Highlights from Ecological Debt: Global Warming and the Wealth of Nations by Andrew Simms

Ecological Debt: Global Warming and the Wealth of Nations by Andrew Simms

Last annotated on May 15, 2017

A similar case was filed in the US in 2003 by descendants of the Herero tribe of Namibia. The tribe was virtually exterminated by German colonial forces during the ‘scramble for Africa’. An estimated 65,000 were killed between 1904 and 1907. The £1.2 billion claim was against still-existing German firms accused of complicity in the historical crimes. The difference between some of these cases and mockery of the fashion for long-range apology is the tangible impacts that these examples have on people alive today. 2472

In a case that shows how we are still touched by the long shadow of colonial abuses, lawyer Martyn Day recently took on the starched might of the British military establishment to represent a large number of Kenyan women in a case that accused army personnel of the repeated rape and mistreatment of local women dating back decades to the 1950s. In the theatre of the courtroom, however, one image stands out of the mighty brought low by the law. It changed people’s expectations about what can be achieved by using the law to force people to take responsibility for their actions. In 1990 the chief executives of America’s largest tobacco companies swore, and were filmed, in front of a congressional committee that the nicotine they put in cigarettes was non-addictive, and as a result, and by implication, they could not be held responsible for the cancer deaths of thousands of addicted smokers. Cutting a very long story short, when evidence was produced to show that they had lied, the case of ‘big tobacco’ made the little person finally believe that the courts could be used to bring wrong-doers down, no matter how big they were. The moment was so iconic that it led to several books and films. Multi-billion dollar lawsuits followed. 2479

Andrew Strauss agreed that it was not only possible for victims of climate change to turn to the law, but that there were numerous approaches they could take. In the summer of 2001 he presented his thoughts to Britain’s first conference on ecological debt, which I organised at London’s Institute of Contemporary Arts. 2490

Prime Minister of Tuvalu at the time, Koloa Talake, surprised the international community by announcing his country’s intention to bring legal action against the world’s worst polluters over their emissions of greenhouse gases. 2495

Around half of all legal cases in the US are so-called ‘tort’ claims.7 These are claims for compensation and punitive damages where injury or harm has resulted from reckless, negligent or improper behaviour. 2506

All industrialised countries consume fossil fuels at a rate per person that is far above a global sustainable threshold. This is their ecological debt. The climatic consequences in terms of floods, storms and droughts are borne by the world’s majority in poor countries. So, it is also only logical that the law should be called in to instruct the ecological debt collectors. 2513

There are few basic principles in law. One is that if someone does you harm two things should happen. First, they should stop what they’re doing, and second, they should compensate you for the harm done. Climate change is doing harm to some people and it is the consequence of what other people are doing. The climate convention signed by most countries at the Earth Summit in Brazil in 1992 committed the signatories to sharing equally the global commons of the atmosphere. Given the slow progress since, and even backsliding, that it was signed at that time was an amazing success. Any country, consequently, pouring more than its fair share of pollution into the atmosphere could be challenged. The United States, obviously, makes a particularly compelling legal target. Not only does the US with 4.6 per cent of the world’s population account for 25 per cent of anthropogenic greenhouse gas emissions, but the Bush administration has refused to submit the international climate agreement, the Kyoto Protocol, for Senate ratification. Figures released by the British government’s Environment Secretary, Margaret Beckett, suggested that George Bush’s energy plan could leave US emissions 25 per cent higher in 2010, compared to the 7 per cent cut that the US agreed to when negotiating in Kyoto. Various legal options are being 2543

Myles Allen writing in the science journal Nature explained how they might do it.11 Insurers, for example, on a balance of probabilities will raise the cost of premiums to householders where there is an increased risk of flooding due to climate change. That both represents an immediate direct cost and sends a signal that will also likely lower a house’s value. All you have to do, says Allen, is work out a ‘mean likelihood-weighted liability by averaging over all possibilities consistent with currently available information’. Unpacked from industry jargon that means that if past greenhouse gas emissions have increased flood risk (or storm damage, or crop loss due to drought) tenfold, 90 per cent of the damage caused by a flood can be attributed to past emissions. Because greenhouse gases mix in the global commons of the atmosphere, ‘an equitable settlement would apportion liability according to emissions’, according to Allen. Insurance costs are incurred in advance due to changing risks. But similar calculations could possibly be used after the event to help seek compensation for actual damages. 2563

The short-term objective is to force US compliance with the international process. Their current opt-out avoids the costs of implementing reductions under Kyoto, which effectively amounts to a subsidy to domestic US businesses. The EU could calculate the value of that subsidy and apply ‘border tax’ adjustments to a selection of US exports until America started to play ball again. Then the US would have recourse to take a complaint to the dispute mechanism at the World Trade Organisation where it would have to defend its behaviour. Trade sanctions, imposed collectively by a group of countries in defence of a multilateral environmental agreement negotiated in good faith like the Kyoto Protocol, are however, entirely legitimate in international law and the decision would very likely go against the US.12 2576

Earth Summit in 1992 the European Commission was considering a climate change tax. To support the idea they cited the US Hazardous Substances Trust Fund, popularly known as Superfund. Superfund is a financial mechanism geared towards the clean up of domestic toxic sites. It is paid for by taxes levied on the petro-chemical industries. Higher rates of tax are levied against imports of petrol and chemicals. This means that a direct trade measure is being used to pursue clear environmental objectives. Superfund was considered by a GATT (General Agreement on Tariffs and Trade) Dispute Settlement Panel following a complaint made by the European Community. The Panel decided that the tax was consistent with GATT rules and that the effective border tax adjustment was not an unacceptable restraint of trade.15 2600

ad hoc legal processes cannot replace the need for an effective global climate deal. Nothing can replace the need to set a target for safe concentration of greenhouse gases in the atmosphere low enough to prevent runaway climate change, and then shrink emissions to meet it. Nothing, also, can substitute for a proper global constitutional framework within which to do that. The shrinking size of the carbon cake and laws of physics also mean that the framework will have to spell out how the cake will be shared equally among the global population. But as we work painfully towards that end, a litigation laxative might just get things moving. America, in particular, has led the way in showing the world how litigation can be a central mechanism for putting wrongs to right. 2607

Decades after the last artillery was fired in anger on the fields of Belgium during the First World War of 1914–18, their shells keep killing people.3 Farmers who plough the difficult clay soil of the old battlefields still unearth unexploded ordnance. In 1983 a ‘muffled explosion’ near the village of Loker announced that Jacques Covemeacker’s tractor had hit a bomb. It killed him leaving a son and widow. No one knew if the shell was German or Allied. In a 25 km radius around the town of Ypres alone, 350 tonnes of explosives are recovered every year. A specialist bomb disposal squad called the Dovos get called out 15 times every day, another 30 requests for help are logged. Belgian authorities estimate it will take 150 years to clear the rest away. To misquote a famous speech from the Hollywood film Gladiator, we should be careful what we do in life because our actions echo long after we die. Greenhouse gases that we put into the atmosphere today will continue to disrupt the climate causing even greater upheaval than the First World War’s unexploded bombs. 2623

violent arsenal of droughts, floods 2639

action to preserve a habitable atmosphere, like putting enough fuel in a plane to get from A to B, is non-negotiable. And history shows that while not easy, behaviour can be changed by focused leadership, public education and a sense of common cause. 2642

The upbeat and hopeful tone of the government was part of a double strategy, persuade and legislate. It proved to be more than self-serving rhetoric. The combination of moral leadership and rationing had two significant results. People did, indeed, become fitter and healthier, and consumption of resources was drastically cut. The awareness that each had a personal role to play spread through the population. 2659

The barrage of information was a success. A combination of emergency powers brought in during the war and a concerted public campaign on changing attitudes dramatically cut waste. By April 1943, for example, 31,000 tonnes of kitchen waste were being saved every week, enough to feed 210,000 pigs. Food consumption fell 11 per cent by 1944 from before the war. Scrap metal was being saved at the rate of 110,000 tonnes per week.4 At this most important time Needless travel is a ‘crime’. Rail companies’ advertisement, 1942 Between 1938 and 1944 there was an enormous 95 per cent drop in the use of motor vehicles in the UK. Even in the United States fuel was strictly and successfully rationed to eliminate unnecessary travel. Such a drop exceeds even the deepest cuts in consumption that the most pessimistic climate watchers say is needed in wealthy countries today. In a similar period, 1938–1943, the use of public transport increased by 13 per cent. Across all goods and services consumption fell 16 per cent but with much higher drops at the household level.5 In just six years from 1938 British homes cut their use of electrical appliances by 82 per cent. At the same time spending on ‘amusements’ went up by 10 per cent.6 In case anyone might question the massive conservation drive, the Ministry for Information produced a manual, Data for the Doubtful. History also judged kindly the overall effect on people’s health of the new ways of living. 2682

On its current course of growth transport, mostly vehicular, as shown in the earlier investigation of the car, is predicted to become the third most common cause of death and disability by 2020. 2698

When the US implemented energy rationing at the time of the first OPEC oil crisis in the early 1970s a similar logic was used. A Congressional Declaration of Purpose announced that ‘positive and effective action’ was needed to protect ‘general welfare … conserve scarce energy supplies’ and ‘insure fair and efficient distribution’ (my emphasis).8 Apply the same principles more generally today and you have a plan for tackling global warming. 2710

Even then Keynes, the friend of redistribution, thought this was no reason for inaction. And he had found a key to unlock official intransigence – agitation. His ‘great service’, wrote The Economist in 1939, ‘has been to impel the so-called ‘leaders of opinion’ to reveal the state of their ignorance on the central economic problem of the war’. 2732

Sir John Simon was Chancellor of the Exchequer at the time and certainly became aware of the trouble he was in. Think of his words marked down in Latin in a memo at the time, echoing through a modern day government, aware of global warming yet committed to a pattern of conventional economic growth with its unavoidable, related greenhouse gas emissions. ‘Video meliora proboque, deteriora sequor’, translated in the official history it reads: ‘I see the right, and I approve it too, Condemn the wrong, and yet the wrong pursue’. As the war progressed purchase taxes were introduced as an attack on luxury spending. As more time passed the taxes became more sophisticated. Real luxuries like fur coats, silk dresses and jewellery were hit with the top rate. Essentials such as towels, bed-linen and utility clothing were exempt. Still, even these measures were a struggle. The fur trade lobbied government emphasising its economic importance. It would be wrong to leave the industry crippled at the war’s end, it said. As a result, a special tax exempt category of ‘utility furs’ made of rabbit and sheepskin was introduced. From now on governments will struggle with how to reduce consumption of the many things whose manufacture and use relies on burning fossil fuels. They will struggle to convince a sceptical public, and in rich countries a largely comfortable one, that take many things for granted. As Thorstein Veblen pointed out more than a century ago, once luxuries become generally available they cease to be seen as luxuries, instead taking on the character of essentials. 2735

Famously in Britain during the Second World War there were collections of pots and pans and the railings from outside houses to provide extra metal to help the war effort. Some believe that the more important purpose of the collections was to convince the public of the seriousness of the war situation, and that the metal itself was secondary. Today agitation like Keynes’ will be needed before governments are prepared to go to the public with similar confidence of purpose. 2747

Why not prepare public opinion now, by admitting the scale of required action, so it would be possible to sell the appropriate policies later? There was the sound of choking. Unlike the forthrightness of public communications during the war, the most the civil servants felt able to do now was ‘suggest’ that people might like to make one less car journey a month. Of course, the contemporary general public is far less credulous about what the government tells it than it was in the 1940s. The impact on lifestyles of real constraints on the use of fossil fuels will also make many feel uncomfortable about changes they will have to make. We have become accustomed to the only restraint on our consumption being how much money we have to spend. The idea of fuel rationing will be seen as intolerable and cause outrage. But it is rationing only in the sense that our take-home pay is a ration of wealth. We can no more live beyond our environmental budget than we can our financial budget, without running into problems. And, it will be rather harder to come back from a bankrupt climate than bank account. The other big difference in this analogy, which affects how we work out a solution, is that the atmosphere is a global commons bounded by physical limits of environmental tolerance. Financial budgets, at least in theory, display far more flexible limits. There is no reason, because of that, why anyone should, either by right or accident of place of birth, have more of that global commons than anyone else. 2755

There should still be some small comfort in the knowledge that all these problems have been wrestled with before and, to a degree, have been overcome. But they have been overcome only when the urgency and necessity is generally understood. Our current dilemma, compared to 1940s Britain, will be managed differently. Modern communications methods are more sophisticated. And many people have already thought hard about how on earth you can protect the global commons of the atmosphere on the one hand, and balance the world’s competing claims to use it as a dustbin for our economic waste on the other. 2768

Property regimes are a balancing act. The wrong sort can cause misery. Restrictive patents applied to medicine, for example, can kill. Charities such as Oxfam working on health issues estimate that 37,000 people die every day as a consequence of patents making drugs too expensive for people living in poverty to buy. These are avoidable deaths that follow from the way that a property right, by another name, is also a right to exclude. However, the absence of property rights can also be lethal. 2799

Global warming is a text book example of the tragedy of the commons. 2802

The reason for the United States’ refusal to act meaningfully on global warming was given with remarkable consistency by Presidents George Bush senior and junior. It is the reluctance to accept any restraint on the freedom of US citizens to pursue their way of life. According to Hardin this is the attitude at the heart of the tragedy of the commons: Every new enclosure of the commons involves the infringement of somebody’s personal liberty. Infringements made in the distant past are accepted because no contemporary complains of a loss. It is the newly proposed infringements that we vigorously oppose; cries of ‘rights’ and ‘freedom’ fill the air. But what does ‘freedom’ mean? When men mutually agreed to pass laws against robbing, mankind became more free, not less so. Individuals locked into the logic of the commons are free only to bring on universal ruin; once they see the necessity of mutual coercion, they become free to pursue other goals. 2811

There is a lobby group in Britain called Freedom to Fly. They oppose environmental restraints on the aviation industry. It is a signature of the tragedy of the commons that individuals pursue their own interests in denial of responsibilities to the wider community. When reckless pollution, in full knowledge of its likely consequences, actually results in death, economic damage and great physical harm in the case of climate change, how different is it from drunk driving?4 If your nation’s lifestyle actually requires you to go to war in order to ensure a continued supply of cheap fossil fuels, how different is that from mugging or armed robbery? In which case, why not have lobby groups called Freedom to Drive Drunk and Freedom to Mug? They would amount to much the same thing. Could it be so simple? Could it be that we allow crises like climate change to occur only because we do not perceive them to represent criminal damage and injury, when we have no problem seeing other, far more petty crimes in that way? The challenge, then, would be to have a constitutional, legal framework for the management of the atmosphere which would force us to change our perception of the atmosphere – a framework which would determine both our rights and responsibilities. 2819

Received wisdom among government circles in places like Britain and the US is that radical lifestyle changes are politically impossible to promote. Ironically those same governments have, for decades, been demanding that many of the world’s poorest countries tighten their belts, cut spending and completely reshape their economies to pay their foreign financial debts. 2828

Eminent Indian academic M.S. Swaminathan wrote: The World Bank and IMF talk about structural adjustment in monetary terms. My own feeling is what we really need is adjustment to sustainable life styles [that] the Bank would not recommend. Because their structural adjustment is in money terms, not value. But if developing countries have to undergo such an adjustment in terms of financial problems … industrialised countries will also have to go through a structural adjustment process.5 Conventional economic adjustment in poor countries is a two-stage process. Stabilisation comes first, followed by a root and branch re-gearing of the economy. How might this apply to tackling ecological debt and establishing environmentally sustainable economies? 2830

The first task would be to remove major distortions. Currently standard economic measurements do not include social and environmental costs. This means two things. The economy free rides for example, on the way that families provide free upbringing, care and maintenance for the workforce and the way that natural resources like fossil fuels get used up, treated like free income to the economy and spent like a one-off family inheritance. The second effect is a hugely over-valued economy, one that doesn’t count either depreciation or expenditure. It is reminiscent of the sort of accounting that brings Enron-like corporations to ruin. 2837

Full cost accounting on the other hand would create the proper feedback of information to the economy, helping return balance to the nation’s accounts for more prudential economic planning. Adjustment though will be a much longer, negotiated process. First, a broad range of reforms is needed to develop greater economic democracy. Second, all economic planning needs to be set within known or precautionary environmental limits, primarily in this case climatic tolerance. These changes are about restoring what might be called the balance of environmental payments – after the common economic term that refers to the flow of imports and exports – but in this case a balance that results from the trade between human economic activity and the natural environment. The primary objective would be to eliminate the ecological deficit, manifest in the damaging accumulation of CO2 in the atmosphere. But what orderly procedure and framework could guide and shape such a process? 2842

What Aubrey understood was that, unlike Dennis Hope’s planetary land grab, if we were to save the climate, everyone would have to have an equal entitlement to its life support system. Opposite to the centuries-long process of expansion and divergence between rich and poor in the global economy, both global warming and considerations of human equity meant a process of contraction and convergence had to be the next step. 2872

If you set out on a journey without the right destination, you are unlikely to get there. That is what international negotiations on climate change are like. They have set an arbitrary target to reduce greenhouse gas emissions by an average of 5.2 per cent among rich countries below 1990 levels by the period 2008–12, a target that has nothing to do with the science of what is actually necessary. And, so far, the community of nations has even failed to hit that random goal. 2876

It is as if a group of people discover that in order to receive a life-saving medical treatment they have to travel to the city of Barcelona, as it is the only place the particular treatment is available. But disagreements emerge, some don’t like Spanish food, others don’t speak the language and for others the weather is not right. So they compromise and instead decide to travel to Berlin. There are, after all, similarities. It too is a major European city, and its name begins with a ‘B’. No one is entirely happy, but all agree that progress has been made. The journey has begun. Unfortunately, however, the life-saving treatment is not available in Berlin. All the group are aware of this, though a silent agreement prevents it being mentioned too openly. They still need to get to Barcelona, and time is running out. To complete the analogy with international climate negotiations, the story would unfold something like this. The group then fail to reach even Berlin. There is an argument on the plane about who is going to sit where, which leads to several group members refusing to travel. Others then say they can’t afford the time to travel. 2880

Working out what accumulation of greenhouse gases in the atmosphere would push us towards such a maximum temperature rise would create a target for climate policy. That is the first step to halting climate change and in the process of contraction and convergence. In effect, it sets the maximum allowable size of the carbon cake of fossil fuels to be eaten by the global economy. When governments agree to be bound by such a target, the diminishing amount of carbon dioxide and the other greenhouse gases that the world can release could be calculated for each year in the coming century. This target sets the initial parameters for contraction. Convergence describes how each year’s slice of this global emissions cake gets shared out among the nations of the world. 2896

It is never likely that everyone in the world will use identical amounts of fossil fuels. Our circumstances are too different. However, it is highly likely that any deal to manage the global commons of the atmosphere will have to be based on the principle that, in a carbon-constrained world, everyone should have equal entitlements to their share of the atmosphere’s ability to safely absorb greenhouse gas emissions. Up to the point that the world converts to clean, renewable energy, this roughly equates to access to economic opportunity. However, the process couldn’t happen overnight without the world going into the economic equivalent of toxic shock. It would need to happen over an agreed timeframe, or convergence period. To summarise the process so far: first it is necessary to cap total greenhouse gas emissions, then progressively to reduce them; entitlements to emit then get allocated, or ‘pre-distributed’, in a pattern of international convergence that moves in a set timeframe towards being equal per person. Under an emerging plan like this, people and nations that take economic benefits by emitting more than their fair share – eating more carbon cake than their allocated slice – will somehow have to pay compensation to the ‘under-polluters’ by purchasing their spare entitlements, or carbon cake. Otherwise they run up a huge ecological debt.8 2902

Probably, the only way to begin negotiations on how to cut the world’s carbon cake is to start with the principle that we all have equal rights to it. What we do with them is another matter. This has enormous and, from a development perspective, very positive consequences. It can liberate vast resources to finance development. But, if action to combat global warming is delayed, emissions grow and populations rise, the size of an acceptable carbon cake slice will get smaller and smaller. In other words, the sooner we act the better. The only weakness of contraction and convergence is that it will take time to negotiate and many poor countries desperately need the resources to adapt to climate change now. All that means, though, is that this cannot be the only international mechanism relied upon to transfer resources from rich to poor. 2913

When the US pulled out of climate talks in early 2001 there was uproar. But even before that it was negotiating in bad faith. At international talks in The Hague in late 2000 it proposed a form of ‘carbon laundering’, claiming domestic forests and farmland as carbon ‘sinks’ and credits against necessary emissions reductions. I call it laundering because it replaces one reliable and stable store of carbon in the form of coal and oil for an unstable storehouse in the form of trees and plants which die and re-release their carbon. US proposals then could have led to an overall 14 per cent increase in CO2 emissions rather than any real cuts.11 2928

Under the first George W. Bush administration (1999– 2004) the US used two arguments to defend its withdrawal from international negotiations. One was flippant and can be dismissed, the other was interesting and creates a small opening of opportunity. First, they say that they cannot ‘afford’ to act. But, if the wealthiest and most resource hungry country in the world can’t afford to act, who else can? Certainly not India where the average citizen emits around 20 times less CO2 than their US counterpart, or Mozambique where the average citizen is responsible for nearly 300 times fewer similar emissions. 2933

The second position stems from the so-called Byrd-Hagel resolution adopted in 1997 by the US Senate. It committed America to only ‘limit’ or ‘reduce’ emissions if poor countries were also involved in the deal. The Byrd-Hagel resolution accepted the logic of both controlling and cutting global emissions. This means that a total global emissions budget must be agreed on, capping greenhouse gas concentration levels in the atmosphere. It also means that the US, committed by its own declaration of independence to human equality, can embrace the contraction and convergence model. There are several, subtly differing, equity-based proposals for global frameworks to tackle climate change that could supersede the current agreement, the Kyoto Protocol, when it has run its course by 2012. Only contraction and convergence, though, passes the tests for both environmental integrity – working within secure environmental limits, and political feasibility – offering real entitlements to majority world countries. 2946

But is there any chance at all that the advanced industrial economies could make the kind of resources cuts necessary to fit into such a model? First, the historical experience of war economies described above suggests that they can if politicians are willing.12 Second, to turn our back on the challenge would be the deepest hypocrisy. Why? Because the world’s poorest countries have been reshaping their economies for decades and for a much worse reason. If they can do it to pay service on dubious foreign debts (that they are only partly responsible for), under the strict gaze of the World Bank and IMF, I see no reason why rich countries can’t do it to pay off their more real ecological debts. Majority world countries, lacking the systems of health, education and social support that the north enjoys, have tolerated badly designed ‘structural adjustment programmes’ intended to solve the orthodox debt crisis. But even the conservative Financial Times commented that the IMF through promoting these programmes under the so-called Washington Consensus ‘probably ruined as many economies as they have saved’.13 This thought is echoed by the Nobel Prize winning economist James Tobin who said, ‘Their standard remedies, fiscal stringency and punitive interest rates, are devastating to economic life’.14 It would be a shameless double-standard now to suggest that we in the rich world, using the targets that contraction and convergence will give us, can’t work within the framework of ‘sustainability adjustment programmes’ to balance our ecological budgets. Is it asking too much, are we too soft to take the medicine? 2953

Reform of our monetary system to re-connect the abstract world of finance and the supply of money to the physical world of natural resources may also be needed. Coming full circle, there once was a link between the money supply and gold and silver. Its availability was, to a degree, a limiting factor on what economies did, how big they grew. 2967

according to Douthwaite, ‘80 percent of the fossil carbon that ends up as man-made CO2 in the earth’s atmosphere comes from only 122 producers of carbon-based fuels’.15 2980

By specifying a set date for convergence at equal per capita rights, the C&C approach would give developing countries surplus emission allocations that they could then sell to countries that need extra permits – most of them developed. The revenue from the sale of surplus permits would give developing countries an income, which would encourage participation in a global climate deal. It would also create an added incentive to invest in clean technologies. Majority world countries also stand to benefit more, the sooner such an agreement is made. Because, as time passes, the cuts needed to prevent runaway global warming get bigger and so tradable emissions get fewer. In the pre-deal intervening period, it also means that rich over-polluting countries are abusing the global commons of the atmosphere without having to pay. C&C and the US Interestingly, C&C would also fit the stated position of the otherwise recalcitrant United States. In his statements on climate change, President George W. Bush set out specific criteria for what sort of treaty the US would be willing to sign. They included: a truly global deal including emissions targets for developing countries (or, from another perspective, entitlements), and the need for a science-based approach. Contraction and convergence, with its global participation design and formal greenhouse gas concentration target, is exactly such an approach. 3004

Minerva the goddess of wisdom. Minerva was also known as Athena. The owl was the sacred bird of Athens and through its connection with Minerva became a symbol of wisdom. As in Hegel’s famous phrase above, dusk is gathering quickly on our young civilisation. If wisdom is to take flight, it has little time. There is growing evidence that civilisations throughout history have collapsed due to climate change. Classic Maya society collapsed in the ninth century at the time of the worst drought experienced during that millennium. And, when drought and cooling struck around 4,300 years ago societies ranging from Egypt to Mesopotamia, Palestine, Greece and Crete fell on hard times and declined.4 3032

More of the world’s population crowd into mega cities of 10 million people or more. Most of those are in locations, on rivers or by the coast, that are on the front line of global warming. Many of the people are in poor or slum housing that barely can stand heavy rain let alone hurricane force winds or flooding. Access to clean drinking water and fertile ground to grow food can only become harder. 3039

Both the scientific warnings and energy alternatives needed to trigger our lifestyle changes have been available for decades. Yet we have moved further in the opposite direction and continue to do so, consuming more of what harms us. 3041

At the fifth anniversary of the Earth Summit in 1997, the United Nations said that without radical change in the way that we produce and consume things, ‘The next quarter century is likely to be characterised by declining standards of living, [and] rising levels of conflict and environmental stress’.6 At the same time a special session of the UN General Assembly noted only ‘marginal progress’ since the original Earth Summit in 1992. WE CAN’T HAVE THE PLANET AND EAT IT As we munch away at our finite fossil fuel inheritance, we munch away too at our life supporting atmosphere. Business-as-usual is at best a form of reckless environmental speculation and at worst a submission to our own fear that we cannot change. But change is necessary and possible. The world’s very poor live with austerity measures imposed under the aegis of often dubious conventional external debts. They also lose their loves, lives and limbs, and their farms and families when global warming strikes. These are things to keep in mind when we worry about giving up that second car or long-haul flight to paradise. 3055

In the recent past the US conserved energy to protect ‘general welfare’ and ‘ensure fair and efficient distribution’. In wartime they called it rationing. Today it would be a form of issuing equity and living within our environmental budget. Majority world countries could for the first time receive their fair entitlements. The health of the planet would be protected using a formula that gave people equal rights to key elements of its natural wealth. Contrary to many fears, prudent management to balance the environmental budget wouldn’t mean the death of business, but it would set new parameters. 3064

Maturing is partly a process of learning which behaviour is seriously anti-social. 3069

Teenagers learn painfully that they are not the centre of the universe, just as employers learn that exploiting child labour is bad, and societies learn that slavery is wrong. Climate change merely introduces a new, but significant parameter on anti-social behaviour. Throughout history people and businesses adapted to new regulatory environments. To get even close to the necessary cuts in fossil fuel consumption requires governments first to make and then win the argument for action in public. Not to do so now in the rich world could leave countries ungovernable when necessary measures have to be taken later. Ecological debt suggests a fundamental realignment of who owes whom in the international economy. A new mood of humility on the part of rich countries needs to characterise their relations with less developed countries. 3070

Now everything we take for granted in the global economy will have to change. Opportunities for development built on the fossil fuel economy have, by definition, to be shared. Enter, stage right, the unquestionable assumption driving the global economy – the growth imperative, with its beating heart of capital accumulation. If the causes and consequences of climate change are accepted, there is one enormous, inescapable and, for many, shattering conclusion. How cautious must we be before making bold predictions? In the language of economists Robert Heilbroner dares point out the elephant in the room. Climate change generates ‘externalities’ that are so huge they put obstacles in the way of ‘the accumulation process on which the system’s life force depends’. 3088

global warming probably means the death of capitalism as the dominant organising framework for the global economy. If that sounds dramatic, remember it’s already the case in Britain, for example, that one third of the economy is taken up by government spending which marches to the beat of different ideas. If the demise of capitalism really is likely, what will replace it? What we recognise today as markets were once a tiny proportion of the stuff of economic life. A wheel may now have turned full circle. Facing greater environmental, economic and political volatility, the notion that the struggle for private gain can provide the glue to hold societies together suddenly seems absurd. What were we thinking? The economy we have now is the result of countless minute decisions made by individuals supposedly maximising their ‘utility’. But, measured mostly by money or status, this ultimately results in an unsatisfying and ever increasing consumption of goods and services. 3095

is there a human emotion that can overcome the pursuit of maximum short-term gratification? The answer, I believe, is an economy driven not in practice by individual wealth accumulation, but by an even stronger emotion, the collective desire for survival, and the protection of family and loved ones. 3107

A great problem, still, is the profession of economics. Robert Heilbroner characterised the early nineteenth century as a world that was ‘not only harsh and cruel but that rationalised its cruelty under the guise of economic law’.12 The laws dressed in the costume of natural forces and could apparently be no more defied than the law of gravity. With choking irony, today immature economic assumptions that treat natural resources as free income to the economy are usurping a natural order that took millions of years to establish. Keynes called on economists to think of themselves humbly, on a ‘level with dentists’.13 3135

Research shows that people’s happiness rises along with conventional wealth only up to the point that our needs for basics like adequate warmth, food, clothing, and shelter are met. After that our well-being depends on other things like friendships, opportunities for creativity and the quality of our family relationships. This means that with better awareness of what really gives us a sense of wellbeing, by ignoring the adverts, we could actually consume less and be happier. 3144

We can expand human wellbeing with an economics that redefines wealth, and measures the losses to social and environmental welfare that occur in the current system. 3150

Local currencies and innovations like Time Banks, where the medium of exchange for goods and services is equal units of people’s time, can help marginalised and officially unemployed people to make useful social contributions. They can create new economic space in the vacuums left by orthodox ‘free’ markets in poor communities and housing estates around the world. There can be expanding economies based upon a cycle of economic re-use, recycling and innovation, rather than one of throughput and the waste of materials. 3152

in the Congo, in late 2006, the World Bank became embroiled in revelations concerning ‘opaque mining deals and the mishandling of reconstruction funds’.1 An internal World Bank memo said the bank risked ‘perceived complicity and/or tacit approval’ in corruption linked to bank-funded ‘reforms’ of the mining sector. It wasn’t the first time such revelations had faced the bank, but considering its lecturing of poor countries on the theme of ‘good governance’, it was one of the worst. Previously, when Mobutu Sese Seko ran his kleptocracy in former Zaire, loans worth billions of dollars, that created enormous, unserviceable sovereign debts, were still given to Mobutu for up to a decade after warnings were given from the international financial institutions’ own staff. 10. 3182

Overall, up to a quarter of greenhouse gas emissions are thought to come from the clearance of tropical forests. But the forests are valuable for many reasons: in their own right, as home to rare primates and other species, as a bulwark against further global warming and, in the case of the Democratic Republic of Congo (DRC), they provide livelihoods including food and medicines to 40 million people, two thirds of the population. Once again the World Bank is compromised in the threat to the area’s natural resources. Following a period of conflict, the bank began lending to the DRC in 2001 and had channelled over $4 billion to the country by 2006. In spite of its leverage as a creditor, things have gone badly. That is in spite of a moratorium on new logging ‘titles’ or the expansion of existing ones since 2002, and the introduction of forestry codes. In four years from 2002, 107 new contracts to log a total of 15 million hectares of forest were signed. Promised benefits to local people from the trade have also failed to materialise. Tax avoidance and timber smuggling are reportedly rife. One assessment concluded that ‘the World Bank maintains the illusion that logging companies will be largely beneficial to local communities’, and ‘has so far failed in its objectives of controlling the expansion of industrial logging’. Instead, it helped introduce a moratorium that has been ‘a cover for behind-the-scenes jostling for valuable forest resources’.2 3192

Against the wishes of Iraqi trade union federations and civil society groups, intense pressure was placed on the country’s government (at the time of writing) to adopt an oil law that would grant abnormally generous terms to foreign oil companies.8 Global oil politics intensified still further over the course of 2006 and 2007 as Venezuela progressively took back control of foreign-owned sectors of the oil industry within its boundaries. Following the move by President Hugo Chavez, thousands of workers moved overnight into oil fields in the Orinoco basin, and foreign companies including BP, Chevron, ExxonMobil, ConocoPhillips, Statoil and Total conceded operational control to Petroleos de Venezuela. 3239

In every direction, seemingly, ecological debt walks hand in hand with global warming and poverty, like a world-weary grandparent to whom a sad child on either side looks up to for answers. 3245

THE SHORT ARM OF THE LAW In line with a nascent trend highlighted in the first edition, there has been a huge rise in redress to national and international law in relation to fossil fuel use and global warming. But, as in the rest of life, the law is an unpredictable and imprecise weapon in the fight against climate change. The people of the Niger Delta also endure day-to-day environmental degradation linked to the oil industry. Gas flaring in the area is a lazy by-product of the oil industry, estimated to cost the country $2.5 billion each year. The annual CO2 emissions that result are estimated to match those of the whole of Sweden. In spite of ample time to comply with legal orders to stop gas flaring in Nigeria, the Anglo-Dutch oil company Shell continued beyond the deadline imposed by the court order at the end of April 2007.9 3246

climate science gives little credibility to the whole idea of offsetting. Kevin Anderson, a senior scientist at the Manchester Tyndall Centre for Climate Change Research, believes the approach is both uncertain and ineffective, describing it as ‘a dangerous delaying technique’. 3282

in line with the latest climate science, substantial fossil fuel reserves should be declared ‘unburnable’, and that companies should be prevented from presenting these as assets when they declare the scale of their reserves. Separate accounts would have to be prepared for burnable and unburnable carbon. 3297

the Jubilee Debt Campaign18 estimated that rich countries’ annual ‘carbon debt’ was in the region of $1 trillion. Low-income countries, on the other hand, had a notional carbon credit of $93 billion, as their fossil fuel use was well within a safe, per capita global share.19 Such numbers highlight, for them, the continuing absurdity of a global system of daily usury in which around $100 million passes in financial debt payments from poor countries to the governments of the rich world, and their private companies and international institutions, amounting to around $40 billion a year. 3311

more recently, an academic study examined the impact of six key types of environmental dam age. It looked across a range of pressures on natural resources driven by the lifestyles and levels of consumption in rich countries and set out to put a price on them. From the in ten sifica t ion and ex pan sion of farming, to de for esta t ion, over- fish ing, loss of man grove swamps, ozone de ple tion and cli mate change, the researchers drew the same conclusion as others before them: that environmental damage dis pro por tion ate ly harms poorer nations. The price of the damage caused to them was put at $1.8 tril lion20 worth of lost output, and was more than their to tal for eign debt.21 Like a bidding war in a game of mutually assured destruction, another study on the economics of ecosystems, funded by the European Commission and the German government, estimated that annual forest loss had a price tag of $2–5 trillion.22 These are useful illustrations. Without a price, things pass either undervalued or completely unvalued in a market economy. Environmental cost accounting goes some way to redress that imbalance. Some even suggest that all environmental problems could be solved if only we had an accurate system that included in the price of things the full cost of the damage their production caused. This would make life much easier for governments and policy makers. The business of saving the world could then be left to businesses operating in the lightly regulated markets of neo-liberal dreams. 3319

‘How do you put a price on the tonne of carbon that, once burned, tips the balance, triggering catastrophic, runaway climate change?” A climate that is habitable, even comfortable, for humankind is like the greatest work of art imaginable; literally priceless. It is without price in the sense that accounting for the full consequences of its loss is, in any meaningful sense, both impossible and pointless. It is also priceless in the sense that runaway global warming is just that – something which will have escaped our wit to control. We almost certainly could not ‘buy’ it back, even if we wanted to and were prepared to make any kind of sacrifice to do so. In seeking solutions to our ecological debts, then, we should remember both the limits of market mechanisms that rely on price and the importance of collective political initiatives (however insufferable and intensely frustrating they prove to be). That is not to say that markets cannot be useful, when used as our slaves rather than our masters, and when equity has been designed-in from the outset; for example, by pre-distributing to all an entitlement to share equally in the planet’s substantial biocapacity. 3333

you take more than your fair share of available biocapacity you run up an ecological debt. 3343

nothing will happen without major cultural shifts, the kind of which the first shoots are beginning to appear. 3346

In 1972 when scientists at MIT published the Limits to Growth report it was widely denounced. Folk memory says they got it wrong, exaggerating the planetary predicament and discrediting the wider environmental movement. Dismissed and criticised for ‘crying wolf’, it now seems that there was after all a wild and hungry carnivore at the door. A detailed study compared the original projections of Limits to Growth with 30 years of subsequent observed trends and actual data. It found a solid correlation between projection and reality; in fact, they ‘compared favourably’.25 Matthew Simmons, founder of the world’s largest energy investment banking firm, commented that its message was more relevant than ever and that ‘we wasted 30 valuable years of action by misreading the message of the first book’. Time, then, to move swiftly on.26 14 Tick Tock Climate Clock The first law says you can’t win, the second law says you can’t even break even. 3359

C.P. Snow, on the laws of thermodynamics If humanity wishes to preserve a planet similar to that on which civilisation developed and to which life on Earth is adapted … CO2 will need to be reduced from its current 385 ppm to at most 350 ppm CO2, but likely much less than that … If the present overshoot of this target CO2 is not brief, there is a possibility of seeding irreversible catastrophic effects. James Hansen, NASA/Goddard Institute for Space Studies1 3370

In his book The Last Generation, Fred Pearce, a long-term writer with New Scientist magazine, collated a range of peer-reviewed research into nature’s complex atmospheric feedback mechanisms, and looked at how they are responding to climate change. From ice cover to permafrost; forests, oceans, and even, more controversially, the behaviour of clouds, almost every feature seemed to wobble like a badly balanced domino – each threatening to fall and knock the other in a catastrophic chain reaction. Other dynamics include the decreasing ability of oceans to absorb CO2 due to higher wind strengths linked to climate change. This has already been observed in the Southern Ocean and the North Atlantic, increasing the amount of CO2 in the atmosphere and adding to climate change. A rough consensus has emerged that an average global temperature rise of more than 2 °C above pre-industrial levels is the threshold that should not be crossed. Beyond that, the likelihood of major, irreversible climate change becomes unacceptably high. 3381

Collapse of the Greenland ice sheet, for example, which could trigger a sea-level rise of seven metres over the course of the next millennium, becomes likely with a local warming of 2.7 °C, and this corresponds to a global mean increase of 2 °C or less.2 Others believe that a global rise of just 1 °C, to which we are already almost certainly committed, is enough to condemn the Greenland ice, and that it could disappear over three times as quickly, 3390

The prospect of not avoiding runaway change for billions of people whose livelihoods come directly from the land is unthinkable. Recent research that modelled future patterns of drought around the world truly deserves the epithet ‘terrifying’. The UK’s Hadley Centre for Climate Prediction and Research, part of the government’s Meteorological Office, looked at the share of the earth’s land surface that is prone to extreme, severe and moderate drought. They concluded that the percentage of land surface suffering extreme drought had already trebled from just 1 per cent to 3 per cent in less than a decade. Then, using a medium scenario for climate change, the Centre projected that this trend will continue until extreme drought conditions affect more than 30 per cent of the globe by 2090.5 Drought will hit the great grain-growing areas of Europe, North America and Russia, as well as the Middle East and Central Asia, North Africa and Southern Africa, Amazonia in Brazil, and Central America. Change is already a reality for some. There are an estimated 3 million pastoralists in northern Kenya. According to one agency, drought increased fourfold in the Mandera region in the last quarter of a century. These changes in the climate forced approximately half a million people, one third of the herders living there, to abandon their nomadic way of life. 3402

Although the models forecast a severe, overall drying pattern, certain areas will get much wetter. More rain is forecast for Central Africa, the Horn and East Africa and parts of coastal West Africa, China and Eastern Asia, and high Northern latitudes. But higher rainfall could come in the destructive form of great deluges as easily as beneficial rains. Devastating floods hit a swathe of African countries in September 2007, for example, killing livestock, destroying crops, bursting dams and leaving hundreds of thousands homeless.7 Historically, a total of 20 per cent of the earth’s land surface has been in drought at any one time, be it extreme, severe or moderate. This has now risen to 28 per cent and is predicted to reach 35 per cent by 2020 and cover 50 per cent – half the earth’s land surface and still rising – by 2090. Droughts will also be much longer in duration.8 And it isn’t just the land we need to worry about. An ocean famine is being created by global warming in tropical and sub-tropical seas. Warmer seas in these regions mean that phytoplankton, microscopic green plants upon which the food chain depends, grow less. To have conditions for them to grow, water at the surface needs to mix with deeper nutrient-rich water. But higher temperatures at the surface prevent it.9 Vast amounts of carbon dioxide in the atmosphere get absorbed into the oceans. As that happens the oceans acidify. Past periods of acidification have coincided with mass extinction events of oceanic species. Having occurred, it can take tens of thousands of years for a balance to be restored. 3413

the paleo-climate record indicates the planet has previously experienced a 10 °C temperature shift in only a decade, and possibly ‘as quickly as in a single year’.10 And going into and coming out of the last ice age, there were ‘local warmings as large as 16 °C’ that happened repeatedly.11 The fact that such huge natural variation can occur means that humanity is toying with a system far more prone to sudden change than previously thought. 3430

from Hansen. To ‘geo-engineer’ just 50 ppm CO2 out of the atmosphere would cost, he estimated $20 trillion.16 That is, not 1 per cent of global income, but between a third and a half of the value of the world economy in 2007. 3459

An emerging consensus suggests that, at best, we have less than a decade to stabilise global greenhouse gas concentrations before potentially irreversible changes to our climate begin to happen. 100 MONTHS, AND COUNTING … If you shout ‘Fire!’ in a crowded theatre when there is none, don’t be surprised if you get arrested for irresponsible behaviour and a breach of the peace. But statistics on climate change are like smoke billowing beneath the door. What constitutes a ‘dangerous’ level of warming depends to an important degree on two things: where and how you are living in the world, and the probability of certain events happening. Scientists like Hansen think we have already gone too far. But even if you take the parameters set by the more cautious majority of the scientific community, things look bad. Based on a very conservative estimate, from August 2008, there were only 100 months left before the world enters a new, more perilous phase of global warming.18 Approximately 1,000 tonnes of CO2 are released into the earth’s atmosphere every second, due to human activity. And when these gases accumulate beyond a certain level – often termed a ‘tipping point’ – global warming will accelerate, potentially beyond control. Faced with circumstances that clearly threaten human civilisation, scientists at least have the sense of humour to term what drives this process as ‘positive feedback’ (see above). Once a critical greenhouse concentration threshold is passed, global warming will continue even if we stop releasing additional greenhouse gases into the atmosphere. If that happens, the earth’s climate will shift into another, more volatile state, with different ocean circulation, wind and rainfall patterns. 3465

collapse of the Greenland ice sheet is more than likely to be triggered by a local warming of 2.7 °C, which could correspond to a global mean temperature increase of 2 °C or less (the disintegration of the Greenland ice sheet could correspond to a sea-level rise of up to seven metres). This timescale also uses the lower end of threats in assessing the impact of vanishing ice cover and other carbon cycle feedbacks. But the result is worrying enough. 3486

One hundred months from August 2008 we will reach a concentration of greenhouse gases at which it is no longer ‘likely’ that we will stay below the 2 °C temperature rise threshold. ‘Likely’ is a definition of risk used by the IPCC. But even just before that point, there is still a one third chance of crossing the line. 3490

In an infinitely growing and materially heavy global economy, as C.P. Snow put it, ‘The first law says you can’t win, the second law says you can’t even break even.’ Even in the most optimistic scenarios for the uptake of renewable energy and energy efficiency used by the IPCC, continued overall global economic growth,19 even at low levels, carries the world beyond the point of potential no-return toward runaway change.20 3499

Economic growth is predominantly fuelled by oil, coal and gas. But we need to reduce the greenhouse gas emissions that come from burning fossil fuels (we shouldn’t forget that growth also creates a burden by extracting many more natural resources from, and dumping more waste into, our life-supporting ecosystems). The only way to reduce emissions, then, would be to reduce the carbon content of growth (or ‘intensity’ as it is called) faster than the rate of growth itself. It would also have to happen fast enough to avoid getting to the point of no return (and this point, as mentioned, could arrive all too soon). 3503

The International Energy Agency projects global economic growth to rise at about 3.4 per cent per year. So, in order to get real reductions in carbon emissions by just 1 per cent per year, the carbon ‘intensity’ of the economy would need to improve by 4.4 per cent. 3508

To survive within the flexible, but real, natural resource limits of our planet, reductions in the overall material intensity of growth would also have to continue forever, and at a rate greater than the growth itself. And, on this score, the news is not good. The first edition of this book (included now in Chapter 2) are some rough calculations on the problem of exponential growth by an astro-physicist who became interested in the clash between conventional economics and climate change. While it remains a heresy punishable by career suicide for economists to question growth, other disciplines seem able to view the issue more logically, their views less obstructed by doctrine. At a guest lecture in May 2007, given by Prof. Roderick Smith from the Royal Academy of Engineering at Imperial College, he again made the point that is so difficult for economists to grasp. The physical view of the economy, he said, ‘is governed by the laws of thermodynamics and continuity’, and so ‘The question of how much natural resource we have to fuel the economy, and how much energy we have to extract, process and manufacture is central to our existence’.22 3515

Engineers must deal every day with the stuff, the material, the ‘thingyness’ of the world around them, the stresses and strains that makes things stand up, fall down, last or wear out. Because of this, they are perhaps more in tune with the real world of resources than the economist working with abstract mathematical simplifications of life. Hence Smith honed in on one of the economy’s most important characteristics – its ‘doubling period’, by which its bulk multiplies in proportion to its current size. Even low growth rates of around 3 per cent, he points out, lead to ‘surprisingly short doubling times’. Hence ‘A 3 per cent growth rate, which is typical of the rate of a developed economy, leads to a doubling time of just over 23 years. The 10 per cent rates of rapidly developing economies double the size of the economy in just under 7 years’.23 3523

Smith quaintly calls the ‘real surprise’. Because, according to Smith, ‘each successive doubling period consumes as much resource as all the previous doubling periods combined’; adding, almost redundantly as jaws in the room fall open: ‘This little appreciated fact lies at the heart of why our current economic model is unsustainable.’24 3531

The reason that we are in our current environmental predicament appears to be that we have become hooked on the fringe benefits while deliberately forgetting the potentially catastrophic consequences of the ecological debts they ring up. Recent trends also suggest that where the world’s biggest economy, the US, is concerned, many of the low-hanging fruits of efficiency may already have been plucked. 3546

‘Assuming the best-case scenario for clean energy and technology,’ I asked, ‘had Stern looked at what level of economic growth, globally, was compatible with keeping under a safe threshold of greenhouse gases in the atmosphere?’ Silence falls. Muttering. Stuttering, and nervous faces. Not a single attempt follows from any speaker at a cogent response. Why? Because, first, they hadn’t looked. And second, if they had, they would instantly be cast out of the circle of respectable opinion. Their crime? Making inadmissible observations and questioning growth. That is in spite of the fact that several decades have passed since a very respectable economist pointed out this clash between economics and physics (and, one might add, even longer since the clash between fossil-fuelled economic growth and atmospheric chemistry was noted; see Chapter 2). 3550

This is how the economist Herman Daly put it, himself drawing on older work by another economist, Nicholas Georgescu-Roegen, concerning entropy and economics. ‘The notion that we can save the “growth forever” paradigm by dematerialising the economy, or “decoupling” it from resources, or substituting information for resources, is fantasy. We can surely eat lower down the food chain,’ he wrote, ‘but we cannot eat recipes … I admit that if the ecosystem can grow indefinitely then so can the aggregate economy’.26 Depletion, waste and pollution are inevitable consequences of an economy based on the throughput of material resources. The consumption of fossil fuels is but one, very serious, example of the flaw in the system. 3556

Daly’s famous phrase (which I quote far too often) is that our economic system treats the planet as if it were a ‘business in liquidation’. Any system based, in this fashion, on the throughput of resources is headed towards insolvency. The important caveat is that there 3563

Worse than that, to have the growth of GDP, as both the principal policy goal and measure of economic success is ‘not only a passive mismeasure but … an actively distorting influence’ that has the effect of ‘maximising depletion and pollution’.27 As an indicator it is so wrong-headed that even when we spend ‘defensively’ to clear up costs of growth like pollution, this, too, is counted positively as growth. A global economy based upon growth, by definition, recognises no biophysical limits. But these limits, fuzzy and unavoidably real, have been there for decades for all of us to see. Ever since space exploration yielded the first photographs of the earth from space, a life-supporting planet floating against the void in glorious isolation, we’ve known that we have no near neighbours to turn to should things go horribly wrong. 3568

Increasingly sophisticated measures of humanity’s ecological footprint suggest that, on very conservative estimates, the human population as a whole has been exceeding its available biocapacity since the early 1980s. We’ve been taking more from our fields, forests and oceans to consume than ecosystems can replace, leading to a net run-down of the natural assets upon which the real economy ultimately depends. And, it appears, we are heading further in the wrong direction each year. A world going deeper into ecological debt can be seen, for example, in the collapse of ocean fish stocks. One estimate suggests that, at current rates of depletion, most fish stocks internationally will collapse by 2048.28 A clear overall demonstration comes from looking at the day in a typical calendar year when the world, in effect, starts eating into its stock of natural resources and goes into ecological debt. The date has been creeping ever earlier in the year since the world entered deficit in the 1980s. By over-consuming, in 2008 for example, the human population collectively went into ecological debt on 23 September.29 3575

And things are much more extreme where many wealthy countries are concerned. If everyone in the world wanted to live like people in the UK, for example, on a very conservative estimate, we would need over three planets like the earth, and head into deficit in early April. The ecological footprint is a measure of human consumption compared to available biocapacity. Trying to run the world without using a measure like this as a basic tool for policy makers is like trying to run a business with no knowledge at all of your cashflow or assets. Anyone trying to run a company like that should not be surprised if they became bankrupt. Why do we suppose it will be any different in the way we treat the environment? 3583

As patriotism was once derided as the last defence of the coward, so the last defence of global growth is that it is necessary to tackle poverty. But other recent evidence has shown this notion to be flawed, inefficient and disingenuous. At a national level, conventional economic growth will happen in poor countries as a consequence of effectively reducing poverty. But at a global level, the policies designed to pursue growth have become a mask for making the rich richer, while leaving the poor with few benefits and abandoned to deal with the consequences.30 3590

During the 1980s, the so-called lost decade for tackling poverty, from every $100 worth of global economic growth, around $2.20 found its way to people living below the absolute poverty line. Bad enough, but a decade later that had shrunk to just 60 cents – the slice of the growth cake going to the poorest has been getting smaller. Meanwhile, the actual mean income of those living under the absolute poverty line of $1 per day in Africa also fell, from 64 cents per person per day in 1981, to just 61 cents in 2001.31 There has been, in effect, a sort of ‘flood up’ of wealth from poor to rich, rather than a ‘trickle down’. Perversely, it means that for the poor to get slightly less poor, the rich have to get very much richer. It now takes around $166 worth of global growth (made up of all those giant flat screen TVs and SUVs) to generate a single dollar of poverty reduction for people living below $1 a day, compared with around just $45 dollars in the 1980s.32 Earnings of between $3 and $4 per day is the rough level at which the strong link between your income and your life expectancy breaks down. So what would happen if we agreed $3 per day as the absolute minimum acceptable level of income to escape absolute poverty? 3594

mentioned, if the whole world wished to consume at the level of the United States, we would need, conservatively, more than five planets like earth to support them. The figure for Britain would be slightly more than three planets. But because of the skewed distribution of benefits in the global economy between rich and poor, and because for the poor to become slightly less poor the rich have to get much richer, and because all this uses up a lot of resources, this simple exercise demonstrates that without radical changes in distribution, we will tip over the ecological edge. Under the current system and pattern of economic growth, to lift everyone in the world onto a modest income of $3 per day would require the resources of around 15 planets like ours. So, where, you might ask, will the other 14 come from? 3604

Robert Kennedy demolished the idea with these words in a speech given in 1968: Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways or carnage. It counts special locks for our doors, and jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead …     Yet the GNP does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile.33 3613

a measure of the ecological efficiency with which we can deliver relatively long and happy lives, dubbed the Happy Planet Index.34 It’s findings revealed that mostly middle-income Latin American countries and small island states were the most ecologically efficient at producing human longevity and wellbeing. 3624

BREAKING THE BANK: FINANCIAL DEBT AND ECOLOGICAL DEBT In her book The Coming First World Debt Crisis,36 Ann Pettifor, the woman who led the headline-grabbing Jubilee 2000 international debt relief campaign in the late 1990s, subsequently turned her attention to other financial misdemeanours perpetrated by rich countries. The steady inflation of a massive bubble of credit (or debt, depending on which label you prefer) is the most striking feature of both the US and UK economies in recent years. And a clear link emerges between the over-consumption that is creating ecological debt and the easy provision of the reckless credit that pays for it by the banking system. ‘I see a strong contradiction between what Herman Daly calls, “the sickness of unlimited wants,” or in other words, consumption financed by debt,’ she writes, ‘and the absolute scarcity of already depleted resources such as oil and the ability of the atmosphere to absorb our wastes’.37 While money to pay for consuming goods can be lent into existence by banks, unfortunately we are yet to uncover a benign creator who can lend matter into existence to replace what we use and turn into waste. 3635

The speed and depth of the government’s response – ensuring that tens of billions of pounds were immediately made available to underwrite the system – showed how seriously the threat was taken. Sadly, still no such concern is evident for the financial system’s parent company, the biosphere. In an ecological timeframe, our life support systems also may be teetering between a crisis of liquidity and irrecoverable insolvency. Yet this deeper, more threatening problem is met instead with the equivalent in advice of telling worried savers not to worry, and to go a little easier on their purse during their next shopping trip. But is it possible that such timidity might finally be about to change? There are some tentative signs. 3649

That shift has invaded the political sphere, where debate (if not action) on climate change now moves at the speed of a receding glacier – in other words, very fast. First came the surprising comment of former UN weapons inspector for Iraq, Hans Blix – the man whose pleas were ignored by the US and UK for more time to establish the truth concerning the presence of ‘weapons of mass destruction’ in the country. Contradicting the media and political narrative dominant at the time, Blix said that climate change was a greater threat to humanity than international terrorism. His sentiments were echoed first by Sir John Houghton, the climate scientist and former senior figure at the IPCC, and then Sir David King, chief scientific advisor to the UK government, and even Prof. Stephen Hawking, who said: ‘The West should have a war on global warming rather than a war on terror.’38 3671

when UK Foreign Secretary, the Rt. Hon. Margaret Beckett MP, gave the Annual Winston Churchill Memorial Lecture in April 2007 to a meeting in New York of the wonderfully dubious-sounding ‘British American Business Inc.’39 3682

the theme and title she chose was ‘Climate Change: “The Gathering Storm”’. ‘It was a time when Churchill, perceiving the dangers that lay ahead, struggled to mobilise the political will and industrial energy of the British empire to meet those dangers. He did so often in the face of strong opposition and not always with success: wasted opportunities that he subsequently referred to as “The Locust Years”’, Beckett said, recalling the atmosphere in the approach to war with Germany. And in case there was any residual ambiguity, she continued: But in the end it was his foresight and his determination to prepare for a threat which – to many – was still seemingly distant and uncertain that in the end guaranteed the liberty and indeed survival of my country and that of many others.     Today politicians and business leaders alike once again face an increasing danger to our security and prosperity, and growing calls for early and resolute measures. Climate change is the gathering storm of our generation. And the implications – should we fail to act – could be no less dire: and perhaps even more so.40 3686

When Stavros Dimas became European Commissioner for the Environment, green hearts sank. He had a reputation as an advocate of unregulated market economics. Exposed to the realities of climate change, however, it wasn’t long before he was calling for the effort of a ‘war economy’ – a notion imbued with all the political parameter-setting and intervention in the working of the market that such a project entails. ‘Damaged economies, refugees, political instability, and the loss of life are typically the results of war. But they will also be the results of unchecked climate change’, said Dimas in January 2007, elaborating that ‘It is clear that the fight against climate change is much more than a battle. It is a world war that will last for many years … It is like a war because to reduce emissions something very like a war economy is needed.’ Such an effort, he said, could bring public health benefits, just as it did in Britain in the 1940s. Plans to reduce emissions by 20 per cent by the year 2020 and increase the share of renewable energy in the EU to 20 per cent by the same year, were called part of a new ‘industrial revolution’.41 3696

Folk memory has been cruel to Cassandra, mythical royal daughter of Troy. Now her name is a gentle term of abuse used to dismiss anyone whose outlook seems negative. Cruel irony, as her god-given curse was to have the power of prophesy and yet be disbelieved. She saw tragedies coming, including her own, but could do nothing to stop them. 3728

Following nationalisation of much of the finance sector, two governments formerly wedded to light touch, and sometimes absent, regulation find themselves owning, in effect, great swathes of their countries’ economies – banks, homes, buildings, infrastructure and much else besides. Both are now in positions to direct investment and revolutionise the energy use and efficiency of much of the economy. 3764

You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete. Richard Buckminster Fuller 3774

The new focus will be on maximising local resilience to external economic and environmental shocks, on the capacity to adapt, and on shifting our consumption patterns into a state of ‘dynamic equilibrium’ with the world of natural resources – the target of one-planet living. (See below: I prefer the term ‘dynamic equilibrium’ in favour of Herman Daly’s ‘steady state economy’. It seems to capture better the relationship between two things that, while needing to achieve balance, will never be static – namely, our consumption patterns and the biocapacity available to feed them.) So how will we build resilience, the capacity to adapt, and move toward a dynamic equilibrium between society and the natural world, while ensuring both equity and sufficiency? First, we should get real. 3816

‘London has become a global centre for financing the expansion of the fossil fuel industry’, says Mark Campanale, a specialist in clean technology with London Bridge Capital, adding that ‘Inaction on this point by either the Treasury or its subsidiary, the Financial Services Authority (FSA), serves to undermine any positive policies brought to bear elsewhere, for example, through carbon trading or voluntary action by the public.’ 3849

The point is this: all around us are familiar names, companies and politicians acting as if no fundamental change is needed. It sets a tone, feeding something called the ‘bystander effect’, coined by psychologists John Darley and Bibb Latané following an infamous, protracted murder which was heard and witnessed by many people who failed to intervene. It suggests that people are more likely to react to an emergency situation when alone than in groups.4 Darley and Latané tested their hypothesis by having volunteers fill out forms in a room that, after a while, began to fill with smoke. Unknown to them, some volunteers were placed in rooms filled with actors who had been briefed to ignore the smoke. While those left alone were quick to report the smoke, those in rooms surrounded by other people who continued calmly to write did not. The ‘astonishing finding’ is, as one journalist put it, ‘that the inaction of other people can make us underestimate threats to our own safety’.5 Now, in relation to climate change, we are surrounded by the active promotion of inaction. With so many soothing, misleading voices speaking over a creeping disaster, it is not surprising that many feel like worried yet passive bystanders. A lot of guff has emanated from the automobile and airline industries about taking the car and the plane ‘out of the environmental equation’. This is usually code for the marginal introduction of new fuel sources such as biofuels, hydrogen fuel cells and electric power. 3856

Then, Ditch the Great Offsetting Myth We need a meaningful measure against which to judge progress. According to Kevin Anderson of the respected Tyndall Centre for Climate Change Research, the UK needs to achieve year-on-year cuts in its greenhouse gas emissions over the coming decades in the region of 7–11 per cent, if it is to play its part in preventing potentially irreversible global warming.7 In practice, new technology and energy efficiency alone, simply are not capable of delivering savings on that scale. Assuming modest economic growth of between 2 per cent and 3 per cent, he implies the need to reduce the carbon intensity of the economy by up to 13 per cent a year. But the most that has been achieved in the United States, a country with perhaps the biggest room for improvement, is 2.7 per cent. Today, annual improvements languish around 1.6 per cent.8 3880

the vast majority of schemes also shift the onus of responsibility from wealthy Northern consumers to poor countries, where, for cost reasons, most offset projects are based. Some have made the comparison that offsetting is like paying someone else to be faithful so that you can have an affair. 3897

Leave aside that some analysts believe current nuclear technologies to be ultimately ‘energy bankrupt’. That is to say, it will take more than all the energy generated by the nuclear sector just to manage their own fuel cycle, waste management and decommissioning – adding nothing to the sustainability or security of our energy supply.10 3924

Put briefly, in spite of what nuclear power companies say, as a response to global warming, nuclear solutions are too slow, too expensive and limited. In an age of terrorist threats, they are more of a security risk than a solution, while answers to the unsolved problem of waste and decommissioning are nowhere in sight. In terms of the relative costs of lowering carbon emissions, nuclear power comes at the end of a long list of more efficient alternatives. Contrary to myth, nuclear power is not itself a carbon-free energy source, as fossil fuel energy is needed at various stages of its production. As higher-grade uranium ores get used up, nuclear becomes progressively more expensive and carbon-polluting. 3931

the conservative philosopher Karl Popper, who pointed out that ‘proponents of complete freedom … are in actuality, whatever their intentions, enemies of Freedom’. In The Open Society and its Enemies, Popper reasoned that unrestrained individual behaviour is not only self-destructive but bound to produce its opposite, for if all restraints were removed there would be nothing whatever to stop the strong enslaving the weak. So complete freedom would bring about the end of freedom.13 The mantra of consumer choice underpins our individualistic economic system. But now it is the absence of action to curb individual excess that is the biggest threat to our freedoms. It is a depressingly unnecessary threat, grown from chasing the retreating shadows of our own wellbeing down the blind alleys of conspicuous consumption. It is consumerism that has enslaved us, we should now argue, not the environmentalism that seeks to end its worst excesses. In its cause we have become chained to the workplace, turning our backs on friends, family and the things that bring real contentment. We work longer hours to earn, to buy the consumer clutter that promises happiness but delivers only listlessness and dissatisfaction. Why? 3955

Barry Schwarz quotes a classic example about lottery winners in his book The Paradox of Choice. The winners reported levels of happiness that were no different from the general population. Schwarz explains that first, people just get used to good or bad fortune. Second, the new standard of what’s a good experience (winning the lottery) may make many of the ordinary pleasures of daily life (the smell of freshly brewed coffee, the new blooms and refreshing breezes of a lovely spring day) rather tame by comparison.15 3975

what sort of indicator could better point the way ahead for policy? Basically, we need to assess the efficiency with which we turn fundamental inputs, in this case fossil fuels, into desirable and meaningful human outcomes, such as relatively long and satisfied lives. Standard, comparable data exist for all these factors and for most countries. Interestingly, for those who doubt the robustness of life satisfaction measures, they correlate closely with a wide range of quantitative data on health, depression and suicide. In other words, when asked in the right way, people do have a good idea of their overall wellbeing. Combining life expectancy and satisfaction produces perhaps the most fundamental indicator of human wellbeing, what academics refer to as ‘happy life years’. By then adding resource inputs, either carbon alone or all resources measured by the ecological footprint, a measure emerges of the relative environmental efficiency with which societies deliver long and happy lives. 3988

Apply this analysis to Europe using carbon, and a surprising and worrying picture emerges. For all the talk of successful knowledge driven, resource-light service economies, the core European nations have as a whole become less, not more, carbon efficient at delivering wellbeing for their citizens in terms of life expectancy and satisfaction. Europe is less carbon efficient now than it was in 1961.16 Better news comes from findings that across Europe, and even more so within the UK, where people report comparable levels of wellbeing, whether their lifestyles are high-consuming and very resource-intensive or low-consuming and leave a much smaller ecological footprint. The range of levels is enormous, from lifestyles that if followed by the whole world’s population would imply the need for the resources of six and a half planets like earth, down to just the one that we actually have. 3995

at most European stages of economic development, when most of basic material needs are met, other things determine the rise or fall of wellbeing. These include the quality of family life, friendships, and the opportunities we have to do things that give lasting satisfaction, such as learning, being engaged in creative pastimes and meaningful work. Typically, these are also the things most likely to be crushed on the hedonic treadmill in the obsessive rush for riches. 4007

the psychological equivalent of the nutritionists advised consumption of five portions of fruit and vegetables per day. All happen to be conveniently low-carbon in nature. They include: being active, continuing to learn, taking notice of the world around you, giving, and connecting with friends, neighbours and colleagues. Although they sound simple, when practised they have been shown to increase wellbeing significantly. If you want to be happy, it is definitively counter-productive to sacrifice the time needed to pursue these five dynamics to chase higher earnings in order to feed materialistic gratification.18 4012

Shopping in the big supermarkets provokes significantly more negative than positive emotions in people.19 4024

WRAP, a government-funded group focused on cutting waste, reported that we throw away one bag of perfectly good groceries in every three that we buy.20 4026

We could then also apply the Treasury’s estimate for the damage cost of carbon, up to £140 per tonne, thus turning ‘assets’ into ‘liabilities’. In the meantime, a windfall tax on oil companies could help to pay for the transition. The challenge is to take all the supposed official prudence and market discipline meant to characterise the UK economy and use it to learn to live within our environmental budget. In addition to cutting carbon, that would mean, for example, taking the ecological footprint as an official measure, with a timetable, policies and resources so that we all move to live within our fair, per capita share of available global biocapacity – so-called ‘one planet living’. 4037

It is no use saying, ‘We are doing our best.’ You have got to succeed in doing what is necessary. Winston Churchill 4047

Behind all the schemes to manage demand, the objective was to secure the fairest possible distribution of whatever supplies are available and to ensure … that as far as possible the things that everybody needs shall be within the reach of all. 4092

Generally, the government deliberately chose rationing over taxation for reasons that were rational and progressive. Taxation alone, they concluded, apart from disproportionately and unfairly placing a burden on the poor, would be too slow to change behaviour. Rationing was considered quicker and more equitable. Tradable rations were rejected through fear of encouraging fraud and inflation and ‘undermining the moral basis of rationing’.27 Historian Mark Roodhouse derives specific lessons for policy making. If transferred to now, government, he writes, would need to ‘convince the public that rationing levels are fair; that the system is administered transparently and fairly; and that evaders are few in number, likely to be detected and liable to stiff penalties if found guilty’.28 4100

Setting a formal greenhouse gas atmospheric concentration target likely to keep global average temperature rises below 2 °C. Paradoxically, while many governments including the European Union have accepted the temperature target, they have not agreed on a concentration level likely to meet it. They have, in effect, decided collectively to travel from Kyoto to Copenhagen, but refused to set off from their base because they cannot agree on what route to take. Now, though, more people are arguing that even a 2 °C rise represents a level of warming that is unacceptably dangerous for many of the world’s people. And NASA scientist James Hansen believes that, to be safe, no further rises should be allowed, and carbon dioxide levels should be significantly reduced from current levels to at least 350ppm.29 •  The delivery of a global, effective and equitable agreement beyond 2012 that deepens reduction targets in industrialised countries. Wealthy industrialised countries should be setting legally binding and constantly contracting ‘carbon budgets’ that plot a course, year by year, towards an emissions cut of well over 80 per cent against 1990 levels. In agreeing the price for full participation by developing countries in a global deal, industrialised countries need to be aware that, to the global South, even equal per capita rights to the global commons of the atmosphere appears a compromise in the face of historically grossly unequal emissions. 4121

ecological debt payments by the wealthy that could create, for example, the opportunity for massive investments in appropriate adaptation and renewable energy in poor countries. 4136

Sustainable development would also be supported by greater flexibility in the rules governing trade, migration finance and intellectual property. •  The explicit recognition and protection in international law of environmental or ‘climate’ refugees, displaced due to ‘push’ factors resulting from global warming. Measures to meet this large and growing challenge should operate along the lines of appropriate burden-sharing. Financial burdens should be met in proportion to both responsibility for the problem and ability to pay. More than that, there will need to be flexibility in immigration policy, protection of displaced people and compensation funds for those affected. 4137

in 1996 petroleum geologist Dr Colin Campbell, founder of the Association for the Study of Peak Oil and Gas, proposed an ‘Oil Depletion Protocol’.31 It works by agreeing annual reductions in the import and export of oil in producer and consumer countries with the aim of ‘stabilizing prices, preserving the resource base, and reducing competition for remaining supplies’, and has the target of reducing global consumption by 3 per cent a year. Campbell’s suggested protocol is designed with one eye clearly focused on current global economic imbalances. It is designed to ‘avoid profiteering’ by keeping oil prices ‘in reasonable relationship with production cost’. The idea is to insulate against ‘destabilizing financial flows arising from excessive oil’ and excessive price rises on poor countries’ imports, and to create new incentives for alternative energy and for consumers to avoid waste. Many different formulas for capturing various of the points above are now in circulation. They can be pursued online by’ the enthusiastic reader and include Kyoto 2,32 ‘cap and share’,33 and greenhouse development rights.34 4152

What difference does it make how much is laid away in a man’s safe or in his barns, how many head of stock he grazes or how much capital he puts out at interest, if he is always after what is another’s and only counts what he has yet to get, never what he has already? You ask what is the proper limit to a person’s wealth? First, having what is essential, and second, having what is enough. Lucius Annaeus Seneca, 4 BC–AD 65 4169

Why isn’t Cuba, in the face of all these problems, on a par with some of the worst failed states in the world, with shattered health and education systems, starvation and endemic malnutrition? The answer is planning, preparation and the fact that they dealt with the problem imaginatively, and head-on. Before the Soviet collapse around 1990, Cuba imported most of its needs. It exported sugar and tobacco to the Soviet Union at agreed premium prices, and took oil in return, some of which was re-exported. This set-up created a distorting incentive for large amounts of land to be given over to export crops grown in industrial monocultures, heavily dependent on oil-based inputs. Just before the collapse, in 1989 three times more land was dedicated to sugar rather than to food. 4188

Then oil imports dropped by over half, crippling the economy and slashing foreign exchange earnings from the re-export trade. The use of chemical pesticides and fertilisers dropped by 80 per cent, sounding a death knell to its industrial approach to farming. The knock-on effect on people’s daily lives was dramatic. The availability of basic food staples like wheat and other grains fell by half and, overall, the average Cuban’s calorie intake fell by over one third in around five years, leading to an average weight loss of 20 lb per person. 4194

Cuba was in a position to respond. Serious and long-term investment in science, engineering, health and education meant the country had a strong social fabric and the capacity to act. Before its local ‘oil shock’, Cuba was already investigating forms of ecological farming far less dependent on fossil fuels. When the shock came, a system of ‘regional research institutes, training centres and extension services’ was in place to support farmers.2 But the foundations were laid much earlier. Successive reforms dating back to the early days of the revolution in 1959 reduced inequality and redistributed ownership of land. Though frequently and conveniently overlooked, in spite of the US economic boycott, in little more than a couple of decades Cuba achieved levels of literacy, health and nutrition that were the envy of the developing world. An educated and healthy population was the foundation of Cuba’s miracle survival. 4199

The threat of serious food shortages was overcome within five years. At the heart of the transition after 1990 was a rapid shift to the use of biofertilisers and biopesticides, crop rotation and intercropping, and the use of animal labour and manure (in other words, a largely organic system), and the success of small farms and urban farms and gardens. Immediate crisis was averted by food programmes that targeted the most vulnerable people, the old, the young, pregnant women and young mothers, and a rationing programme that guaranteed a minimum amount of food to everyone. Ironically, however, in spite of the planning, it was the large-scale state farms that found the change hardest. Small-scale farms responded quickly, raising their productivity above previous levels. Seeing the success of the peasant-run small farms, in 1993 state farms were turned into so-called Basic Units of Co-operative Production – owned and run by the workers themselves or as cooperatives. After that, land was made available to anyone who wanted to start an urban garden farm. 4206

Shortages and rising food prices made urban farming very profitable. It also proved highly productive. Once the state backed the urban farming movement, it grew rapidly. Lots and backyards in Cuban cities became home to food crops and farm animals – grown and reared almost exclusively along organic lines. Half the food consumed in the capital, Havana, is grown in the city’s own gardens and, overall, urban gardens provide 60 per cent of the vegetables eaten in Cuba. The country’s experience suggests huge, barely tapped global potential for urban farming. In Havana alone, there are more than 26,000 food gardens.3 In a comparison that might be generally unwelcome in the US, Cuba’s recent experience both echoes and surpasses what America achieved in its push for ‘Victory Gardening’ during the Second World War. Back then, led by Eleanor Roosevelt, 30–40 per cent of vegetables for domestic consumption were produced by the Victory Gardening movement. Cuba’s eventual transition to a more self-sufficient food system wasn’t smooth, but demonstrated that it is possible to feed a population under extreme economic stress with very little or even no fossil-fuel inputs. And, as with wartime Britain, there were unexpectedly positive outcomes. 4214

Dramatic reductions in consumption, coupled with other dietary and lifestyle changes (people walked more), altered the health of the nation. As calorie intake fell by more than one third, the proportion of physically active adults more than doubled and obesity halved. Between 1997 and 2002, deaths attributed to diabetes fell by half, coronary heart disease by 35 per cent, stroke by a fifth, and all causes by just under.4 These findings were published in 2007 in the American Journal of Epidemiology and carry a profound, broader message of the potential general benefits of reduced consumption. The global food system is both fossil-fuel dependent and a major source of greenhouse gas emissions (and, of course, vulnerable to climate change). Reduced human consumption could improve health, ease the burden we place on the planet’s ecosystems and introduce much-needed ‘room to manoeuvre’ in the face of external shocks. The article’s authors comment: ‘These results suggest that population-wide measures designed to reduce energy stores, without affecting nutritional sufficiency, may lead to declines in diabetes and cardiovascular disease 4224

prevalence and mortality.’5 But in spite of its successes (and partly unintentional positive consequences) the recent Cuban approach thoroughly contradicted the model of development normally sponsored by the international financial institutions. It was highly managed, focused on meeting domestic needs rather than being export-oriented, was largely organic and built on the success of small farms. Such a radical departure from orthodoxy explains why, with some startled respect, it was called the ‘anti-model’ by the World Bank. At least one analyst suggested that the Cuban experiment ‘may hold many of the keys to the future survival of civilisation’.6 4233

Compared to the deaths in New Orleans, which totalled well over 1,000, and the lasting devastation left behind, when the 216 kmph winds of Hurricane Michelle hit Cuba in 2001, only five lives were lost, in spite of 20,000 homes being damaged (see Chapter 3). Proper planning in advance of the largely predictable hurricane season, and a collective approach managed by government but with strong local buy-in, saved lives and enabled communities to bounce back more quickly afterwards. 4241

We are challenged at the global level to learn lessons in a few short years that such small communities often took millennia to arrive at. In Karl Polanyi’s classic work The Great Transformation, he presents various types of social and economic organisation on islands as evidence against some of Adam Smith’s more sweeping assumptions on the central role of markets.8 Complex forms of ‘gift exchange’, in which people partly meet their needs not through markets mediated with cash, but through the giving and receiving of gifts, operated over vast areas, revealing a system that not only met people’s needs in a challenging environment but also bonded society together. In the face of our rising vulnerabilities, the degree to which different forms of economic organisation enhance or undermine social cohesion must become a basic test of their fitness for purpose. 4253

From a sweeping historical and anthropological survey of societies across Europe, North Africa, the Middle East and Asia, Polanyi codified certain principles common to most up until the late Middle Ages: reciprocity, redistribution and ‘householding’, by which he meant a system that enables needs to be met in a largely self-reliant way. It’s from the latter that we derive the root of the word ‘economics’ – oikonomia. 4260

But many island nations are relative models of resilience, quality of life and ecological efficiency. The Happy Planet Index9 assesses the efficiency with which natural resources are converted into meaningful human outcomes. It compares ecological footprint data with life expectancy and satisfaction. Across and within regions, island nations score particularly well. There are many probable reasons why, and they are important enough to recap: contact with nature; an awareness of and adaptation to more obvious limits; sharing-based economies which have been seen to reduce inequality across a community and maintain supportive social relationships; crops bred for hardiness and grown in mixed, highly productive plots. Island diets, too, more typically follow the balance in most ecosystems which is the nine-word mantra of food and science writer Colin Tudge for a more sustainable food system: ‘lots of plants, a little meat and maximum variety’.10 To which you might add fish, of course, if you live on a small island. 4264

report of the International Assessment of Agricultural Knowledge, Science and Technology. Its approach was parallel to the approach of the IPCC – gather together a large, diverse group of scientists and see what consensus emerges about the nature of a problem and its solutions. It found that a massive shift of support to small-scale farmers using a diverse range of agro-ecological methods would be one of the most efficient ways to build resilience, inoculate against food crises and insure against increasingly hostile weather patterns. 4273

The aim, instead, is to make poverty reduction the central aim of policy, not the hoped-for outcome of a dozen other strategies. In practice, this means supporting the kind of models outlined above. The point is, says Woodward, ‘to make poverty reduction self-sustaining, by increasing demand for the goods and services on which poor households depend for their incomes’.12 Supply and demand are raised in parallel, ‘so that increases in the incomes of poor households feed through into stronger demand for the goods produced by other poor households’. Rather than running faster and falling further behind, the typical outcome for the poorest countries under economic globalisation, a ‘local markets for local people first’ approach, makes poverty reduction self-reinforcing rather than self-defeating. 4291

The sorts of things this means in practice include: labour-intensive public works schemes using local contractors, to develop schools and health facilities, other infrastructure and environmental improvements; public procurement policies geared to encouraging procurement from small-scale local producers wherever possible; farming support programmes geared to small-scale farmers; land reform and redistribution; and social safety nets. On the ground it will mean more production locally of high-value foodstuffs; basic household goods; building materials for housing and infrastructure; basic transport equipment, such as carts and bicycles; fuel and renewable energy; small-scale retailing; personal services; transport services; and communications services such as mobile phones. The strategy could be described as moving from export promotion to a virtuous circle or cycle of local economic regeneration – or ‘home first, world second’. 4298

the community of Vauban, near Freiburg in Germany. It claims to have achieved CO2 emissions reductions of 80–90 per cent, due to good building design, renewable energy, car-sharing and good water management.14 The dramatic renaissance of urban gardening and horticulture in the UK is evidence of an unplanned cultural and economic self-medication. In the face of volatile food and fuel prices, and the alienation of spending six months of your life shopping in a supermarket, it’s clearly meeting a need.15 Seed suppliers in the UK report ‘astronomical’ growth in the sale of vegetable seed varieties.16 In the US, they are reported to be ‘through the roof’.17 Anyone tempted to dismiss such grassroots flowering of alternatives as idle middle-class play should visit the Growing Communities project18 4321

the inventor of Time Banks, Edgar Cahn, writes of another fundamental system that has been called the ‘core economy’ by economist Neva Goodwin.19 Cahn writes of two economic systems, the money economy and the core economy. The core economy is the operating system that the money economy depends on, yet takes for granted and often cannibalises. The core economy consists of family, neighbourhood, community and civil society. It is what you and I do when we provide care for children, families and the elderly. It produces safe neighbourhoods, enables democracy to happen and creates community and civil society. It comes to your rescue in times of need. Back in 1998, household work done in the core economy in the US was valued at $1.9 trillion. In 2002, the informal care that keeps the elderly out of homes was given a replacement price of $253 billion. Having for decades promoted the self-interest of finance above the wellbeing of the core economy, will it be strong enough now that we need it among the wreckage left behind by the chimera of triumphal capital? The invisible hand of the market has been at odds with the invisible heart of the core economy, and it is the latter that we cannot do without and which must take precedence. A healthy core economy will share the characteristics of those resilient island economies – strong in reciprocity, cooperation, sharing, and collaboration in the delivery of essential services, care provision and raising families. Think of Kropotkin’s ‘mutual aid’.20 To boost the core economy we need to imagine a significantly expanded and broadened role for public services – such as the so-called extended schools and health centres. In this way, people become involved in helping to ‘produce’ their own wellbeing. 4343

An elderly, frail person visiting the doctor complaining of symptoms linked to cold weather might, for example, be prescribed help from another patient to fit insulation or low-energy light bulbs to lower fuel bills. In return they might offer the practice to make supportive phone calls to check on people returning home from hospital. Their contribution is tailored to their ability to give. It’s called ‘co-production’, it’s based on reciprocity, and it works. It builds more resilient and cohesive communities.21 To grow, it will need a duty on public services to collaborate among themselves, and with the voluntary sector, and health and safety rules will need looking at again. A shorter working week, freeing up time to contribute, and lower house prices so that we don’t have to work so much would also help. But this alone is not enough. 4357

IMPLEMENT A GREEN NEW DEAL History shows that more co-operative forms of economic organisation can emerge in response to extreme hardship, dependence and exploitation. For example, cultures and models of self-help were born under far harsher circumstances than now during the Industrial Revolution. The great capitalist-turned-social-reformer 4365

The modernised Green New Deal, published by nef on behalf of the Green New Deal group on the 75th anniversary of Roosevelt’s New Deal, is, like his plan, designed to happen in two waves.22 First, we outline a structural transformation of the regulation of the financial system, including major changes to taxation. Second, we call for a sustained programme to invest in, and deploy, energy conservation and renewable energies, coupled with effective demand management. In place of Roosevelt’s politically clever 100-day programme – in which all of his measures were passed – we find ourselves with the very real timeframe of less than 100 months from August 2008, imposed by the unthinkable prospect of runaway climate change. The outcomes of our plan will create countless green-collar jobs, introduce greater economic stability, bring huge benefits to the real economy and establish prudent environmental policy. Three interlocking elements make up the Green New Deal: 1. Stabilising the financial system. A financial system built on speculation and the reckless accumulation of debt needs saving from itself, with a thorough overhaul of regulation. This would include breaking up discredited financial institutions that have survived only through the injection of vast sums of public money.     Instead of institutions that are ‘too big to fail’, we need institutions that are small enough to fail without creating problems for depositors and the wider public.     We also need to minimise corporate tax evasion by clamping down on tax havens and obfuscatory corporate financial reporting. 2. Raising the resources to invest in change. The Green New Deal needs resourcing. As part of the financial reform described above, cheaper money is needed to invest in the environmental transformation of our energy, transport and building infrastructure.     In parallel, to prevent inflation, we want to see much tighter regulation of the wider financial environment. There are plenty of other ways of urgently freeing-up necessary finance. 4374

As just one part of a wide-ranging package of financial innovations, the Deal calls for the establishment of an Oil Legacy Fund, similar to a highly successful Norwegian government initiative paid for by a windfall tax on the profits of oil and gas companies.     More realistic fossil fuel prices, raised to include their cost to the environment, will generate further revenue and create economic incentives that drive efficiency and bring alternative fuels to market. Importantly, this multiple approach will help to pay for the safety nets needed for those vulnerable to higher food and fuel prices, and help to keep chaos from the door. 3. Environmental transformation. The end-game of the Green New Deal is to bring about a low-carbon, high-wellbeing economy.     There are numerous benefits in shifting to a more efficient, decentralised energy system that uses a wide range of renewable energy technologies applied at different scales, and in which demand is actively managed. 4391

Centralised energy infrastructures can be extremely inefficient.23 In the UK, Greenpeace estimates that up to two thirds of potential energy is lost between generator and consumer.24 Far more efficient models developed by the World Alliance for Decentralised Energy have been used by the UK Foreign Office to project China’s energy future; by the Federal Government of Canada to look at the country’s energy system; and by the European Commission to investigate the options for the EU. 4399

Increasing our energy security and independence by making every building a power station and efficiency centre will create a ‘carbon army’ of countless green-collar workers. BUILD A NEW FOOD CULTURE Ecological debt puts the way we produce our food in a unique bind. Farming is both a major source of greenhouse gases (some types of farming much more than others, particularly livestock), and especially vulnerable to global warming and rising oil prices. Of all the monumental challenges we face, developing a food system that will reduce its own impact on the biosphere while simultaneously increasing its resilience to climate change is possibly the biggest. 4407

In the spring of 2008, food riots driven by shortages and rising prices were reported in 33 countries ranging from Bolivia to Senegal, and Uzbekistan to Egypt and Indonesia. The prices, in turn, are being pushed by the high cost of oil and, in some places, competition between the use of crops for food and biofuels. In response, major countries like China and India, who together account for over one third of humanity, are de-prioritising their international food trade and restricting the export of staples like rice in order to prioritise the feeding of their own people. The lessons of the Cuban miracle, too, are taking on ever wider significance. 4413

For example, according to figures from the Department for Environment, Food and Rural Affairs (Defra), organic farming uses in general over a quarter less energy compared to non-organic farming to produce the same amount of food.26 But why is the world food system not currently designed to feed people? asks Colin Tudge, the food writer and former contributing editor at New Scientist magazine, and he calls for something he refers to as ‘enlightened agriculture’. Asked what that means, he said: ‘agriculture that is designed to feed people’. But surely all farming is designed to feed people, isn’t it?, comes the perplexed response. No, and that’s the point. If the existing and future world population is to eat adequately, even well, in the face of mounting ecological debts and declining oil supplies, a substantial redesign of the global food chain is unavoidable.27 4418

This enigma wrapped inside a paradox comes down to the law of primary purpose. That is to say, a system’s primary purpose shapes, to a great extent, how it operates, whatever its hoped-for secondary benefits might be. In recent decades, ever more of the world food system, from seed companies, to manufacturers of pesticides and fertilisers, the farms themselves, grain and shipping firms, wholesalers, distribution networks and retailers, have slipped into the control of ever fewer and ever larger global companies. These companies, locked into and in the act of expanding a particular market system, have to generate financial returns to institutional investors at a certain rate, or face serious consequences. This primary purpose shapes all their decisions. The result is a system designed to meet the needs of a certain group of global consumers – those who can pay, the middle classes with money. Some others might benefit at the margins, but the resulting food system is increasingly geared against meeting the needs of all the world’s people, especially the poorest. 4425

Typical anomalies are not hard to spot, from the redirection of scarce water resources that bypass the local community to feed thirsty export crops of luxury horticulture in South America or West Africa, like flowers and sugarsnap peas, to supermarkets squeezing the livelihoods of small farmers and producers, to the environmental and economic carpet-bombing of large parts of Asia with palm oil plantations (palm oil is the discreet ingredient in countless products lining supermarket shelves). Then, most strikingly, there is the use of good arable land, not to produce food for direct human consumption, but for cereals and other crops, grown in vast monocultures, and destined increasingly to produce biofuels to fill the tanks of European and American motorists, or fodder for calorie-hungry and methane-making cattle, 4433

According to another branch of the UN, the Food and Agriculture Organization (FAO), livestock production in particular accounts for nearly one fifth of all emissions.28 One study estimated that producing just 1 kg of beef emits the equivalent in CO2 emissions of an average European car driving 250 km.29 Globally, one third of arable land is set aside for growing animal feed, and over 90 per cent of soya beans and around 60 per cent of maize and barley are destined for cattle, pigs and poultry.30 The ‘push’ factor of massively rising biofuel demand is also having striking effects. The International Monetary Fund (IMF) estimated that 70 per cent of the rise in corn prices and 40 per cent of soya bean price rises were for this reason.31 4440

Food Sovereignty For the second half of the food system equation, ‘social justice’, a growing international movement for ‘food sovereignty’ has sought to spell out the meaning of social justice in the food chain, boiling it down to four key elements.35 First is the right to food, meaning that people need physical access to land, water and the seeds to grow the food that’s right for them. And, that they must also be able to afford to buy what they need or cannot grow. This, in turn, means tackling the power of those who set prices and control land, water and seeds. 4458

Second is getting access to resources. A programme of reform is required that gives smallholder farmers, pastoralists and fisherfolk the means to exercise their right to food. It’s here that clashes with powerful vested interests occur. The Cuban example above gives one successful illustration of radically widening access to productive land, motivated by the need to ensure a whole nation can feed itself. This element also means a major relaxation in favour of the poorest people and countries of restrictive rules at the international level that currently control the intellectual property on seeds, breeds of livestock and other types of biodiversity. Third is to take positive, ecological approaches to farming. Environmentally friendly approaches to farming that grow a wider range of crops are, over time and a wide range of conditions and climates, more friendly to small-scale farmers, less vulnerable to external shocks, and more resilient and productive. Such ‘agroecology’ works. A study published by the FAO in 2002 showed that the approach produced increases in crop yields that averaged 94 per cent. In the best cases, yields went up by an astonishing 600 per cent.36 4464

Fourth and finally is escaping the trade trap. Instead of just assuming that any increase in international trade will benefit people in need, this suggests that new policies are needed that prioritise enabling ‘communities and countries vulnerable to hunger and malnutrition to produce sufficient quantities of safe and secure food supplies’. At the same time, rules are needed to stop ‘the negative effects of subsidized exports, food dumping [and] artificially low prices’ that mark the current model of agricultural trade.37 4473

Kropotkin’s analysis that economics could learn from the success of cooperation, or mutual aid,39 as he coined it, in ecological systems (itself a riposte to the fashionable misappropriation of Darwinism to social and economic problems). Mill also prefigured Keynes’ hope, and similar faith in technology, that once the ‘economic problem’ was solved, we would all be able to turn to more satisfying pursuits and put our feet up more. He also prepared the ground for the emergence of ecological economics. 4487

more general refusal of the economics profession to accept that it, too, like the rest of life on the planet, is bound by the laws of physics. As Daly wrote in Beyond Growth, Since the earth itself is developing without growing, it follows that a subsystem of the earth (the economy) must eventually conform to the same behavioural mode of development without growth.40 Of course, the big question concerns when, precisely, the ‘eventually’ moment comes. Daly borrows a public safety analogy from the shipping industry to demonstrate what is needed ecologically at the planetary level. 4494

But, on the contrary, writes Daly, it is just that a very different economics is needed, one that is: a subtle and complex economics of maintenance, qualitative improvements, sharing frugality, and adaptation to natural limits, It is an economics of better, not bigger.45 ‘Dynamic equilibrium’ is both a more accurate description of the condition we have to find and manage, and a more attractive term. Found typically in discussions of population biology and forest ecology, it captures better a mirror of nature for society in which, within ecosystem limits, there is constant change, shifting balances, and evolution. ‘Dynamic’ in the sense that little is steady or stationary, but ‘equilibrium’ in that the vibrant, chaotic kerfuffle of life, economics and society must organise its affairs within the parent-company boundaries of available biocapacity. As Daly advocates, for general use it is possibly sufficient to replace the word ‘growth’ with ‘development’.46 4535

As said, for an international climate agreement to work it must globally cap greenhouse gases at a safe level and share out allowable emissions. From these inescapable dynamics it is possible to imagine the shape of other deals to manage finite resources and ecosystems that have limits. Whether fossil fuels, forest timber or fish taken from the oceans of the world, to work within nature’s budget – its biocapacity – and prevent an ecological solvency crisis, we must, as best we can, identify the safe limits of use and extraction, cap them at that level and have a formula for allocation. At a fundamental level, this is the primary mechanism to avoid the tragedy of the commons and move toward one-planet living, or dynamic equilibrium. 4545

Change is built into a consumer-based, hi-tech economy. But rapid change outside of any meaningful human control is something different again. Responding to such unchosen demands for rapid transition is an art in itself. This is what we now face: a multiple crunch driven by energy shock, credit crunch and climate change. We can now include a linked, growing, global food and water crisis. 4553

In our national living memory, the scale of economic re-engineering needed to prevent catastrophic climate change has only been witnessed during wartime. No other current approach looks remotely capable of delivering the necessary volume of emissions reductions in the time needed. In that light we can learn from those experiences, positive and negative. The best of those lessons can then be translated into our contemporary circumstance. One difference is that we need to work out how to maintain acceptance of lifestyle changes over a long period, unlike during wartime when there was a general assumption that, sooner or later, hostilities would 4557

Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy by Michael Hudson

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the “Forgash Plan.” Named for Florida Senator Morris Forgash, it proposed a World Bank for Economic Acceleration with an alternative policy to the existing World Bank – lending in domestic currency for land reform and greater self-sufficiency in food instead of plantation export crops. My first evening’s visit with him transfixed me with two ideas that have become my life’s work. First was his almost poetic description of the flow of funds through the economic system. He explained why most financial crises historically occurred in the autumn when the crops were moved. 39

Finance, natural resources and industry were parts of an interconnected system much like astronomy – and to me, an aesthetic thing of beauty. But unlike astronomical cycles, the mathematics of compound interest leads economies inevitably into a debt crash, because the financial system expands faster than the underlying economy, overburdening it with debt so that crises grow increasingly severe. Economies are torn apart by breaks in the chain of payments. 44

For the next twenty years, Terence and I spoke about an hour a day on current economic events. He had translated A History of Economic Doctrines: From the Physiocrats to Adam Smith, the first English-language version of Marx’s Theories of Surplus Value – which itself was the first real history of economic thought. 49

they are not taught in any university departments: the dynamics of debt, and how the pattern of bank lending inflates land prices, or national income accounting and the rising share absorbed by rent extraction in the Finance, Insurance and Real Estate (FIRE) sector. 55

the more prices rise, the more banks are willing to lend – as long as more people keep joining what looks like a perpetual motion wealth-creating machine. The process works only as long as incomes are rising. Few people notice that most of their rising income is being paid for housing. They feel that they are saving – and getting richer by paying for an investment that will grow. At least, that is what worked for sixty years after World War II ended in 1945. But bubbles always burst, because they are financed with debt, which expands like a chain letter for the economy as a whole. Mortgage debt service absorbs more and more of the rental value of real estate, and of homeowners’ income as new buyers take on more debt to buy homes that are rising in price. Tracking the upsweep of savings and the debt-financed rise in housing prices turned out to be the best way to understand how most “paper wealth” has been created 66

despite the fact that the economy’s largest asset is real estate – and is both the main asset and largest debt for most families – the analysis of land rent and property valuation did not even appear in the courses that I was taught in the evenings working toward my economics PhD. 75

export earnings and other foreign exchange receipts, which served as were a measure of how much revenue might be paid as debt service on new borrowings from U.S. banks. 80

international banks view the hard-currency earnings of foreign countries as potential revenue to be capitalized into loans and paid as interest. The implicit aim of bank marketing departments – and of creditors in general – is to attach the entire economic surplus for payment of debt service. 82

foreign debts mounted up at compound interest, an exponential growth that laid the ground for the crash that occurred in 1982 when Mexico announced that it couldn’t pay. In this respect, lending to Third World governments anticipated the real estate bubble that would crash in 2008. Except that Third World debts were written down in the 1980s (via Brady bonds), unlike mortgage debts. 89

using “flags of convenience” in Liberia and Panama enabled them to avoid paying income taxes either in the producing or consuming countries by giving the illusion that no profits were being made. The key was “transfer pricing.” Shipping affiliates in these tax-avoidance centers bought crude oil at low prices from Near Eastern or Venezuelan branches where oil was produced. These shipping and banking centers – which had no tax on profits – then sold this oil at marked-up prices to refineries in Europe or elsewhere. The transfer prices were set high enough so as not to leave any profit to be declared. 94

My charts revealed that the U.S. payments deficit was entirely military in character throughout the 1960s. The private sector – foreign trade and investment – was exactly in balance, year after year, and “foreign aid” actually produced a dollar surplus (and was required to do so under U.S. law). 110

I quickly discovered that of all the subdisciplines of economics, international trade theory was the silliest. Gunboats and military spending make no appearance in this theorizing, nor do the all-important “errors and omissions,” capital flight, smuggling, or fictitious transfer pricing for tax avoidance. These elisions are needed to steer trade theory toward the perverse and destructive conclusion that any country can pay any amount of debt, simply by lowering wages enough to pay creditors. All that seems to be needed is sufficient devaluation (what mainly is devalued is the cost of local labor), or lowering wages by labor market “reforms” and austerity programs. This theory has been proved false everywhere it has been applied, but it remains the essence of IMF orthodoxy. 116

Academic monetary theory is even worse. Milton Friedman’s “Chicago School” relates the money supply only to commodity prices and wages, not to asset prices for real estate, stocks and bonds. It pretends that money and credit are lent to business for investment in capital goods and new hiring, not to buy real estate, stocks and bonds. There is little attempt to take into account the debt service that must be paid on this credit, diverting spending away from consumer goods and tangible capital goods. So I found academic theory to be the reverse of how the world actually works. 122

early economists recognized the problems of governments (or others) relying on creditors for policy advice. As Adam Smith explained, a creditor of the public, considered merely as such, has no interest in the good condition of any particular portion of land, or in the good management of any particular portion of capital stock. … He has no inspection of it. He can have no care about it. Its ruin may in some cases be unknown to him, and cannot directly affect him. The bondholders’ interest is solely to extricate as much as they can as quickly as possible with little concern for the social devastation they cause. Yet they have managed to sell the idea that sovereign nations as well as individuals have a moral obligation to pay debts, even to act on behalf of creditors instead of their domestic populations. 129

My focus here too was to warn that Third World economies could not pay their foreign debts. Most of these loans were taken on to subsidize trade dependency, not restructure economies to enable them to pay. 158

IMF “structural adjustment” austerity programs – of the type now being imposed across the Eurozone – make the debt situation worse, by raising interest rates and taxes on labor, cutting pensions and social welfare spending, and selling off the public infrastructure (especially banking, water and mineral rights, communications and transportation) to rent-seeking monopolists. This kind of “adjustment” puts the class war back in business, on an international scale. 160

Although Wall Street bankers usually see the handwriting on the wall, their lobbyists insist that all debts can be paid, so that they can blame countries for not “tightening their belts.” Banks have a self-interest in denying the obvious problems of paying “capital transfers” in hard currency. My experience with this kind of bank-sponsored junk economics infecting public agencies inspired me to start compiling a history of how societies through the ages have handled their debt problems. It took me about a year to sketch the history of debt crises as far back as classical Greece and Rome, as well as the Biblical background of the Jubilee Year. But then I began to unearth a prehistory of debt practices going back to Sumer in the third millennium BC. 165

how interest-bearing debt first came into being – in the temples and palaces, not among individuals bartering. Most debts were owed to these large public institutions or their collectors, which is why rulers were able to cancel debts so frequently: They were cancelling debts owed to themselves, to prevent disruption of their economies. 172

shares were sold in Buenos Aires and San Paolo, mainly to the elites who held the high-yielding dollar bonds of their countries in offshore accounts. This showed us that the financial managers would indeed keep paying their governments’ foreign debts, as long as they were paying themselves as “Yankee bondholders” offshore. The Scudder fund achieved the world’s second highest-ranking rate of return in 1990. 184

most of the public is interested in understanding a great crash only after it occurs, not during the run-up when good returns are to be made. 190

the Near Eastern tradition of Biblical debt cancellations was firmly grounded. Two decades ago economic historians and even many Biblical scholars thought that the Jubilee Year was merely a literary creation, a utopian escape from practical reality. I encountered a wall of cognitive dissonance at the thought that the practice was attested to in increasingly detailed Clean Slate proclamations. Each region had its own word for such proclamations: Sumerian amargi, meaning a return to the “mother” (ama) condition, a world in balance; Babylonian misharum, as well as andurarum, from which Judea borrowed as deror, and Hurrian shudutu. Egypt’s Rosetta Stone refers to this tradition of amnesty for debts and for liberating exiles and prisoners. Instead of a sanctity of debt, what was sacred was the regular cancellation of agrarian debts and freeing of bondservants in order to preserve social balance. Such amnesties were not destabilizing, but were essential to preserving social and economic stability. 205

an economics curriculum in Modern Monetary Theory (MMT) at UMKC. For the past twenty years our aim has been to show the steps needed to avoid the unemployment and vast transfer of property from debtors to creditors that is tearing economies apart today. I presented my basic financial model in Kansas City in 2004, with a chart that I repeated in my May 2006 cover story for Harper’s. 225

The disabling force of debt was recognized more clearly in the 18th and 19th centuries (not to mention four thousand years ago in the Bronze Age). This has led pro-creditor economists to exclude the history of economic thought from the curriculum. Mainstream economics has become censorially pro-creditor, pro-austerity (that is, anti-labor) and anti-government (except for insisting on the need for taxpayer bailouts of the largest banks and savers). Yet it has captured Congressional policy, universities and the mass media to broadcast a false map of how economies work. 233

Spouting ostensible free market ideology, the pro-creditor mainstream rejects what the classical economic reformers actually wrote. One is left to choose between central planning by a public bureaucracy, or even more centralized planning by Wall Street’s financial bureaucracy. The middle ground of a mixed public/private economy has been all but forgotten – denounced as “socialism.” Yet every successful economy in history has been a mixed economy. 240

As for financial dynamics in the business sector, today’s “activist shareholders” and corporate raiders are financializing industry in ways that undercut rather than promote tangible capital formation and employment. Credit is increasingly predatory rather than enabling personal, corporate and government debtors to earn the money to pay. This pattern of debt is what classical economists defined as unproductive, favoring unearned income (economic rent) and speculative gains over profits earned by employing labor to produce goods and services. I therefore start by reviewing how the Enlightenment and original free market economists spent two centuries trying to prevent precisely the kind of rentier dominance that is stifling today’s economies and rolling back democracies to create financial oligarchies. 247

what is at work is an Orwellian strategy of rhetorical deception to represent finance and other rentier sectors as being part of the economy, not external to it. This is precisely the strategy that parasites in nature use to deceive their hosts that they are not free riders but part of the host’s own body, deserving careful protection. 254

leeches inject an anti-coagulant enzyme that helps prevent inflammation and thus steers the body to recovery. 270

countries under public sponsorship. Across the political spectrum, from “state socialism” under Bismarck to Marxist theorists, bankers were expected to become the economy’s central planners, by providing credit for the most profitable and presumably socially beneficial uses. A three-way symbiotic relationship emerged to create a “mixed economy” of government, high finance and industry. For thousands of years, from ancient Mesopotamia through classical Greece and Rome, temples and palaces were the major creditors, coining and providing money, creating basic infrastructure and receiving user fees as well as taxes. The Templars and Hospitallers led the revival of banking in medieval Europe, whose Renaissance and Progressive Era economies integrated public investment productively with private financing. To make this symbiosis successful and free immune to special privilege and corruption, 19th-century economists sought to free parliaments from control by the propertied classes that dominated their upper houses. 284

Parliamentary reform extending the vote to all citizens was expected to elect governments that would act in society’s long-term interest. Public authorities would take the lead in major capital investments in roads, ports and other transportation, communications, power production and other basic utilities, including banking, without private rent-extractors intruding into the process. The alternative was for infrastructure to be owned in a pattern much like absentee landlordship, enabling rent-extracting owners to set up tollbooths to charge society whatever the market would bear. Such privatization is contrary to what classical economists meant by a free market. They envisioned a market free from rent paid to a hereditary landlord class, and free from interest and monopoly rent paid to private owners. The ideal system was a morally fair market in which people would be rewarded for their labor and enterprise, but would not receive income without making a positive contribution to production and related social needs. 294

Adam Smith, David Ricardo, John Stuart Mill and their contemporaries warned that rent extraction threatened to siphon off income and bid up prices above the necessary cost of production. Their major aim was to prevent landlords from “reaping where they have not sown,” as Smith put it. Toward this end their labor theory of value (discussed in Chapter 3) aimed at deterring landlords, natural resource owners and monopolists from charging prices above cost-value. Opposing governments controlled by rentiers. 303

Recognizing how most great fortunes had been built up in predatory ways, through usury, war lending and political insider dealings to grab the Commons and carve out burdensome monopoly privileges led to a popular view of financial magnates, landlords and hereditary ruling elite as parasitic by the 19th century, epitomized by the French anarchist Proudhon’s slogan “Property as theft.” 307

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. Repaying a loan – amortizing or “killing” it – shrinks the host. Like the word amortization, mortgage (“dead hand” of past claims for payment) contains the root mort, “death.” A financialized economy becomes a mortuary when the host economy becomes a meal for the financial free luncher that takes interest, fees and other charges without contributing to production. 311

The answer depends on whether the host can remain self-steering in the face of a parasitic attack. Taking control of the host’s brain/government Modern biology provides the basis for a more elaborate social analogy to financial strategy, by describing the sophisticated strategy that parasites use to control their hosts by disabling their normal defense mechanisms. To be accepted, the parasite must convince the host that no attack is underway. To siphon off a free lunch without triggering resistance, the parasite needs to take control of the host’s brain, at first to dull its awareness that an invader has attached itself, and then to make the host believe that the free rider is helping rather than depleting it and is temperate in its demands, only asking for the necessary expenses of providing its services. In that spirit bankers depict their interest charges as a necessary and benevolent part of the economy, providing credit to facilitate production and thus deserving to share in the surplus it helps create. 319

distinguish financial claims on wealth from real wealth creation. Their interest charges and fees typically eat into the circular flow of payments and income between producers and consumers. To deter protective regulations to limit this incursion, high finance popularizes promotes a “value-free” view that no sector exploits any other part. Whatever creditors and their financial managers take is deemed to be fair value for the services they provide 329

David Ricardo aimed his rent theory at Britain’s landlords while remaining silent about the financial rentiers – the class whose activities John Maynard Keynes playfully suggested should be euthanized. Landed proprietors, financiers and monopolists were singled out as the most visible free lunchers – giving them the strongest motive to deny the concept in principle. Familiar parasites in today’s economy include Wall Street’s investment bankers and hedge fund managers who raid companies and empty out their pension reserves; also, landlords who rack-rent their tenants (threatening eviction if unfair and extortionate demands are not met), and monopolists who gouge consumers with prices not warranted by the actual costs of production. Commercial banks demand that government treasuries or central banks cover their losses, claiming that their credit-steering activity is necessary to allocate resources and avoid economic dissolution. So here again we find the basic rentier demand: “Your money, or your life.” A rentier economy is one in which individuals and entire sectors levy charges for the property and privileges they have obtained, or more often that their ancestors have bequeathed. 352

The great reversal of classical Industrial Era reform ideology to regulate or tax away rentier income occurred after World War I. Bankers came to see their major market to be real estate, mineral rights, and monopolies. Lending mainly to finance the purchase and sale of rent-extracting opportunities in these sectors, banks lent against what buyers of land, mines and monopolies could squeeze out of their rent-extracting “tollbooth” opportunities.  The effect was to pry away the land rent and natural resource rent that classical economists expected to serve as the natural tax base. In industry, Wall Street became the “mother of trusts,” creating mergers into monopolies as vehicles to extract monopoly rent. Precisely because a “free lunch” (rent) was free – if governments did not tax it away – speculators and other buyers sought to borrow to buy such rent-extracting privileges. 382

Biological nature provides a helpful analogy for the banking sector’s ideological ploys. A parasite’s toolkit includes behavior-modifying enzymes to make the host protect and nurture it. Financial intruders into a host economy use Junk Economics to rationalize rentier parasitism as if it makes a productive contribution, as if the tumor they create is part of the host’s own body, not an overgrowth living off the economy. A harmony of interests is depicted between finance and industry, Wall Street and Main Street, and even between creditors and debtors, monopolists and their customers. Nowhere in the National Income and Product Accounts is there a category for unearned income or exploitation. 409

about half of what the media report as “industrial profits” are FIRE-sector rents, that is, finance, insurance and real estate rents – and most of the remaining “profits” are monopoly rents for patents (headed by pharmaceuticals and information technology) and other legal privileges. Rents are conflated with profit. This is the terminology of financial intruders and rentiers seeking to erase the language and concepts of Adam Smith, Ricardo and their contemporaries depicting rents as parasitic. 416

The financial sector’s strategy to dominate labor, industry and government involves disabling the economy’s “brain” – the government – and behind it, democratic reforms to regulate banks and bondholders. Financial lobbyists mount attacks on public planning, accusing public investment and taxes of being a deadweight burden, not as steering economies to maximize prosperity, competitiveness, rising productivity and living standards. Banks become the economy’s central planners, and their plan is for industry and labor to serve finance, not the other way around. 420

today’s high (and low) finance rarely leaves the economy enough tangible capital to reproduce, much less to feed the insatiable exponential dynamics of compound interest and predatory asset stripping. In nature, parasites tend kill hosts that are dying, using their substance as food for the intruder’s own progeny. The economic analogy takes hold when financial managers use depreciation allowances for stock buybacks or to pay out as dividends instead of replenishing and updating their plant and equipment. Tangible capital investment, research and development and employment are cut back to provide purely financial returns. When creditors demand austerity programs to squeeze out “what is owed,” enabling their loans and investments to keep growing exponentially, they starve the industrial economy and create a demographic, economic, political and social crisis. This is what 443

As wages fall, suicide rates rise, life spans shorten, and marriage and birth rates plunge. Failure to reinvest enough earnings in new means of production shrinks the economy, prompting capital flight to less austerity-ravaged economies. 452

Today’s banks don’t finance tangible investment in factories, new means of production or research and development – the “productive lending” that is supposed to provide borrowers with the means to pay off their debt. Banks largely lend against collateral already in place, mainly real estate (80 percent of bank loans), stocks and bonds. The effect is to transfer ownership of these assets, not produce more. 3. Borrowers use these loans to bid up prices for the assets they buy on credit: homes and office buildings, entire companies (by debt-leveraged buyouts), and infrastructure in the public domain on which to install tollbooths and charge access rents. Lending against such assets bids up their prices – Asset-Price Inflation. 4. Paying off these loans with interest leaves less wage or profit income available to spend on consumer goods or capital goods. This Debt Deflation is the inevitable successor to Asset-Price Inflation. Debt service and rent charges shrink markets, consumer spending, employment and wages. 505

Austerity makes it harder to pay debts, by shrinking markets and causing unemployment. That is why John Maynard Keynes urged “euthanasia of the rentier” if industrial capitalism is to thrive. He hoped to shift the focus of fortune-seeking away from banking, and implicitly from its major loan markets in absentee landlordship and privatization of rent-extracting monopolies. 6. Mainstream policy pretends that economies are able to pay their debts without reducing their living standards or losing property. But debts grow exponentially faster than the economy’s ability to pay as interest accrues and is recycled (while new bank credit is created electronically). The “magic of compound interest” doubles and redoubles savings and debt balances by purely mathematical laws that are independent of the economy’s ability to produce and pay. Economies become more debt-leveraged as claims for payment are concentrated in the hands of the One Percent.514

Debts that can’t be paid, won’t be. The question is: how won’t they be paid? There are two ways not to pay. The most drastic and disruptive way (euphemized as “business as usual”) is for individuals, companies or governments to sell off or forfeit their assets. The second way to resolve matters is to write down debts to a level that can be paid. Bankers and bondholders prefer the former option, and insist that all debts can be paid, given the “will to do so,” that is, the will to transfer property into their hands. This is the solution that mainstream monetarist economists, government policy and the mass media popularize as basic morality. But it destroys Economy #1 to enrich the 1 percent who dominate Economy #2.522

Banks and bondholders oppose debt write-downs to bring debt in line with earnings and historical asset valuations. Creditor demands for payment run the economy in the interest of the financialized Economy #2 instead of protecting the indebted production-and-consumption Economy #1. The effect is to drive both economies bankrupt. 10. The financial sector (the One Percent) backs oligarchies. Eurozone creditors recently imposed “technocrats” to govern debt-strapped Greece and Italy, and blocked democratic referendums on whether to accept the bailouts and their associated austerity terms. This policy dates from the 1960s and ’70s when the IMF and U.S. Government began backing creditor-friendly Third World oligarchies and military dictatorships. 11. Every economy is planned. The question is, who will do the planning: banks or elected governments? Will planning and structuring the economy serve short-term financial interests (making asset-price gains and extracting rent) or will it promote the long-term upgrading of industry and living standards?536

That is why consumer spending has not risen since 2008. Even when income rises, many families find their paychecks eaten up by debt service. That is what debt deflation means. Income paid to creditors is not available for spending on goods and services. 566

Debt deflation leads to defaults and foreclosures, while bondholders and banks get bailed out at government expense. In the workplace, many employees are so deep in debt that they are afraid to complain about working conditions out of fear losing their jobs and thus missing a mortgage payment or utility bill, which would bump their credit-card interest rates up to the penalty range of circa 29 percent. This has been called the debt-traumatized worker effect, and it is a major cause of wage stagnation. 572

Finance and land rent: How bankers replaced the landed aristocracy The Norman Conquest of Britain in 1066 and similar conquests of the land in other European realms led to a constant fiscal struggle over who should receive the land’s rent: the king as his tax base, or the nobility to whom the land had been parceled out for them to manage, nominally on behalf of the palace. Increasingly, the hereditary landlord class privatized this rent, obliging kings to tax labor and industry. This rent grab set the stage for the great fight of classical free market economists, from the French Physiocrats to Adam Smith, John Stuart Mill, Henry George and their contemporaries to tax land and natural resource rents as the fiscal base. Their aim was to replace the vested aristocracy of rent recipients with public taxation or ownership of what was a gift of nature 576

The main aim of political economy for the past three centuries has been to recover the flow of privatized land and natural resource rent that medieval kings had lost. The political dimension of this effort involved democratic constitutional reform to overpower the rent-levying class. By the late 19th century political pressure was rising to tax landowners in Britain, the United States and other countries. In Britain a constitutional crisis over land taxation in 1910 ended the landed aristocracy’s power in the House of Lords to block House of Commons tax policy. Sun Yat-Sen’s revolution in China in 1911 to overthrow the Qing dynasty was fueled by demands for land taxation as the fiscal base. And when the United States instituted the income tax in 1913, it fell mainly on rentier income from real estate, natural resources and financial gains. Similar democratic tax reform was spreading throughout the world. 588

most of the rental income hitherto paid to a landlord class is now paid to banks as mortgage interest, not to the government as classical doctrine had urged. Today’s financial sector thus has taken over the role that the landed aristocracy played in feudal Europe. But although rent no longer supports a landed aristocracy, it does not serve as the tax base either. It is paid to the banks as mortgage interest. Homebuyers, commercial investors and property speculators are obliged to pay the rental value to bankers as the price of acquiring it. 604

The buyer who takes out the biggest mortgage to pay the bank the most gets the asset. So real estate ends up being worth whatever banks will lend against it. 608

Finance as the mother of monopolies The other form of rent that Adam Smith and other classical economists sought to minimize was that of natural monopolies such as the East India Companies of Britain, France and Holland, and kindred special trade privileges. This was what free trade basically meant. Most European countries kept basic infrastructure in the public domain – roads and railroads, communications, water, education, health care and pensions so as to minimize the economy’s cost of living and doing business by providing basic services at cost, at subsidized rates or even freely. 609

The financial sector’s aim is not to minimize the cost of roads, electric power, transportation, water or education, but to maximize what can be charged as monopoly rent. Since 1980 the privatization of this infrastructure has been greatly accelerated. Having financialized oil and gas, mining, power utilities, financial centers are now seeking to de-socialize society’s most important infrastructure, largely to provide public revenue to cut taxes on finance, insurance and real estate (FIRE). 615

The reality is that debt service (interest and dividends), exorbitant management fees, stock options, underwriting fees, mergers and acquisitions add to the cost of doing business. 624

Property speculators and buyers of price-gouging opportunities for monopoly rent on credit have a similar operating philosophy: “rent is for paying interest.” The steeper the rate of monopoly rent, the more privatizers will pay bankers and bond investors for ownership rights. The financial sector ends up as the main recipient of monopoly rents and land rents, receiving what the landlord class used to obtain. 625

banks rarely fund new means of production. They prefer to lend for mergers, management buyouts or raids of companies already in place. As for bondholders, they found a new market in the 1980s wave of high-interest “junk-bond” takeovers. Lower interest rates make it easier to borrow and take over companies – and then break them up, bleed them via management fees, and scale back pensions by threatening bankruptcy. 639

Bank lending focused on trade financing, not capital investment. 643

industry has become financialized, “activist shareholders” treat corporate industry as a vehicle to produce financial gains. Managers are paid according to how rapidly they can increase their companies’ stock price, which is done most easily by debt leveraging. This has turned the stock market into an arena for asset stripping, using corporate profits for share buybacks and higher dividend payouts instead of for long-term investment (Chapter 8). 645

Financializing industry thus has changed the character of class warfare from what socialists and labor leaders envisioned in the late 19th century and early 20th century. Then, the great struggle was between employers and labor over wages and benefits. Today’s finance is cannibalizing industrial capital, imposing austerity and shrinking employment while its drive to privatize monopolies increases the cost of living. 649

budget deficits have increased the power of financial lobbyists who have pushed politicians to reverse progressive income taxation and cut taxes on capital gains. Instead of central banks monetizing deficit spending to help the economy recover, they create money mainly to lend to banks for the purpose of increasing the economy’s debt overhead. Since 2008 the U.S. Federal Reserve has monetized $4 trillion in Quantitative Easing credit to banks. The aim is to re-inflate asset prices for the real estate, bonds and stocks held as collateral by financial institutions (and the One Percent), not to help the “real” economy recover. 655

Financial sector advocates have sought to control democracies by shifting tax policy and bank regulation out of the hands of elected representatives to nominees from world’s financial centers. The aim of this planning is not for the classical progressive objectives of mobilizing savings to increase productivity and raise populations out of poverty. The objective of finance capitalism is not capital formation, but acquisition of rent-yielding privileges for real estate, natural resources and monopolies. These are precisely the forms of revenue that centuries of classical economists sought to tax away or minimize. By allying itself with the rentier sectors and lobbying on their behalf – so as to extract their rent as interest – banking and high finance have become part of the economic overhead from which classical economists sought to free society. 667

The result of moving into a symbiosis with real estate, mining, oil, other natural resources and monopolies has been to financialize these sectors. As this has occurred, bank lobbyists have urged that land be un-taxed so as to leave more rent (and other natural resource rent) “free” to be paid as interest – while forcing governments to tax labor and industry instead. To promote this tax shift and debt leveraging, financial lobbyists have created a smokescreen of deception that depicts financialization as helping economies grow. They accuse central bank monetizing of budget deficits as being inherently inflationary – despite no evidence of this, and despite the vast inflation of real estate prices and stock prices by predatory bank credit. 674

Money creation is now monopolized by banks, which use this power to finance the transfer of property – with the source of the quickest and largest fortunes being infrastructure and natural resources pried out of the public domain of debtor countries by a combination of political insider dealing and debt leverage – a merger of kleptocracy with the world’s financial centers. 680

The financial strategy is capped by creating international financial institutions (the International Monetary Fund, European Central Bank) to bring pressure on debtor economies to take fiscal policy out of the hands of elected parliaments and into those of institutions ruling on behalf of bankers and bondholders. This global power has enabled finance to override potentially debtor-friendly governments. 683

Financial oligarchy replaces democracy All this contradicts what the 18th, 19th and most of the 20th century fought for in their drive to free economies from landlords, monopolists and “coupon clippers” living off bonds, stocks and real estate (largely inherited). Their income was a technologically and economically unnecessary vestige of past conquests – privileges bequeathed to subsequent generations. When parliamentary reform dislodged the landed aristocracy’s control of government, the hope was that extending the vote to the population at large would lead to policies that would manage land, natural resources and natural monopolies in the long-term public interest. Yet what Thorstein Veblen called the vested interests have rebuilt their political dominance, led by the financial sector which used its wealth to gain control of the election process to create a neo-rentier society imposing austerity. 686

A cultural counter-revolution has taken place. If few people have noticed, it is because the financial sector has rewritten history and re-defined the public’s idea of what economic progress and a fair society is all about. The financial alternative to classical economics calls itself “neoliberalism,” but it is the opposite of what the Enlightenment’s original liberal reformers called themselves. Land rent has not ended up in government hands, and more and more public services have been privatized to squeeze out monopoly rent. Banks have gained control of government and their central banks to create money only to bail out creditor losses, not to finance public spending. 696

finance has backed the rent-extracting sectors. And instead of central banks creating money to finance their budget deficits, governments are now forced to rely on bondholders, leaving it up to commercial banks and other creditors to provide the credit that economies need to grow. The result is that today’s society is indeed moving toward the central planning that financial lobbyists have long denounced. But the planning has been shifted to financial centers (Wall Street, the City of London or Frankfurt). And its plan is to create a neo-rentier society. Instead of helping the host economy grow, banking, bond markets and even the stock market have become part of a predatory, extractive dynamic. 704

This destructive scenario would not have been possible if memory of the classical critique of rentiers had remained at the center of political discussion. Chapter 2 therefore reviews how three centuries of Enlightenment reform sought to free industrial capitalism from the rentier overhead bequeathed by feudalism. Only by understanding this legacy can we see how today’s financial counter-Enlightenment is leading us back to a neo-feudal economy. 710

Marxism diagnosed the main inner contradiction of industrial capitalism to be that its drive to increase profit by paying labor as little as possible would dry up the domestic market. The inner contradiction of finance capitalism is similar: Debt deflation strips away the economy’s land rent, natural resource rent, industrial profits, disposable personal income and tax revenue – leaving economies unable to carry their exponential rise in credit. Austerity leads to default, as we are seeing today in Greece. The financial sector’s response is to double down and try to lend enough to enable debtors to pay. When this financial bubble bursts, creditors foreclose on the public domain of debtor economies, much as they foreclose on the homes of defaulting mortgage debtors. Central banks flood the economy with credit in an attempt to inflate a new asset-price bubble by lowering interest rates. U.S. Treasury bonds yield less than 1 percent, and the interest rate on German government bonds is actually negative, reflecting the “flight to safety” when debt write-downs look inevitable. In the end even zero-interest loans cannot be paid. 713

The underlying theme of this book thus can be summarized in a single sentence: Debts that can’t be paid, won’t be. But trying to pay such debts will plunge economies into prolonged depression. 723

The Long Fight to Free Economies from Feudalism’s Rentier Legacy If you do not own them, they will in time own you. They will destroy your politics [and] corrupt your institutions. — Cleveland mayor Tom Johnson (1901-09) speaking of power utilities726

Classical economics was part of a reform process to bring Europe out of the feudal era into the industrial age. This required overcoming the power of the landed aristocracy, bankers and monopolies to levy charges that were unfair because they did not reflect actual labor or enterprise. Such revenue was deemed “unearned.” The original fight for free markets meant freeing them from exploitation by rent extractors: owners of land, natural resources, monopoly rights and money fortunes that provided income without corresponding work – and usually without tax liability. Where hereditary rental and financial revenue supported the richest aristocracies, the tax burden was shifted most heavily onto labor and industry, in addition to their rent and debt burden. 730

The classical reform program of Adam Smith and his followers was to tax the income deriving from privileges that were the legacy of feudal Europe and its military conquests, and to make land, banking and monopolies publicly regulated functions. 736

Neoliberals have re-defined “free markets” to mean an economy free for rent-seekers, that is, “free” of government regulation or taxation of unearned rentier income (rents and financial returns). 738

The best way to undo their counter-revolution is to revive the classical distinction between earned and unearned income, and the analysis of financial and debt relations (the “magic of compound interest”) as being predatory on the economy at large. This original critique of landlords, bankers and monopolists has been stripped out of the current political debate in favor of what is best characterized as trickle-down junk economics. 741

The title of Adam Smith’s chair at the University of Edinburgh was Moral Philosophy. This remained the name for economics courses taught in Britain and America through most of the 19th century. Another name was Political Economy, and 17th-century writers used the term Political Arithmetic. The common aim was to influence public policy: above all how to finance government, what best to tax, and what rules should govern banking and credit. 744

The French Physiocrats were the first to call themselves économistes. Their leader François Quesnay (1694-1774) developed the first national income models in the process of explaining why France should shift taxes off labor and industry onto its landed aristocracy. Adam Smith endorsed the view of the Marquis de Mirabeau (father of Honoré, Comte de Mirabeau, an early leader of the French Revolution) that Quesnay’s Tableau Économique was one of the three great inventions of history (along with writing and money) for distinguishing between earned and unearned income. The subsequent debate between David Ricardo and Thomas Malthus over whether to protect agricultural landlords with high tariffs (the Corn Laws) added the concept of land rent to the Physiocratic analysis of how the economic surplus is created, who ends up with it and how they spend their income. 749

The guiding principle was that everyone deserves to receive the fruits of their own labor, but not that of others. Classical value and price theory provided the analytic tool to define and measure unearned income as overhead classical economics. It aimed to distinguish the necessary costs of production – value – from the unnecessary (and hence, parasitic) excess of price over and above these costs. This monopoly rent, along with land rent or credit over intrinsic worth came to be called economic rent, the source of rentier income. An efficient economy should minimize economic rent in order to prevent dissipation and exploitation by the rentier classes. 756

For the past eight centuries the political aim of value theory has been to liberate nations from the three legacies of feudal Europe’s military and financial conquests: land rent, monopoly pricing and interest. Land rent is what landlords charge in payment for the ground that someone’s forbears conquered. Monopoly rent is price gouging by businesses with special privileges or market power. These privileges were called patents: rights to charge whatever the market would bear, without regard for the actual cost of doing business. Bankers, for instance, charge more than what really is needed to provide their services. 761

Bringing prices and incomes into line with the actual costs of production would free economies from in these rents and financial charges. Landlords do not have to work to demand higher rents. Land prices rise as economies become more prosperous, while public agencies build roads, schools and public transportation to increase site values. Likewise, in banking, money does not “work” to pay interest; debtors do the work. 766

Distinguishing the return to labor from that to special privilege (headed by monopolies) became part of the Enlightenment’s reform program to make economies more fair, and also lower-cost and more industrially competitive. But the rent-receiving classes – rentiers – argue that their charges do not add to the cost of living and doing business. Claiming that their gains are invested productively (not to acquire more assets or luxuries or extend more loans), their supporters seek to distract attention from how excessive charges polarize and impoverish economies. The essence of today’s neoliberal economics is to deny that any income or wealth is unearned, or that market prices may contain an unnecessary excessive rake-off over intrinsic value. If true, it would mean that no public regulation is necessary, or public ownership of infrastructure or basic services. Income at the top is held to trickle down, so that the One Percent serve the 99 Percent, creating rather than destroying jobs and prosperity. 770

The Churchmen’s theory of Just Price was an incipient labor theory of value: The cost of producing any commodity ultimately consists of the cost of labor, including that needed to produce the raw materials, plant and equipment used up in its production. Thomas Aquinas (122574) wrote that bankers and tradesmen should earn enough to support their families in a manner appropriate for their station, including enough to give to charity and pay taxes. The problem that he Aquinas and his fellow Scholastics addressed was much like today’s: it was deemed unfair for bankers to earn so much more for the services they performed (such as transferring funds from one currency or realm to another, or lending to business ventures) than what other professionals earned. It resembles today’s arguments over how much Wall Street investment bankers should make. The logic of Church theorists was that bankers should have a living standard much like professionals of similar station. This required holding down the price of services they could charge (e.g., by the usury laws enacted by most of the world prior to the 1980s), by regulating prices for their services, and by taxing high incomes and luxuries. 786

It took four centuries to extend the concept of Just Price to ground rent paid to the landlord class. Two decades after the Norman Conquest in 1066, for instance, William the Conqueror ordered compilation of the Domesday Book (1086). This tributary tax came to be privatized into ground rent paid to the nobility when it revolted against the greedy King John Lackland (1199-1216). The Magna Carta (1215) and Revolt of the Barons were largely moves by the landed aristocracy to avoid taxes and keep the rent for themselves, shift the fiscal burden onto labor and the towns. The ground rent they imposed thus was a legacy of the military conquest of Europe by warlords who appropriated the land’s crop surplus as tribute. 796

By the 18th century, attempts to free economies from the rent-extracting privileges and monopoly of political power that originated in conquest inspired criticisms of land rent and the aristocracy’s burdensome role (“the idle rich”). These flowered into a full-blown moral philosophy that became the ideology driving the Industrial Revolution. Its political dimension advocated democratic reform to limit the aristocracy’s power over government. The aim was not to dismantle the state as such, but to mobilize its tax policy, money creation and public regulations to limit predatory rentier levies. That was the essence of John Stuart Mill’s “Ricardian socialist” theory and those of America’s reform era with its anti-trust regulations and public utility regulatory boards. 802

Tax favoritism for rentiers and the decline of nations What makes these early discussions relevant today is that economies are in danger of succumbing to a new rentier syndrome. Spain might have used the vast inflows of silver and gold from its New World conquests to become Europe’s leading industrial power. Instead, the bullion it looted from the New World flowed right through its economy like water through a sieve. Spain’s aristocracy of post-feudal landowners monopolized the inflow, dissipating it on luxury, more land acquisition, money lending, and more wars of conquest. The nobility squeezed rent out of the rural population, taxed the urban population so steeply as to impose poverty everywhere, and provided little of the education, science and technology that was flowering in northern European realms more democratic and less stifled by their landed aristocracy. 808

The “Spanish Syndrome” became an object lesson for what to avoid. It inspired economists to define the various ways in which rentier wealth – and the tax and war policies it supported – blocked progress and led to the decline and fall of nations. Dean Josiah Tucker, a Welsh clergyman and political economist, pointed out in 1774 that it made a great difference whether nations obtained money by employing their population productively, or by piracy or simply looting of silver and gold, as Spain and Portugal had done with such debilitating effects, in which “very few Hands were employed in getting this Mass of Wealth … and fewer still are supposed to retain what is gotten.” 816

…Taxes were tripled between 1556 and 1577. Spending went up even faster… By 1600, interest on the national debt took 40 percent of the budget. Spain descended into bankruptcy and never recovered. Despite its vast stream of gold and silver, Spain became the most debt-ridden country in Europe – with its tax burden shifted entirely onto the least affluent, blocking development of a home market. Yet today’s neoliberal lobbyists are urging similar tax favoritism to un-tax finance and real estate, shift the tax burden onto labor and consumers, cut public infrastructure and social spending, and put rentier managers in charge of government. The main difference from Spain and other post-feudal economies is that interest to the financial sector has replaced the rent paid to feudal landlords. And as far as economic discussion is concerned, there is no singling out of rentier income as such. 825

The main distinction between today’s mode of conquest and that of 16th-century Spain (and 18th-century France) is that it is now largely financial, not military. Land, natural resources, public infrastructure and industrial corporations are acquired by borrowing money. The cost of this conquest turns out to be as heavy as overt military warfare. Landlords pay out their net rent as interest to the banks that provide mortgage credit for them to acquire property. Corporate raiders likewise pay their cash flow as interest to the bondholders who finance their takeovers. Even tax revenue is increasingly earmarked to pay creditors (often foreign, as in medieval times), not to invest in infrastructure, pay pensions or spend for economic recovery and social welfare. 835

Today’s monopolization of affluence by a rentier class avoiding taxes and public regulation by buying control of government is the same problem that confronted the classical economists. Their struggle to create a fairer economy produced the tools most appropriate to understand how today’s economies are polarizing while becoming less productive. The Physiocrats, Adam Smith, David Ricardo and their successors refined the analysis of how rent-seeking siphons off income from the economy’s flow of spending. 842

The classical critique of economic rent Classical value theory provides the clearest conceptual tools to analyze the dynamics that are polarizing and impoverishing today’s economies. The labor theory of value went hand-in-hand with a “rent theory” of prices, broadening the concept of economic rent imposed by landholders, monopolists and bankers. Rent theory became the basis for distinguishing between earned and unearned income. Nearly all public regulatory policy of the 20th century has followed the groundwork laid by this Enlightenment ideology and political reform from John Locke onward, defining value, price and rent as a guide to progressive tax philosophy, anti-monopoly price regulation, usury laws and rent controls. 846

Defenders of landlords fought back. Malthus argued that landlords would not simply collect rent passively, but would invest it productively to increase productivity. Subsequent apologists simply left unearned income out of their models, hoping to leave it invisible so that it would not be taxed or regulated. 853

Instead of acknowledging the reality of predatory rentier behavior, financial lobbyists depict lending as being productive, as if it normally provides borrowers with the means to make enough gain to pay. Yet little such lending has occurred in history, apart from investing in trade ventures. Most bank loans are not to create new means of production but are made against real estate, financial securities or other assets already in place. The main source of gain for borrowers since the 1980s has not derived from earnings but seeing the real estate, stocks or bonds they have bought on credit rise as a result of asset-price inflation – that is, to get rich from the debt-leveraged Bubble Economy. 859

What makes classical economics more insightful than today’s mainstream orthodoxy is its focus on wealth ownership and the special privileges used to extract income without producing a corresponding value of product or service. Most inequality does not reflect differing levels of productivity, but distortions resulting from property rights and other special privileges. Distinguishing between earned and unearned income, classical economists asked what tax philosophy and public policy would lead to the most efficient and fair prices, incomes and economic growth. 865

Government was situated to play a key role in allocating resources. But although nearly all economies in history have been mixed public/private economic systems, today’s anti-government pressure seeks to create a one-sided economy whose control is centralized in Wall Street and similar financial centers abroad. Democratic political reforms were expected to prevent this development, by replacing inherited privilege with equality of opportunity. The aim was to do away with such privileges and put everyone and every business on an equal footing. Economies were to be freed by turning natural monopolies and land into public utilities. 869

This is how classical free market reforms evolved toward socialism of one form or another on the eve of the 20th century. The hereditary landlord class was selling its land to buyers on credit. That is how land and home ownership were democratized. The unanticipated result has been that banks receive as mortgage interest the rental income formerly paid to landlords. The financial sector has replaced land ownership as the most important rentier sector, today’s post-industrial aristocracy. 874

In Britain, the House of Lords lost its ability to block revenue bills passed by the House of Commons in 1910. 881

The objective of most lending is to extract interest charges by attaching debt to real estate rent, corporate profits and personal income streams, turning them into a flow of interest charges. The “real” economy slows in the face of these exponentially growing financial claims (bank loans, stocks and bonds) that enrich primarily the One Percent. Instead of finance being industrialized, industry has become financialized. The stock and bond markets have been turned into arenas for debt-leveraged buyouts and asset stripping (described in Chapters 9 and 10 below). These dynamics represent a counter-revolution against classical ideas of free markets. Today’s neoliberal tax and financial philosophy is corrosive and destructive, not productive. Instead of promoting industry, capital formation and infrastructure, finance has moved into a symbiosis with the other rentier sectors: real estate, natural resource extraction, and natural monopolies.Acquisition of rent-yielding privileges on credit (or simply by insider dealing and legal maneuvering) does not require the fixed capital investment that manufacturing entails. 884

The Critique and Defense of Economic Rent, From Locke to Mill The main substantive achievement of neoliberalization … has been to redistribute, rather than to generate, wealth and income. [By] ‘accumulation by dispossession’ I mean … the commodification and privatization of land and the forceful expulsion of peasant populations; conversion of various forms of property rights (common, collective, state, etc.) into exclusive private property rights; suppression of rights to the commons; … colonial, neocolonial, and imperial processes of appropriation of assets (including natural resources); …and usury, the national debt and, most devastating of all, the use of the credit system as a radical means of accumulation by dispossession. … To this list of mechanisms we may now add a raft of techniques such as the extraction of rents from patents and intellectual property rights and the diminution or erasure of various forms of common property rights (such as state pensions, paid vacations, and access to education and health care) won through a generation or more of class struggle. The proposal to privatize all state pension rights (pioneered in Chile under the dictatorship) is, for example, one of the cherished objectives of the Republicans in the US. —David Harvey, A Brief History of Neoliberalism (Oxford, 2005)895

The phenomena cited by Harvey represent opportunities for rent extraction. Neoliberals claim that such special privileges and expropriation of hitherto public assets promote economic efficiency. Classical free marketers defined the rents they yielded as neither earned nor necessary for production to occur. They were a post-feudal overhead. 907

The year 1690 usually is treated as the takeoff point for the classical distinction between earned and unearned wealth and its income stream. At issue then was the contrast between real wealth created by labor, and special privileges – mainly post-feudal overhead – from which society could free itself and thus lower its cost structure. John Locke’s guiding axiom was that all men have a natural right to the fruits of their labor. A corollary to this logic was that landlords have a right only to what they themselves produce, not to exploit and appropriate the labor of their tenants: Though the earth and all inferior creatures be common to all men, yet every man has a property in his own person … The labour of his body and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property. … For this labour being the unquestionable property of the labourer, no man but he can have a right to what that is once joined to, at least where there is enough and as good left in common for others. 910

Locke’s labor theory of property and wealth ownership set the stage for distinguishing between the portion of land rent that resulted from its owner’s expenditure of labor and capital investment, and what was received simply from ownership rights without labor effort. This contrast guided tax reform down through the Progressive Era in the early 20th century. Despite his conflation of former and present landholder’s labor, Locke’s exposition initiated a centuries-long discussion. By the 19th century the rising price of land sites was seen as occurring independently of effort by landlords. The rent they charged reflected prosperity by the rest of the economy, not their own effort. Economists call this kind of gain a windfall. It is like winning a lottery, including in many cases the inheritance lottery of how much wealth one’s parents have. 922

Classical economists argued that labor and capital goods require a cost necessary to bring them into production. Labor must receive wages sufficient to cover its basic subsistence, at living standards that tend to rise over time to sustain personal investment in better skills, education and health. And capital investment will not take place without the prospect of earning a profit. More problematic are accounting for land and natural resources. Production cannot take place without land, sunlight, air and water, but no labor or capital cost is necessary to provide them. They can be privatized by force, legal right or political fiat (sale by the state). 931

Classical economists focused on this kind of property claim in defining a fair distribution of income from land and other natural resources as between their initial appropriators, heirs and the tax collector. At issue was how much revenue should belong to the economy at large as its natural patrimony, and how much should be left in the hands of discoverers or appropriators and their descendants. The resulting theory of economic rent has been extended to monopoly rights and patents such as those which pharmaceutical companies obtain to charge for their price gouging. 938

The history of property acquisition is one of force and political intrigue, not labor by its existing owners. The wealthiest property owners have tended to be the most predatory – military conquerors, landed aristocracies, bankers, bondholders and monopolists. Their property rights to collect rent for land, mines, patents or monopolized trade are legal privileges produced by the legal system they control, not by labor. Medieval land grants typically were given to royal companions in return for their political loyalty. This land acquisition process continued from colonial times down through America’s land grants to the railroad barons and many other political giveaways to supporters in most countries, often for bribery and similar kinds of corruption. Most recently, the post-Soviet economies gave political insiders privatization rights to oil and gas, minerals, real estate and infrastructure at giveaway prices in the 1990s. 943

Russia and other countries followed American and World Bank advice to simply give property to individuals, as if this would automatically produce an efficient (idealized) Western European-style free market. What it actually did was to empower a class of oligarchs who obtained these assets by insider dealings. Popular usage coined the word “grabitization” to describe “red company” managers getting rich by registering natural resources, public utilities or factories in their own name, obtaining high prices for their shares by selling large chunks to Western investors, and keeping most of their receipts for these shares abroad as flight capital (about $25 billion annually since 1991 for Russia). This neoliberal privatization capped the Cold War by dismantling the Soviet Union’s public sector and reducing it to a neofeudal society. 950

The great challenge confronting post-Soviet economies is how to undo the effects of these kleptocratic grabs. One way would be to re-nationalize them. This is difficult politically, given the influence that great wealth is able to buy. A more “market oriented” solution is to leave these assets in their current hands but tax their land or resource rent to recapture portions of the windfall for the benefit of society. Without such restructuring, all that Vladimir Putin can do is informal “jawboning”: pressuring Russia’s oligarchs to invest their revenue at home. 957

these economies are going directly into neoliberal rentier decadence. The problem of how an economy can best recover from such grabitization is not new. Classical economists in Britain and France spent two centuries analyzing how to recapture the rents attached to such appropriations. Their solution was a rent tax. Today’s vested interests fight viciously to suppress their concept of economic rent and the associated distinction between earned and unearned income. It would save today’s reformers from having to reinvent the methodology of what constitutes fair value. Censoring or rewriting the history of economic thought aims at thwarting the logic for taxing rent-yielding assets. 962

Seeking to reform the French monarchy in the decades preceding the 1789 Revolution, the Physiocrats popularized the term laissez faire, “let us be.” Coined in the 1750s to oppose royal regulations to keep grain prices and hence land rents high, the school’s founder, Francois Quesnay, extended the slogan to represent freedom from the aristocracy living off its rents in courtly luxury while taxes fell on the population at large. Quesnay was a surgeon. The word Physiocracy reflected his analogy of the circulation of income and spending in the national economy with the flow of blood through the human body. This concept of circular flow inspired him to develop the first national income accounting format, the Tableau Économique in 1759 to show how France’s economic surplus – what was left after defraying basic living and business expenses – ended up in the hands of landlords as groundrent. 969

they did not characterize landlords as taking rent by virtue of their labor. The crop surplus was produced by the sun’s energy. This logic underlay their policy proposal: a Single Tax on land, l’impôt unique. Taxing land rent would collect what nature provided freely (sunlight and land) and hence what should belong to the public sector as the tax base. The 19th century came to characterize landlords and other rentiers as the Idle Rich. 979

Quesnay’s ploy was to claim that the class that produces the surplus is the natural source of taxation. Depicting agricultural land as the ultimate source of surplus implied that all taxes would end up being paid out of it. Deeming manufacturing to be “sterile,” merely working up the raw materials supplied by nature, meant that taxing industry or the labor it hired would raise the break-even cost that business needed to cover. Any taxes on industry or labor would simply be passed on to the source of the surplus (agricultural landlords). In effect, the Physiocrats said: “Indeed you landowners are the source of our nation’s wealth. That is why all taxes end up being paid by you, indirectly if not directly. Let us avoid the convoluted pretenses at work and tax you directly by our Single Tax instead of impoverishing French industry and commerce.” 990

the net surplus (produit net), defined as income over and above break-even costs. They asked who ends up with it, and who ended up bearing the tax? 997

Adam Smith broadens Physiocratic rent theory Adam Smith met Quesnay and Les Économistes on his travels in France during 1764-66. He agreed with the need to free labor and industry from the land rent imposed by Europe’s privileged nobilities: “Ground-rents and the ordinary rent of land are … the species of revenue which can best bear to have a peculiar tax imposed on them.” But in contrast to the Physiocratic description of industry being too “sterile” to tax, Smith said manufacturing was productive. In his lectures at Edinburgh a decade before he wrote The Wealth of Nations, Smith generalized the concept of rent as passive, unearned income – and used the labor theory of value to extend this idea to finance as well as land ownership: The labour and time of the poor is in civilized countries sacrificed to the maintaining of the rich in ease and luxury. The landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his exactions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full enjoyment of the fruits of his own labours; there are no landlords, no usurers, no tax gatherers. 1003

Failure to tax this rent burden shifted taxes onto commerce and industry, eroding its profits and hence capital accumulation. In addition to bearing the cost of land rents, populations had to pay excise taxes levied to pay interest on public debt run up as a result of the failure to tax landlords. 1016

In 1848, John Stuart Mill explained the logic of taxing it away from the landlord class: “Suppose that there is a kind of income which constantly tends to increase, without any exertion or sacrifice on the part of the owners: those owners constituting a class in the community.” Rejecting the moral justification that Locke provided for landownership – that their land owed its value to their own labor – Mill wrote that landlords grow richer, as it were in their sleep, without working, risking, or economizing. What claim have they, on the general principle of social justice, to this accession of riches? In what would they have been wronged if society had, from the beginning, reserved the right of taxing the spontaneous increase of rent … ? The value of land rose as a result of the efforts of the entire community. Mill concluded that rising site value should belong to the public as the natural tax base rather than leaving it as “an unearned appendage to the riches of a particular class.” 1020

Mill justified taxing land rent on grounds of national interest as well as moral philosophy. The aim was to avoid taxing labor and industry, but on income that had no counterpart in labor. In time the labor theory of value was applied to monopoly rents. The remainder of the 19th century was filled with proposals as to how best to tax or nationalize the land’s economic rent. 1029

orthodox trade theory explaining the (supposed) virtues of global specialization of labor. Ricardo’s logic reflected the self-interest of his banking class: Globalization promoted commerce, which was still the major market for bank lending in the early 19th century. 1050

The desirability of sites in good neighborhoods is enhanced by public infrastructure investment in transportation and other improvements, combined with the general level of prosperity – and most of all in recent times, by bank credit on easier (that is, more debt-leveraged) lending terms. Owners enjoy a price rise without having to invest more of their own money – the situation Ricardo described with regard to agricultural landowners. 1073

Contrary to Ricardo’s description of rent as “a transfer of wealth, advantageous to the landlords and proportionally injurious to the consumers,” Malthus countered that new capital investment in the land could not be afforded without high crop prices: 1086

Landlords were what today’s One Percent call themselves: “job creators” who hired coachmen, tailors and seamstresses, butlers and other servants, and bought coaches, fine clothes and furnishings. So even when rent recipients spent their revenue on luxuries, they augmented the demand for labor. This argument failed to recognize that if workers did not have to pay such high food prices, they could spend more on the products of industry – or, if they still earned only the subsistence wage (as Ricardo assumed), industrial profits would be higher at the expense of land rent. The real choice thus was between luxury consumption by the landed aristocracy or higher living standards for the rest of the population and more industrial investment. 1093

what Malthus described is best characterized as rentier demand by the One Percent. He was justifying what the late 19th-century cartoonist Thomas Nast depicted: Wall Street plutocrats dressed in finery and so fat from gluttonous over-eating that the buttons on their jackets nearly burst. 1100

defining economic rent as the excess of price over costs of production shaped subsequent conceptualization of rent theory. 1106

in the cheapest market leaves the economy dependent on foreign producers. The long-term risk of dependency on imported food and basic consumer goods escaped Ricardo’s attention, as did the problem of financing trade deficits 1111

As Parliamentary spokesman for his fellow financiers, he accused only landlords of draining income out of the economy, not creditors. So his blind spot reflects his profession and that of his banking family. (The Ricardo Brothers handled Greece’s first Independence Loan of 1824, for instance, on quite ruinous terms for Greece.) Seeing no parallel between paying interest to bankers and paying rents to landlords, Ricardo sidestepped Adam Smith’s warning about how excise taxes levied on food and other necessities to pay bondholders on Britain’s war debt drove up the nation’s subsistence wage level. His one-sided focus on land rent diverted attention from how rising debt service – the financial analogue to land rent – increases break-even costs while leaving less income available for spending on goods and services. Treating money merely as a veil – as if debt and its carrying charges were not relevant to cost and price levels – Ricardo insisted that payment of foreign debts would be entirely recycled into purchases of the paying-nation’s exports. There was no recognition of how paying debt service put downward pressure on exchange rates or led to domestic austerity. 1132

keeping debts on the books while prices decline enhances the value of creditor claims for payment. This polarization between creditors and debtors is what happened after the Napoleonic Wars, and also after America’s Civil War, crucifying indebted farmers and the rest of the economy “on a cross of gold,” as William Jennings Bryan characterized price deflation. The financial sector now occupies the dominant position that landlords did in times past. Debt service plays the extractive role that land rent did in Ricardo’s day. 1143

creditors recycle most of their receipt of interest into new loans. This increases the debt burden without raising output or living standards. 1148

Today, banking has found its major market in lending to real estate and monopolies, adding financial charges to land and monopoly rent overhead. The financial counterpart to diminishing returns that raise the cost of living and doing business takes two forms. Interest rates rise to cover the growing risks of lending to debt-strapped economies. And the “magic of compound interest” extracts an exponential expansion of debt service as creditors recycle their interest income into new loans. The result is that debts grow more rapidly and inexorably than the host economy’s ability to pay. 1153

The All-Devouring “Magic of Compound Interest”1158

overgrowth of debt is at the root of today’s economic crisis. Creditors make money by leaving their savings to accrue interest, doubling and redoubling their claims on the economy. This dynamic draws more and more control over labor, land, industry and tax revenue into the hands of creditors, concentrating property ownership and government in their hands. The way societies have coped with this deepening indebtedness should be the starting point of financial theorizing. 1163

Money is not a “factor of production.” It is a claim on the output or income that others produce. Debtors do the work, not the lenders. Before a formal market for wage labor developed in antiquity, money lending was the major way to obtain the services of bondservants who were compelled to work off the interest that was owed. Debtors’ family members were pledged to their creditors. In India, and many other parts of the world, debt peonage still persists as a way to force labor to work for their creditors. In a similar way, getting inducing landholders into debt was the first step to pry away their subsistence lands, beaching archaic communalistic land tenure systems. In this respect creditors are like landlords, obtaining the labor of others and growing richer in the way that J. S. Mill described: “in their sleep,” without working. 1166

The idea of such exponential growth is expressed in an Egyptian proverb: “If wealth is placed where it bears interest, it comes back to you redoubled.” A Babylonian image compared making a loan to having a baby. This analogy reflects the fact that the word for “interest” in every ancient language meant a newborn: a goat-kind (mash) in Sumerian, or a young calf: tokos in Greek or foenus in Latin. The “newborn” paid as interest was born of silver or gold, not from borrowed cattle (as some economists once believed, missing the metaphor at work). What was born was the “baby” fraction of the principal, 1/60th each month. (In Greece, interest was due on the new moon.) The growth was purely mathematical with a “gestation period” for doubling dependent on the interest rate. 1195

Sumer in the third millennium BC, which already had a term mashmash, “interest (mash) on the interest.” Students were asked to calculate how long it will take for one mina to multiply 64 times, that is, 26 – in other words, six doubling times of five years each. The solution involves calculating powers of 2 (22 = 4, 23 = 8 and so forth). A mina multiplies fourfold in 10 years (two gestation periods), eightfold in 15 years (three periods), sixteenfold in 20 years (four periods), and 64 times in 30 years. The 30-year span consisted of six fiveyear doubling periods. 1203

Martin Luther depicted usurers scheming “to amass wealth and get rich, to be lazy and idle and live in luxury on the labor of others.” The growing mass of usurious claims was depicted graphically as a “great huge monster … who lays waste all … Cacus.” Imbuing victims with an insatiable desire for money, Cacus encouraged an insatiable greed that “would eat up the world in a few years.” A “usurer and money-glutton … would have the whole world perish of hunger and thirst, misery and want, so far as in him lies, so that he may have all to himself, and every one may receive from him as from a God, and be his serf for ever. … For Cacus means the villain that is a pious usurer, and steals, robs, eats everything.” 1213

the 19th century German economist, Michael Flürscheim, cast this exponential doubling and redoubling principle into the form of a Persian proverb telling of a Shah who wished to reward a subject who had invented chess, and asked what he would like. The man asked only “that the Shah would give him a single grain of corn, which was to be put on the first square of the chess-board, and to be doubled on each successive square,” until all sixty-four squares were filled with grain. Upon calculating 64 doublings of each square from the preceding, starting from the first gain and proceeding 1, 2, 4, 8, 16, 32, 64 and so on. At first the compounding of grain remained well within the physical ability of the kingdom to pay, even after twenty squares were passed. But by the time the hypothetical chessboard was filled halfway, the compounding was growing by leaps and bounds. The Shah realized that this he had promised “an amount larger than what the treasures of his whole kingdom could buy.” The moral is that no matter how much technology increases humanity’s productive powers, the revenue it produces will be overtaken by the growth of debt multiplying at compound interest. The major source of loanable funds is repayments on existing loans, re-lent to finance yet new debts – often on an increasingly risky basis as the repertory of “sound projects” is exhausted. Strictly speaking, it is savings that compound, not debts themselves. Each individual debt is settled one way or another, but creditors recycle their interest and amortization into new interest-bearing loans. The only problem for savers is to find enough debtors to take on new obligations. 1224

The Rule of 72 A mathematical principle called the “Rule of 72” provides a quick way to calculate such doubling times: Divide 72 by any given rate of interest, and you have the doubling time. To double money at 8 percent annual interest, divide 72 by 8. The answer is 9 years. In another 9 years the original principal will have multiplied fourfold, and in 27 years it will have grown to eight times the original sum. A loan at 6 percent doubles in 12 years, and at 4 percent in 18 years. This rule provides a quick way to approximate the number of years needed for savings accounts or prices to double at a given compound rate of increase. 1238

The exponential growth of savings (= other peoples’ debts) One of Adam Smith’s contemporaries, the Anglican minister and actuarial mathematician Richard Price, graphically explained the seemingly magical nature of how debts multiplied exponentially. As he described in his 1772 Appeal to the Public on the Subject of the National Debt: Money bearing compound interest increases at first slowly. But, the rate of increase being continually accelerated, it becomes in some time so rapid, as to mock all the powers of the imagination. One penny, put out at our Saviour’s birth at 5% compound interest, would, before this time, have increased to a greater sum than would be obtained in a 150 millions of Earths, all solid gold. But if put out to simple interest, it would, in the same time, have amounted to no more than 7 shillings 4½d. 1246

In his Observations on Reversionary Payments, first published in 1769 and running through six editions by 1803, Price elaborated how the rate of multiplication would be even higher at 6 percent: “A shilling put out at 6% compound interest at our Saviour’s birth would … have increased to a greater sum than the whole solar system could hold, supposing it a sphere equal in diameter to the diameter of Saturn’s orbit.” 1254

Balances snowball in the hands of bankers, bondholders and other savers, as if there always will be enough opportunities to find remunerative projects and credit-worthy borrowers to pay the interest that is accruing. The moral is that the economy’s ability to produce and earn enough of a surplus to pay exponentially rising interest charges is limited. The more it is stripped to pay creditors, the less able it is to produce and pay as a result of unemployment, underutilization of resources, emigration and capital flight. 1265

In the two thousand years since the birth of Christ, the European economy has grown at a compound annual rate of 0.2 percent, far lower than the level at which interest rates have stood. Yet financial fortunes have crashed again and again – in part because interest payments have absorbed the revenue that otherwise would have been available for new direct investment. The inability of productive investment opportunities to keep pace with the expansion of credit is the Achilles heel of finance-based growth. How can compound interest be paid? Who will end up paying it? Who will receive it, and what will they do with it? If banks and a creditor class receive this money, will they spend it domestically to maintain balance, or will they drain the economy’s income stream and shift it abroad to new loan markets, leaving the economy strapped by the need to pay interest on the growing debt? If the state accrues this money, how will it recirculate it back into the economy? 1270

“The Magic of Compound Interest” vs. The Economy’s Ability to Pay 1. Neither money nor credit is a factor of production. Debtors do the work to pay their creditors. This means that interest is not a “return to a factor of production.” Little credit is used to expand production or capital investment. Most is to transfer asset ownership. 2. If loan proceeds are not used to make gains sufficient to pay the creditor (productive credit), then interest and principal must be paid out of the debtor’s other income or asset sales. Such lending is predatory. 3. The aim of predatory lending in much of the world is to obtain labor to work off debts (debt peonage), to foreclose on the land of debtors, and in modern times to force debt-strapped governments to privatize natural resources and public infrastructure. 1278

Most inheritance consists of financial claims on the economy at large. In antiquity, foreclosure for non-payment was the major lever to pry land away from traditional tenure rights inheritable within the family. (Early creditors got themselves adopted as Number One sons.) Today, most financial claims are on the land’s rent, leaving ownership “democratized” – on credit. 5. Most interest-bearing debt always has been predatory, apart from lending for commerce. Carrying a rising debt overhead slows material investment and economic growth.1286

The rate of interest never has reflected the rate of profit, the rise in physical productivity or the borrower’s ability to pay. The earliest interest rates were set simply for ease in mathematical calculation: 1/60 per month in Mesopotamia, 1/10 annually in Greece, and 1/12 in Rome. (These were all the unit fractions in their respective fractional systems.) In modern times the rate of interest has been set mainly to stabilize the balance of payments and hence exchange rates. Since 2008 it has been set low to re-inflate asset prices and bank profits. 7. Any rate of interest implies a doubling time for money lent out. See the Rule of 72 (e.g., five years in Mesopotamia).1291

Modern creditors avert public cancellation of debts (and making banks a public utility) by pretending that lending provides mutual benefit in which the borrower gains – consumer goods now rather than later, or money to run a business or buy an asset that earns enough to pay back the creditor with interest and still leave a profit for the debtor. 9. This scenario of productive lending does not typify the banking system as a whole. Instead of serving the economy’s production trends, the financial sector (as presently organized) makes the economy top-heavy, by transferring assets and income into the hands of an increasingly hereditary creditor class.1297

The exponential growth of debt shrinks markets and slows and investment, reducing the economy’s ability to pay debts, while increasing the debt/output and debt/income ratios. 11. The rising volume of debt changes the distribution of property ownership unless public authorities intervene to cancel debts and reverse expropriations. In antiquity, royal “Jubilee” proclamations liberated bondservants and restored lands that had been foreclosed. 12. Cancelling debts was politically easiest when governments or public institutions (temples, palaces or civic authorities) were the major creditors, because they were cancelling debts owed to themselves. This is an argument for why governments should be the main suppliers of money and credit as a public utility.1303

Gustavus Myers’ History of the Great American Fortunes. In 1895, J. W. Bennett warned of a rentier caste drawing the world’s wealth into its hands as the inventive powers of industry were outrun by the mathematics of compound interest, “the principle which asserts that a dollar will grow into two dollars in a number of years, and keep on multiplying until it represents all of the wealth on earth.” Although not much noticed at the time, Bennett was one of the first to recognize that financial recycling of interest receipts into new lending was the driving force of the business cycle. Despite the rising role of industry, “financial systems are founded on rent and interest-taking,” and “interest-bearing wealth increases in a ratio which is ever growing more and more rapid,” leaving few assets unattached by debt. The exponential growth of debt makes business conditions more risky, because “there are not available assets to meet [creditor] demands and at the same time keep business moving.” Bankers call in their loans, causing a crash followed by “a trade depression every ten years or oftener and panics every twenty years.” 1319

The mathematics of compound interest explain “the extremely rapid accumulation of wealth in the hands of a comparatively few non-producers,” as well as “the abject poverty of a large percentage of the producing masses.” Non-producers receive “much the largest salaries,” despite the fact that their “income is often in inverse ratio to the service which [they do for their] fellow men.” As a result, Bennett concluded: “The financial group becomes rich more rapidly than the nation at large; and national increase in wealth may not mean prosperity of the producing masses.” All this sounds remarkably modern. The same basic criticisms were made after the 2008 crash, as if the discovery of predatory finance was something new. 1328

Bennett’s contemporary John Brown (not the abolitionist) argued that compound interest “is the subtle principle which makes wealth parasitic in the body of industry – the potent influence which takes from the weak and gives to the strong; which makes the rich richer and the poor poorer; which builds palaces for the idle and hovels for the diligent.” Only the wealthy are able to save up significant amounts and let sums simply accumulate and accrue interest over time. Small savers must live off their savings, drawing them down long before the mathematics of compound interest become truly significant. What is remarkable is that this principle of compound interest has come to be viewed as a way to make populations richer rather than poorer. It is as if workers can ride the exponential growth of financial debt claims, by saving in mutual funds or investing in pension funds to financialize the economy. This rosy scenario assumes that the increase in debt does not dry up the growth in markets, investment and employment in much the way that Ricardo imagined landlords and their rent would stifle industrial capitalism. 1334

How the One Percent Holds the 99 Percent in Exponentially Deepening Debt [W]hat Smith and Marx shared, critically, was the belief that it was entirely possible for an activity to be revenue- and profit-generative without actually contributing to the creation of value. There was no paradox. (Or rather, for Marx at any rate, the paradox was not that banks made profits without producing value, but that industrial capitalists allowed them to do so.) J. P. Morgan and John D. Rockefeller are said to have called the principle of compound interest the Eighth Wonder of the World. For them it meant concentrating financial fortunes in the hands of an emerging oligarchy indebting the economy to itself at an exponential rate. This has been the key factor in polarizing the distribution of wealth and political power in societies that do not take steps to cope with this dynamic. The problem lies in the way that savings and credit are lent out to become other peoples’ debts without actually helping them earn the money to pay them off.1343

the financial sector this poses a banking problem: how to prevent losses to creditors when loan defaults occur. Such defaults prevent banks from paying their depositors and bondholders until they can foreclose on the collateral pledged by debtors and sell it off. But for the economy at large, the problem is bank credit and other loans loading the economy down with more and more debt, “crowding out” spending on current output. Something has to give – meaning that either creditors or debtors must lose. Politicians thus face a choice of whether to save banks and bondholders or the economy. Do they simply reward their major campaign contributors by giving banks enough central bank or taxpayer money to compensate losses on bad loans? Or do they restructure debts downward, imposing losses on large bank depositors, bondholders and other creditors by writing down bad debts so as to keep debt-strapped families solvent and in possession of their homes? It is politically convenient in today’s world to solve the banking dimension of this problem in ways that please the financial sector. After the 1907 crash hit the United States harder than most economies, the Federal Reserve was founded in 1913 to provide public back-up credit in times of crisis. The assumption was that debt problems were merely about short-term liquidity for basically solvent loans whose carrying charges were temporarily interrupted by crop failures or a major industrial bankruptcy. The exponential growth of debt was not anticipated to reach a magnitude that would bring economic growth to a halt. That worry has faded almost entirely from mainstream discussion for the past century. 1352

The Glass Steagall Act, also passed in 1933, separated normal banking from the risky speculation until 1999, when its provisions were gutted under Bill Clinton. Banks were regulated to make loans to borrowers who could provide sound collateral and earn enough to carry their debts. 1372

The economy was idealized as rising and falling fairly smoothly around a steady upward trend. The mathematics of compound interest should have alerted regulators to the need “to take away the punch bowl just as the party gets going,” as McChesney Martin, long-term Federal Reserve Chairman (1951-70) famously quipped. But the combination of New Deal reforms and soporific economic theory (assuming that economies could carry a rising debt burden ad infinitum) led regulators to lower their guard against the strains created by banks and bondholders lending on increasingly risky terms at rising debt/income and debt/asset ratios. Alan Greenspan promised the public before the 2008 crash that a real estate implosion was impossible because such a decline would be only local in scope, not economy-wide. But by this time the pro-Wall Street drive by the Clinton Administration’s orchestrated by Treasury Secretary Robert Rubin (later to chair Citibank, which became the most reckless player) had opened the floodgates that led rapidly to widespread insolvency. Nearly ten million homes fell into foreclosure between 2008 and mid-2014 according to Moody’s Analytics. Cities and states found themselves so indebted that they had to start selling off their infrastructure to Wall Street managers who turned roads, sewer systems and other basic needs into predatory monopolies. 1377

Across the board, the U.S. and European economies were “loaned up” and could not sustain living standards and public spending programs simply by borrowing more. Repayment time had arrived. That meant foreclosures and distress sales. That is the grim condition that the financial sector historically has sought as its backup plan. For creditors, debt produces not only interest, but property ownership as well, by indebting their prey. 1388

Wages and profits rose steadily from 1945 to the late 1970s. So did savings. Banks lent them to fund new construction, as well as to bid up prices for housing already in place. This recycling of savings plus new bank credit into mortgage lending obliged homebuyers to borrow more as interest rates rose for 35 years, from 1945 to 1980. The result was an exponential growth of debt to buy housing, automobiles and consumer durables. Financial wealth – what the economy owes bankers and bondholders – increases the volume of debt claims from one business cycle to the next. Each business recovery since World War II has started with a higher debt level. Adding one cyclical buildup on top of another is the financial equivalent of driving a car with the brake pedal pressed tighter and tighter to the floor, slowing the speed – or like carrying an increasingly heavy burden uphill. The economic brake or burden is debt service. The more this debt service rises, the slower markets can grow, as debtors are left with less to spend on goods and services because they must pay a rising portion of income to banks and bondholders. Markets shrink and a rising proportion of debtors default. New lending stops, and debtors must start repaying their creditors. This is the debt deflation stage in which business upswings culminate. By the mid-1970s entire countries were reaching this point. New York City nearly went bankrupt. Other cities could not raise their traditional source of tax revenue, the property tax, without forcing mortgage defaults. 1400

Deterioration of loan quality to interest-only loans and “Ponzi” lending Hyman Minsky has described the first stage of the financial cycle as the period in which borrowers are able to pay interest and amortization. In the second stage, loans no longer are self-amortizing. Borrowers can only afford to pay the interest charges. In the third stage they cannot even afford to pay the interest. They have to borrow to avoid default. In effect, the interest is simply added onto the debt, compounding it. Default would have obliged banks to write down the value of their loans. To avoid “negative equity” in their loan portfolio, bankers made new loans to enable Third World governments to pay the interest due each year on their foreign debts. That is how Brazil, Mexico, Argentina and other Latin American countries got by until 1982, when Mexico dropped the “debt bomb” by announcing that it could not pay its creditors. Leading up to the 2008 financial crash, the U.S. real estate market had entered the critical stage where banks were lending homeowners the interest as “equity loans.” Housing prices had risen so high that many families could not afford to pay down their debts. To make the loans work “on paper,” real estate brokers and their banks crafted mortgages that automatically added the interest onto the debt, typically up to 120 percent of the property’s purchase price. Bank credit thus played the role of enticing new subscribers into Ponzi schemes and chain letters. Over-lending kept the economy from defaulting until 2008. 1414

These are paid out of the proceeds from more and more new players joining the scheme, e.g., by new homebuyers taking out ever-rising mortgage loans to buy out existing owners. The newcomers hope that returns on their investment (like a chain letter) can keep on expanding ad infinitum. But the scheme inevitably collapses when the inflow of new players dries up or banks stop feeding the scheme. 1430

Higher prices for the houses being borrowed against seemed to justify the process, without much thought about how debts could be paid by actually earning wages or profits. Banks created new credit on their keyboards, while the Federal Reserve facilitated the scheme by sustaining the exponential rise in bank loans (without anyone having to save and deposit the money). However, this credit was not invested to increase the economy’s productive powers. Instead, it saved borrowers from default by inflating property prices – while loading down property, companies and personal incomes with debt. The fact that price gains for real estate are taxed at a much lower rate than wages or profits attracted speculators to ride the inflationary wave as lending standards were loosened, fostering lower down payments, zero-interest loans and outright fictitious “no documentation” income statements, forthrightly called “liars’ loans” by Wall Street. But property prices were bound to crash without roots in the “real” economy. Rental incomes failed to support the debt service that was owed, inaugurating a “fourth” phase of the financial cycle: defaults and foreclosures transferring property to creditors. On the global plane, this kind of asset transfer occurred after Mexico announced its insolvency in 1982. Sovereign governments were bailed out on the condition that they submit to U.S. and IMF pressure to sell off public assets to private investors. Every major debt upswing leads to such transfers. These are the logical consequence of the dynamics of compound interest. 1437

Table B.100 from the Federal Reserve’s flow-of-funds statistics shows the consequences of U.S. debt pyramiding. By 2005, for the first time in recent history, Americans in the aggregate held less than half the market value of their homes free of debt. Bank mortgage claims accounted for more than half. By 2008 the ratio of home equity ownership to mortgage debt had fallen to just 40 percent. Bank mortgages now exceed homeowners’ equity, which fell below 40% in 2011. 1450

What happens when the exponential buildup of debt ends During the financial upswing the financial sector receives interest and capital gains. In the fallback period after the crisis, the economy’s private- and public-sector assets are expropriated to pay the debts that remain in place. A “Minsky moment” erupts at the point when creditors realize that the game is over, run for the exits and call in their loans. The 2008 crash stopped bank lending for mortgages, credit cards and nearly all other lending except for U.S. government-guaranteed student loans. Instead of receiving an infusion of new bank credit to break even, households had to start paying it back. Repayment time arrived. This “saving by paying down debt” interrupts the exponential growth of liquid savings and debt. But that does not slow the financial sector’s dominance over the rest of the economy. Such “intermediate periods” are free-for-alls in which the more powerful rentiers increase their power by acquiring property from distressed parties. 1455

Financial emergencies usually suspend government protection of the economy at large, as unpopular economic measures are said to be necessary to “adjust” and restore “normalcy” – finance-talk for a rollback of public regulatory constraints on finance. “Technocrats” are placed in control to oversee the redistribution of wealth and income from “weak” hands to strong under austerity conditions. 1464

reverse mortgages. Retirees and other homeowners signed agreements with banks or insurance companies to receive a given annuity payment each month, based on the owner’s expected lifetime. The annuity was charged against the homeowner’s equity as pre-payment for taking possession upon the owner-debtor’s death. The banks or insurance companies ended up with the property, not the children of the debtors. (In some cases the husband died and the wife received an eviction notice, on the ground that her name was not on the ownership deed.) The moral is that what is inherited in today’s financialized economy is creditor power, not widespread home ownership. So we are brought back to the fact that compound interest does not merely increase the flow of income to the rentier One Percent, but also transfers property into its hands. 1469

economies veer out of balance as revenue is diverted to pay bankers and bondholders instead of to expand business. Yet this has not discouraged economists from projecting national income or GDP as growing at a steady trend rate year after year, assuming that productivity growth will continue to raise wage levels and enable thrifty individuals to save enough to retire in affluence. The “magic” of compound interest is held to raise the value of savings as if there are no consequences to increasing debt on the other side of the balance sheet. The internal contradiction in this approach is the “fallacy of composition.” Pension funds have long assumed that they and other savers can make money financially without inflicting adverse effects on the economy at large. Until recently most U.S. pension funds assumed that they could make returns of 8.5 percent annually, doubling in less than seven years, quadrupling in 13 years and so forth. This happy assumption suggested that state and local pension funds, corporate pension funds and labor union pension funds would be able to pay retirees with only minimal new contributions. The projected rates of return were much faster than the economy’s growth. Pension funds imagined that they could grow simply by increasing the value of financial claims on a shrinking economy by extracting a rise in interest, dividends and amortization. 1478

It is as if savings can keep accruing interest and make capital gains without shrinking the economy. But a rate of financial growth that exceeds the economy’s ability to produce a surplus must be predatory over time. Financialization intrudes into the economy, imposing austerity and ultimately forcing defaults by siphoning off the circular flow between producers and consumers. To the extent that new bank loans find their counterpart in debtors’ ability to pay in today’s bubble economies, they do so by inflating asset prices. Gains are not made by producing or earning more, but by borrowing to buy assets whose prices are rising, being inflated by credit created on looser, less responsible terms. Today’s self-multiplying debt overhead absorbs profits, rents, personal income and tax revenue in a process whose mathematics is much like that of environmental pollution. 1490

The twenty-ninth day,” that is, one day before the half the pond’s lilies double for the final time, stifling its surface. The end to exponential growth thus comes quickly. The problem is that the pond’s overgrowth of vegetation is not productive growth. It is weeds, choking off the oxygen needed by the fish and other life below the surface. This situation is analogous to debt siphoning off the economic surplus and even the basic needs of an economy for investment to replenish its capital and to maintain basic needs. Financial rentiers float on top of the economy, stifling life below. Financial managers do not encourage understanding of such mathematics for the public at large (or even in academia), but they are observant enough to recognize that the global economy is now hurtling toward this pre-crash “last day.” That is why they are taking their money and running to the safety of government bonds. Even though U.S. Treasury bills yield less than 1 percent, the government can always simply print the money. The tragedy of our times is that it is willing to do so only to preserve the value of assets, not to revive employment or restore real economic growth. Today’s creditors are using their gains not to lend to increase production, but to “cash out” their financial gains and buy more assets. The most lucrative assets are land and rent-yielding opportunities in natural resources and infrastructure monopolies to extract land rent, natural resource rent and monopoly rent. 1500

Finance has converted its economic power into the political power to reverse the classical drive to tax away property rent, monopoly rent and financial income, and to keep potential rent-extracting infrastructure in the public domain. Today’s financial dynamics are leading back to shift the tax burden onto labor and industry while banks and bondholders have obtained bailouts instead of debts being written down. This is the political dimension of the mathematics of compound interest. It is the pro-rentier policy that the French Physiocrats and British liberals sought to reverse by clearing away the legacy of European feudalism. 1515

the forefront of the news by the statistical research of Thomas Piketty 1529

statistical research of Thomas Piketty and Emmanuel Saez showing the increasing concentration of income in the hands of the richest One Percent. The main remedies they propose are a wealth tax (especially on inherited estates) and a return to steeper progressive income taxation. The idea of taxing higher income brackets more without regard for whether their gains are earned “productively” or in extractive rentier ways represents a victory in dissuading critics from focusing on the policy aim of Adam Smith and other classical economists: preventing “unearned” income from being obtained in the first place. As Chapter 3 has described, they recognized not only that rentier revenue (and capital gains) is earned in a predatory and unproductive way, but also that land rent, monopoly rent and financial charges are mainly responsible for the rising wealth of the One Percent as compared to that held by the rest of society. 1530

FIRE sector revenue appears as a cost of producing an equivalent amount to Gross Domestic Product (GDP), not as unearned income or “empty” pricing. And neither the NIPA nor the Federal Reserve’s flow-of-funds statistics recognize how the economy’s wealthiest financial layer makes its fortunes by land-price gains and other “capital” gains. A cloak of invisibility thus is drawn around how FIRE sector fortunes are amassed. 1546

The foundation myth of pro-rentier economics is that everyone receives income in proportion to the contribution they make to production. This denies that economic rent is unearned. Hence, there is no exploitation or unearned income, and no need for the reforms advocated by classical political economy. 1550

Robber barons, landlords and bankers are depicted as part of the production process, and prices are assumed to settle at their cost of production, defined to include whatever rentiers manage to obtain. This closed logical circle excludes any criticism that markets may work in an unfair way. To Clark and other “free market” economists, “the market” is simply the existing status quo, taking for granted the existing distribution of wealth and property rights. Any given distribution of property rights, no matter how inequitable, is thought of as part of economic nature. The logic is that all income is earned by the recipient’s contribution to production. It follows that there is no free lunch – and also that There Is No Alternative to the extent that the existing distribution of wealth is a result of natural law. 1566

Treating any revenue-yielding asset as capital conflates financial and rentier claims on production with the physical means of production. The vantage point is that of financiers or investors buying land and real estate, oil and mineral deposits, patents, monopoly privileges and related rent extraction opportunities without concern for whether economists classify their returns as profit or as rent. Today’s tax laws make no such distinction. 1575

failure to distinguish manmade capital from property rights that did not involve any necessary or intrinsic cost of production. The result, Patten said, was to conflate profits earned on tangible industrial capital investment with land and monopoly rent. To real estate investors or farmers buying properties on mortgage, the financial and monopoly charges built into their acquisition price appear as an investment cost. “The farmer thinks that land values depend on real costs” because he had to pay good money for his property, explained Patten, “and the city land speculator has the same opinion as to town lots.” This individualistic view is antithetical to the socialist and Progressive Era reforms being introduced in the late 19th century. That is what makes classical concerns with the economics of national development different from the financialized investor’s-eye view of the world. At issue was what constitutes the cost of production in terms of real value, as distinct from extractive rentier charges. Freeing economies from such charges seemed to be the destiny of industrial capitalism. 1581

“Institutionalist” and sociological reformers retained rent theory Patten pointed out that land sites, like mineral rights provided by nature and financial privileges provided by legal fiat, do not require labor to create. But instead of describing their economic rent as an element of price without real cost or labor effort, Clark viewed whatever amount investors spent on acquiring such assets as their capital outlay and hence as a market cost of doing business. “According to the economic data he presents,” Patten wrote, “rent in the economic sense, if not wholly disregarded, at least receives no emphasis. Land seems to be a form of capital, its value like other property being due to the labor put upon it.” But its price simply capitalizes property rights and financial charges that are not intrinsic. 1590

For national economies, the problem is that and land rent and natural resource rent are taken at the expense of wage earnings as well as from industrial profits. “It seems to me,” Patten wrote, that the doctrine of Professor Clark, if carried out logically, would deny that the laborers have any right to share in the natural resources of the country. … All the increase of wealth due to fertile fields or productive mines would be taken gradually from workmen with the growth of population, and given to more favored persons … When it is said that the workingman under these conditions gets all he is worth to society, the term ‘society,’ if analyzed, means only the more favored classes … They pay each laborer only the utility of the last laborer to them, and get the whole produce of the nation minus this amount. This is why Patten’s contemporary reformers urged that land, natural resources and monopolies be kept in the public domain, so as to minimize the rake-off of national patrimony “given to more favored persons.” The idea of unearned income as a subtraction from the circular flow of income available for labor and industry as wages and profits has vanished from today’s post-classical NIPA. Now, whatever is paid to rentiers is considered a bona fide cost of doing business as if it embodies intrinsic value for a product. 1606

Clark’s claim that no income is unearned defines all economic activities as being productive in proportion to how much income they obtain. No one way of making money is deemed more or less productive than any other. 1617

Everyone earns just what he or she deserves. Natural law will proportion income and wealth to their recipients’ contribution to production, if not “interfered” with. Today’s highest paying occupations are on Wall Street, running banks, hedge funds or serving as corporate Chief Financial Officers. In Clark’s view they earn everything they get, and everyone else only deserves whatever is left over. Gary Becker, the University of Chicago economist, followed this logic in justifying such incomes as being earned productively, warning that progressive taxation would discourage their enterprise and hence productivity: “A highly progressive income tax structure tends to discourage investment in human capital because it reduces take-home pay and the reward to highly skilled, highly paid occupations.” Rentier income, inherited wealth, landlords and monopolies making money off the economy is thus interpreted as “earnings” on one’s “human capital,” the neoliberal catchall residual to absorb whatever cannot be explained in terms of actual labor effort or cost. It replaces what former economists called unearned income. It is as if the One Percent and the FIRE sector do not make money off the property they have (either inherited or built up far beyond what anyone’s individual labor and enterprise could explain), but out of their own human talents. Finance capital, rentier capital, land and monopoly rights are all conflated with “capital.” 1619

Keynes worried that as economies grew richer, people would save a larger proportion of their income instead of spending on consumption. This drain from the circular flow would lead to depression, unless governments compensated by infusing money into the economy, hiring labor for public works. Keynes depicted saving simply as hoarding – withdrawing revenue from the spending stream of production and consumption. 1647

There always is an economic gain for some party in sponsoring bad theory. Many erroneous economies can be traced to policies endorsed by the bad theorists. Leaving rentier income and spending out of the equation enables anti-labor economists to demand monetary austerity and a balanced government budget as their knee-jerk policy response. The narrow-minded MV=PT tautology enables economists to blame wages for inflationary pressures, not the cost of living being pushed up by debt-leveraged housing prices and other FIRE sector expenses, or by the rising corporate debt service built into the pricing of goods and services. In reality, asset prices rise or fall at a different rate from commodity prices and wages. This is a result precisely of the fact that the Federal Reserve and other central banks “inject” money into the economy via Wall Street, the City of London or other financial centers, by buying and selling Treasury securities or providing commercial bank reserves, e.g., in the post-2008 waves of Quantitative Easing. 1666

The assumption is that people only receive income for what they produce. This assumption rests on a tunnel vision that reflects the ideological victory that landlords and vested financial interests achieved in the late 19th century against the classical drive to tax economic rent. The effect of excluding land rent, natural resource rent and monopoly rent – the drain of income from producers and consumers to pay landlords, privatizers, monopolists and their bankers – is to deter measurement of what I call rent deflation. That is the analogue to debt deflation – the diversion of income to pay debt service. 1687

There also is no measure of criminal income, smuggling or fictitious accounting for tax avoidance. No category of spending is counted as overhead, not even pollution cleanup costs or crime prevention, not to mention financial bailouts. Economists dismiss these as “externalities,” meaning external to the statistics deemed relevant. Yet despite the rising proportion of spending that takes the form of rent extraction, environmental pollution cleanup costs, debt pollution and its bailout costs, GDP is treated as a an accurate measure of economic welfare. The result confuses healthy growth with that of a tumor on the body politic. Taken together, these omissions deter the kind of systemic analysis that would have alerted policy makers and voters to the distortions leading up to the 2008 crash. 1693

Rental income obtained by commercial investors and natural resource owners is called “earnings” on a par with profits and wages. This diverts attention away from how fortunes are made without labor or out-of-pocket production costs. It also requires a convoluted reorganization of statistics to discover how large the actual cash-flow return to absentee real estate ownership is, given the heavy component of interest and the “just pretend” economic category of over-depreciation. 1704

Land rent appears to have disappeared into the Orwellian memory hole. It is as if commercial real estate investors and owners receive no land rent at all. This terminological sleight of hand helped divert attention from how bank over-lending led to the real estate bubble that burst in 2008. It also trivializes international trade theory, by failing to recognize how capitalizing land rent into mortgage loans raises the cost of housing and other debt-leveraged prices. What the NIPA do make clear is that most real estate rental income is paid to the banks as interest. NIPA accountants find real estate and banking are so intertwined in the symbiotic FIRE sector that for many years financial and real estate income was not separated in the statistics. The activities of mortgage brokers and real estate agents seem to belong to Finance, Insurance or Real Estate in common. 1715

The NIPA also show how the tax fiction of over-depreciation (writing off a building more than once, over and over again) offsets otherwise taxable earnings for commercial real estate, enabling commercial real estate, oil and mining companies to operate decade after decade without a reportable taxable profit. An army of accountants has been backed by political lobbyists to write “loopholes” (a euphemism for distorting economic reality) into the tax code to make it appear that landlords and oil companies lose money, not make it! According to the NIPA, real estate earnings do not cover the rate at which landlords pay interest as a cost of production and buildings depreciate. Depreciation and the rate of return For industrial capital that wears out or obsolesces (becoming high-cost as a result of improving technology, e.g., computers that quickly get out of date even though they remain in working order), depreciation is a return of capital, and hence not part of surplus value strictly speaking. But this is not the case in the real estate, because buildings do not wear out – and rather than their technology becoming obsolete, older buildings tend to have much more desirable construction, or else have been renovated as a result of the ongoing maintenance repairs that typically absorb about 10 percent of rental income (or a property’s equivalent rental value). So for real estate, depreciation is largely a fictitious category of income designed to make rental revenue tax-free. The same building can be depreciated all over again – at a rising price – each time the property is sold to a commercial investor. (Homeowners are not allowed this tax subsidy.) 1723

Thus, despite the pretense by accountants that real estate is losing its value, the land’s site value (and the decline in interest rates) actually is increasing its value. Reality and seemingly empirical statistics tell opposite stories. No wonder the wealthiest One Percent have widened their wealth gap over the rest of the economy, defending this just-pretend statistical picture as if it is empirical science and therefore objective simply because its deception has decimal points. 1737

What actually happens is that landlords, oil and gas companies, mining companies, monopolies and banks charge rents for access to the land, natural resources and credit needed for production to take place. These payments drain the circular flow of spending between producers and consumers, shrinking markets and causing unemployment. Rentiers spend their income not only to hire labor and buy its products (as Malthus described, and as Keynes applauded) but also to buy financial assets and more property. Banks use their revenue to make more loans. This creates yet more debt while bidding up asset prices, obliging new homebuyers to borrow even more for ownership rights. 1742

the NIPA provide a cloak of invisibility for rent-extracting activities. The vested interests have won the fight against creating more relevant statistical categories. Their hope evidently is that if exploitative activities are not seen or quantified, they are less likely to be taxed or regulated. 1753

Today’s major rentier sector is banking and high finance. Most bank loans are geared not to produce goods and services, but to transfer ownership rights for real estate, stocks (including those of entire companies) and bonds. This has led national income theorists to propose treating the revenue of such institutions as transfer payments, not payments for producing output or “product.” 1757

Thorstein Veblen 2117

the Paris Bourse and Frankfurt, instead of in public hands as socialists 2141

Most U.S. and European corporations pay for their capital investment out of their current earnings, not by borrowing from bondholders or banks. The financial system extends credit mainly to buy property already in place, from real estate (the focus of most bank lending today) to entire companies. This shift in ownership adds to debt without increasing output, merely transferring ownership. Existing stockowners are bought out by new owners who issue high-interest bonds and borrow takeover loans from banks. And corporations borrow increasingly to buy up their own stock, and even to pay dividends, creating gains by inflating asset prices. 2173

As early as 1910, Rudolf Hilferding’s Finanzkapital described high finance as extractive: “Property ceases to express any specific relation of production and becomes a claim to the yield, apparently unconnected with any particular activity.” 2322

The tax subsidy for debt over stock market financing is a major catalyst to debt-leveraged buyouts (LBOs) and share buybacks. The new breed of corporate raiders and “financial engineers” pay themselves interest and produce capital gains with the profits hitherto shared with federal, state and local tax collectors. The government budget deficits deepens, and the Treasury issues more bonds (and looks to raise taxes from labor and consumers). The entire economy becomes more debt-leveraged, paying income to creditors – headed by the One Percent – instead of investing it or spending to raise living standards. This phenomenon is the major theme of this book. 2346

Debts require interest to be paid at a stipulated pace without regard for what the debtor earns. If a payment is missed, creditors have the right to foreclose on whatever assets are pledged as collateral. To protect themselves, debtors keep a liquid savings cushion on hand to cover the risk of declining income. Paying interest and amortization thus leaves less available to spend. 2356

Banks hesitate to finance new ventures. They prefer to lend against collateral on which they can foreclose if debtors cannot meet their scheduled payment. This obliges debtors to keep liquid savings on hand, leaving less for current spending. In antiquity, debtors who could not pay fell into bondage to their creditors. That is the original literal meaning of bond: a fetter imprisoning the debtor. Now that debtors’ prisons have been phased out, creditors have recourse to the debtor’s property and future earnings. Homeowners pledge their real estate to back their mortgage debts, companies pledge their assets, and clients of payday loan sharks pledge their kneecaps. 2363

The problem is that instead of raising capital to fund new capital investment and avoid debt, the stock market has been turned into a vehicle for debt-financed takeovers, replacing equity with debt. Starting with the high-interest “junk” bonds issued from 1977 onward, a class of raiders and “buyout kings” like Carl Icahn emerged to become Wall Street’s most lucrative market. Financial empire builders borrowed from banks and institutional bond buyers to buy out existing stockholders. Takeover financing pays an interest rate premium because of the relatively high risk that the process will drive targeted companies bankrupt, or at least will strip their capital and slow their growth by raising their debt/equity ratio. The process is called debt leveraging. It has been welcomed as “wealth creation,” as if it enriches the economy rather than leaving less for new investment and hiring. 2368

Researchers at Stanford University have concluded that pressure to meet quarterly earnings targets may be reducing research and development spending, and cutting US growth by 0.1 percentage points a year. Others have found that privately held companies, free to take a longer-term approach, invest at almost 2.5 times the rate of publicly held counterparts in the same industries. This persistent lower investment rate among America’s biggest 350 listed companies may be reducing US growth by an additional 0.2 percentage points a year. Much of the problem stems from the way the vast majority of asset owners pay the people who manage their money. On average, 74 per cent of remuneration is paid in cash, and tied to outperforming an annual stock market benchmark. The result is an obsession with next quarter’s earnings rather than the next 10 years’. — Financial Times, April 1, 2015 2380

The origins of banking, financial partnerships and shares in enterprises are to be found in the temples and palaces of the ancient Near East at the inception of the Bronze Age (3200-1200 BC). From the time interest-bearing debt was innovated in Mesopotamia to finance commerce and provide agricultural credit around 3000 BC, there is no trace of borrowing to manufacture goods in workshops, and rarely to buy land. Business credit came into the picture initially to consign temple handicrafts or commodities to seafaring merchants and caravans for long-distance commerce. 2393

The wealthy used their profits from this commerce and money lending to buy land, which was the major determinant of social status and economic patronage throughout antiquity. (What modern historians call “banks” were family or public lenders using mainly their own money, not deposits.) Purchases of real estate and other assets were for cash. Even in modern times it has been rare for banks to finance investment in industrial production. Until the 19th century most business loans were to fund the sale (usually exportation) of goods after they were produced, not to put workshops and factories in place. Banks thus found their major market in international trade, which helps explain why the British bank spokesman David Ricardo advocated an international specialization of labor instead of national self-sufficiency in food and other basic needs. 2399

Historically, most lending to governments has focused on war borrowing. When the Habsburgs and other rulers had trouble paying their debts, bankers pressed for payment in the form of a transfer of ownership of mines and other natural resources in the public domain. Rulers also created commercial monopolies to privatize: the East and West Indies Companies of Holland, Britain and France, and similar exclusive privileges (literally “private law”) to trade with specific regions or similar. These Crown Corporations paid dividends out of monopoly rent extraction, not profits from industrial manufacturing. 2423

To maximize what they received for these monopolies, governments promoted stock markets as a speculative vehicle. 2432

To dispose of France’s royal debt, he created the Mississippi Company to develop plantation slavery in what later was called the Louisiana territory (named for Louis XIV). Britain emulated the scheme, hoping to retire its war debts by privatizing the asiento slave trade monopoly its navy had won from Spain. This treaty became the sole asset of the newly incorporated South Sea Company, named for the South Atlantic across which slaves were shipped from Africa to the New World. Together, these two government-sponsored bubbles promised enormous wealth from 18th century’s the major growth sector: the African slave trade, that century’s version the dot.com bubble of the 1990s. The beneficiaries were the French and British governments, along with insiders who became part of what today is called a pump and dump operation. 2439

The French and British governments accepted payment for stock in these companies in their own bonds – at full par value. This provided a giveaway to bondholders, because the bonds could be bought at a steep discount, reflecting widespread doubt that they could actually be paid. Bond prices rose as new buyers used them to buy shares in the Mississippi and South Sea companies. Almost no money raised by these companies was actually invested to undertake business and generate a profit. What was sold was hope – shares in purely potential gains. Investors only needed to put down about 10 percent of the purchase price of the stock to subscribe. By the time the second payment was due, the stock price may have been bid up by at least that amount, doubling the initial down payment. This debt leveraging – buying on credit with only a small down payment – magnifies gains and losses in asset prices on both the upside and downside. It was the strategy Margaret Thatcher used to popularize the privatization of British Telecom and subsequent selloffs of government assets, providing quick speculative gains to early buyers with small down payments. 2446

The government tactic was to sell stocks in order to retire its bonds instead of defaulting on them, by persuading bondholders to swap their bonds for shares in the new companies. When the swap was completed, the stock price was allowed to plunge. The government shed crocodile tears at the “madness of crowds” that it itself had encouraged! It was a carefully orchestrated madness. Insiders avoided loss by selling out in time. 2455

Making stock market gains from financial leverage and rent extraction The privatization of monopolies, canals or national railroad systems always has been associated with insider dealing and fraud, ending with latecomer buyers holding a collapsing financial bag. Yet despite insider manipulations and subsequent collapse, the idea of making capital gains while putting down only a fraction of the purchase price seized the public imagination. It offered the temptation of outsiders making the huge gains that insiders tended to monopolize. 2459

The irony of the stock market is that corporations were created to replace short-term partnerships for voyages and other such ventures. Instead of having to divide up profits at the end of each voyage or upon the death of major partners, corporations have been given a permanent existence, divided into shares that were transferable. Yet the financial time frame is still short-term. This is especially true of bankers, who did little to finance the Industrial Revolution. The economic historian George W. Edwards has found that Britain’s “investment banking houses had little to do with the financing of corporations or with industrial undertakings. The great investment houses bitterly opposed the numerous corporate issues which were floated in 1824 and 1825,” hoping to control industry by bank credit. “The investment houses for a long time refused to take part even in the financing of the British railways.” Banks and other lenders advanced credit to industry only if proprietors could show orders for their products, or bills falling due for sales. Most of all, banks financed shipments of goods, spanning the time gap between production, delivery and receipt of payment by the customer, usually payable after 90 days. This financing involved foreign exchange fees for the banks as well as interest. But it was a short-term business. 2465

the Industrial Revolution’s leading entrepreneurs could obtain bank credit only after investing their own funds to get production underway. From James Watt’s steam engine in the late 18th century to Henry Ford’s automobile in the early 20th century, banks were not in the foresight business. Stock markets really began to take off in the 19th century for railroads and canals, other basic infrastructure, monopolies and trusts. These undertakings were rife with financial fraud, headed by the Panama and Suez Canal schemes. America’s stock market consisted mainly of railroad stocks during its early years, which transferred enormous sums of British and other European savings to the United States. Wall Street operators skimmed off much of the inflow. A favorite tactic was “stock watering,” a practice of proprietors issuing stock to themselves, “diluting” the ownership of existing shareholders. Banks favored railroads and public utilities whose income streams could be easily forecast, and large real estate borrowers with land pledged as collateral. Manufacturing enterprises only obtained significant bank and stock market credit after companies had grown fairly large with stable earnings. Growth potential hardly qualified. By the 1920s, Britain’s banks were broadly criticized for their failure to finance industry, and for favoring international clients rather than domestic ones. 2477

Apart from infrastructure speculation, the stock market was mainly a vehicle for manipulators to buy ownership rights of natural monopolies and rent-seeking privileges, especially to create large trusts such as U.S. Steel and Standard Oil. Banks, pension funds and other financial institutions have lent increasingly for speculation in stocks and bonds, including today’s debt-leveraged buyouts for mergers, acquisitions and outright raids. Trade financing was evolving into investment banking, focusing on real estate, oil and other natural resources, and funding speculation in stocks, foreign bonds and currencies. These high-risk activities held consumer and business deposits hostage to financial gambling and raiding, leading to the 1929 crash and the Great Depression. 2490

The economic wreckage made it obvious that the U.S. financial system needed to be insulated from such speculation. Congress passed the Glass-Steagall Act in 1933 to isolate financial speculation from personal and basic business banking. Other New Deal reforms included creation of the Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corp. (FDIC) and a shift to 30-year home mortgages instead of the short three-year time frame. These reforms succeeded in stabilizing banking through the 1940s up to the 1970s. 2496

high finance has promoted debt at the expense of equity, and used it to make short-term financial returns rather than funding new capital investment. 2510

The result is that despite 20th-century reformers’ hopes to see the stock market promote industrial capital formation, it has become a vehicle for loading companies down with debt and cutting back their long-term investment. Unlike dividends to shareholders, interest charges on debt cannot be reduced when sales and earnings turn down. 2512

Companies that replace equity with debt lose economic flexibility and must live on short financial leashes. 2515

The term “junk bonds” was coined to reflect high-interest bonds issued to corporate raiders and takeover kings to buy companies with borrowed credit (or, less negatively, to finance smaller new business without a track record or deemed too risky to obtain normal bank credit). 2518

Adam Smith long ago remarked that profits often are highest in nations going fastest to ruin. There are many ways to create economic suicide on a national level. The major way throughout history has been by indebting the economy. Debt always expands to reach a point where it cannot be paid by large swaths of the economy. That is the point where austerity is imposed and ownership of wealth polarizes between the One Percent and the 99 Percent. Today is not the first time this has occurred in history. But it is the first time that running into debt has occurred deliberately, applauded as if most debtors can get rich by borrowing, not reduced to a condition of debt peonage. 2664

Finance vs. Industry: Two Opposite Sides of the Balance Sheet Last year, the corporations in the Russell 3000, a broad U.S. stock index, repurchased $567.6 billion worth of their own shares – a 21% increase over 2012 … That brings total buybacks since the beginning of 2005 to $4.21 trillion – or nearly one-fifth of the total value of all U.S. stocks today. — Jason Zweig, “Will Stock Buybacks Bite Back?” Wall Street Journal, March 22, 2014. Today’s financial sector is raiding what was expected a century ago to be the social functions of capital: to expand output and employment. Economies are slowing in the face of exponentially growing financial claims (bank loans, stocks and bonds) that enrich the One Percent at the expense of the 99 Percent. This polarization leads to unemployment and also to corporate underinvestment by leaving companies too cash-strapped to undertake new capital spending to raise productivity.2679

Business schools teach today’s new breed of managers that the proper aim of corporations is not to expand their business but to make money for shareholders by raising the stock price. Instead of warning against turning the stock market into a predatory financial system that is de-industrializing the economy, they have jumped on the bandwagon of debt leveraging and stock buybacks. Financial wealth is the aim, not industrial wealth creation or overall prosperity. The result is that while raiders and activist shareholders have debt-leveraged companies from the outside, their internal management has followed the post-modern business school philosophy viewing “wealth creation” narrowly in terms of a company’s share price. The result is financial engineering that links the remuneration of managers to how much they can increase the stock price, and by rewarding them with stock options. This gives managers an incentive to buy up company shares and even to borrow to finance such buybacks instead of to invest in expanding production and markets. 2688

Conventional wisdom throughout the 20th century described low interest rates as spurring new investment and employment by lowering the cost of borrowing, and hence supposedly the cost of new investment. But few bank loans or bonds are for this purpose. Instead, low interest rates provide easier credit for raiders to attack companies, or simply for mergers and acquisitions. 2707

The effect of financial interlopers buying a company and making it appear more profitable in the short run by “bleeding” its balance sheet (hoping to find a buyer who will believe that the company has been “streamlined,” not depleted) is like a landlord stinting on maintenance and repairs, paying bills more slowly, and letting the property deteriorate by laying off doormen and other niceties. The property is left debt-ridden, with a stagnating rent roll unable to cover the mortgage. If we view industry as part of the economic and social environment, today’s breed of corporate raiders and shareholder activists are strip-mining companies, causing debt pollution, clear-cutting industry and leading to economic drought. Such short-termism is much like a debt-strapped family having to rely on a junk-food diet in order to make ends meet, leading to long-term medical costs and shorter lifespans. Living in the short run does not help make economies lower-cost and more productive. The aim is simply to report bigger profits so that managers and stockholder “activists” can exercise their stock options at a higher price. 2764

Even the public sector has adopted financial management criteria to squeeze out a positive cash flow. Governments are reducing their budget deficits by cutting back on maintenance and repair of bridges, roads and other infrastructure, and selling off public real estate and other assets. The effect is to inject less purchasing power and employment to support economic recovery. 2807

The financial sector promised to inaugurate a postindustrial economy in which bank customers could make money from borrowed credit created on computer keyboards without a need for industrial capital formation or employment. 2821

banking was on its way to becoming a public utility in the years leading up to World War I. 2830

public banking would be less likely to extend credit for the asset-stripping and asset-price inflation that characterizes today’s financial system. 2833

Most futurists a century ago believed that public regulation was needed to keep predatory finance and rent-seeking in check. But bankers and financiers successfully instituted a deregulatory economic philosophy and have seized control of governments to use its money-creating power to subsidize high finance, while leaving creditors “free” to stifle the economy’s real growth with debt deflation. 2834

Today’s financial interests denounce public regulation and rentier taxes as socialism. But “socialism” was not initially a term of invective for classical theorists. John Stuart Mill was called a Ricardian socialist because classical economists were moving toward reforms they themselves characterized as social – and hence, as socialist. Most reformers referred to themselves as socialists of one kind or another, from Christian socialists to Marxist socialists and reformers across the political spectrum. The question was what kind of socialism “free market” capitalism would evolve into. 2838

The resulting financial overhead consists of claims on the economy’s actual means of production. Yet most people think of these bonds, bank loans and stocks and creditor claims as wealth, not its antithesis on the debit side of the balance sheet. This inside-out doublethink is a precondition for the bubble economy to be applauded by the mass media, keeping its corrosive momentum expanding. 2881

Most capital investment in the U.S. and other economies normally is self-financed out of retained corporate earnings, not by borrowing from banks or bondholders. During the 35-year upswing spanning the return to peace after World War II until the late 1980s, “profits and overall net investment in the US tracked each other closely … with both about 9 per cent of gross domestic product,” noted a recent Financial Times report. But this correlation between capital investment and corporate profits “began to break down” in the Reagan/Thatcher era. By 2012 the National Income and Product Accounts (NIPA) were reporting that pre-tax corporate profits had risen to a record 12 per cent-plus of GDP, “while net investment is barely 4 per cent of output.” Although corporate profits have soared in recent years, they are not leading to new tangible investment, output or employment. The explanation for this disconnect is financialization. 2891

Some 40 percent of profits are now registered by the banking and financial sector, not industry. In the manufacturing sector, managers increase reported profits by cutting back basic spending, letting their physical investment run down, and replacing long-term skilled employees with less highly paid new recruits, while using the remaining corporate profits increasingly for share buybacks and higher dividend payouts. These practices have decoupled financial management from investment in new means of production. The idea that economies can get rich mainly from the debit side of the national balance sheet reflects the degree to which creditor interests have taken over the economy’s brain. 2899

Mainstream economists called the 1990-2007 era the Great Moderation. But then, bankers were in charge of naming it (in this case, David Shulman of Salomon Brothers). In reality it was the Great Indebtedness, leading to the Great Polarization that paved the way for today’s Great Austerity. When the bubble crashed, Wall Street blamed “the madness of crowds.” This blame-the-victim view depicted borrowers as being immoderate and greedy, and it seemed only moral that the “mad crowd” should now pay the price for its reckless indebtedness, not the creditors. So the most reckless banks were bailed out, as if it were not they and the Federal Reserve that were mad and immoderate. What made this period immoderate was deregulation of the financial sector. 2919

To new homebuyers, housing prices rose so high that by 2008 taking out a mortgage to buy a home meant cutting back consumption and living standards – unless one ran up credit-card debt and other borrowing. Many homeowners took out home equity loans (“second mortgages”), using their homes as an ATM to draw against a bank account. 2930

Every economic recovery since 1945 has started with a higher debt level than the one before it, and each successive recovery has been weaker. The rising debt overhead explains why the bank bailout that resolved the 2008 financial crisis has failed to yield a real “recovery.” To banks and other creditors, recovery means keeping the debts on the books, and indeed, re-inflating prices for homes by creating yet new debt. The bankers’ “solution” is to extend a new wave of credit to bid real estate, stock and bond prices back up. But debt is the problem. What is depressing today’s economies is that the debts have been kept in place, acting as a financial brake blocking a business upswing. The “solution” that banks offer is austerity: Most of the economy is geared to work off its debts, not write them down to levels that can be paid without pushing the economy into austerity. Austerity is Wall Street’s (and the Eurozone’s) new definition of “moderation.” 2933

Creditors and debtors thus have naturally opposing worldviews. Labor (“consumers”) and industry are obliged to pay a rising proportion of their income in the form of rent and interest to the Financial and Property sector for access to property rights, savings and credit. This leaves insufficient wages and profits to sustain market demand for consumer goods and investment in new means of production (capital goods). The main causes of economic austerity and polarization are rent deflation (payments to landlords and monopolists) and debt deflation (payments to banks, bondholders and other creditors). To the banks, “moderation” simply means not defaulting. From the 1990s to 2007, this eventuality was postponed by consumers running deeper into debt to pay their scheduled debt service and other rentier charges. Banks created enough new credit to finance rising personal budget deficits by lending mortgage credit and home equity loans to a widening segment of the population, without much regard for their ability to pay. Supplemented by soaring credit-card debt, this bank credit enabled consumers to support the living standards that their wages were unable to cover. The hope was that somehow they would come out ahead, as long as bank credit continued to bid up prices for real estate, stocks and bonds. 2941

Government deficits are deemed “good” as long as they are spent to bail out banks and bondholders. They are only “bad” when they are spent on labor and the “real” economy. Federal Reserve credit (“Quantitative Easing”) is good if it helps inflate asset prices for the One Percent and improves bank balance sheets. But public money creation is deemed “irresponsible” if it spurs recovery in employment and wages, helping the 99 Percent break even and recover its former share of national income and wealth. Rising asset prices for real estate, stocks and bonds are “good” because they increase the power of the One Percent over the rest of the economy. Rising wages and commodity prices are deemed bad, because they threaten to erode this power of debt over the economy. 2958

The reality is that bank loans do not fund direct investment and employment. They extract debt service while inflating asset prices to provide “capital” gains. This makes homes more expensive to buy, requiring new owners to take out larger mortgage loans. That is the Asset-Price Inflation phase of the financial cycle. At some point, repayment time arrives. Paying off debts absorbs income that otherwise would be available for spending on the goods and services that labor produces. This is the Debt Deflation phase. Each business upswing leaves a higher level of debt, diverting a rising proportion of income to pay debt service. The post-2008 bailout and imposition of austerity aimed to squeeze out enough income to carry the debt claims. But austerity generates even more defaults and a deeper crash. 2985

In contrast to industrial profits, capital gains are the product largely of the wave of asset-price inflation – that is, the wave of bank credit on easier terms for debt leveraging. Since interest rates began their 30-year decline in 1980, a financial wave of credit has enabled borrowers to buy these assets and their flow of incomes with higher amounts of low-interest credit. Price/earnings ratios rise when interest rates fall (described below). Making such gains therefore is different from earning them by labor and enterprise. These profits are what 19th-century writers called the “unearned increment,” especially when they accrue for the land’s rising site value. 3011

Public investment in roads and other transportation, schools and parks, water and other infrastructure is provided freely or at prices subsidized by taxpayers as a whole. The result is that taxpayers as well as rent-payers end up paying to create wealth for landlords – enabling them to borrow more or obliging new homebuyers to borrow more to obtain ownership of such sites. To the extent that rental values are paid to the banks as interest, landlords as well as taxpayers end up creating revenue and wealth for the financial sector. 3036

Capital gains are fueled mainly by debt leveraging – buying with as little of one’s own money as possible. As financial wealth mounts up, banks compete for new business by loosening their lending terms. The process becomes self-feeding as property prices rise. Speculators and homeowners are willing to pay their banks the rental value, hoping to get a capital gain. The logical end is reached at the point where the financial carrying charges absorb all the rental income or profits. This willingness of borrowers to pay all the rental income to creditors is the driving force behind asset-price bubbles. 3041

Pension funds diversified into junk bonds in the 1980s, and into packaged mortgages after the dot.com bubble burst in 2000. Mortgages became the highest-yielding form of security, steering pension savings into the real estate market by providing banks with a market for loans they originated. Tax favoritism for capital gains and inherited wealth When the U.S. income tax was inaugurated in 1913, capital gains were taxed as normal income. The logic was that a price gain for a stock, bond or real estate builds up the owner’s net worth just as do savings out of wages or profits. 3052

The Reagan-Bush Administration eased it yet more, especially for real estate. Landlords were allowed to pretend that their buildings depreciated in just over seven years, creating a fictitious charge that offset the rental income. This made commercial and absentee real estate basically income-tax free. Real estate gains are not taxed if they are re-invested in new property acquisition. Many European countries do not tax capital gains at all. British landlords can evade taxes by holding their property in an Isle of Man account or other tax-avoidance enclave. This favoritism has enabled real estate fortunes to be built up largely free of income and capital gains taxes. When owners die, all tax liability is forgiven and the heirs can continue the buildup. No wonder the One Percent now controls the lion’s share of U.S. wealth and income! 3059

selling the mortgage loans it has originated 3093

Together these payments to the FIRE sector (and the tax shift off it onto consumers) absorb roughly two-thirds of many blue-collar family budgets, leaving only about a third available to spend on current output: Rent or home ownership costs (incl. property tax): 35 to 40% Other debt service (credit cards, student loans etc.): 10% FICA wage withholding (Social Security and Medicare): 7.5%  Other taxes (income and sales taxes and health insurance): 10 to 15% TOTAL: about 67% There is no way for an economy with such high debt service, real estate and tax charges to compete with less financialized economies where housing is not so debt-leveraged, where family budgets do not have such high debt carrying charges, and where taxes have not been shifted so regressively off the FIRE sector onto labor and industry. Debt Deflation Meanwhile, the rentier overhead leaves consumers with less to spend on current output. This imposes deepening austerity as asset-price inflation gives way to debt deflation: 3110

(Phase 1) Consumer Demand = wages + new borrowing (that is, increase in debt) Paying back the rising debt taken on prior to 2008 led to the Debt Deflation phase of the credit cycle: (Phase 2) Demand = wages minus debt service. Asset-price inflation turns into debt deflation when paying amortization and interest (not to mention late fees) drains income from the economy’s circular flow of production and consumption spending (“Say’s Law” discussed in Chapter 3). This slows growth. The economy tapers off while the volume of credit and debt grows exponentially. Carrying this rising debt leaves less available to spend on goods and services, while government tax revenues and new money creation are paid to bondholders instead of being spent on public infrastructure, education, health and other social programs. 3121

Bernanke’s denial that rising debt levels do not reduce overall market demand for goods and services is reminiscent of Malthus’s argument that landlords spend their rents back into the economy. In trying to absolve the financial sector from causing austerity, Bernanke claimed that “debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects.” In other words, if creditors (or real estate moguls) spend the same proportion of their income and capital gains on consumer goods and investment goods as do average wage earners, there would be no debt deflation or general spending shortfall, but simply a transfer of purchasing power from debtors to creditors and their fellow rentiers. 3139

But the whole point is that “spending propensities” do differ between the One Percent and the 99 Percent, between rentiers on the one hand, and consumers and producers on the other. 3145

when today’s Wall Street financiers do spend their multi-million dollar salaries and bonuses money on themselves, it is largely on fine art trophies, luxury apartments that already have been built, on yachts and high fashion – largely imported, as was noted already in Malthus’s day. But most important, the super-rich lend out most of their gains, indebting the rest of the economy to themselves. 3148

President Obama and Republicans sought to reduce the government’s budget deficit, not spend more money into the economy. For Bernanke, monetary inflation after 2008 was limited to providing easy Federal Reserve credit money for banks. He expressed the hope that they would extend credit to the real estate, stock and bond markets to re-inflate asset prices. The “real” economy was left to suffer debt deflation. But more debt overhead involves carrying charges that drain consumption and investment spending. And paying down the debt overhead intensifies the austerity. This transforms the character of “saving” to mean a pay-down of debt, not money in the bank. 3155

The “saving” in question was an accounting entry in the national income accounts – a negation of a negation, and hence a positive. The only way these savings were “money in the bank” was that they were paid by debtors to their banks and credit card companies. This debt deflation shows how false the image is of using one’s home like the proverbial piggy bank. Running up a debt is not at all like withdrawing cash from a savings account. Bankers euphemize taking out equity loans (borrowing more against the property’s rising market price) as “cashing out” on one’s equity, as if this does not leave a legacy of debts, which constrain future spending by diverting more income to pay creditors. The more the “savings rate” rose in the post-2008 world, the less money “savers” had to spend. Debtors ate cheaper foods and ran down whatever liquid savings they had. This “upside down” saving led to debt deflation. 3178

To restore prosperity, the way the economy operates must be changed – mainly by writing down the debt overhead. Piketty and Saez have documented the extent to which just One Percent of the population owns most of the stocks and bonds in the banks and other firms, and receive their surplus in the form of dividends, profits, interest, rent and capital gains. A realistic model or picture of how the economy operates would require separating the “wealthy” households from the wage earners that live by their own labor rather than on dividends, rents, interest and capital gains. There is no way for markets to maintain full employment and grow in the face of debt deflation and regressive tax systems that have reached today’s magnitudes. 3190

at the heart of Citigroup’s loss. Nobody could know in advance precisely 3264

mainstream economics has become a lobbying effort to dismantle government power to regulate and tax rentiers. Well-subsidized models promote a trickle-down rationalization for the status quo, as if it were produced by inexorable economic laws. “Free market” ideologues then reason backward to construct a logic “proving” that economies become lower-cost and more efficient by lowering wage levels, removing taxes on wealth, cutting back public spending and privatizing infrastructure monopolies. In the resulting symbiosis between bankers and other rentiers, debt is created mainly to purchase rent-extracting privileges and other rent-yielding properties, turning their economic rent into interest and related financial fees. Nearly all new credit since 1980 has been extended to the FIRE sector – credit to transfer ownership of assets while running the economy into debt, not to create new wealth. 3288

The intended effect is to leave financial management to “technocrats,” who turn out to be bank lobbyists toting around a few academics as useful idiots embedded in well-subsidized “think tanks.” Much as the oil industry subsidizes Junk Science to deny how carbon emissions contribute to global warming, so Wall Street subsidizes Junk Economics to deny that debt pollution plunges economies into chronic austerity and unemployment. Their conclusion is that no public regulation is needed, and no cleanup charges to compensate for the damage being caused. 3297

Much as the oil industry subsidizes Junk Science to deny how carbon emissions contribute to global warming, so Wall Street subsidizes Junk Economics to deny that debt pollution plunges economies into chronic austerity and unemployment. 3298

Questions that a relevant economic theory needs to answer Today, years after the 2008 financial crisis, the most pressing task for economic theory should be to explain why employment and consumption spending have not recovered. The Federal Reserve has given banks $4 trillion and the European Central Bank €1 trillion in Quantitative Easing to help the financial layer atop the economic pyramid, not to write down debts or revive the “real” economy by public spending. This enormous act of money creation could have enabled debtors to free themselves of debt so that they could resume spending to keep the circular flow of production and consumption in motion. Instead, governments have left the economy debt-strapped, creating money only to give to financial institutions. Orwellian rhetoric is invoked to describe governments running budget deficits and creating central bank credit to help banks and bondholders but not employment and production. This is called “preserving the system.” However, what is intended to be preserved is not the indebted economy, but the debt overhead owed to the financial sector. Central banks assiduously avoid any attempt to quantify how far wages, profits and tax revenue can be diverted to pay creditors without causing economic collapse and insolvency. 3301

through the early 1970s, wages had risen faster than overall prices. But since the late 1970s, they have hardly moved. Consumer prices also have stabilized over the past thirty years. What have risen are asset prices, fueled by a tidal wave of bank credit inflating the greatest bond market rally in history. More money has been made in the stock market, bonds and real estate than by employing labor to produce goods for sale. 3320