Why read Michael Hudson? Part 1

Former Reagan Treasury appointee Paul Craig Roberts, one of the many gamekeepers turned poacher quoted on this site, has called Professor Hudson the world’s greatest living economist. Me, I don’t think that goes far enough given the degradation of a discipline once the domain of honest scientists like Adam Smith and David Ricardo, but now of supine technicians, apologists and defenders of the indefensible. Rather, I see Michael Hudson – his scientific as opposed to normative approach making him one of the tiny few who predicted, two years before the fall of Lehman Brothers, the crash of 2008 ¹ – as the most important thinker of our time.

But let me backtrack a little and, while I’m at it, issue a corrective to a message I too often relay in a one-sided manner. I refer to my many scathing asides on a Western liberal intelligentsia I say is too concerned with identity politics, too little with global realpolitik.

(In this respect its indifference to the fate of Julian Assange served as the perfect metonym for a demographic yet to embrace – fully, when our most deeply inculcated beliefs would shepherd us onto safer ideological terrain – two stark truths. One is that behind a facade of democracy the Western world is ruled by criminals whose exponential accumulation of super profits in a dysfunctionally financialised world has made them – though an overplayed hand most evident in the proxy war in Ukraine may mark a turning point – ever more powerful. The other is that, on matters pivotal to the interests of those criminals, corporate media cannot, as a matter of stubbornly systemic fact and notwithstanding the many subjectively sincere journalists on their payrolls, be honest with us. ² )

But that isn’t the whole picture. This liberal intelligentsia has a few things going for it. First and foremost it is a highly literate caste, well schooled in the abstract reasoning our perilous age requires. By which I mean the capacity to transcend, however fleetingly and however subject to priorities helpfully schematised by Maslow, our tendency to view life in a small and painfully personalised way. Though hobbled by those two crippling delusions, the saving grace of liberal intellectuals is an awareness that on several fronts humanity stands at the brink of catastrophe.

Which brings me to my assessment, in a post last September, of the state we’re in:

• Our world is capitalist in its advanced stage of imperialism – the export of monopoly capital from global north to south, and the south to north repatriation of profits.
• The prime beneficiaries of this world order are rentier elites in the most successful imperialisms: i.e. most of the former colonial powers (including the USA) but also the Antipodes, Canada, Scandinavia and an EU led by Germany.
• In its initial progressive phase capitalism freed humanity, albeit at terrible cost, from feudal ties and slavery while hugely advancing human productivity. Now its structures (means of wealth creation in ever fewer hands) and laws of motion (prioritising above all else of private profits and insatiable accumulation) demand unsustainable levels of narrowly defined and grossly distorted ‘growth’, condemning the world to:
  • environmental degradation;
  • ceaseless wars, normalised and monetised, and sold to us in tissues of lies;
  • levels of global and national inequality as dysfunctional as they are obscene, and a mortal threat to meaningful democracy. ³

I continued with an assessment of resistance within the West whose:

three broad strands – social democracy ⁴ .. ‘vanguard’ revolutionary sects .. grass roots activism pace  Occupy, XR etc – all have useful features but, each for its own reasons, zero chance of success of the kind and magnitude needed.

This I followed with an assertion which has drawn criticism from Liberals and Leftists alike, but which I stand by more firmly than ever:

I’ve long welcomed the rise of China not because of its intrinsic features – of which, like most Westerners across the political spectrum, I knew little – but because I saw as A Good Thing any check to US Exceptionalism’s pursuit of full spectrum dominance …

Lately though I’ve been taking a closer look at China, and liking what I see.

If humanity has any hope of avoiding the various forms of disaster to which the venal ineptitude of its ruling classes have brought us, that hope lies with the rise of China and its challenge to the reckless insanity of a dollarised world. To the liberals who object that China’s government is ‘authoritarian’, I ask: what do you really know of China’s governance, and how did you come by this knowledge?

To the infantile ultra leftists who bewail China’s “abandonment of socialism” I say three things. One, thanks to the failure of the Western Left to make its own revolutions, China had to adapt – though not to submit – to a neoliberal world. And now these intellectual adolescents presume to lecture Beijing on how to do socialism! Two, China’s capitalists are – as the increasingly shrill accusations of The Economist and Wall Street Journal eloquently testify – subordinate to the State whereas in the West the State, beneath the folderol of democratic forms which do not hold up under a scintilla of rigorous scrutiny, is subordinate to Big Capital. Three, China’s use of capitalism has pulled off the extraordinary and quite unprecedented feat of lifting – as even the World Bank, US owned in all but name, grudgingly acknowledges – 800 million of its citizens from extreme poverty within a single generation. ⁵

It takes fanatical attachment to The Shining Idea to new depths of inhumanity to shrug off as a trifling matter that third argument:

All of which leads me, finally, to the man I call the most important thinker of our day. In May this year Michael Hudson, author of Super Imperialism and J is for Junk Economics – published The Destiny of Civilization: Finance Capitalism, Industrial Capitalism or Socialism. ⁶ That last places China’s rise – not just as the most powerful challenger so far to US hegemony, but as a fundamentally different and demonstrably superior economic model for the world at large – at the heart of an inquiry which, with humanity standing at the crossroads, could not be more timely.

It’s fitting then that both of the book’s two forewords are by Chinese scholars. The first is by Professor Wen Teijun of China’s Southwest University, where he is Executive Dean at the Institute of Rural Reconstruction. This post concludes with that foreword, replicated in full.

I mean to follow with the other – How an Economist is Tempered: The Contributions of Michael Hudson to Humanity’s Future –  by Professor Lau Kin Chi at Hong Kong’s Lingnan University. Hers is a more personal tribute to Michael, fascinating in its filling in of the many things I hadn’t known about this brilliant and compassionate man. For instance that he’d planned on a career in music theory, in particular its dialectical aspects, before a chance encounter opened his eyes to the same movement – thesis, antithesis, synthesis – in the field of political economy.

A third post will be my own review of The Destiny of Civilization but, for now, Professor Wen Tiejun’s foreword will suffice.

Humanity Shares a Common Prospect: Barbarism or Ecological Civilisation

The most important factor affecting the global economy is the increasing strain caused by U.S. hegemony. Its diplomacy has shaped the economic and trading rules enforced by the IMF, World Bank and other international institutions in America’s favor after World War II. U.S. leadership reached its peak with its Cold War victory over the Soviet Union in 1991, consolidated by increasingly aggressive military diplomacy over the next twenty years. But since 2008 this U.S. diplomacy has become so aggressive that it is now self-destructive, driving other nations out of the U.S. orbit, leading America’s international influence to fall increasingly short of its ambition to siphon off the world’s income and wealth for itself despite its own weakening economic power.

The principal conflict in today’s world is between the United States and China. This book by Professor Hudson explains this conflict as a process of international transformation, above all in the sphere of economic systems and policy. He explains why the U.S.-China conflict cannot simply be regarded as market competition between two industrial rivals. It is a broader conflict between different political-economic systems – not only between capitalism and socialism as such, but between the logic of an industrial economy and that of a financialized rentier  economy increasingly dependent on foreign subsidy and exploitation as its own domestic economy shrivels.

Professor Hudson endeavours to revive classical political economy in order to reverse the neoclassical counter-revolution. The essence of 19^th-century political economy was its conceptual framework of value, price and rent theory. Its idea of a free market was one free from economic rent – defined as the excess of market price over intrinsic cost-value, and hence unearned income. The classical aim was to free markets from landlords, monopolies and creditors. Yet the reverse has occurred in the West, particularly since the globalization of neoliberal policies in the 1980s.

Historically, the way for industrial nations to gain wealth and power was to make their government strong enough to prevent a landlord class from dominating, and indeed to suppress the rentier sector as a whole. To promote industrial prosperity, governments provided public services to reduce the costs of living and doing business. Basic services were provided at subsidized prices that would have been replaced by exploitative monopoly prices if key public infrastructure were turned over to private owners.

Economically, the most important service that all economies need to function smoothly is the provision of money and bank credit. When privatized, it becomes a rent-extracting choke point. That is why 19^th-century economists developing the logic of industrial capitalism concluded that money and banking needed to be a public utility, so as to minimize financial overhead unnecessary for industrial production.

Today’s anti-classical economics regards financial charges as income earned productively by providing a “service,” which is categorized as output and hence part of Gross Domestic Product (GDP). That statistical methodology treats financial profits, along with other forms of economic rent, as additions to GDP, not as an overhead burden. This produces an illusion that the real economy is growing. But what actually is growing is the rentier sector, which does not create real economic value, but merely transfers income from debtors, renters and consumers to creditors, landlords and monopolists. This rentier takeover is achieved by privatizing the public sector to create rent-extracting means for monopoly capital, organized mainly by the financial sector. ⁷

This book by Professor Hudson is based on the lecture series on finance capitalism that he presented for the Global University for Sustainability. The series is directed towards the Chinese audience because he believes that China’s mixed economy with its classical industrial policy has best succeeded in avoiding the neoliberal American disease. These lectures explain why the U.S. and other Western economies have lost their former momentum: A narrow rentier  class has gained control and become the new central planner, using its power to drain income from increasingly indebted and high-cost labor and industry. The American disease of de-industrialization has resulted from the costs of industrial production being inflated by the economic rents extracted by this class under the system of financialized monopoly capitalism that now prevails throughout the West.

The policy question for China is how it can best maintain its advantage and indeed, avoid falling prey to American ideological and diplomatic pressure. Professor Hudson summarizes his prescription as follows: First, national statistics should distinguish the productive sectors that create real value from the financial rentier  sectors that merely transfer income from the rest of the economy to themselves. A transfer payment is not production. Second, all successful economies have been mixed economies. Money and credit, land, public services and natural resources should be controlled by the government so that they can be provided at cost or on a subsidized basis, thereby lowering the cost of living and doing business in the private sector. Third, the way to prevent unproductive debt overhead is to tax away economic rent so that it will not be financialized and paid out to banks as interest by speculators and buyers of rent-extracting opportunities.

A central point of Professor Hudson’s analysis is that U.S. diplomacy is an extension of the neoliberal ideology sponsored by its rentier  oligarchy. “U.S. exceptionalism” means that the United States can ignore international laws, dictate the policies of other countries, and demand that they relinquish control of potential rent-yielding assets (banking, mineral-resource extraction rights, and high-technology monopolies) to U.S. multinational corporations and those of U.S. economic satellites.

For nearly the entire 75 years since World War II, pro-creditor laws have been imposed on all nations within the U.S. diplomatic orbit. This U.S. drive has imposed austerity on Global South countries when they have not been able to pay their dollarized debts, sacrificing their domestic economy and the well-being of their people to pay foreign bondholders.

What is ironic is that the United States itself is by far the world’s largest international debtor. It has turned the dollarized system of international payments into a way to make other countries finance its global military spending by making the foreign reserves of the world’s central banks take the form of loans to the U.S. Treasury – holdings of U.S. Treasury securities, U.S. bank deposits and other dollar-denominated assets. That is the buttress of today’s debt-based Dollar Hegemony. To break out of this dollar trap, China should stand with other independent nations to develop a new system of international payments and formulate new principles of international law for trade and investment relations. These principles require an overall economic and political doctrine along the lines described in this book.

What I find strange is that despite the West’s economic, political, social and cultural problems stemming from its neoliberal anti-classical ideology being obvious for many years, many people in China still look to Western schools and leaders for guidance, as if their own native institutions, civilization and even their own race are inferior. The defeat of a country starts with the defeat of the people’s self-confidence in its institutions. Yet as an American scholar, Professor Hudson, who has studied U.S. finance his entire life and worked on Wall Street for decades, recognizes China’s institutional advantages. As long as we have the scientific spirit to continue self-reflection, self-correction and self-enhancement, there is no reason not to believe that China’s social organization and its ideology of Common Prosperity can lead its society toward a higher form of civilization. The key is to pursue our institutional advantage and abandon the shortcomings of the post-industrial Western rentier  economies, not follow the Western neoliberal path and fall into dependency on the U.S. hegemony and ideology that has ground prosperity to a halt in most Western economies, subjected as they are to debt-ridden austerity.

Behind today’s finance-capitalist crisis is thus a profound civilizational crisis. The world is at a crossroad in which all humanity now shares a common prospect: Barbarism or Ecological Civilization.

* * *

1. In brief, where Smith and Ricardo had taken as obvious and unproblematic that human labour is the measure of market value, the economists who followed (Marx excepted) were for ideological reasons at pains to deny or ignore this. To that end they were highly successful but the price of that triumph was a collective failure to understand their own subject. Hence the low predictive power, even by social science standards, of economic theory post Ricardo.
2. On the systemic nature of media corruption, see Britain decides and Monolithic control at the Guardian
3. I might usefully have added, “a mortal threat too to the rule of law”. Over years of global travel I’ve learned how vital a gain – vastly more important than our illusory democratic gains – the rule of law is, and how much we take it for granted till it’s gone. “The law”,  says the judge in Tom Wolfe’s magnificent Bonfire of the Vanities, “is man’s attempt – man’s feeble attempt – to bring decency into the world.”  We needn’t ignore its many shortcomings in the application, nor the ways it serves power, to appreciate this. More decisively than its close cousins, morality and etiquette, the law manages, arbitrates and attenuates tensions inherent in our dual nature as social yet individuated beings.
4. I should have spelt this out – or better still made it a fourth category of resistance – but I was unconsciously filing trade unionism under social democracy.
5. That World Bank figure of 730 million, cited in my FB exchanges, dates back to 2016. By 2019 the World Bank had upwardly revised this to 780 million. While the wolf-crying Economist has for at least a decade run story after doom-laden story on the Chinese economy running out of steam, it simply ignores this extraordinary achievement. In the main, albeit with important exceptions when need arises, our media lie more by omission than commission. If it ain’t in the papers, it ain’t in our hearts and minds. (There are countless ways of demonstrating that last but here’s a topical one. For eight years Kiev, its leaders fearful of the country’s far right nationalist currents, has inflicted living hell on Eastern Ukraine but this civil war seldom made the headlines of Western media. Only after the ratcheting of tensions culminating in Russia’s move of February 24 did the Western public discover its love for freedom in that neck of the woods. Out of sight is indeed out of mind.)
6. For ease of reference I’ve linked Michael’s titles to Amazon, but they can be procured elsewhere. Me, I pick my battles. I bought Destiny of Civilization from Jeff Bezos as a Kindle download.
7. One striking outcome of what Wen Teijun calls a “statistical methodology [which] treats financial profits, along with other forms of economic rent, as additions to GDP, not as an overhead burden”  is the way a Russian economy now recovering – albeit handicapped by its own “nouveau rentier”  elites – from the disastrous years of IMF prescribed shock therapy/disaster capitalism under Boris Yeltsin, has been underrated. Likening its GDP to California’s may be a tad less crass than John McCain’s “gas station with nukes”, but is equally wide of the mark. Given the stranglehold of the FIRE sectors on the governments of the West – their manufacturing outsourced to the global south – GDP is a wildly inaccurate measure of a nation’s economic wellbeing.