The Delphic Oracle Was Their Davos: A Four-Part Interview With Michael Hudson: Mixed Economies Today, Compared To Those Of Antiquity (Part 2)
John Siman: Could you define what you mean by a mixed economy?
Michael Hudson: There are many degrees of how “mixed” an economy will be — meaning in practice, how active its government sector will be in regulating markets, prices and credit, and investing in public infrastructure.
In the 20th century’s Progressive Era a century ago, a “mixed economy” meant keeping natural monopolies in the public sector: transportation, the post office, education, health care, and so forth. The aim was to save the economy from monopoly rent by a either direct public ownership or government regulation to prevent price gouging by monopolies.
The kind of “mixed economy” envisioned by Adam Smith, John Stuart Mill and other classical 19thcentury free market economists aimed at saving the economy from land rent paid to Europe’s hereditary landlord class. Either the government would tax away the land’s rent, or would nationalize it by taking land out of the hands of landlords. The idea was to free markets from economic rent (“unearned income”) in general, including monopoly rents, and also to subsidize basic needs to create a price-competitive national economy.
Long before that, in the Bronze Age — which I describe in …and forgive them their debts— the palace reversed the buildup of personal and agrarian debts by annulling them on a more or less regular basis. This freed the economy from the overgrowth of debt that tended to build up chronically from the mathematical dynamics of compound interest, and from crop failures or other normal “market” phenomenon.
In all these cases a mixed economy was designed to maintain stability and avoid exploitation that otherwise would lead to economic polarization.
JS: So a mixed economy is still a market economy?
MH: Yes. All these degrees of “mixed economy” were market economies. But their markets were regulated and subordinated to broad social and political objectives rather than to personal rent-seeking or creditor gains. Their economic philosophy was long-term, not short-term, and aimed at preventing economic imbalance from debt and land monopoly.
Today’s “mixed economy” usually means an active public sector undertaking investment in infrastructure and controlling money and credit, and shaping the context of laws within which the economy operates. This is best understood by contrasting it to what neoliberals call a “pure” or “market” economy – including what the Trump administration accuses China of when it proposes countervailing tariffs to shape the U.S. and international market in a way that favors American corporations and banks.
So it is necessary to clear the terminological slate before going into more detail. Every economy is a “market economy” of some sort or another. What is at issue is how large a role governments will play — specifically, how much it will regulate, how much it will tax, how much it will invest directly into the economy’s infrastructure and other means of production or act as a creditor and regulator of the monetary and banking system.
JS: What can we learn from the mixed economies of the Ancient Near East? Why were they so prosperous and also stable for so long?
MH: The Bronze Age mixed economies of Sumer, Babylonia, Egypt and their Near Eastern neighbors were subject to “divine kingship,” that is, the ability of kings to intervene to keep restoring an economy free of personal and rural debt, so as to maintain a situation where the citizenry on the land was able to serve in the military, provide corvée labor to create basic infrastructure, and pay fees or taxes to the palace and temples.
Mesopotamian rulers proclaimed Clean Slates to keep restoring an idealized status quo anteof free labor (free from debt bondage). Babylonian rulers had a more realistic view of the economy than today’s mainstream economists. They recognized that economies tended to polarize between wealthy creditors and debtors if what today are called “market forces” are not overridden — especially the “market forces” of debt, personal liberty or bondage, and land rent. The task of Bronze Age rulers in their kind of mixed economy was to act from “above” the market so as to prevent creditors from reducing the king’s subjects (who were their military defense force) to bondage from appropriating their land tenure rights. By protecting debtors, strong rulers also prevented creditors from becoming an oligarchic power in opposition to themselves.
JS: What kind of economic theories and economic models are the critics of mixed economies trying to advance?
MH: Opponents of a mixed economy have developed an “equilibrium theory” claiming to show that markets come to a natural, fair and stable balance without any government “interference.” Their promise is that if governments will refrain from regulating prices and credit, from investing and from providing public services, economies will settle naturally at a highly efficient level. This level will be stable, unless “destabilized” by government “interference.” Instead of viewing public investment as saving the economy from monopoly rent and debt peonage, the government itself is described as a “rent seeker” exploiting and impoverishing the economy.
JS: But is this sort of economic theory legitimate, or just a libertarian-sounding camouflage for neoliberal pillage?
MH: It’s Orwellian Doublethink. Today’s neoliberal theory justifies oligarchies breaking free of public control to appropriate the economic surplus by indebting economies to skim off the economic surplus as interest and then foreclose on personal landholdings and public property, overthrowing “mixed economies” to create a “pure oligarchy.” Their idea of a free market is one free for creditors and monopolists to deny economic freedom to the rest of the population. The political extension of this approach in antiquity was to unseat kings and civic regimes, to concentrate power in the hands of an increasingly predatory class reducing the economy to bondage, impoverishing it, and ultimately leaving it to be conquered by outsiders. That is what happened to Rome in Late Antiquity.
Advocates of strong government have a diametrically opposite mathematical model. Ever since the Bronze Age, they recognized that the “natural” tendency of economies is to polarize between a wealthy creditor and land-owning class and the rest of society. Bronze Age rulers recognized that debts tend to grow faster than the ability to pay (that is, faster than the economy). Babylonian rulers recognized that if rulers did not intervene to cancel personal debts (mainly agrarian debts by cultivators) when crops failed, when military action interfered, or simply when debts built up over time, then creditors would end up taking the crop surplus and even the labor services of debtors as interest, and finally foreclosing on the land. This would have deprived the palatial economy of land and labor contributions. And by enriching an independent class of creditors (on their way to becoming large landowners) outside of the palace, financial wealth would express itself in economic and even military power. An incipient financial and landholding oligarchy would mount its own military and political campaign to unseat rulers and dismantle the mixed palatial/private economy to create one that was owned and controlled by oligarchies.
The result in Classical Antiquity was economic polarization leading to austerity and bondage, grinding the economy to a halt. That is the tendency of economies in “unmixed” economies where the public sector is privatized and economic regulation is dismantled. Land and credit was monopolized and smallholders became dependent clients and ultimately were replaced by slaves.
Mixed economies by the late 19thcentury aimed at minimizing market prices for real estate and monopoly goods, and for credit. The economic aim was to minimize the cost of living and doing business so as to make economies more productive. This was called “socialism” as the natural outgrowth of industrial capitalism protecting itself from the most burdensome legacies of feudalism: an absentee landlord class, and a banking class whose money-lending was not productive but predatory.
JS: So mixed economies require strong and ultimately good governments.
MH: Any “mixed” economy has some basic economic theory of what the proper role of government is. At the very least, as in the 20thcentury, this included the limitation of monopoly rents. The neoclassical (that is, anti-classical) reaction was to formulate a euphemistic theory of consumer “demand” — as if American consumers “demand” to pay high prices for pharmaceuticals and health care. Likewise in the case of housing prices for renters or, for owner-occupied housing, mortgage charges: Do renters and home buyers really “demand” to pay higher and higher rents and larger and larger mortgages? Or are they compelled to pay out of need, paying whatever their suppliers demand (e.g., as in “Your money or your life/health”).
So to answer your question, a mixed economy is one in which governments and society at large realize that economies need to be regulated and monopolies (headed by credit and land ownership) kept out of the hands of private rent-seekers in order to keep the economy free and efficient.
JS: Has there ever been a civil society that effectively implemented a mixed economy since, say, 500 BC?
MH: All successful economies have been mixed economies. And the more “mixed” they are, the more successful, stable and long-lasting they have been as a result of their mutual public/private checks and balances.
America was a mixed economy in the late 19th century. It became the world’s most successful industrial economy because it didn’t have an absentee landlord class like Europe did (except for the railroad octopus), and it enacted protective tariffs to endow a domestic manufacturing class to catch up with and overtake England.
JS: Other countries?
MH: Germany began to be a mixed economy in the decades leading up to World War I. But it had a mentally retarded king whom they didn’t know how to restrain, given their cultural faith in royalty. China is of course the most successful recent mixed economy.
JS: Isn’t it pretty brutal in China for most of the population?
MH: Most of the population does not find it brutal there. It was brutal under colonialism and later still, under Mao’s Cultural Revolution. But now, most people in China seem to want to get rich. That’s why you’re having a consolidation period of trying to get rid of the local corruption, especially in the rural areas. You’re seeing a consolidation period that requires clamping down on a lot of people who became successful through shady operations.
JS: So how would you describe an ideal society without a Hammurabi-style “divine kingship”? An ideal mixed economy?
MH: The credit system would be public. That way, public banks could create credit for socially productive purposes — and could cancel the occasional overgrowth of debts without causing private creditors to lose and protest. The public sector also would own and operate the natural infrastructure monopolies. That was the basic principle of classical economics from Adam Smith to Marx, even for erstwhile libertarians such as Henry George. Everybody in the 19th century expected a mixed economy with governments playing a growing role, replacing absentee landlords, bankers and monopolists with public collection of economic rent, public control of the credit system and provider of basic needs.
JS: How extensive should the public sector be?
MH: A classical public sector would include the natural monopolies that otherwise would engage in price gouging, especially the credit and banking system. These sectors should be public in character. For one thing, only a public bank can write down the debts — like student debts today — without hurting an independent oligarchic financial class. If student debts and mortgage debts were owed to public banks, they could be written down in keeping with the reasonable ability to be paid. Also, public banks wouldn’t make junk mortgage loans to NINJA borrowers, as did Citibank and the other crooked banks. A public bank wouldn’t make predatory corporate raiding and takeover loans, or finance and speculate in derivative gambles.
Most of all, when the debt overhead becomes too large — when a large corporation that is essential to the economy can’t pay its debts —public banks can write down the debt so that the company isn’t forced into bankruptcy and sold to an American vulture fund or other vulture fund. It can keep operating. In China the government provides this essential service of public banks.
The key public concern throughout history has been to prevent debt from crippling society. That aim is what Babylonian and other third-millennium and second-millennium Near Eastern rulers recognized clearly enough, with their mathematical models. To make an ideal society you need the government to control the basic utilities — land, finance, mineral wealth, natural resources and infrastructure monopolies (including the Internet today), pharmaceuticals and health care so their basic services can be supplied at the lowest price.
All this was spelled out in the 19th century by business school analysts in the United States. Simon Patten [1852-1922] who said that public investment is the “fourth factor of production.” But its aim isn’t to make a profit for itself. Rather, it’s to lower the cost of living and of doing business, by providing basic needs either on a subsidized basis or for free. The aim was to create a low-cost society without a rentier class siphoning off unearned income and making this economic rent a hereditary burden on the economy at large. You want to prevent unearned income.
To do that, you need a concept to define economic rent as unearned and hence unnecessary income. A well-managed economy would do what Adam Smith, David Ricardo, John Stuart Mill, Marx and Veblen recommended: It would prevent a hereditary rentier class living off unearned income and increasing society’s economic overhead. It’s okay to make a profit, but not to make extractive monopoly rent, land rent or financial usury rent.
JS: Will human beings ever create such a society?
MH: If they don’t, we’re going to have a new Dark Age.
JS: That’s one thing that especially surprises me about the United States. Is it not clear to educated people here that our ruling class is fundamentally extractive and exploitative?
MH: A lot of these educated people are part of the ruling class, and simply taking their money and running. They are disinvesting, not investing in industry. They’re saying, “The financial rentier game is ending, so let’s sell everything and maybe buy a farm in New Zealand to go to when there is a big war.” So the financial elite is quite aware that they are getting rich by running the economy into the ground, and that this must end at the point where they’ve taken everything and left a debt-ridden shell behind.
JS: I guess this gets back to what you were saying: The history of economics has been expurgated from the curriculum.
MH: Once you strip away economic history and the history of economic thought, you wipe out memory of the vocabulary that people have used to criticize rent seeking and other unproductive activity. You then are in a position to redefine words and ideals along the lines that euphemize predatory and parasitic activities as if they are productive and desirable, even natural. You can rewrite history to suppress the idea that all this is the opposite of what Adam Smith and the classical economists down through Marx advocated.
Today’s neoliberal wasteland is basically a reaction against the 19thcentury reformers, against the logic of classical British political economy. The hatred of Marx is ultimately the hatred of Adam Smith and John Stuart Mill, because neoliberals realize that Smith and Mill and Ricardo were all leading to Marx. He was the culmination of their free market views — a market free from rentiers and monopolists.
That was the immediate aim of socialism in the late 19thcentury. The logic of classical political economy was leading to a socialist mixed economy. In order to fight Marxism, you have to fight classical economics and erase memory of how civilization has dealt with (or failed to deal with) the debt and rent-extracting problems through the ages. The history of economic thought and the original free-market economics has to be suppressed. Today’s choice is therefore between socialism or barbarism, as Rosa Luxemburg said.
JS: Let’s consider barbarism: When I observe the neoliberal ruling class — the people who control the finance sector and the managerial class on Wall Street — I often wonder if they’re historically exceptional because they’ve gone beyond simple greed and lust for wealth. They now seek above all some barbaric and sadistic pleasure in the financial destruction and humiliation of other people. Or is this historically normal?
MH: The financial class has always lived in the short run, and you can make short-term money much quicker by asset stripping and being predatory can by being productive. Moses Finley wrote that there was not a single productive loan in all of Antiquity. That was quite an overstatement, but he was making the point that there were no productive financial markets in Antiquity. Almost all manufacturing, industry, and agriculture was self-financed. So the reader of Finley likely infers that we modern people have progressed in a fundamental way beyond Antiquity. They were characterized by the homo politicus, greedy for status. We have evolved into homo œconomicus, savvy enough to live in stable safety and comfort.
We are supposedly the beneficiaries of the revolution of industrial capitalism, as if all the predatory, polarizing, usurious lending that you had from feudal times (and before that, from Antiquity), was replaced by productive lending that finances means of production and actual economic growth.
But in reality, modern banks don’t lend money for production. They say, “That’s the job of the stock market.” Banks only lend if there’s collateral to grab. They lend against assets in place. So the result of more bank lending is to increase the price of the assets that banks lend against — on credit! This way of “wealth creation” via asset-price inflation is the opposite of real substantive progress. It enriches the narrow class of asset holders at the top of the economic pyramid.
JS: What about the stock market?
MH: The stock market no longer primarily provides money for capital investment. It has become a vehicle for bondholders and corporate raiders to borrow from banks and private funds to buy corporate stockholders, take the companies private, downsize them, break them up or strip their assets, and borrow more to buy back their stocks to create asset-price gains without increasing the economy’s tangible real asset base. So the financial sector, except for a brief period in the late 19th century, especially in Germany, has rarely financed productive growth. Financial engineering has replaced industrial engineering, just as in Antiquity’s creditors were asset strippers.
The one productive activity that the financial sector engaged in from the Bronze Age onward was to finance foreign trade. The original interest-bearing debt was owed by merchants to reimburse their silent partners, typically the palace or the temples, and in time wealthy individuals. But apart from financing trade – in products that were already produced – you’ve rarely had finance increase the means of production or economic growth. It’s almost always been to extract income. The income that finance extracts is at the expense of the rest of society. So the richer the financial sector is, the more austerity is imposed on the non-financial sector.
JS: That’s pretty depressing.
MH: When I did the show with Jimmy Dore, he saw that the most important dynamic to understand is that debts grow more rapidly than the economy at large. The rate of interest is higher than the rate of growth. It may not be higher than the profit rate, but it’s higher than the rate of growth. So every society that has interest-bearing debt is going to end up deeper and deeper in debt. At a certain point the creditors are paid at the expense of production and investment — and soon enough they foreclose.
JS: And then?
MH: Then you have debt deflation. That is the norm. Austerity. It is not an anomaly, but the essence. The Babylonians knew this, and they tried to avoid debt deflation by wiping out the predatory personal debts, not the business debts that were commercial and productive. Only the non-commercial debts were wiped out.
JS: How could Modern Monetary Theory be used now, effectively?
MH: The main way is to say that governments don’t have to borrow at interest from existing financial “savers,” mainly the One Percent. The government can do what America did during the Civil War: print greenbacks. (The MMT version is the Trillion-dollar platinum coin.) The Treasury can provide the money needed by the economy. It does that by running a budget deficit and spending money into the economy. If you don’t do that, if you do what Bill Clinton did in the last years of his presidency and run a budget surplus, then you force the economy to depend on banks for credit.
The problem is that bank credit is essentially predatory and extractive. The same thing happens in Europe. The Eurozone governments cannot run a budget deficit of more than 3 percent, so the government is unable to spend enough money to invest in public infrastructure or anything else. As a result, the Eurozone economy is subject to debt deflation, which is exacerbated by people having to borrow from the banks at high interest rates that far exceeds the rate of growth. So Europe is suffering an even more serious debt deflation than the United States.
JS: Is any of this going to change, either in Europe or here?
MH: Not until there’s a crash. Not until it gets serious enough that people realize that there has to be an alternative. Right now Margaret Thatcher and the neoliberals have won. She said there was no alternative, and as long as people believe There Is No Alternative, they’re not going to realize that it doesn’t have to be this way, and that you don’t need a private banking sector. A public banking sector would be much more efficient.
JS: How would you sum up Wall Street right now? Is it entirely predatory? Entirely parasitical? What are Wall Street’s essential functions now?
MH: Number one, to run a casino. By far the largest volume at stake is betting on whether interest rates, foreign exchange rates or stock prices will go up or down. So the financial system has turned into a gambling casino. Its second aim is to load the economy down with as much debt as possible. Debt is the banking system’s “product,” and the GDP counts its “carried interest” penalties and late fees, its short-term trading gains as “financial services” counted as part of Gross Domestic Product (GDP).
The aim is to get as much of these financial returns as possible, and finally to foreclose on as much property of defaulting debtors as possible. The business plan — as I learned at Chase Manhattan years ago — is to transfer all economic growth into the hands of financial investors, the One Percent. The financial business plan is to create a set of laws and mount a campaign of regulatory capture so that all the growth in the economy accrues to the One Percent, not the 99 Percent. That means that as the One Percent’s rentier income grows, the 99 Percent gets less and less each year, until finally it emigrates or dies off, or is put into a for-profit prison, which looks like a growth industry today.
JS: Is there a single good thing that Wall Street does? Is there anything good that comes out of Wall Street?
MH: You have to look at it as a system. You can’t segregate a particular action from the overall economy. If the overall system aims at making money in predatory ways at somebody else’s expense, then it is a zero-sum game. That is essentially a short-run business model. And politically, it involves opposing a mixed economy. At least, the “old fashioned” socialist mixed economy in which governments subordinate short-term gain-seeking to long-term objectives lifted the entire economy.
As the Greek philosophers recognized, wealthy people define their power by their ability to injure the rest of society, so as to lord it over them. That was the Greek philosophy of money-lust [πλεονεξία, pleonexia] and hubris [ὕβρις] — not merely arrogance, but behavior that was injurious to others.
Rentier income is injurious to society at large. Rentiers define a “free market” as one in which they are free to deny economic freedom to their customers, employees and other victims. The rentier model is to enrich the oligarchy to a point where it is able to capture the government.
End of part 2.