Mohsen Abdelmoumen interviews economist and anthropologist Michael Hudson on the history of debt and credit, modern economics and what an alternative monetary and financial system would look like.
Cross-posted from Michael Hudson’s blog
Mohsen Abdelmoumen: Your analysis of Mesopotamian times and the wise rule of Emperors embodied by the practice of the Jubilee (compared to the predation of oligarchies) resonate with the Islamic economic theory which forbids riba (meaning usury) and imposes that banks and creditors share the risk of investment or debt. It also seems something deeply rooted in our Arabic and North African traditions of equality and justice where it is socially unacceptable to leave part of the community in dire poverty. As an anthropologist, have you related the success or failure of modern finance to anthropological factors like the structures of the rural families, theories developed by some like Emmanuel Todd?
Michael Hudson: I have written a long article on Ibn Khaldun, which I think is to be published in the French periodical MAUSS, focusing on his idea of mutual aid, and on the 18th-century Scottish Enlightenment developed this view as it passed to Western Europe.
Echoing Aristotle’s concept of man as a “political animal” (zoon politikon), Ibn Khaldun’s Prefatory Discussion stated that “Man needs food to subsist,” but that the power of the individual human being is not sufficient for him to obtain (the food) he needs … Thus, he cannot do without a combination of many powers from among his fellow beings, if he is to obtain food for himself and for them. Through co-operation, the needs of a number of persona, many times greater than their own (number), can be satisfied.
Building up communities requires a feeling of common identity – a polis, a self-identifying people. Along similar lines Adam Ferguson endorsed Montesquieu’s statement in Spirit of the Laws (1748): “Man is born in society, and there he remains.” People need to cooperate in a system of mutual aid to survive. “Man is, by nature, the member of a community; and when considered in this capacity, the individual appears to be no longer made for himself. He must forego his happiness and his freedom, where these interfere with the good of society.” Lord Kames referred to “the intimate union among a multitude of individuals, occasioned by agriculture” and then proceeding to pastoral farming, agriculture, urbanization and commerce.
After initially coming together with group spirit, the challenge was to preserve this ethics in the face of increasing prosperity. “Subsequent improvement of their conditions and acquisition of more wealth and comfort than they need, cause them to rest and take it easy,” wrote Ibn Khaldun. Luxury ensues, and “sedentary people are much concerned with all kinds of pleasures. … The more of them they possess, the more remote do the ways and means of goodness become to them.” The inhabitants of cities “look only to their own pleasure and gain, not realising a need for mutual support.”
Ferguson likewise described how prosperity lays the groundwork for undermining societies. Upon entering the commercial stage, the characteristic prosperous man returned to selfish behaviour, “a detached and solitary” individual “in competition with his fellow creatures, and he deals with them as he does with his cattle and his soil, for the sake of the profits they bring. The mighty engine which we suppose to have formed society, only tends to set its members at variance, or to continue their intercourse after the bonds of affection are broken.”
It should not be surprising that modern financial elites are behaving in the way that Ibn Khaldun described decadent dynasties: with anti-social selfishness. The drive for money turns men into homo economicus, the self-seeking “libertarian” individuals idealized by the Austrian and Chicago Schools, unconstrained by feelings of the “group identity” that Ibn Khaldun called ‘asabiyah, Ferguson called “fellow feeling” and the Russian anarchist Peter Kropotkin called mutual aid.
Most philosophers anticipated that wealth would breed selfishness and hubris, but none were so cynical as to anticipate that elites would rewrite history to depict their gain-seeking and luxury not as a decline of civilization lapsing back into savagery, but as a rise or even as the eternal state of society, a timeless and constant human nature. The public-spirited moral checks that used to be viewed as consolidating social solidarity are now denigrated as a detour from the “natural” spirit of self-seeking.
The financial sector’s academic army of advocates denies that there ever has been a social benefit in annulling debts on an economy-wide scale. That helps explain why Assyriology and Bronze Age Mesopotamian history remain outside the normal academic curriculum: Their findings are adverse to our epoch’s financial ideology, showing that debt and markets need not work in ways that impoverish society. So we are brought back to the main issue that philosophers discussed for thousands of years: the need for wise public authority to override the workings of “free markets,” valuing the renewal of economic balance and growth above the financial drive to engulf the economy in debt and dependency.
Q: How can your exceptional analysis of Rome as a hegemon led by an oligarchy using war and debt to rule the Mediterranean Sea can help us understand the type of dominance of Western countries on the World during the last few centuries, whether through colonial Empires or through American exceptionalism?
Classical Greece and Rome made a radical break from the Near Eastern tradition of periodic Clean Slates canceling agrarian and personal debts, liberating bondservants and returning self-support land that had been forfeited or sold under economic harshness. There was no tradition of Clean Slates. The accumulation of debt, the loss of land and liberty was made irreversible. As a result, economies polarized between creditors and debtors.
Greece and Rome experienced many centuries of social revolution demanding debt cancellation and land redistribution. Leaders advocating this were assassinated throughout the Roman Republic.
Classical antiquity bequeathed to subsequent Western civilization the legal and political structure of economically polarizing creditor oligarchies, not democracy in the sense of social structures and policies that promote widespread overall prosperity. Antiquity’s great transition to the modern world lay in replacing kingship not with democracies but with oligarchies having a pro-creditor legal philosophy. That philosophy is what permitted creditors to draw wealth into their own hands, without regard for restoring economic balance and long-term economic viability as occurred in the Near East through Clean Slates. To the extent that today’s “free market democracies” have economic planning, it is increasingly done by the financial sector seeking to concentrate in its own hands as much income, land and money as possible at the expense of the indebted population at large. As I have summarized in my forthcoming book to be published in January, The Collapse of Antiquity, these are the oligarchic dynamics that Rome’s own historians blamed for the Republic’s decline and fall.
Rome’s ultimate collapse was the forerunner to the many debt crises and their associated austerity caused by subsequent Western oligarchies. The West’s pro-creditor laws and ideology make repeated debt crises transferring property and control of government to financial oligarchies inevitable. That is why a knowledge of the economic history of the Bronze Age Near East and classical antiquity is so important – to demonstrate that there is indeed an alternative to rentier oligarchies, and that it succeeded over prolonged periods of time. But as the West has succumbed to oligarchic tactics to disable checks on financial power, it depicts the dynamics of oligarchy as the workings of a free market maximizing economic efficiency, as if there is no policy able to resist the resulting economic polarization.
From Sumerian and Babylonian rulers down to Ibn Khaldun and Vico, society’s concept of time was circular. The accrual of debt was reversible. Royal proclamations restored the status quo ante, idealized as a “mother” state of affairs in which citizens were self-supporting and shared equal access to their means of livelihood.
Western civilization’s concept of progress means irreversibility. The means of livelihood or the Commons cannot be recovered once they are sold or forfeited for debt. This irreversibility of creditor claims is polarizing today’s economies. Our society is willing to permit what earlier societies could not afford: impoverishment, dependency and emigration of large swaths of the population. Neither mainstream economic models nor political ideology consider the “progress” of debt, economic polarization, instability or environmental pollution to be relevant dimensions of public policy.
Most ancient peoples had a sense of equity based on mutual aid and popular self-reliance to cement social bonds. To replace this ethics with creditor-oriented laws, it was necessary to depict them as being in the public interest, regardless of the poverty this caused. That ultimately meant praising wealth seeking and the sanctity of debt, while opposing governments powerful enough to enact anti-usury laws and write down debts.
Q: What are your main recommendations to Sergey Glazyev and the people involved in the creation of a new financial and monetary order in order to create a more equal and fair system? We are not fully reassured that this work goes in the right direction since you compared their framework to the recommendations of Keynes at Bretton Woods, and we know at the same time that Keynes was a member of the British oligarchy and the Malthusian Fabian society and the financial architect of the disaster Versailles Treaty.
Keynes saw the problem of international debts payments collapsing exchange rates, stifling the economies of debtor countries. I have discussed this in Trade, Development and Foreign Debt, and also in my Super Imperialism. Britain faced that problem, and was duly wrecked by US policy until 1950.
The basic idea of MMT – a post-Keynesian school – is that governments do not have to borrow to spend money. They can create money just as banks create credit. Governments need not let banks create credit to lend to them at interest. That “hard money” view is unscientific and ahistorical.
The key to creating any kind of money, including a negotiated alternative to the US dollar, is to get it accepted in payment by the governments joining the monetary alliance. That requires the creation of an alternative international monetary institution to the IMF, which has become a political arm of the US military.
Q: Can you please share your analysis of the irony of the latest Nobel Prize attributed to Bernanke for his work on quantitative easing and the bail out of banks too big to fail (and indirectly to the implementation of this theory to save the system in 2008) in a time of Worldwide revolt against the 0.01% ruling the Western World, whether outside the West or inside the Western societies?
The Nobel Prize for Economic “Science” is really an ideological prize for right-wing “free market” economics of the University of Chicago-style neoliberalism. Its premise is that economies are self-stabilizing without any government regulation, which is called “interference.” This is an argument for privatization and financialization.
Giving an award to Bernanke is reflects the junk-economics assumption that inflation is caused by wage-earners making too much money. There is no acknowledgment of monopoly rent or other forms of economic rent as “unearned income,” that is, price without inherent cost-value. Bernanke’s principle is that of central banks that are controlled by the commercial banking center: The solution to every problem is to lower labor’s wages and living standards. There is no concept of a correlation between rising wages and rising labor productivity.
This is not scientific economics. It is political class war.
Q: My country, Algeria, has been of the leaders of the Movement of non-alignment during its first 20 years of Independence implementing a socialist system with State-ruled Finance, International trade and Industry which led to a strong social and economic growth. During the last 40 years, we have gone through 20 years of liberalization, strongly influenced by the Washington consensus, then 20 years of predation with international trade and public procurement monopolized by oligarchs. Fortunately, we still have a few elements of economic sovereignty like public banks and industries, non-convertibility of our currency, no financial markets, state-owned land and a central bank controlled by the Government. Algerians are also extremely risk averse regarding credit and debt.
Every successful economy in history has been a mixed public/private economy. Infrastructure should be public in character. Its aim should not be to make a profit (or economic rent), but to provide basic needs freely as human rights, or at least on a subsidized basis in order to lower the economy’s cost of living and doing business.
The most important infrastructure that must be left in public hands is the money and credit system. The aim is to create credit to finance the “real” production-and-consumption economy. Commercial banks create credit to purchase assets already in place – mainly housing already built, and stocks and bonds already issued. The effect is to inflate asset prices. That raises the cost of housing and also access to corporate ownership – above all, ownership of rent-extracting monopoly privileges.
My recent book The Destiny of Civilization outlines my ideas along these lines. In order to track the economy’s progress, an alternative to GDP and national-income accounting is needed, so as to isolate rent-seeking activities – land rent, natural-resource rent and monopoly rent (including financial interest and charges) as transfer payments, not as a “product.”
In addition, a set of price measures should be introduced to distinguish between asset-price inflation and commodity-price inflation. This should provide a guide for tax policy to tax away economic rent as unearned income.