Karl Marx may have been too optimistic about capitalism. Economist Michel Hudson has long claimed that Marx’s contention that ultimately industrial capitalism would triumph over finance capitalism was wrong. That, in fact, bankers have prevailed subjugating the productive forces of industry to the power of debt slavery and rentier capitalism. The real economy has been subsumed by the FIRE economy.
Whereas the old industrial capitalism sought profits, the new finance capitalism seeks capital gains mainly in the form of higher land prices and prices for other rent-yielding assets.
This was previously a fringe view. To mainstream economists modern capitalism was all about value creation and productivity not rent seeking. That was then, this is now. Recently, two prominent Nobel Prize-winning economists have defected to the Hudsonian view of contemporary capitalism.
Joseph Stiglitz, the former Chief Economist of the World Bank and Nobel-prize winner for economics, has submitted that much of the American economy is based on rent-seeking activity not production.
Q: How has the financial sector contributed to the growing inequality?
A: Much of what goes on in the financial sector is this kind of rent-seeking.
The most dramatic example was the predatory lending and the abusive credit card practices, which took money from people on the bottom and the middle often in a very deceptive way, sometimes in a fraudulent way, and moved it to the top.
Given the financial sector has become one of the largest sectors of the U.S. economy it’s not hard to understand why productivity is down.
And now, in another high profile defection, Nobel Prize-winning economist Paul Krugman has endorsed the Hudsonian view in a column titled Profits Without Production:
So what’s really different about America in the 21st century?
The most significant answer, I’d suggest, is the growing importance of monopoly rents: profits that don’t represent returns on investment, but instead reflect the value of market dominance. Sometimes that dominance seems deserved, sometimes not; but, either way, the growing importance of rents is producing a new disconnect between profits and production and may be a factor prolonging the slump.
Has the emperor finally been declared naked? Did Occupy Wall Street win the argument?
Well, there’s no puzzle here if rising profits reflect rents, not returns on investment. A monopolist can, after all, be highly profitable yet see no good reason to expand its productive capacity… Or to put it differently, rising monopoly rents can and arguably have had the effect of simultaneously depressing both wages and the perceived return on investment.
You might suspect that this can’t be good for the broader economy, and you’d be right.
Welcome to reality Paul. Nice to have you here.
There are many good reasons to be antagonistic to Wall Street – they are criminals, liars, and corrupt our republic. But another good reason is that they produce nothing. They don’t create, they live off the buying and selling of others. Wall Street is, in truth, a parasite – extracting rents from the real economy that Wall Street itself weakened through creating a financial crisis due to reckless greed and criminality.
Though it may not be very consequential, it is nice to see mainstream economists acknowledge the truth.