolistic public utilities for extortionate charges for water, sewer, electricity, cable TV and education. These are things that should be removed from the marketplace, not giving people the income to buy overpriced and monopolized real estate and infrastructure services that should be public in the first place.

Adam Simpson: I completely agree. That’s my criticism of this ongoing universal basic income debate. It might be a good idea if we solve a lot of other things first. One of them being financial parasites, because in my mind people talk about a trickle-down economy. I get a sense right now that we have what more or less amounts to a trickle-up economy. At the end of the day the rich are going to get theirs. The idea of providing universal basic income or a stimulus, eventually it’s going to work their way up to the top of the system.

Michael Hudson: The key to any such analysis is circular flow. If you give people income, what do they spend it on? As I said, people have to spend 75% of their income on things other than the goods and services they produce. You don’t want to give them services to bloat this FIRE sector that is sucking income upward to the 5%. You don’t want to give more people income just to pay higher rents and bank loans to the 5% at the top. You want to do the opposite.

This is why classical economics is so important. Look at the debate between Ricardo and Malthus. Ricardo was the lobbyist for the bankers, and Malthus was the lobbyist for the landlords. In the Napoleonic Wars, England had to grow its own food because Napoleon had a naval blockade that prevented England from importing its food. So more food was produced. After 1815 when peace came, they were going to have free trade in food. But the landlord complained that if you have free trade in food, you’ll have lower food prices. Agricultural land rents would come down, and landlords would lose the high valuation of their property. They want the Corn Laws to limit imports and keep food prices high.

America’s agricultural policy since the 1930’s is like Britain’s Corn Laws. Roosevelt’s protectionist agricultural policy echoed Malthus saying that you need to give more rents to the landlords, in the form of high-priced food – so that they could invest more income in capital to raise productivity. Malthus also asked the question, without the landlords who’s going to hire the butlers? Who’s going to hire the coachmen? And who will buy all the fine clothes to hire the tailors? Keynes loved Malthus for saying this. But Ricardo said, if you pay this luxurious class of landlords all this rent, you’re going to have to pay labor so much to pay for food that industrialists can’t afford to hire it to out-compete with France, Germany, and other industrialists.

So where’s the economic surplus going to go? Is it going to go to the landlords—who, by the way, when they bought their clothes usually bought imports from France and Germany, not from England? Or, are you going to invest the surplus productively? That debate is missing today, because they’ve expurgated it from the economics curriculum. There’s no economic rent, no national income analysis that looks at the economy as the 99% paying money to the FIRE sector that extracts 75% of the income all for finance, insurance and, real estate, and monopolies and government.

About one third of the GDP is monopoly rent. One third – which otherwise could take the form of rising living standards. A century ago there were futurists who were writing about the future, Simon Patten and others, they all thought we would have an economy of leisure by now. If you told anyone a century ago about the rise in productivity, they’d think that people would only have to work one or two days a week. There would be a lot of leisure time. But the opposite is happening. People are being squeezed, they’re having to work overtime. They’re struggling just to break even. They’re one paycheck away from missing a utility payment. They can’t afford to campaign for better working conditions, much less go on strike.

So if you think of the economy in terms of who gets the surplus and what they do with it, you can develop a logic that leads you to invest the surplus in ways that increase people’s standard of living and well-being. But post-classical economics says that there’s no such thing as a surplus. A surplus implies exploitation, and there’s no such thing as exploitation – as if we’re all working together. That’s not reality.

Adam Simpson: Well that’s all the questions I have for you today, Michael. I really appreciate you joining me today and talking about your new book, J is for Junk Economics.

Michael Hudson: Thank you for having me.