If you don't own them, they will eventually own you. They will destroy your politics [and] corrupt your institutions - Mayor of the City of Cleveland Tom Johnson (1901-09) talks about the energy companies.
Classical economics was part of a reform process aimed at transitioning Europe from the feudal era to the industrial era. This required overcoming the rights of the landed aristocracy, bankers, and monopolies to collect rent, which was unfair because it did not represent real labor or entrepreneurial effort. Such income was recognized as “unearned”.
The initial struggle for free markets meant freeing them from exploitation by the recipients of rent: the owners of land and natural resources, the owners of monopoly rights and wealth, which brought income without the investment of labor - and usually without tax obligations. Where hereditary rents and financial revenues supported the wealthiest aristocracy, the tax burden was shifted most heavily to labor and industry, in addition to the rent and debt burdens they paid.
The classic reform agenda of Adam Smith and his followers was to tax income derived from privileges inherited from feudal Europe and its military conquests and to give land, banking, and monopolies publicly regulated functions. Today, neoliberalism is turning the original meaning of the word upside down. The neoliberals redefined the concept of “free markets” and called it a rent-free economy, that is, “free” from government regulation or taxation of unearned rental income (rent and financial profits).
The best way to undo this counter-revolution would be to revive the classic distinction between earned and unearned income, and to analyze financial and debt relationships (the magic of compound interest) as predatory for the economy as a whole. This initial criticism of landowners, bankers, and monopolists has been excluded from the current political debate in favor of what is best described as a junk economy.
The Adam Smith Chair at the University of Edinburgh is called Moral Philosophy. Economics courses taught in Britain and America for much of the 19th century shared the same name. The term "political economy" was also used, and the 17th century authors used the term "political arithmetic". The overall goal was to influence public policy: primarily on issues such as government financing, what exactly should be taxed, and what rules should govern banking and lending.
The French physiocrats were the first to call themselves economists. Their leader, François Quesnay (1694-1774), developed the first models of national income in the process of explaining why France should shift taxes on labor and industry to its landowning aristocracy. Adam Smith supported the opinion of the Marquis de Mirabeau (father of Honoré, Comte de Mirabeau, one of the first leaders of the French Revolution) that Quesnay's Ficonomics was one of the three great inventions of history (along with writing and money) to understand the difference between earned and unearned income. Subsequent debates between David Ricardo and Thomas Malthus on whether landowners should be protected with high tariffs (grain laws) added the concept of land rent to a physiocratic analysis of how economic surplus is created, who ultimately gets it.and what these individuals spend their income on.
The guiding principle was that everyone deserves to enjoy the fruits of their own labor, not the labor of others. The classical theory of value and price provided an analytical tool for defining and measuring unearned income as a classical top-level economy. It was aimed at distinguishing between necessary production costs - cost - from unnecessary (and therefore parasitic) excess of the price in excess of these costs. This monopoly rent, together with land rent or credit above intrinsic value, came to be called economic rent, the source of income for the rentier. An efficient economy must minimize economic rents in order to prevent the spread of the rentier class and its exploitation. Over the past eight centuries, the political goal of value theory has been to free nations from three legacies of the military and financial conquests of feudal Europe: land rent, monopoly pricing, and interest income.
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Land rent is what landowners charge as payment for land that someone's ancestors conquered. Monopoly rent is price gouging by companies with special privileges or special market power. These privileges were called patents: the right to charge the market whatever it can give, without considering the real cost of doing business. Bankers, for example, take more than they really need to provide their services.
Bringing prices and incomes in line with actual production costs would free the economy from such rents and financial costs. Landowners don't have to work to demand higher rents. Land prices rise as the economy becomes more prosperous, while governments build roads, schools, and public transport to add value to properties. Likewise, in banking, money does not "work" to pay interest; borrowers do the work.
Determining the difference between a return to work and this special privilege (led by the monopolies) became part of the Enlightenment's reform agenda to make the economy fairer and cheaper and more industrially competitive. But the rent-receiving classes - rentiers - argue that the fees they charge do not add to the cost of living and doing business. By arguing that their earnings are being invested productively (not to acquire additional assets, luxury goods, or provide more credit), their proponents try to divert attention from the fact that excessive spending polarizes and impoverishes national economies.
The essence of today's neoliberal economy is the denial that any income or wealth is unearned, or that market prices may contain undue reductions in intrinsic value. If this is true, there is no need for government regulation or public ownership of infrastructure or essential services. Income is held at the top to be trickled down to the bottom, and One Percent of the population serves 99 percent, creating rather than destroying jobs and prosperity.
The labor theory of value serves to isolate and measure economic rent
Until the Middle Ages, most families were engaged in production for their own basic needs. Most of the market trade took place in the border zone, especially in imported goods and luxury goods. It was only after the revival of trade and urbanization that took place in the 13th century that analytical attempts were made to systematically link market prices to production costs.
This adjustment was prompted by the need to determine a fair price that bankers, merchants and other professionals charge for their services. It was about understanding what exploitation is, which should be avoided in a fair economy, and what the costs of doing business are. This discussion took place in the first training centers: in the church that founded the very first universities.
The theory of fair price proposed by the churchmen became the nascent labor theory of value: the cost of production of any good ultimately consists of the cost of labor, including the cost of raw materials, plants and equipment used in production. Thomas Aquinas (122574) wrote that bankers and merchants should earn enough to support their families in accordance with their position and have funds for charity and taxes.
The problem addressed by Thomas Aquinas and his scholastic colleagues is very similar to the one that confronts us now: it was determined unfair that bankers receive much more for the services they provide (for example, transferring funds from one currency or sphere of economic activity to other or lending to commercial enterprises) than other professionals earn. This is reminiscent of today's debate over how much Wall Street investment bankers should make.
The logic of church theorists was that bankers should have the same standard of living as other professionals of a similar level. This required lowering the price of services that they could charge (for example, in the usury laws enacted in most countries of the world before the 1980s) by regulating the prices of their services and taxing high incomes and luxuries.
It took four centuries to spread the concept of a fair price for land rent paid to the landowning class. For example, two decades after the Norman conquest in 1066, William the Conqueror ordered the compilation of the Book of Judgment Day (1086). This surcharge began to be privatized as land rent paid to the nobility when they rebelled against the greedy King John Lackland (1199-1216). Magna Carta (1215) and the Baronial Revolt were attempts by the landed aristocracy to evade taxes, appropriate rents, and shift the fiscal burden onto labor and cities. Thus, the land rent they introduced was the legacy of the military conquest of Europe by the military feudal rulers, who appropriated the surplus harvest as tribute.
By the eighteenth century, attempts to free the economy from the privileges of rent-seeking and the monopoly of political power that emerged from conquest had sparked criticism of land rent and the onerous role of the aristocracy (“rich bums”). This developed into a full-blown moral philosophy that became the ideology of the industrial revolution. Its political dimension advocated the need for democratic reforms to limit the power of the aristocracy over government. The goal was not to destroy the state as such, but to mobilize its tax policy, create money and establish government regulations to limit predatory levies of rentiers. This is the essence of John Stuart Mill's "Ricardian socialist" theory and the American reform era, with their antitrust laws and the establishment of councils to regulate public services.
Tax favoritism for rentiers and the decline of nations
Those long-standing controversies are re-emerging as national economies risk falling victim to a new rentier syndrome. Spain had every chance to use the influx of silver and gold from its colonies in the New World in order to become the leading industrial force in Europe. Instead, the gold and silver bars the Spanish received from the New World flowed through its economy like water through a sieve. The Spanish aristocracy of post-feudal landowners monopolized this stream, spending it on luxury, acquiring even more land, issuing loans and new wars of conquest. The nobility squeezed rent out of the rural population so much and taxed the urban population in such a way that it created poverty everywhere, with the little provision of education, science and technology that flourished in the regions of Northern Europe.more democratic and experiencing less pressure from the landed aristocracy.
The Spanish Syndrome has become an object lesson on what to avoid. This inspired economists to identify ways in which rentiers' wealth - and the tax and military policies they support - have blocked progress and led nations to decline and collapse. Dean Josiah Tucker, a clergyman and political economist from Wales, pointed out in 1774 that it matters whether nations obtain their money through the productive use of their populations or through piracy and simple plunder of silver and gold, as Spain and Portugal did, and which had dire consequences when "a very small number of hands were used to obtain this mass of wealth … and very few held on to it."
Parallels with those centuries can be drawn in our time. In The Great Reckoning (1991), James Dale Davidson and Lord William Rhys-Mogg write of the glory days of the Spanish Golden Age (AD 1525-1625):
“The Spanish government was completely subservient to the interests of tax-consuming entities: the military, the bureaucracy, the church and the nobility. … The rulers of Spain resisted any attempts to cut costs. Taxes tripled between 1556 and 1577. Spending rose even faster … By 1600, interest on public debt was 40 percent of the budget. Spain went bankrupt and never recovered from it again."
Classical criticism of economic rent
Classical value theory provides the clearest conceptual tools for analyzing the process by which the modern economy is polarizing and becoming poorer. The labor theory of value went hand in hand with the "rent theory" about pricing, expanding on the concept of economic rent that landowners, monopolists, and bankers imposed. Rent theory has become the basis for distinguishing between earned and unearned income. Nearly all government regulatory policies in the 20th century followed the foundations laid by Enlightenment ideology and political reform from John Locke onwards, defining value, price, and rent as a guide to progressive philosophies of taxation, antitrust price regulation, usury laws, and rent control.
The landowners' defenders resisted. Malthus argued that landowners are not just passively collecting rents, but productively investing them to improve productivity. Subsequent apologists have simply eliminated unearned income from their models, hoping to make them invisible so that they are not taxed or regulated. Towards the end of the 19th century, John Bates Clark in the United States of America and similar "simplists" in other countries defined any income received as earned, simply as part of a free market relationship. Debt service and rents showed little in these models, except for trickle down as general market demand and funding for new investments. (Chapter 6 will focus on this pedigree of today's financial lobbying).
Instead of acknowledging the reality of predatory behavior by rentiers, financial lobbyists portray lending as a productive act, i.e. that it usually provides borrowers with the means to generate sufficient income to repay the loan. Indeed, there are few examples of such lending in history other than investment in trade enterprises. Most bank loans are not intended to create new means of production, but are issued against the collateral of real estate, financial securities or other existing assets. Since the 1980s, the main source of income for borrowers has become not revenue, but the rise in prices for real estate, stocks or bonds that they acquired on credit, as a result of asset price inflation, that is, for enrichment from debt, thereby creating “the economy of the bubble”.
What makes classical economics more understanding of the subject in comparison with the mainstream orthodoxy of the present time is its orientation towards possession of wealth and special privileges used to generate income without producing the corresponding value of a product or service. In most cases, inequality does not reflect different levels of productivity, but distortions arising from property rights and other special privileges. Distinguishing between earned and unearned income, classical economists asked which tax philosophy and public policy would lead to the most efficient and fair prices, incomes, and economic growth.
Finance versus industry
The financial sector today is taking over what was expected a century ago to be the social functions of capital. The purpose of most lending is to generate interest payments by linking debt to real estate rentals, corporate income, and personal income streams, turning them into an interest stream. The "real" economy is slowing down in the face of exponentially growing financial demands (bank loans, stocks and bonds), which mainly enrich the same One Percentage. Instead of moving finance towards industry, the industry began to become financial. The stock and bond markets have become arenas for debt and asset buybacks (see Chapters 9 and 10 below).
This development represents a counter-revolution against the classic ideas of the free market. Today's neoliberal tax and finance philosophy is corrosive and destructive, not productive. Rather than promoting industry, capital accumulation, and infrastructure, finance has entered into symbiosis with other sectors of rentiers: real estate, resource extraction, and natural monopolies. The acquisition of rent-bringing privileges on credit (or simply through insider trading and legal maneuvering) does not require investment in fixed assets that entails the development of production. Chapter 3 will discuss the privilege of rentiers in general, and Chapter 4 will explain the purely financial mathematics of increasing savings and debt using the magic of compound interest, without caring about the needs of labor and industry.
Fragment of the book by Michael Hudson "Kill the Master: How Financial Parasites and Debt Bondage Destroy the World Economy"
Translation: Kirill Vladimirovich
