“Industrial capitalism is over, it’s time to take the money and run” Killing The Host— book review
Michael Hudson is painting a grim picture of our post-Covid-19 world, and if there’s an economist we should be paying attention to now, it’s Hudson.
Hudson is something of a renegade in the field because he acknowledges the existence of cash, debt and banks. (Debt and banks are written off by orthodox economists as passive mediators between economic actors, not as active forces that affect the economy in their own right).
But recognising the existence of banks and debt and the growing portion of wealth creation they were absorbing gave Hudson and every other analyst outside of the economics mainstream the remarkable power to predict the 2008 crash, and the picture such figures are drawing now isn’t pretty.
The economyths that heterodox economists like Hudson exposes have to be shattered: we don’t live in a free market economy; we don’t live in an industrial capitalist economy; neoliberal government is small some days and big on other days depending on who needs its help; we do live in a centrally planned economy, by a financial bureaucracy rather than a public bureaucracy; and the stock market is about as reflective of the health of the real economy as Walmart’s profits are reflective of the average household’s income, which is not very reflective, and probably inversely so. In Hudson’s words, “the super rich have decided industrial capitalism is over, and it’s time to take the money and run.”
These are inconvenient truths, inconvenient for both sides of the orchestrated political divide: identitarians don’t want to hear we’re all in the same boat; and free-marketers of the right or libertarian centre don’t want to hear how centralised and reliant on public money our “private sector” is.
So Hudson’s work is left to progressive nerds, and apolitical cynics trying to understand how the system is gamed so they can do it too — like the US Defence Department which funded Hudson’s research back in the day to better understand how they were gaming the international financial system.
Hudson argues that basically any country fully integrated in international markets consists of two economies: 1. the “Host”, the real, tangible economy, based on real production and consumption, “tangible means of production” i.e. factories, farms, the labor force and its consumption potential etc.; and 2. the “Parasite”, the finance, insurance and real estate (FIRE) sector.
Mainstream economics doesn’t distinguish between these two sectors of the economy, it depicts all income as being earned productively. But the classical economists, Locke, Adam Smith, Ricardo, and indeed Marx, did recognise that a distinction had to be drawn between “unproductive income”, that is, income earned by not adding to or producing anything, but by rent, interest, and the ever-elusive “fee”; versus profits or income earned by producing a tangible good or service.
It should be said, this “parasite” and “host” metaphor is not (purely) meant as a pejorative, Hudson uses it technically to describe the relationship between the host — the independent organism, the productive economy — upon which the parasite feeds and cannot survive without — the FIRE sector.
Classical economists saw the FIRE sector as a threat to free markets and free market principles. They warned that rent extraction threatened to siphon off income and bid up prices above the necessary cost of production: “Reaping where they have not sown” as Adam Smith put it. The incentives of the FIRE sector are not aligned with the rest of the economy, they undermine it.
“Instead of creating a mutually beneficial symbiosis with the economy of production and consumption, today’s financial parasitism siphons off income needed to invest and grow. Bankers and bondholders desiccate the host economy by extracting revenue to pay interest and dividends… A financialised economy becomes a meal for the financial free luncher that takes interest, fees and other charges without contributing to production.”
“But hold on,” you say, “don’t loans and credit contribute to production when, for example, an owner borrows to grow their business, buying new machinery or inventory on credit which feeds growth giving that business the revenue to pay off that debt and its interest?” Ideally, yes, where there is a healthy relationship between the FIRE sector and the host economy. But as a proportion of lending activities, Hudson points out, banks don’t really do this anymore.
Today the vast majority of private lending, about 80 percent, goes to real estate mortgages. Lending to businesses for the purpose of investing in production-adding activities represents a tiny fraction of lending, partly because it is seen as having more short-term risk than real estate lending.
Credit-fueled asset and stock price inflation e.g. mortgages, stock buybacks is the much-preferred FIRE sector strategy, generating quick and easy returns with the added advantage of contributing to overall inflation which the FIRE sector makes a killing off.
The downside of this strategy is you get catastrophic financial crashes like that of 2008–09, or as serious economists argue, 2008-present. But by the time a financial crash does occur, the insiders have enriched themselves and stored their wealth far away from the centres of economic crisis and conflict — this is the role tropical-island banking plays.
The same dynamic is at work in corporations: instead of investing profits in R&D, workers, equipment, tangible expansion and so on, profits are being used to inflate stock market prices through buybacks, bigger dividends and buyouts of other companies — financial engineering. Hudson points out, “Stocks of companies whose managers use earnings for share buybacks have outperformed those of old-fashioned industrial companies that reinvest their earnings in tangible capital formation and new hiring to expand sales.” So perverse incentives are built into the system. Companies that do take risk, investing in R&D, investing in new technologies, investing in their workers, are being beaten by companies that use financial wizardry and other anti-competition strategies. Microsoft exemplifies this, a company which has done nothing innovative for something like twenty-five years and resorts to pure force against users when they do not use their inferior services by hijacking systems and software, from document readers to browsers to operating systems. While their market strategies over this same period have been aimed at beating competitors and raising their stock price by any means except innovation. Or Australia’s Telstra, our biggest telecommunications company that spends more money on lawyers and lobbyists every year trying to stop competitors and new technologies from reaching the market than in investing in its infamously bad network.
Hudson describes this as a Ponzi scheme — it works as long as growth can keep up with the debt overhead, but this doesn’t last long: banking and finance keeps pumping out credit, prices get inflated, so more lending and debt is required to cover inflated prices, especially real estate values, which start to outstrip peoples’ incomes. A larger and larger share of the economy’s wealth production is absorbed by the FIRE sector, while more debt is required to navigate an artificially inflated economy and less money is put back into the real economy. Eventually this imbalance becomes so acute you have a crash. Then, as we saw in 2008 and several more times less dramatically in the years since and most recently in response to Covid-19, the FIRE sector gets bailed out, the debts stay on the books, the people pay the price of a gutted economy with austerity, unemployment, lower incomes, less public money for public services because saving the FIRE sector absorbs so much national wealth.
Politically, as these processes unfold, democracy suffers, the people are less free in a very real sense, their freedom to do what they want in life, their choice of work, whether they can get educated, get married, have a family and so on, is increasingly restricted. Under the weight of debts and low income one works simply to keep up with repayments to the FIRE sector — what Hudson calls the “debt-traumatised worker effect.” The system increasingly works to represent the FIRE sector, the parasite, over the people, the host.
The solution to this crisis, Hudson argues, is broad debt cancellation, which he demonstrates historically is how every heavily indebted economy has recovered. We have been primed to think of this as morally reprehensible as well as economically catastrophic by the same people who have made a killing from predatory lending, inflating markets and crashing the economy, and who then ask for public money to do the same all over. Clearly a new economic paradigm is needed.
Hudson’s work, among other heterodox economists like Yanis Varoufakis and Steve Keen, is really essential reading today.