THE MELTDOWN AS OPPORTUNITY
As the financial meltdown brings leading economies ever closer to stagnation and deflationary depression, some economists believe that the great tangle of bad debts should simply be allowed to collapse, unpaid. They see it as an opportunity for a beneficial restructuring that is long overdue.
In the words of Michael Hudson:
"The great fiscal benefit of letting the bad debts go is the opportunity it provides to reshape the tax system so as finally to achieve the classical economic objective of taxing the free lunch of land rent rather than labor and capital. This would save the rent from being pledged as interest and thereby raising property prices. A rent tax is difficult to introduce under conditions where the rent already has been fully pledged to bankers as interest, because that would cause financial default. But today’s financial system already has defaulted. A debt write-down provides a path of least resistance for classical tax reform that would prevent recurrence of a debt bubble.
"Unthinkable as it might seem at first glance, a debt cancellation would wipe off the trillions of dollars in ‘bad savings’ that the Bush-Paulson bailout has created. Without an annulment, these financial claims on the economy threaten to vest a new oligarchy of the sort that Europe spent nearly a millennium trying to replace with a freer and more purified industrial capitalism. That was the aim of classical political economy and its doctrine of economic rent – and it was to oppose that political drive that the vested interests mounted their anti-classical ‘neoliberal’ reaction that has culminated in today’s ‘socialism for the rich’ and shifted economic power from governments into the financial sector. Its lobbying aims at making an alternative fiscal and financial reality appear ‘unthinkable.’
"Today’s bubble provides the best opportunity in more than half a century to start thinking about it."
A more extensive rationale for this proposal is scheduled to appear in Harper’s Magazine early in 2009. In the meantime, Hudson is drafting a letter with a colleague in England which they will circulate among academic economists, seeking their signatures on the proposal.
The authority of knowledge for this proposal is Professor Hudson’s lengthy career as an observer and historian of financial practices and of economic theories – including direct experience with Wall Street firms. His general perspective is that laws designed to protect the general welfare are consistently, persistently eroded by the pressure on lawmakers and justice systems from persons intent on securing a greater share of the social surplus for themselves. The more of it they already have, of course, the greater is the influence they are able to exert on constitutions, laws and regulations. That is part of the explanation for the speed with which the bubble economy of the past 30 years has emerged, featuring deregulation of finance and the inflation of paper asset values in preference to investment in productive industry.
The foregoing quotation makes reference to the classical economists in Britain, who made efforts to turn back the process of eroding the access of citizens to resources traditionally accessible as a commons. (Cf. the recent article in ER.1) But that is only a recent example of the process. It was also the dynamic which impoverished and expropriated farmers in the Roman Empire as wealth concentrated at the top and land was aggrandized into latifundia.The system eventually collapsed from within for lack of a vigorous society of producers and defenders. A Dark Age of serfdom and isolation ensued, in which direct power relationships regulated material life, without the mediating lubricant of commerce via credit and money. This experience of the Empire was a degeneration from efforts in the prior Republic to make resources (especially land) broadly acceptable to citizens. The pattern was replayed in England after the Norman Conquest when its resources and people were organized into a system of capitalism by and for the King.
"However, as the surplus controlled by individuals grew, the wealthier mercantile class managed to break free of public control. This counter-dynamic is seen in the Magna Carta, the Revolt of the Barons, and the 1688 Glorious Revolution. Finally, in the 19th century, the limited liability joint-stock corporation emerged as a fully free mode of private-sector corporate organization. The privatization of wealth and power has produced a drive for dismantling the public regulatory state. The ultimate objective of the privatizers, today as in antiquity, is to gain control of the public sector to serve their own economic interests."2
Professor Hudson pursued this pattern of wealth concentration and erosion of common rights to resources as far back as the pre-history of the earliest known civilizations of the middle east. Between 1994 and 2000 he organized four colloquia of The International Scholars Conference on Ancient Near Eastern Economies at universities in New York, the Oriental Institute at St. Petersburg and at the British Museum. These specialists in antiquities have in very recent years made discoveries that refute the supposition that property is by nature and origin private (e.g., the rationale of John Locke).
That finding undermines a favorite theme of Chicago School economists that the ideal socio-economic-political system is a free market for the exchange of absolute property rights. (Efforts to impose state controls on the extraction of rents and interest by private individuals are condemned as contrary to Nature.)
The antiquarians find instead that the earliest stable societies in Mesopotamia featured periodic proclamations of debt relief (annulment), to avoid having a dispossessed, impoverished population with no interest or capacity to produce more wealth for the overlords or to serve as soldiers in the defense of the regime and its territory. The Year of Jubilee mentioned in the Bible, in which debts were forgiven and families were allowed to return to their farms and orchards which they may have lost to foreclosing creditors, appears to have been the application of an old principle from its near eastern neighborhood.
An implication of this process is that the private accumulation of capital that accompanies Progress in technology and total output also leads via the serfdom of excessive and unrepayable debts – to Poverty.
Do you know of university economists who may wish to sign the proposed letter? Professor Hudson can be reached via his website, at www.michael-hudson.com.
1. Angus, Ian (October 2008). The Myth of the Tragedy of the Commons. Economic Reform.
2. Hudson, M. (1994). The Dynamics of Privatization, from the Bronze Age to the Present. In M. Hudson and Baruch Levine (Eds) Privatization in the Ancient Near East and Classical World (p. 57). Cambridge, MA: Peabody Museum of Archaeology and Ethnology, Bulletin 5.
– from Economic Reform, December 2008