11: The Rentier Flourishes

In the depths of the Great Depression, John Maynard Keynes prophesied the ‘euthanasia of the rentier.’ By this he meant that in a highly developed economy capital would be plentiful, interest rates would stabilize at very low levels, and the income of the rentier would fall accordingly. Clearly Keynes welcomed the prospect as a means of "getting rid of many of the objectionable features of capitalism." "Interest," he wrote, ‘rewards no genuine sacrifice." When capital is scarce, interest is needed to convert savings into investment. When it is plentiful, no such premium is needed.

The capitalist will presumably invest his capital at a low return rather than get no return at all–or a negative return due to inflation.

It hasn’t happened. Indeed the opposite has occurred. Since the 1950s, there has been a secular rise in real interest rates from about 2% to over 6%, with periodic spikes over 10%. This increase, combined with an even larger increase in the total debt, has produced a rise in the proportion of our national income payable as interest from 5% to 20%. It is clear, as frequently stated in ER, that interest is now the ‘dominant revenue–the leading force in economic decision making and the prime determinant of economic policy. Governments cringe before the bond market. What happened?

Keynes, along with Douglas (and others) clearly understood the need to stimulate aggregate demand (spending) during the Great Depression. Whereas Douglas looked to government creation of money, however, Keynes proposed to borrow it. He saw this as the logical way to return ‘excess savings’ to circulation but he failed to foresee the long term implications. Since he believed the level of savings, though not investment, would remain constant, he may have inferred that interest rates would remain low. In any case it was government borrowing, not money creation, that carried the day. Over time, money creation was delegated to the private sector. That, in turn, led to more debt and more interest.

Thus instead of being plentiful and cheap, capital became scarce and expensive. Not because of the need for investment. In fact rates of investment have been falling across the industrial world. No, the increased demand for finance capital came from borrowing to repay debt and interest.

Since 1980, there has been a virtual explosion of debt, and we are now on a treadmill which forces us to increase the debt or risk a depression.

In the process, the financial sector has prospered, outpacing all other sectors by handling debt instruments and collecting interest. The bond market has grown like topsy and we are all in its thrall. The rentier class, far from passing quietly into oblivion, has flourished, and insists on an even larger dividend from the economy.

I do not blame Keynes for this unhappy state of affairs. He clearly understood that "there is no intrinsic reason for the scarcity of capital." But there is power and self interest. The financiers and bankers have ensured that society will continue to pay ever increasing interest. The rentier flourishes.

–from Economic Reform, September 2000