Inequality

Mainstream Economics Has Become a Celebration of the Wealthy Rentier Class

The One Percent have found a pressing need for the services of mainstream economists

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By Michael Hudson

To paraphrase Mark Twain, everyone complains about inequality, but nobody does anything about it.

What they do is to use “inequality” as a takeoff point to project their own views on how to make society more prosperous and at the same time more equal. These views largely depend on whether they view the One Percent as innovative, smart and creative, making wealth by helping the rest of society – or whether, as the great classical economists wrote, the wealthiest layer of the population consist of rentiers, making their income and wealth off the 99 Percent as idle landlords, monopolists and predatory bankers.

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Economic statistics show fairly worldwide trends in inequality. After peaking in the 1920s, the reforms of the Great Depression helped make income distribution more equitable and stable until 1980.[1] Then, in the wake of Thatcherism in Britain and Reaganomics in the United States, inequality really took off. And it took off largely by the financial sector (especially as interest rates retreated from their high of 20 percent in 1980, creating the greatest bond market boom in history). Real estate and industry were financialized, that is, debt leveraged.

Inequality increased steadily until the global financial crash of 2008. Since then, as bankers and bondholders were saved instead of the economy, the top One Percent have pulled even more sharply ahead of the rest of the economy. Meanwhile, the bottom 25 percent of the economy has seen its net worth and relative income deteriorate.

Needless to say, the wealthy have their own public relations agents, backed by the usual phalange of academic useful idiots. Indeed, mainstream economics has become a celebration of the wealthy rentier class for a century now, and as inequality is sharply widening today, celebrators of the One Percent have found a pressing need for their services.

A case in point is the Scottish economist Angus Deaton, author of The Great Escape: Health, Wealth, and the Origins of Inequality. (2013). Elected President of the AEA in 2010, he was given the Nobel Economics Prize in 2015 for analyzing trends in consumption, income distribution, poverty and welfare in ways that cause no offense to the wealthy, and in fact treat the increasingly inequitable status quo as perfectly natural and in its own kind of mathematical equilibrium. (This kind of circular mathematical reasoning is the criterion of good economics today.)

His book treats the movie The Great Escape as a metaphor. He deridingly pointed out that nobody would have called the movie “The prisoners left behind.” Describing the escapers as brilliant innovators, he assumes that the wealthiest One Percent likewise have been smart and imaginative enough to break the bonds of conventional thinking to innovate. The founders of Apple, Microsoft and other IT companies are singled out for making everyone’s life richer. And the economy at large has experienced a more or less steady upward climb, above all in public health extending lifespans, conquering disease and pharmaceutical innovation.

I recently was put on the same stage as Mr. Deaton in Berlin, along with my friend David Graeber. We three each have books translated into German to be published this autumn by the wonderful publisher Klett-Cotta, who organized the event at at the Berlin Literaturfestival in mid-September.

In a certain way I find Deaton’s analogy with the movie The Great Escape appropriate. The wealthy have escaped. But the real issue concerns what have they escaped from. They have escaped from regulation, from taxation (thanks to offshore banking enclaves and a rewriting of the tax laws to shift the fiscal burden onto labor and industry). Most of all, Wall Street banksters have escaped from criminal prosecution. There is no need to escape from jail if you can avoid being captured and sentenced in the first place!

A number of recent books – echoed weekly in the Wall Street Journal’s editorial page – attribute the wealthiest One Percent to the assumption that they must be smarter than most other people. At least, smart enough to get into the major business schools and get MBAs to learn how to financialize corporations with zaitech or other debt leveraging, reaping (indeed, “earning”) huge bonuses

The reality is that you don’t have to be smart to make a lot of money. All you need is greed. And that can’t be taught in business schools. In fact, when I went to work as a balance-of-payments analyst at Chase Manhattan in 1964, I was told that the best currency traders came from the Brooklyn or Hong Kong slums. Their entire life was devoted to making money, to rise into the class of the proverbial Babbitts of our time:nouveau riches lacking in real culture or intellectual curiosity.

Of course, for bankers who do venture to “stretch the envelope” (the fraudster’s euphemism for breaking the law, as Citigroup did in 1999 when it merged with Travelers’ Insurance prior to the Clinton administration rejecting Glass-Steagall), you do need smart lawyers. But even here, Donald Trump explained the key that he learned from mob lawyer Roy Cohn: what matters is not so much the law, as what judge you have. And the U.S. courts have been privatized by electing judges whose campaign contributors back deregulators and non-prosecutors. So the wealthy escape from being subject to the law.

Although no moviegoers wanted to see the heroes of the Great Escape movie captured and put back in their prison camp, a great many people wish that the Wall Street crooks from Citigroup, Bank of America and other junk-mortgage fraudsters would be sent to jail, along with Angelo Mazilo of Countrywide Financial. Little love is given to their political lobbyists such as Alan Greenspan, Attorney General Eric Holder, Lanny Breuer and their hirees who refused to prosecute financial fraud.

Deaton’s Great Escape sees some problems, but not in the economic system itself – not debt, not monopoly, not the junk mortgage crisis or financial fraud. He cites global warming as the main problem, but not the political power of the oil industry. He singles out education as the way to raise the 99 Percent – but says nothing about the student loan problem, the travesty of for-profit universities funding junk education with government-guaranteed bank loans.Deaton did cite “rent seekers” – but in the sense that his predecessor Nobel prizewinner Buchanan did, locating rent seeking within government, not real estate, monopolies such as pharmaceuticals and information technology, health insurance, cable companies and high finance. So any blame for poverty falls on either the government or on the debtors, renters, unemployed and not-wellborn who are the main victims of today’s rentier economy.

He measures the great improvement in well-being by GDP (gross domestic product). Lloyd Blankfein of Goldman Sachs notoriously described his investment bank’s managers and partners of being the most productive individuals in the United States for earning $20 million annually (not including bonuses) – all of which is recorded as adding to the financial sector’s “output” of GDP. There is no concept at all that this is what economists call a zero-sum activity – that is, that Goldman Sachs’s salaries may be unproductive, parasitic, predatory, and the rest of the economy’s loss or overhead.

Such thoughts do not occur in the happy-face views promoted by the One Percent. Deaton’s praise-hymn to the elites assumes that everyone earns what they get, by playing a productive role, not an extractive one.

An even more blatant denial of rent-seeking is a new book by one of the founders of Bain Capital (Mitt Romney’s firm), Edward Conard, The Upside of Inequality attacking the “demagogues” and “propagandists” who claim that the winnings of the One Percent are largely unearned. Curiously, he does not include Adam Smith, David Ricardo or John Stuart Mill as such “propagandists.” Yet that is what classical free market economics was all about: freeing economies from the unearned rental income and rising land prices that landlords make “in their sleep,” as John Stuart Mill put it. This propaganda book thus misrepresents the program that the major founders of economics urged: public ownership or collection of land rent, natural resource rent, and pubic operation of natural monopolies, headed by the financial sector.

For Conard, the reason for the soaring wealth of the One Percent is not financial, real estate or other monopolistic rent seeking, but the wonders of the information economy. It is Josef Schumpeter’s “creative destruction” of less productive technology, by hard working and dedicated innovators whose creativity raises the level of everyone. So the wealth of the One Percent is a measure of society’s forward march, not a predatory overhead extracted from the economy at large.

Conard’s policy conclusion is that regulation and taxation slows this march of economies toward prosperity as led by the One Percent. As a laudatory Wall Street Journal review of his book summarized his message:“Redistribution – whether achieved through taxation, regulatory restrictions, or social norms – appears,” he asserts, “to have large detrimental effects on risk-taking, innovation, productivity, and growth over the long run, especially in an economy where innovation produced by the entrepreneurial risk-taking of properly trained talent increasingly drives growth.”[2]His solution is to lower taxes on the rich!

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My friend Dave Kelley notes the policy message that is being repeated ad nauseum these days: the assertion that “progressive moves like taxation end up hurting the economy rather than helping it. This ‘I would feed you but you might become dependent on food’ theory is central in showing how consumer societies like ours are returning to feudal distributions of wealth.” This seems to be the policy proposal of the three leading candidates for U.S. President – in our modern post-Citizens United world where elections are bought in much the way that consulships were back in the closing days of the Roman Republic.

Originally published here.

References:

[1] Anthony B. Atkinson, author of Inequality: What Can Be Done? coined the phrase “Inequality Turn” to describe when economic inequality began to widen around 1980. He was a mentor of Thomas Piketty, and together they worked with Saez to create an historical database on top incomes.

[2] Richard Epstein, “The Necessity of the Rich,” Wall Street Journal, September 15, 2016. The libertarian reviewer’s only criticism is hilarious: “Mr. Conard overlooks vast numbers of possible reforms. He never, for instance, discusses the weakening of patent law (a real inhibitor of innovation), or the arduous compliance culture that has grown up in the wake of Dodd-Frank and ObamaCare, or how zoning, rent stabilization and affordable-housing laws strangle the housing market. By ignoring the threat that regulation increasingly poses to the economy, his case for the upside of inequality is far weaker than it should be.”


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  • William Ellis

    How does the author define “mainstream” ? It seems in this post that mainstream economics equates to classical economics…
    Keynesian economics is often included “mainstream” too. But I think it is unfair to lump the Keynesians in with thoses who reflexively “celebrate the rentier class”.

    • Good question! Especially after the recent celebration of Capital in the Twenty-First Century by a huge number of economists.

      Why do authors put in language like “The reality is that you don’t have to be smart to make a lot of money. All you need is greed.” which are obviously false if taken at face value and merely polemical if not.

      It further seems questionable that most changes in measured inequality come from gains by “rentiers” as opposed to those producing products. But, to the extent it is true, why dismiss those like Richard Epstein who would like nothing better than to decrease the value of rent-seeking (most of which is made possible by moving the levers of state power)?

      • odswartz

        But the “levers of state power” are controlled by whom? Ah, the 1%; the rentiers themselves.

        • Certainly to some extent. In any event, why not try to take away the power?

          • odswartz

            Yes, I agree. I believe taking away that power begins slowly, at the local level and it will take many years, with those in power fighting to keep it every step of the way.

  • Apocalypso

    All of these people will die, either at our hands, or from their own mortality. It’s truly pathetic that some people desire $billions at the expense of others who have nothing.

  • Agree so much with this article. In my opinion books such as the ones quoted, The views promoted in the medai are simply the Overton principle at work – continual propoganda shifting people’s perceptions so they accept the idea of the 1% as ‘deserving’ and the poor as ‘feckless’ and poor through their own fault.

  • Kimock

    The crux of this diatribe is that the top 1% consists of rentiers such as idle landlords, monopolists and predatory bankers. Rent-seeking behaviors is indeed a problem (See Robert Tollison’s review from 1982). But to assume that the top 1% are rentiers is fallacious. Some earn the wealth, some inherit it, and yes, some do so via rent seeking. On the other hand, rent seeking is evident throughout economic strata in, for example, labor unions and local demand for strict zoning laws.

    • Adrian S

      By making that mistake, I think the author invalidate most of the points he tried to put forward in this article. What do the 1% do? Answer = graph from the NYT:
      http://www.nytimes.com/packages/html/newsgraphics/2012/0115-one-percent-occupations/

      Guess what, they’re from ALL walks of life. All types of professions are represented, though unsurprisingly, people in managing positions hold the largest share of the pie. Shouldn’t they? It’s hard to tell, all I know is that the trend have more and more people with different occupation taking a larger share of the pie with each decade. While I don’t personally agree with this distribution, I like the trend of how things work.

      But let’s step back for a second, inequality is not about the 1%, which is the biggest trap that this article falls into. It’s about the lower income earners. There’s a case and an important discussion about everybody contributing their share, as even those of the 1% that aren’t “renters” (the majority of them) have used methods to pay a smaller percentage than the middle-class does. But if you start by vilifying them or by confusing them with marxist-style propaganda against the aristocracy, I’m completely lost. Let’s talk about matters. These people benefitted from the context this society created for them and they’re not paying their fair share. Let’s not criminalise these people, let’s plug these loopholes too.

    • Duncan Cairncross

      It is true – some do “earn” it
      But how many?
      In actual practice while most of the 1% earn their living only a vanishingly small percentage of the 0.1% actually “earn” their living – most of them have simply inherited their wealth – another large percentage have managed to parasite on the work of others
      only a tiny tiny fraction (like Musk) actually “earn” it

  • Macrocompassion

    Its equality of opportunity that matters. we may well have huge differences in the amount of wealth we currently own but what is significant the the need to justly share the natural resources because these are the only means for acquiring this wealth which do not have the means for entrepreneurs to generate. We can do this by a socially just taxation regime.

    Socially Just Taxation and Its Effects (17 listed)

    Our present complicated system for taxation is unfair and
    has many faults. The biggest problem is to arrange it on a socially just basis.
    Many companies employ their workers in various ways and pay them diversely. Since
    these companies are registered in different countries for a number of
    categories, the determination the criterion for a just tax system becomes
    impossible, particularly if based on a fair measure of human work-activity. So
    why try when there is a better means available, which is really a true and
    socially just method?

    Adam Smith (“Wealth of Nations”, 1776) says that land is one of the 3 factors
    of production (the other 2 being labor and durable capital goods). The
    usefulness of land is in the price that tenants pay as rent, for access rights to
    the particular site in question. Land is often considered as being a form of
    capital, since it is traded similarly to other durable capital goods items. However
    it is not actually man-made, so rightly it does not fall within this category.
    The land was originally a gift of nature (if not of God) for which all people
    should be free to share in its use. But its site-value greatly depends on
    location and is related to the community density in that region, as well as the
    natural resources such as rivers, minerals, animals or plants of specific use
    or beauty, when or after it is possible
    to reach them. Consequently, most of the land value is created by man within
    his society and therefore its advantage should logically and ethically be
    returned to the community for its general use, as explained by Martin Adams (in
    “LAND”, 2015).

    However, due to our existing laws, land is owned and formally registered and its
    value is traded, even though it can’t be moved to another place, like other
    kinds of capital goods. This right of ownership gives the landlord a big
    advantage over the rest of the community because he determines how it may be
    used, or if it is to be held out of use, until the city grows and the site
    becomes more valuable. Thus speculation in land values is encouraged by the law,
    in treating a site of land as personal or private property—as if it were an
    item of capital goods, although it is not (Mason Gaffney and Fred Harrison:
    “The Corruption of Economics”, 2005).

    Regarding taxation and local community spending, the municipal taxes we pay are
    partly used for improving the infrastructure. This means that the land becomes
    more useful and valuable without the landlord doing anything—he/she will always
    benefit from our present tax regime. This also applies when the status of unused
    land is upgraded and it becomes fit for community development. Then when this
    news is leaked, after landlords and banks corruptly pay for this information, speculation
    in land values is rife. There are many advantages if the land values were taxed
    instead of the many different kinds of production-based activities such as earnings,
    purchases, capital gains, home and foreign company investments, etc., (with all
    their regulations, complications and loop-holes). The only people due to lose from
    this are those who exploit the growing values of the land over the past years,
    when “mere” land ownership confers a financial benefit, without the owner doing
    a scrap of work. Consequently, for a truly socially just kind of taxation to
    apply there can only be one method–Land-Value Taxation.

    Consider how land becomes valuable. New settlers in a region
    begin to specialize and this improves their efficiency in producing specific goods.
    The central land is the most valuable due to easy availability and least
    transport needed. This distribution in land values is created by the community
    and (after an initial start), not by the natural resources. As the city expands,
    speculators in land values will deliberately hold potentially useful sites out
    of use, until planning and development have permitted their values to grow. Meanwhile
    there is fierce competition for access to the most suitable sites for housing,
    agriculture and manufacturing industries. The limited availability of useful
    land means that the high rents paid by tenants make their residence more costly
    and the provision of goods and services more expensive. It also creates unemployment,
    causing wages to be lowered by the monopolists, who control the big producing
    organizations, and whose land was already obtained when it was cheap. Consequently
    this basic structure of our current macroeconomics system, works to limit
    opportunity and to create poverty, see above reference.

    The most basic cause of our continuing poverty is the lack of properly paid
    work and the reason for this is the lack of opportunity of access to the land
    on which the work must be done. The useful land is monopolized by a landlord
    who either holds it out of use (for speculation in its rising value), or
    charges the tenant heavily for its right of access. In the case when the
    landlord is also the producer, he/she has a monopolistic control of the land
    and of the produce too, and can charge more for this access right than what an
    entrepreneur, who seeks greater opportunity, normally would be able to afford.

    A wise and sensible government would recognize that this problem derives from
    lack of opportunity to work and earn. It can be solved by the use of a tax
    system which encourages the proper use of land and which stops penalizing
    everything and everybody else. Such a tax system was proposed 136 years ago by
    Henry George, a (North) American economist, but somehow most macro-economists
    seem never to have heard of him, in common with a whole lot of other experts.
    (I would guess that they don’t want to know, which is worse!) In “Progress and
    Poverty” 1879, Henry George proposed a single tax on land values without other
    kinds of tax on produce, services, capital gains etc. This regime of land value
    tax (LVT) has 17 features which benefit almost everyone in the economy, except
    for landlords and banks, who/which do nothing productive and find that land
    dominance has its own reward.

    17 Aspects of
    LVT Affecting Government, Land Owners, Communities and Ethics

    Four Aspects for Government:

    1. LVT, adds to the national income as do other taxation systems, but it
    replaces them.

    2. The cost of collecting the LVT is less than for all of the production-related
    taxes–tax avoidance becomes impossible because the sites are visible to all.

    3. Consumers pay less for their purchases due to lower
    production costs (see below). This creates greater satisfaction with the
    management of national affairs.

    4. The national economy stabilizes—it no longer experiences the 18 year
    business boom/bust cycle, due to periodic speculation in land values (see
    below).

    Six Aspects Affecting Land Owners:

    5. LVT is progressive–owners of the most potentially productive sites pay the
    most tax.

    6. The land owner pays his LVT regardless of how his site is used. A large
    proportion of the ground-rent from tenants becomes the LVT, with the result
    that land has less sales-value but a significant “rental”-value (even
    when it is not used).

    7. LVT stops speculation in land prices and the withholding of land from proper
    use is not worthwhile.

    8. The introduction of LVT initially reduces the sales price of sites, even
    though their rental value can still grow over a longer term. As more sites
    become available, the competition for them is less fierce.

    9. With LVT, land owners are unable to pass the tax on to their tenants as rent
    hikes, due to the reduced competition for access to the additional sites that come
    into use.

    10. With LVT, land prices will initially drop. Speculators in land values will want
    to foreclose on their mortgages and withdraw their money for reinvestment.
    Therefore LVT should be introduced gradually, to allow these speculators
    sufficient time to transfer their money to company-shares etc., and
    simultaneously to meet the increased demand for produce (see below).

    Three Aspects Regarding Communities:

    11. With LVT, there is an incentive to use land for production or
    residence, rather than it being unused.

    12. With LVT, greater working opportunities exist due to cheaper land and a
    greater number of available sites. Consumer goods become cheaper too, because
    entrepreneurs have less difficulty in starting-up their businesses and because
    they pay less ground-rent–demand grows, unemployment decreases.

    13. Investment money is withdrawn from land and placed in durable capital
    goods. This means more advances in technology and cheaper goods too.

    Four Aspects About Ethics:

    14. The collection of taxes from productive effort and commerce is socially
    unjust. LVT replaces this extortion by gathering the surplus rental income,
    which comes without any exertion from the land owner or by the banks– LVT is a
    natural system of national income-gathering.

    15. Bribery and corruption on information about land cease. Before, this was due to the leaking of news of
    municipal plans for housing and industrial development, causing shock-waves in
    local land prices (and municipal workers’ and lawyers’ bank balances).

    16. The improved use of the more central land reduces the environmental damage
    due to a) unused sites being dumping-grounds, and b) the smaller amount of
    fossil-fuel use, when traveling between home and workplace.

    17. Because the LVT eliminates the advantage that landlords
    currently hold over our society, LVT provides a greater equality of opportunity
    to earn a living. Entrepreneurs can operate in a natural way– to provide more
    jobs. Then earnings will correspond to the value that the labor puts into the
    product or service. Consequently, after LVT has been properly introduced it
    will eliminate poverty and improve business ethics.