{bit.ly/gd29gfc} Karl Marx said that “The advance of capitalist production develops a working class which by education, tradition and habit looks upon the requirements of that mode of production as self-evident natural laws.” Modern economic theory is a tool of central importance in making the laborers and the poor accept their own exploitation as natural and necessary. As explained in greater detail in the next lecture (AM09), Economic Theory argues that distribution of income is
- FAIR – everyone gets what they deserve, in proportion to what they contribute (the marginal product)
- NECESSARY – the laws of economics ensure that this is the only distribution which will prevail in equilibrium
- EFFICIENT – this distribution creates efficient outcomes, and maximal productivity in the economic system.
In fact, as I have argued elsewhere, neoclassical Economic Theory should be labeled as ET1% (Economic Theory of the Top 1%), because it only represents their interests, and glosses over issues of central importance and concern to bottom 90%. Nonetheless, widespread propagation of this theory through university courses, and popular expositions for the general public, are very important in convincing the bottom 90% that the capitalist economic system is the best possible, and their own misfortunes are due to their own bad luck or other defects.
1 Classical Economic Theory
According to classical economic theory, free markets automatically eliminate unemployment, guaranteeing jobs for everyone at a fair wage, consonant with the productivity of labor. In particular, payoff to labor and to capital is perfectly symmetric – both factors get what they deserve. If government tries to regulate the labor market to create better outcomes – minimum wages, better working conditions, labor unions, etc. — it will actually end up hurting laborers. Economists argue that unemployment is due to minimum wage laws, labor unions, and search costs, and not due to free markets themselves.
2 Credit Creation By Banks
Although this is denied by conventional textbooks, banks create money when they make loans. Thus, outstanding credits which banks extend are always greater than their cash reserves (which accounts for the name “Fractional Reserve” banking system). Because bank profits are directly linked to the amount of credit they create, they are incentivized to maximize credit creation, and hence also to maximize the risks of a crisis when depositors panic and ask for money that the bank does not have in its possession. As detailed in “The Web of Debt” by Ellen Brown, financiers created artificial banking crises to scare the public into creating the Federal Reserve Bank in 1914, with the duty of bailing out banks in trouble, by extending them loans to cover their shortfalls. The FRB was created to prevent banking crises, but it actually led to biggest crisis of 20th century, the Great Depression of 1929 (GD ’29). With the FRB behind them, banks went on a credit creation spree, unconstrained by fears of potential crises. Credit creation is only possible when people want loans, and banks invented many different types of mechanisms to encourage people to borrow. They created “the American Dream” to create a consumer society, and instalment sales to sell loans for all sorts of consumer goods. They went further to encourage people to borrow in order to invest in stocks and land so that money can be made through speculation. This was the cause of roaring 1920’s, also known as the Gilded Age, when those with access to finance got very rich very fast.
3 The Great Depression
Like all artificial booms created by speculation, not backed by any real factor, the financial bubble burst in a stock market crash in 1929. The Great Depression was the worst economic crisis in American history, one that profoundly affected every area of American life and left psychic scars that still affect millions of families. With unemployment insurance nonexistent and public relief inadequate, the loss of a job meant economic catastrophe for workers and their families. By 1930, 4.2 million workers, 9 percent of the labor force, were out of work. Unemployment struck families by destroying the traditional role of the male breadwinner.
4 Two Revolutions
After Great Depression two revolutions took place of which first was regulation of financial industry and second was in economic theory. Among the financial regulations, an important one was the Glass-Steagall act which prevents banks from speculation in stocks. Banks were prohibited to compete, and restricted to operate in one state only. The Chicago Plan to eliminate fractional reserve banking, and move to a 100% reserve system was also proposed and approved by a hundred and fifty economists of the time, but the financial lobby successfully blocked its passage.
The second revolution, in economic theory, was launched by Keynes. He said unemployment is not eliminated by free markets. So, the ideas of classical economic theory that supply and demand automatically eliminates the unemployment is wrong and government needs to intervene to get full employment. Keynes also punctured myths about money propagated by ET1%, namely the money is neutral, and has no real effects on the economy. This myth – that money is veil you must push aside in order to look at the workings of the real economy – is very useful to the 1% to hide the crucial role that money plays in funneling wealth to the rich, and in exploiting the poor.
5 Effect of Twin Revolution
Financial Regulations constrained the power of big money, and government policies to achieve full employment helped improve the lot of the bottom 90% substantially. The graph below shows how the share of the top 10% dropped drastically from 1940 to 1980 (start of the Reagan-Thatcher era). In the roaring twenties, the power of finance led to the rising share of top 0.1% creating the gilded age. Incidentally, it is important to note that the concept of GNP per capita systematically prevents us from looking into inequality because it takes all of the wealth that is produced in a country and distributes it equally among whole population. This is also part of ET1%, the systematic deception required to keep the bottom 90% content with its lot.
Chart from The New Yorker: Piketty in Six Charts
After 1929, after the two revolutions took place, the share of bottom 90% started to rise and that of to 0.1% stared to go down. Top 0.1% were very unhappy from this state of affair and plotted a counter revolution. The master strategist, Milton Friedman, said that change can be created during a period of crisis (see The Shock Doctrine). So, the 1% prepared their theories and economic plans, and patiently waited for a shock. The Oil Crisis of 1970’s led to stagflation created the opportunity for Chicago school free market economists to discredit Keynesian theory. In fact, stagflation was due to cost-push inflation instead of demand-pull inflation, and Keynesian theory can easily be adapted to explain it. However, due to a large number of pre-planned and co-ordinated strategms on multiple fronts, Chicago School theories of free markets, as well as policies, became dominant after this crisis. (see Ideological Macroeconomics and Increasing Inequality.) As the graph shows, de-regulation of finance, and de-empowerment of labor lead to increasing wealth share of the rich, and declining share of the poor.
6 Consequences of Counter-Revolution
Due to counter-revolution in the 1970’s and 80’s, the distribution of wealth entirely changed. Only top 20% of the USA got 90% of total wealth, second 20% got 9.4% of the total wealth, third 20% have only 2.6% of total wealth in USA while the bottom 40% have -0.9% of wealth which means they are in debt actually with negative wealth. This is the income distribution that currently exist in USA after counter revolution by free market propagators.
Gradually, the effects of BOTH revolutions were reversed. The Quantity theory of money was re-implanted after its rejection and refutation by Keynes. The standard theory of labor currently being taught does not recognize the possibility of involuntary unemployment that Keynes introduced. (see The Keynesian Revolution and the Monetarist Counter-Revolution) Also, the Glass-Steagall act was repealed in 1999, and the Commodity Futures Modernization Act was passed in 2000. This gave an enormous amount of power to the financial lobby, creating unregulated arenas for their activities, and leading to the emergence of a vast “shadow” banking industry. The consequences were exactly the same as before – a spectacular crash only 8 years after the repeal of Glass-Steagall – the Global Financial Crisis of 2007.
So today we have gone around full circle, and stand exactly where we did a century ago, prior to GD ’28, with Pre-Keynesian economic theories about money and labor markets, and pre-Keynesian unregulated financial markets. However there are some important differences. The top 1% is MUCH better prepared this time around. They have blocked all attempts at financial reforms in Congress (unlike the aftermath of GD ’29. They have also battened down the hatches to prevent revolution in Economic Theory, and are using creating strategies to both protect neoclassical theory. Even more worrisome are their efforts create camps within heterodoxy (like INET, MMT, CORE Micro) which will create justifications for wealth even after rejecting neoclassical economics. Thing look much worse for the bottom 89% today.
A 22 minute video covering the ideas expressed above is linked below:
WEA Pedagogy Blog 
The start of this article is mistaken in what is thought to be FAIR.
“Fair” is the situation where everyone is given the same opportunity and not (as socialist thinkers would have it) the same as he deserves (for he he or she does). Unless we all deserve the same chances, this attitude makes no sense.
Equality of opportunity boils down to us all having the same advantages, when the access to natural resources is properly shared. In particular, it is when the land is privately owned and this is the most basic of natural resources whose value is mostly determined by the local population density and partly by the animal, vegetable and mineral contents.
This idea of equal opportunity is not so easy to provide unless our whole system of taxation is changed. It should take from those who own the natural resources a sum that corresponds to what their rights stop others from sharing. Other kinds of taxation are national robbery, since the advantages in land ownership are sufficient and more to meet all government expenditure needs. Yet land owners are opposed to having to pay tax and others to be less badly burdened. The answer is given below:
Apart from use of the word “Tax”, which in any case no politician wants to propose, we must eliminate the offense that our proposals for LVT causes to landlords. Obviously they will strongly oppose the proposal for having to pay a new tax (or anything else we might like to call it). The problem then is not to have to fight them, nor try to convince them on moral grounds, but how to make them want to pay for land access rights or revenues.
To achieve this ideal there should be introduced a gradual change in the way that land is being owned, which should be introduced by new laws. Whenever a site or prospect of land is being offered for sale (possibly with its buildings, etc.,) and whenever ownership of such a site is being transferred between family members (and on which an inheritance-tax would normally be paid), the government automatically buys the land at its current normal nominal price. This is done simultaneously as the buildings are sold or their ownership transferred. (The courts shall be empowered to settle the land-value, if/when doubt is expressed–land-value maps being publicly accessible.)
The previous landlords or their heirs will no longer have any political objection, since the money from the land sale will greatly exceed the subsequent annual lease-fee (see below) for access rights to this land. This change will also eliminate the (hated) inheritance-tax. It is imagined that this process of land sales and governmental purchases will be spread over at least 40 years.
Immediately when the site belongs to the government, this land must be offered for lease to the new or bequeathed owner of any buildings thereon. The lease-fee should be set according to normal amounts of rent for other similar sites, (and again the courts should decide when there is disagreement.) The above “first refusal” for this leasing offer is most necessary, because any buildings of practical use and value on the site, will still be sold or bequeathed as items of durable capital goods, as before. However, access to the site and its buildings is denied by the government until the site is leased by someone who can then (and normally would) have purchased (or been given) the building in the usual way. All taxes that are applied to subsequent building developments should be abolished at this time.
A new owner would acquire the building property more cheaply than before, because it is now without the selling price of the land under and around it. Such a buyer can then give for hire (rent-out) any building for access and use, as if it were any other item of durable capital goods. In the unlikely event of the leaser not owning the buildings, his/her incoming land rent (from the building owner), shall not exceed the out-going lease-fees by more than 2% (say). Should nobody initially lease the site and its buildings (if any), because of there being no interest for their use, the buildings may be pulled down by the next (eventual) leaser, who will be free to re-develop the site (and would naturally want to do so).
The government should borrow the money for site purchase, or can even offer national redeemable bonds to raise money for it. As the lease money begins to flow to the government, it uses this to:
a) repay part of its loan for site purchase, which may be extended,
b) purchase more sites as and when they become available,
c) cover the interest on the loan and on the new bonds and their eventual redemption, and even more eventually
d) reduce other kinds of taxation.
It will be appreciated that over the long term the lease fees are equivalent to LVT, but due to the greed of landlords (who behave as if they were capitalists), their income from land sales will satisfy them better than their being taxed. nearly all the land would then be leased from the government.
Nationally leased land, in countries like Hong Kong, is close to 100%. This approach is known to be most successful, for the general rate of growth of prosperity. Also when the previous landlords have more money to spend, most of it will be invested in durable capital goods, making production costs lower as obsolescent durable items are more easily replaced and so the national prosperity will grow from the government’s investment in land values.
This proposal is not land nationalization (at least no more than what currently applies), since no additional regulations are placed on how the land is to be used.
Because the selling of land is a natural process which is (if anything) encouraged by the land returning to public benefit, the resulting lower priced building properties will become more easy to sell and not place such a limitation on their owners who wish to better develop the sites.
Reblogged this on An Islamic WorldView.