The Bubble and Beyond

by Michael Hudson

PROFESSOR MICHAEL HUDSON is one of the foremost critics of contemporary finance capitalism and the w....

Genres: Economics, Politics, Finance, Nonfiction, History, Social Science, Theory

558 pages, Paperback

First published July 1, 2012

About the author

Michael Hudson is an American economist, Professor of Economics at the University of Missouri–Kansas City and a researcher at the Levy Economics Institute at Bard College, former Wall Street analyst, political consultant, commentator and journalist. He is a contributor to The Hudson Report, a weekly economic and financial news podcast produced by Left Out.

Reviews

[The Conspiracy is Capitalism (episode 2 is out!) · Rating 5 out of 5]

Finance Capitalism treatise that is all-together infuriating...

Preamble:
1) The topic? Infuriating.
a) “Finance Capitalism” (esp. FIRE sectors = Finance, Insurance, Real Estate), is appalling. “The devil wins at the point where the public comes to believe that he doesn’t exist”, and so wealth/passive unearned income hides in obscurity while useful idiots (“mainstream economists”) avoid money/credit/banking/land/violence/crime from their theories.
b) Critiques of Finance Capitalism are messy and often underwhelming. Social democrats with watered-down Keynesianism seem to only see the tip of the iceberg. “Productionist” Marxists seem to surgically remove “Finance Capitalism” as a surface-level distraction.

2) The author? Infuriating.
…I started writing book reviews because a fellow reviewer rescued me while I was slogging through ECON101. Michael Hudson was his favourite political economist. That was some 8 years ago; it has taken me this long to finish a single Hudson book, and my attempts to synthesize his views are still in shambles.
…Hudson’s range is mind-boggling:
a) Classical political economy: progressive industrial capitalism was supposed to be revolutionary and reform into socialism, sorry Rosa Luxemburg.
b) Geopolitics of imperialism: wait, Rosa, come back. Ex. joining favorite Vijay Prashad on US dollar imperialism’s New Cold War on China: https://youtu.be/p7ERe-_YpKs
c) Ancient economic histories: anthropologist/anarchist David Graeber: “There are few people alive who have taught me more than Michael Hudson.” https://youtu.be/1rlIXAUGans

3) The book? Infuriating.
…I’ve been spoiled by academics who are also talented writers (Varoufakis, Graeber, Hickel, etc.); Finance Capitalism in particular requires exceptional writing + editing (both absent here; repetitive articles + insufficient referencing) to unravel. We desperately need an accessible and concise version of this tome or else it will remain siloed. I do find his lectures more approachable: https://youtube.com/playlist?list=PLS...

Highlights:
1) Classical vs. Post-Classical:
The Good:
--Hudson’s specialty is Finance, so he frames an 800 year struggle for more pro-debtor, anti-rentier laws (celebrating Classical political economy, i.e. Physiocrats to Smith/Ricardo to Marx, and later Progressive reformers, i.e. Patten/Veblen/Keynes/Minsky) until the rentier backlash since the Allies’ WWI victory.
…OK, we get it. You want to contrast Classical with Post-Classical (“Marginalist” “Neoclassical” “mainstream economics” and their goofy step-brother “Austrian”…basically “anti-Classical”), the backlash which reduces all of human sociability to market exchange, i.e. instantaneous, self-interested transactions between strangers (whereas Classical actually bothered to theorize the real world, i.e. class/power relations + motion/change).
--Yes, Classical wanted reforms to “free the market” from feudalism, thus had some interesting points on abolishing (certain forms of) economic rent (gains from ownership privileges rather than work, i.e. land rent, financial usury, monopoly rent) by establishing real costs, i.e. cost of production (labour theory of value). Yes, rents have re-emerged as a dominant paradigm under today’s Finance/Insurance/Real Estate, so rent theory is worth reviving.
The Bad:
--How do we deal with contradictions in Classical assumptions? Marx mocks Smith's idyllic “primitive (original) accumulation” by capitalists (hard work and savings) by detailing the violent expropriation of Commons. How much is this a crucial step in capitalism's logic, to seek profits by privatization's dispossessions, where artificial scarcity creates dependency on markets? How much of Finance Capitalism's new "rentier" markets (money, intellectual property, environmental services, etc.) is a logical trajectory rather than a reactionary diversion? How much can the "productive" aspects of markets be wielded? (On this, I do appreciate Hudson's focus on real-world consequences rather than remaining in theoretical abstractions; see his lectures on China).
--I'd also be interested to see a synthesis of Hudson's rent theory with Anwar Shaikh's "real competition" of capitalism (i.e. rent-seeking is not always rent-getting).
…And why set such a low bar? Hudson exposes Ricardo as a bank lobbyist who omits debt/usurious interest from his rent theory (instead focusing on land rent when attacking the Corn Laws) and the consequential legacy (money/credit becomes “exogenous” thus hidden)!
--Hudson’s wealth of knowledge on imperialism (Super Imperialism: The Origin and Fundamentals of U.S. World Dominance) and trade (Trade, Development and Foreign Debt) means he readily acknowledges how Classical “free trade” theory ignores imperialist rent. It’s like a switch is flipped between one topic and another; is this adequate synthesis? Global South Marxists have a very different tone towards these founding fathers: Capital and Imperialism: Theory, History, and the Present
--I’m troubled by this aspect of intellectualism, where we seem to show too much respect to privileged founding fathers as “inventors” of theories (related: capitalism’s “intellectual property” vs. intellectual Commons); they absorbed and tweaked existing ideas and were in the right places (of privilege) to be popularized.
--Bad intellectualism absolves intellectuals, while on the flip side provides excessive armchair criticism to those on the front-lines struggling with direct violence, uncertainty, and insufficient information (i.e. somehow every action here is “authoritarian”).

2) Industrial vs. Finance Capitalism?
--Given how contradictory “capitalism” is, I’m less and less interested in finding a single, ultimate theory to somehow explain everything (or big labels like Hudson's “neofeudalism” and Varoufakis' “techno-feudalism”). Instead, testing a variety of frameworks for various scenarios, seeing how/what/where they emphasize/overlap/contradict, and finding possible synthesis seems most fruitful (ex. Varoufakis on “capitalism” being inherently contradictory: Talking to My Daughter About the Economy: or, How Capitalism Works—and How It Fails).
The Good:
--Well, Hudson has his own grand narrative. Western finance has historically been detached from industry. From the medieval period to Napoleon, finance was dominated by monarchs getting loans (esp. when taxation was difficult) from financiers (ex. Italian/Dutch, creating the vested interest of bondholders) to finance endless wars (esp. Britain and France).
--While the 1688 Glorious Revolution brought liberal reformism (i.e. Bank of England) to bypass foreign creditors, Anglo-Dutch banking was still predicated on collateral (thus merchant banking) instead of financing new means of production (industrial banking, which were absent during Smith/James Watt’s time and apparently into Marx's time!). Anglo-American industrial financing relied more on the stock market, which was more short-term hit-or-miss and favoured legal monopolies (railroads/canals/public utilities).
--Marx recognized the dangers of compound interest, the “void form of capital”, and creditors demanding austerity: “The value of commodities is therefore sacrificed, for the purpose of safeguarding the phantastic and independent existence of this value in money” (Capital, Vol. 3: The Process of Capitalist Production as a Whole). However, Marx seemed to expect industrial capital to discipline merchant/usurer capital, thus merchant banking will be disciplined by industrial banking: “On the whole, interest-bearing capital under the modern credit-system is adapted to the conditions of the capitalist mode of production” (Capital Vol.3). During Marx’s time, this was still mostly theoretical (i.e. Henri de Saint-Simon).
--The US responded to British free trade in the 1840s with protectionism (America's Protectionist Takeoff 1815-1914), followed by Progressive era reforms. It seems Germany during Bismarck’s State Socialism (starting 1883, coincidentally Marx's death) was the breakthrough for industrial banking (Reichsbank). This was derailed after WWI’s Allies victory, with Anglo-American merchant banking triumphing.
--This was followed by inter-Ally debts (esp. US enforced on Britain) thus harsh reparations (Britain enforced on Germany) creating international payments “transfer problem” leading to WWII (see Keynes); Hudson points to this as the actual root of hyperinflation (instead of the hysteria around government domestic spending), thus the importance of foreign debt in balance of payments.
--The critique of land rent (while omitting usury/debt) since Ricardo continued into the Progressive era and took a curious turn: while land ownership was becoming democratized, bankers inserted themselves in the place of landlords via mortgage interest payments. Finance and Real Estate merged, with mortgage loans dominating Anglo-American bank loans.
--Industrial capitalism (M-C-M’: Money invested to produce Commodities to be sold for more Money) waned in the presence of the new Finance capitalism (M-M’: Money for more Money via rent extraction + speculation in asset prices, i.e. stocks/bonds/real estate, + theft of Commons/public infrastructure). Central planning is now done by Finance, which conveniently is obscured (mainstream economics model commodity prices, omitting assets/money/debt etc.).
--Land value increases dramatically from the labour of society (tax-funded public transportation, schools, hospitals, general social wealth). The less this windfall gain is taxed, the more is available for Finance to extract via mortgage interest. Furthermore, with Finance merging with Real Estate, “a property is worth whatever a bank will lend against it” as banks (too powerful to care about bad loans) flood real estate with bigger loans (speculative housing bubble; similar with stocks/bonds) which promotes debt-leveraging (purchasing assets via debt, paid off assuming rising asset prices).
--Tax laws also favour M-M’: taxing income more than capital gains, interest payments being tax-deductible (encouraging debt-leveraging instead of direct purchases), depreciation for real estate as if it wears out like machines when the windfall gain is on land value rather than the building, etc.
--Finally, we get to crisis theory, which clearly depends on how we conceptualize “capitalism” (once again, I'm not sure a single theory is adequate):
1) TRPF (“Tendency for the Rate of Profit to Fall”): unlike many productionist Marxists, Hudson rejects TRPF as a cause of crisis, citing book 2 of Theories of Surplus Value (basically Volume 4 of Marx’s Capital project, dear god) where apparently Marx challenges Ricardo’s concerns of mechanization leading to crisis. While increased Constant Capital will lead to more depreciation (Hudson's definition; standard definition is declining rate of surplus value given relative decline of Variable Capital, i.e. labour, although Harvey stresses mass of surplus value needs to be considered too), apparently greater scale leads to more employment.
2) Financial cycle: Hudson follows Hyman P. Minsky’s view that business cycles are caused by Financial cycles, where interest-bearing debt (magic of compound interest exponential growth) becomes independent of the real economy (S-curve growth). Hudson’s wealth of knowledge on ancient economies is compelling (...And Forgive Them Their Debts: https://youtu.be/M4DkZ3CWFOk). The consequences are:
a) Asset price inflation: Finance bids up existing asset prices instead of reinvestment in new means of production.
b) Debt deflation: Finance creates so much private debt overhead that the real economy is exponentially burdened to try and pay this off rather than demand goods/services (thus deflationary). Keynes missed the debt overhead and was concerned increased savings would create a similar effect. Note: we are critiquing private debts (i.e. usurious interest for private gain), not public “debt” (public spending is crucial for social reproduction, to counter the après moi, le déluge self-destructive individualism of capitalists).

3) Industrial vs. Environment?:
The Bad:
--The environment is basically absent. Classical productionism’s elephant in the room: we are in the midst of existential Anthropocene/Capitalocene with the Earth Systems under dire threats. When it comes to this, Hudson has nothing to say besides regulation. I’m baffled given his interest in systems and motion that he has not attempted to synthesize, say, Marxist metabolic rift.
…Indeed, his point that Finance Capitalism is fictitious growth might mean less strain on the environment compared to Industrial-driven growth! (OK, crude joke given distribution/direction of goods, debt-fueled growth, etc.)
--Classical productionism via markets (even if free from economic rent) will still be markets (i.e. competitive survivalism via impersonal transactions thus anti-social growthism) predicated on externalizing costs (where the environment is an ideal dumping ground given its pervasiveness and difficulty to quantify/regulate).
--For the 21st century and beyond, we must move beyond cancerous growth and into a degrowth/leisure paradigm recalibrated to social needs. Improving quality of life for the masses has historically relied not on disruptive private markets that shift labour/environmental costs on the weak, but on expanding the Commons (public sanitation/health, education, welfare, etc.):
-Less is More: How Degrowth Will Save the World
-Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist

4) Real-world, big picture:
The Good:
--Great to have someone with insights working on Wall Street and advising governments rather than theorizing in academic silos: https://youtu.be/hH9pzzIIEj4
a) US dollar imperialism: how US lost its post-WWII balance-of-payments surplus due to its military spending in the genocidal bombings of Korea and Vietnam, where countries like France would take their incoming US dollars and exchange them for US gold supply under Bretton Woods. US severed this with the Nixon Shock, and forced the US dollar as the international reserve currency.
...Now a debtor empire, a US decline did not happen because US had the power to wreck the global financial system; the US dollar became a tribute system, the ultimate free-ride forcing foreign central banks to accept US Treasury bonds IOUs (which the US creates at will) in payment for US military spending encircling the world + foreign productive goods + foreign company buyouts.
…intro: https://youtu.be/paUgY6SGlgY
…labyrinth: Super Imperialism: The Origin and Fundamentals of U.S. World Dominance; also Varoufakis's more accessible The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy
…Thus, a major geopolitical struggle for de-dollarization: https://youtu.be/h45Bovld7Vk

b) Macro alternatives:
--Hudson adds more variety to the socialist owning-the-means-of-production solution (be it micro workers self-directed enterprises or macro state central planning):
i) Debtor protection: national debts in own currency, debt cancellation (ex. ancient jubilee, German Economic Miracle), reasonable ability to pay legislation, “fraudulent conveyance”.
ii) Money as a public utility rather than private creditors/bondholder middlemen: public option credit, central bank monetizing government deficits, State theory of money/Modern Monetary Theory, depreciate value of money/financial claims:
-Another Now: Dispatches from an Alternative Present
-The Public Bank Solution: From Austerity to Prosperity

[Clif · Rating 3 out of 5]

For the message this book brings, I give it 5 stars. For the clarity of writing, 5 stars. Knowledge shown by the author, 5 stars. Then why 3 stars?

This book could stand as a monument to the need for editing. It is twice as long as it needs to be and that is because Hudson repeats himself so many times you will lose track of the number. His main message is not difficult to understand yet he delivers it in almost the same words in multiple chapters. In addition, he introduces some useful graphics that help explain his text, but he waits until halfway through this large book to do so when they should be in the first chapter.

The main message.

There is a real economy that takes in money both through the sale of stock and the issuance of debt, using it to build and operate plant, pay employees (creating customers), creating tangible products that bring in sales, earning a profit that both rewards the investors and provides funding for expansion. Thus does industrial capitalism prosper. It takes money, does something productive with it, and returns money through real earnings.

There is a second, "financial" economy that seeks simply to make money from money without producing anything. This is the economy of debt, which is the product of banks. By extending credit the price of whatever is purchased with the loan is driven up, giving the illusion of value when only price is increased. Easy credit brings speculation with prices limited only by how much credit can be obtained to allow a purchase. The object is to create more money to loan in an endless processes of leveraging. Remember house flipping? That's the idea, only extending it to everything, not just housing. That is the bankers' paradise.

In this world of debt, income goes to pay interest, not to buy real things produced by a real economy. Homeowners, for example, have little to no equity in the house and the paycheck goes largely to pay the banks. There is precious little left to buy things at stores. This is debt deflation. With the total amount of money to spend on real things greatly reduced, prices go down, profits of real producers are crimped, business sags, employees must be laid off, you get the picture. Prices of houses rise in a bubble, the real economy sinks. The 1% get richer, Joe Average gets laid off.

Hudson wants us to know that we are living in a world where the economy has been "financialized", at the expense of the real economy. In great detail he convincingly makes the case that the brakes have been released on creditors thought continual dismantling of regulation and the transformation of tax structure to benefit creditors while punishing the real economy. Incredibly, capital gains are taxed at a lower rate than earned income! When Uncle Sam doesn't take taxes from the wealthy, that money becomes available as credit to increase the burden of debt on the 99%. Government is strapped for funds to keep services running, so goes further into debt, going to the credit market where the banks are eagerly waiting to "help".

It can't continue because debt levels have increased to the point where the debts cannot possibly be repaid from future income. At the same time, creditors are so empowered and have so completely taken control by way of central banks and proponents in Congress, along with the aid of the ignorant "we hate government" multitude, that politicians (Elizabeth Warren and Bernie Sanders excepted) stand aside as banking technocrats determine policy.

Hudson perfectly describes the technique of the takeover artists who with funding provided by easy credit take ownership of companies only to raid pension plans, strip assets, cut workforce and then use earnings not to plow back into the company but to pay themselves, leaving a hollow shell where real value once existed, the world of Gordon Gekko.

In our financialized world, money goes to those with money to lend and when their project fails - when debts can no longer be paid, government comes to the aid not of the many indebted, but to prevent loss to creditors - see 2008 with Uncle Sam riding to the rescue of the banks at the expense of the taxpayer. Recall if you will that the President virtually disappeared at the time while the Secretary of the Treasury (formerly of Goldman Sachs) and the Chairman of the Federal Reserve along with the CEO's of the big banks did their deal by themselves. We the people were at no point involved, just waiting to find out how much we would be fleeced.

The Bubble and Beyond is a very valuable source of information for a complete understanding of our dire situation, one that cannot end happily but only when debts are written down to where they are in accord with the ability of debtors to pay. We are in a stagnant situation with creditor protection standing supreme instead of the good of the real economy. Inevitably accompanying this is the transfer of wealth to the wealthy, the lackluster performance of the real economy, the sacrifice of income to debt service instead of spending on the real economy. The Fed stands in a corner of its own making, not daring to raise the interest rate for fear of bringing the big collapse that will stand over us like a black cloud until either great inflation or debt write-downs come.

Since we are biding our time, you can read this book to understand exactly why we have arrived at this baleful point, but I want to suggest a very easy to understand series of videos that explain exactly what Hudson is explaining but in a far quicker and easier to digest manner. Go to YouTube and watch Chris Martenson's entire multi-chapter "Crash Course". Filled with illuminating graphics, free of buzzwords and comprehensive in scope, Martenson, like Hudson, strips away the BS that we get daily and tells it like it is. Unlike Hudson, Martenson's video shows tight editing and repetition is avoided.

[Robin · Rating 4 out of 5]

Michael Hudson before he understood MMT.

[Fearless Leader · Rating 4 out of 5]

Hudson repeats himself frequently throughout the book. The book could have been shortened by half and retained all the content. The book also lacks clear structure. Otherwise it is an interesting amalgamation of the authors ideas.

[Manuel · Rating 4 out of 5]

The book is a good deep dive into the speculative forces shaping our economy since 1980, the Reganomics take off. But it often feels long and very dry. Despite, Michael Hudson’s skillful analysis unpacks complex financial concepts. A must-read for anyone seeking to understand the economical disaster we live nowadays