Fun With Junk Economics, Part 1: Unearned Income
Along with death and taxes, useless economists are one of life’s constants. From missing blatantly obvious bubbles to promoting poor trade and fiscal policies, unaccountable economic astrologists have redefined sinecures. If only I could get handsomely paid to consistently screw up!
As vitriolic as that sounds, I’m actually being too kind. A more scathing (and accurate) claim is that economists are worse than useless, namely because their blunders are not accidental. Rather than being math-obsessed savants making human errors, economists suffer from what Michael Hudson—one of the rare, competent economists who predicted the late 2000s housing bubble collapse—calls “trained incapacity.” In other words, economists are taught not to understand economics.
I admit, Hudson’s argument sounds a bit like tin foil hat rambling— something King of the Hill’s Dale Gribble might say. However, it’s not conspiracy mongering if one backs it up, which Hudson does impeccably. In his latest book, J is For Junk Economics, Hudson buttresses his bold contention by thoroughly exposing the corruption and rot plaguing modern economics. Both a revisionist political economy encyclopedia and compilation of Hudson’s best articles, J is For Junk Economics makes a convincing case that mainstream economics is little more than furtive PR for the one percent.
Such deceptive PR takes multiple forms: denying the existence of unearned income, promulgating lies about finance and debt, and treating government spending as pure overhead. By trenchantly tackling all of these subjects (and more!), Hudson gives the lay person a handy tool for seeing through economic chicanery.
Because one article won’t do Hudson’s edifying work justice, I’m going to make this review a series. I’ll start by analyzing unearned income.
I’ve often heard that “nothing in life is free,” which makes sense. After all, if I take a PS4 out of Best Buy without paying (and get caught), I’d enjoy a visit from the Blue Lives Matter gang. It sucks, but you gotta pay to play; there’s no free lunch.
To the extent that Americans conceive of free lunches, they equate them with various subsidies: food stamps, corporate welfare, and bailouts for Wall Street banks. However, as Hudson reveals, the worst freeloaders, rentiers, don’t receive direct handouts per se. Instead, rentiers collect economic rent, which Hudson defines as “unearned income — the excess of price over real-cost value — a property claim or privilege that does not reflect a necessary cost of production.” Rentiers are essentially legally-sanctioned gatekeepers of vital resources and infrastructure. They’re like the odious House Frey from Game of Thrones — tollbooth operators who get rich without having to so much as lift a finger.
A good real-life example of an inactive rentier is your hated landlord, who annually hikes your rent just because he can. Of course, landlords insist that they earn their money by paying for maintenance and insurance; some will even renovate their buildings on occasion. But they do nothing to increase the value of land, which rises due to external factors. Hudson writes (emphasis mine)
[land rent] stems not only from nature (such as soil fertility) but also reflects the infrastructure services provided by society. Privatization of rent thus appropriates not only nature but also the value of public investment and overall prosperity. The real estate market determines the level of land rent over and above the landlord’s capital investment in buildings and kindred improvements.
Needless to say, mooching off nature and society doesn’t require any expenditures that justify price gouging tenants. Hell, a landlord could fall into a yearlong coma, only to emerge from his slumber a wealthier man. Meanwhile, people who actually work — and whose tax dollars fund infrastructure projects responsible for landlords’ enrichment — have to pay higher rents or risk homelessness.
Indeed, rentiers’ common denominator is forcing people to choose between their money and their lives. Such predation explains why Big Pharma’s life-saving, patent-protected prescription drugs sell at prices hundreds of times what they cost to manufacture; or why telecom cartels charge Americans a premium for the worst Internet in the industrialized world; or, on a lighter note, why baseball stadiums — which forbid outside food and drink—demand eleven bucks for a lousy Coors Light.
Since Americans won’t stop needing these aforementioned necessities anytime soon (especially ballgame booze!), rentiers who monopolize the supply have free reign to charge “whatever the market will bear.” Sadly Americans will continue to endure this vampirism. Not only do they have little say in the matter, but few are even aware that they’re being fleeced. And that’s exactly what Junk Economics intends.
The Birth of Junk Economics
If the Devil’s greatest trick was convincing the world that he doesn’t exist, Junk Economics’ is persuading people that all income (excluding obvious handouts) is earned. Like Rome, this absurd economic consensus wasn’t built in a day. As Hudson documents, our current pro-rentier regime was over a century in the making — and a repudiation of classical, free market economics.
Naturally, the term “free market” is anathema to progressives, and with good reason. Since the majority of “free market” zealots are Ayn Rand-worshipping sociopaths, progressives — or anyone with a modicum of compassion — understandably look at the free market askance. However, as Hudson makes abundantly clear, old notions of “free markets” were radically different from today’s grotesque apologia for the wealthy. Whatever one thinks of Adam Smith and other capitalist pioneers, they did not hold the idle and predatory rich in high esteem. Hudson writes (emphasis mine):
The focus of [Adam] Smith, [John Stuart] Mill, [Francois] Quesnay and the whole of 19th-century classical economics was to distinguish between productive and unproductive labor — that is, between people who earn wages and profits, and rentiers who, as Mill said, “get rich in their sleep…”
While one post isn’t sufficient to pay homage to these luminaries (among others), the important takeaway is that they did not support anarchy for oligarchs. Despite their differing views, they all shared an “abhorrence of unearned income and parasitic wealth.”
Adam Smith in particular fulminated against extractive rentiers. For one, he acidly remarked that landlords “love to reap where they have not sown.” He likewise denounced monopolies, arguing that when businessmen in the same industry meet, the conversation “ends in a conspiracy against the public, or in some contrivance to raise prices.” Consequently, his free market meant freedom from undeserving reapers and anticompetitive monopolists; and the means to accomplish that were nationalizing or taxing away economic rent. By phasing out an unnecessary rentier class, Smith and other classical economists hoped to free Europe from the legacy of feudalism, and render economies low-cost and competitive.
By the mid-19th century, it looked like the reformers’ dream was coming to fruition. Many people reasonably believed that rentiers would go the way of the Dodo, and that labor and capital (i.e. wages and profits) would own the future. The only problem is that people like making money in their sleep. Therefore, by the end of the century, rentiers launched their counteroffensive. Taking umbrage with claims that their income was unearned, they enlisted junk economists to promote their interests.
Chief among these junk merchants was turn of the century American economist John Bates Clark, a Columbia University professor and one of the main architects of “neoclassical” economics. In his 1899 work Distribution of Wealth, Clark argues that income distribution is “controlled by a natural law, and this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates.” Translated to English, Clark is saying that people get paid what they’re worth. According to this fatuous worldview, disgraced Pharma bro Martin Shkreli jacking up the price of Daraprim from $13.50 to $750 per tablet somehow reflects Shkreli’s productive activities (I guess being an insufferable douchebag does take some effort).
Obviously, Clark’s tautology is nonsense, and would make classical capitalists vomit — which is precisely why America’s elites honor him. Hudson writes (emphasis mine):
Clark’s whitewashing of real estate, banking and monopolies was so appreciated by Wall Street that the American Economics Association — gatekeepers of mainstream economics in the United States — created the John Bates Clark Medal in 1947 to award economists under the age of 40 judged to have made significant contribution to economic thought and knowledge in Clark’s tradition…The award provides an incentive for young economists to depict an economy in which unearned income and exploitation do not appear.
The most famous recipient of this dubious award was Nobel Prize-winning economist and libertarian deity Milton Friedman. Following in Clark’s footsteps, Friedman and his buddies at the University of Chicago asserted that there are no free lunches. Curiously, they also supported reducing property taxes while increasing wage withholdings. I guess their sacrosanct “no free lunch” rule only applies to regular people.
In spite or because of such hypocrisy, the John Bates Clarks and Milton Friedmans ultimately prevailed. Thanks to Junk Economics muddying the waters, official economic data — specifically the National Income and Product Accounts (NIPA) — treats all income as earned. Hudson elaborates (emphasis mine):
Any activity that is paid for [is] deemed to be “output,” except for crime, bribes and extortion, which do not appear in the NIPA despite their economic importance. No attempt is made to distinguish economic rent from profit by specifying land rent or overall rental payments for land, natural resources, monopolies, or the financial sector. Yet the mainstream media treat each change in GDP as if it reflects overall welfare.
This failure to separate productive endeavors from zero-sum transfer payments helps explain why Americans’ living standards continue to decline — more Americans live paycheck-to-paycheck and work two jobs—despite a “growing” economy. Turns out that growth by itself doesn’t mean squat for regular people; not when their rising incomes get sucked up by landlords and other rentiers. Nor is this problem confined to average workers. Just take my native Bay Area, where tech employees making six figures struggle to keep up with soaring living expenses. Granted, the Bay Area is insane, and some might argue that certain tech workers live beyond their means. Nevertheless, the plight of affluent techies demonstrates how rentier property claims make necessary items unnecessarily expensive — and economies much less prosperous than they appear on paper.
Unfortunately, the claims of landlords and monopolists don’t account for all economic rent. While I highlighted these conspicuous parasites to illustrate unearned income, they aren’t the only — or even the worst — economic leeches. That distinction goes to the financial sector, which uses its own claims and privileges to reduce Americans to debt peonage; and like other rentiers, financiers can count on the unwavering support of Junk Economics.
But that will have to wait for the next entry in this series. Stay tuned.