The rentier resurgence and takeover - Finance Capitalism vs. Industrial Capitalism
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Today’s neo-rentier economies obtain wealth mainly by rent seeking, while financialization capitalizes real estate and monopoly rent into bank loans, stocks and bonds. Debt leveraging to bid up prices and create capital gains on credit for this “virtual wealth” has been fueled by central bank Quantitative Easing since 2009.
Households and industry are becoming debt-strapped, owing rent and debt service to the Finance, Insurance and Real Estate (FIRE) sector. This rentier overhead leaves less wage and profit income available to spend on goods and services, bringing to a close the 75-year U.S. and European expansion since World War II ended in 1945.
It may seem ironic today that Britain’s banking sector was whole-heartedly behind the first great fight to minimize land-rent. That alliance occurred after the Napoleonic Wars ended in 1815, which ended the French blockage against British seaborne trade and re-opened the British market to lower-priced grain imports. British landlords demanded tariff protection under the Corn Laws – to raise the price of food, so as to increase the revenue and hence the capitalized rental value of their landholdings – but that has rendered the economy high-cost. A successful capitalist economy would have to minimize these costs in order to win foreign markets and indeed, to defend its own home market. The classical idea of a free market was one free from economic rent – from rentier income in the form of land rent.
Real estate is by far the banking sector’s largest market. Mortgage lending accounts for about 80 percent of U.S. and British bank credit. It played only a minor role back in 1815, when banks focused on financing commerce and international trade. Today we can speak of the Finance, Insurance and Real Estate (FIRE) sector as the economy’s dominant rentier sector. This alliance of banking with real estate has led banks to become the major lobbyists protecting real estate owners by opposing the land tax that seemed to be the wave of the future in 1848 in the face of rising advocacy to tax away the land’s entire price gains and rent, to make land the tax base as Adam Smith had urged, instead of taxing labor and consumers or profits. Indeed, when the U.S. income tax began to be levied in 1914, it fell only on the wealthiest One Percent of Americans, whose taxable income consisted almost entirely of property and financial claims.
The basic reason why banks support tax favoritism for landlords is that whatever the tax collector relinquishes is available to be paid as interest. Mortgage bankers end up with the vast majority of land rent in the United States. When a property is put up for sale and homeowners bid against each other to buy it, the equilibrium point is where the winner is willing to pay the full rental value to the banker to obtain a mortgage. Commercial investors also are willing to pay the entire rental income to obtain a mortgage, because they are after the “capital” gain – that is, the rise in the land’s price.
Although banking developed ostensibly to serve foreign trade by the industrial nations, it became a force-in-itself undermining industrial capitalism. In Marxist terms, instead of financing the M-C-M’ circulation (money invested in capital to produce a profit and hence yet more money), high finance has abbreviated the process to M-M’, making money purely from money and credit, without tangible capital investment.
Under a regime of “burdenless taxation” the return on public investment does not take the form of profit but aims at lowering the economy’s overall price structure to “promote general prosperity.” This means that governments should operate natural monopolies directly, or at least regulate them. “Parks, sewers and schools improve the health and intelligence of all classes of producers, and thus enable them to produce more cheaply, and to compete more successfully in other markets.” Patten concluded: “If the courts, post office, parks, gas and water works, street, river and harbor improvements, and other public works do not increase the prosperity of society they should not be conducted by the State.” But this prosperity for the overall economy was not obtained by treating public enterprises as what today is called a profit center.[4]
In one sense, this can be called “privatizing the profits and socializing the losses.” Advocating a mixed economy along these lines is part of the logic of industrial capitalism seeking to minimize private-sector production and employment costs in order to maximize profits. Basic social infrastructure is a subsidy to be supplied by the state.
For a century, public investment helped the United States pursue an Economy of High Wages policy, providing education, food and health standards to make its labor more productive and thus able to undersell low-wage “pauper” labor. The aim was to create a positive feedback between rising wages and increasing labor productivity.
That is in sharp contrast to today’s business plan of finance capitalism – to cut wages, and also cut back long-term capital investment, research and development while privatizing public infrastructure. The neoliberal onslaught by Ronald Reagan in the United States and Margaret Thatcher in Britain in the 1980s was backed by IMF demands that debtor economies balance their budgets by selling off such public enterprises and cutting back social spending. Infrastructure services were privatized as natural monopolies, sharply raising the cost structure of such economies, but creating enormous financial underwriting commissions and stock-market gains for Wall Street and London.
One must conclude that America has chosen to no longer industrialize, but to finance its economy by economic rent – monopoly rent, from information technology, banking and speculation, whilst leaving industry, research and development to other countries. Even if China and other Asian countries didn’t exist, there is no way that America can regain its export markets or even its internal market with its current debt overhead and its privatized and financialized education, health care, transportation and other basic infrastructure sectors.
The underlying problem is not competition from China, but neoliberal financialization. Finance-capitalism is not industrial capitalism. It is a lapse back into debt peonage and a rentier neo-feudalism. Bankers play the role today that landlords played up through the 19th century, making fortunes without corresponding value, by capital gains for real estate, stocks and bonds on credit, by debt leveraging whose carrying charges increase the economy’s cost of living and doing business.
The transformation of academic economic theory under today’s finance capitalism has reversed the progressive and indeed radical thrust of the classical political economy that evolved into Marxism. Post-classical theory depicts the financial and other rentier sectors as an intrinsic part of the industrial economy. Today’s national income and GDP accounting formats are compiled in keeping with this anti-classical reaction depicting the FIRE sector and its allied rent-seeking sectors as an addition to national income, not a subtrahend. Interest, rents and monopoly prices all are counted as “earnings” – as if all income is earned as intrinsic parts of industrial capitalism, not predatory extraction as overhead property and financial claims.
The essence of private equity, Matt Stoller explains, is for “financial engineers [to] raise large amounts of money and borrow even more to buy firms and loot them. These kinds of private equity barons aren’t specialists who help finance useful products and services, they do cookie cutter deals targeting firms they believe have market power to raise prices, who can lay off workers or sell assets, and/or have some sort of legal loophole advantage. Often they will destroy the underlying business. The giants of the industry, from Blackstone to Apollo, are the children of 1980s junk bond king and fraudster Michael Milken. They are essentially are super-sized mobsters.”[8]
Underlying today’s rivalry felt by the United States against China is thus a clash of economic systems. The real conflict is not so much “America vs. China,” but finance capitalism vs. industrial “state” capitalism/socialism. At stake is whether “the state” will support financialization benefiting the rentier class or build up the industrial economy and overall prosperity.