Thursday, March 31, 2011


Notes on Michael Hudson's Adam Smith critiques the Deficit Reduction Commission.

I don't get "rent."

I know, the place where you live, if you don't own a home, you rent. That's easy.

Adam Smith's factor costs are wages (for labor), profit (for capital), and rent (for natural resources). I'm okay with this. Renting a place to live is paying to make use of some piece of land. "Rent" as the name used to mean paying for natural resources is much like paying to make use of some piece of land, from which resources are taken.

What I don't get is the way economists use the word "rent" today. Here's Michael Hudson:

The 19th century elaborated the concept of economic rent as that element of price which found no counterpart in actual cost of production. and hence was “unearned.”

Unearned income is rent? Maybe. But it is too vague a notion, and blamey.

This is the policy that the Bowles-Simpson Deficit-Reduction Commission endorses. Its regressive tax proposals would shrink the economy, pushing it further into debt. This transfer of revenue from labor and business to property owners – and from them to their bankers and bondholders – threatens to force up the government’s fiscal deficit (as states and municipalities are seeing today) and turn the United States into a Third World type neofeudal economy.

Hudson worries about the "transfer of revenue from labor and business to property owners – and from them to their bankers and bondholders." Rent here includes not only payment to property owners but also to creditors. Just lump 'em all together. I don't like it. It is too vague and blamey.

Land is land. Money is money. Keynes pointed out that the mercantilists and the Church could easily distinguish between interest and profit, but that classical economics had blurred the two together, And it was wrong, Maynard said.

Economists today blur together the payment to land and the payment to money. It is wrong.


Smith’s argument against waging foreign wars was basically an argument that they were not worth the debt burden and the associated taxes to pay interest on it. These payments transferred income from taxpayers to creditors – largely foreign creditors, the Dutch in Smith’s day, Asians today.

Michael Hudson's concern is the payment to creditors. That's "interest." It only weakens the argument to call it "rent." And if Hudson means it's unfair that so much money goes to pay interest, well, that's an even weaker argument.


The way that Adam Smith would have addressed the deficit would have been, “Mr. Obama, pull out of Afghanistan – and perhaps 850 of our foreign bases.” And the century of free market economists who followed Smith would have said, “Tax away unearned rentier income...

...President Obama selected members of the Bowles-Simpson commission to provide a rationale – or at least a rhetorical cover story – for turning the U.S. economy into a neofeudal economy increasingly indebted to creditors...

I'm not big on blaming the military for our deficits. If we taxed away rentier income, maybe we could balance the budget even if we opened another 850 foreign bases.

Oh, and that "neofeudal" thing -- that isn't right. Feudalism comes before capitalism in the cycle, not after it. After capitalism comes the dark age.

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