Friday, July 27, 2012

Michael Hudson — Veblen’s Institutionalist Elaboration of Rent Theory

Simon Patten recalled in 1912 that his generation of American economists – most of whom studied in Germany in the 1870s – were taught that John Stuart Mill’s 1848 Principles of Political Economy was the high-water mark of classical thought. However, Mill’s reformist philosophy turned out to be “not a goal but a half-way house” toward the Progressive Era’s reforms. Mill was “a thinker becoming a socialist without seeing what the change really meant,” Patten concluded. “The Nineteenth Century epoch ends not with the theories of Mill but with the more logical systems of Karl Marx and Henry George.[1] But the classical approach to political economy continued to evolve, above all through Thorstein Veblen.
Like Marx and George, Veblen’s ideas threatened what he called the “vested interests.” What made his analysis so disturbing was what he retained from the past. Classical political economy had used the labor theory of value to isolate the elements of price that had no counterpart in necessary costs of production. Economic rent – the excess of price over this “real cost” – is unearned income. It is an overhead charge for access to land, minerals or other natural resources, bank credit or other basic needs that are monopolized.
This concept of unearned income as an unnecessary element of price led Veblen to focus on what now is called financial engineering, speculation and debt leveraging. The perception that a rising proportion of income and wealth is an unearned “free lunch” formed the take-off point for Veblen to put real estate and financial scheming at the center of his analysis, at a time when mainstream economists were dropping these areas of concern.
Veblen’s exclusion from today’s curriculum is part of the reaction against classical political economy’s program of social reform. By the time he began to publish in the 1890s, academic economics was in the throes of a counter-revolution sponsored by large landholders, bankers and monopolists denying that there was any such thing as unearned income.[2] The new post-classical mainstream accepted existing property rights and privileges as a “given.” In contrast to Veblen’s argument that the economy was all about organizing predatory schemes, this approach culminated in Milton Friedman’s Chicago School defense the pro-rentier argument: “There is no such thing as a free lunch.”
Read it at Michael Hudson
Veblen’s Institutionalist Elaboration of Rent Theory
Presented at the Veblen, Capitalism and Possibilities for a Rational Economic Order Conference, Istanbul, Turkey, June 6th, 2012
Michael Hudson

This illumines J. M. Keynes call to "euthanize the rentier," which many consider to be outrageous. Hudson shows how mainstream economics is propaganda for rent-seeking and rentierism disguised as "growth."

11 comments:

Major_Freedom said...

Owners of land who use it for productive use, tend to lose possession of that land when they don't use it well in the eyes of consumers

Owners of capital tend to lose possession of capital when they don't use it well in the eyes of consumers.

Contrary to being "unearned", these incomes are actually earned.

Just because the income varies more in proportion to the capital, and less in proportion to the intellectual labor the capital owners provide, it doesn't mean the incomes are unearned. It's still traceable to the owner's efforts, without which those incomes could not be earned.

Major_Freedom said...

This illumines J. M. Keynes call to "euthanize the rentier," which many consider to be outrageous. Hudson shows how mainstream economics is propaganda for rent-seeking and rentierism disguised as "growth."

And where does the power of this derive?

Hint #1: It's not being productive for your fellow human beings and being voluntarily rewarded for it.

Hint #2: It's always physical force, and the threats of physical force. It's replacing reason with violence.

DeusDJ said...

Major Freedom: keep your comments to yourself, I'd urge you to get an education in all the stuff you love to criticize but I know idiots like you can't read. If you want to create excuses for the vested interests then do it elsewhere, not here, you're just an annoying fly here and you should just be banned.

David said...

Owners of land who use it for productive use, tend to lose possession of that land when they don't use it well in the eyes of consumers

Well, that might be true if land were taxed at its rental value. That was a big part of the land taxer's argument: "use it or lose it." I see all around me underused land and landowners taking advantage of the agricultural tax break our state provides. So the reality where I live is pretty much the opposite of what you stated.

Anonymous said...

Old Thorstein Veblen is indeed still worth reading!I am glad Mike Hudson pay him attencion!Everyone should read his Theory of The Leisure Class. One could read for free on http://socserv2.mcmaster.ca/~econ/ugcm/3ll3/veblen/leisure/index.html
and http://socserv.mcmaster.ca/econ/ugcm/3ll3/veblen/

Anonymous said...

Major freedom will try to find any excuse to justify grotesque unearned wealth which finding any excuse to demonise poor "leeches". It's just how his mind is wired.

Anonymous said...

Major freedom will try to find any excuse to justify grotesque unearned wealth whilst finding any excuse to demonise poor "leeches". It's just how his mind is wired.

Vilhelmo said...
This comment has been removed by the author.
Vilhelmo said...

Major_Freedom - "Owners of land who use it for productive use, tend to lose possession of that land when they don't use it well in the eyes of consumers.
Owners of capital tend to lose possession of capital when they don't use it well in the eyes of consumers."

This is patently false as the abundance of vacant & under-used properties that plague our cities easily demonstrate.



Major_Freedom - "Contrary to being "unearned", these incomes are actually earned."

You have no idea what is meant by "earned"/"unearned" income.
Earned income is derived from productive work.
Unearned income stems entirely from privilege (natural or legal).

Major_Freedom - "It's still traceable to the owner's efforts, without which those incomes could not be earned."

No it is not.

A brief look at the definition of Economic Rent (unearned income) would be most insightful.
- "A payment for the services of an economic resource which is not necessary as an incentive for its production"
- "A return over and above opportunity costs, or the normal return necessary to keep a resource in its current use"

Tom Hickey said...

@ Vilhelmo

Exactly. There is a natural right of property if we take human custom as an indication of what is natural. But virtually all so-called "primitive" (pre-market and per-surplus) people consider the right to property to be based on present use iaw present need. It is also well-known among anthropologists that the social hero is the great distributor rather than the great accumulator and that property acquisition was consider to be a moral failure of character.

The notion that anything like this applies in developed societies is just silly.

But Major Freedom is smart enough to recognize the use is the basis for a natural right of property. but his argument that it applies in capitalistic market-driven economies doesn't hold up. His argument is that risk ensures effective and efficient use as the basis for holding property, not the right, which is just a condition needed to make an exchange-based system work.

This appears to be the case if one assumes methodological individualism and ignores cultural convention and custom and institutional arrangement that result in class and power structures that vitiate atoms. The reason that methodological individualism is inappropriate is in assuming ontological individualism, while humans are not like atoms and economic behavior doesn't resemble 19th century physics.

Tom Hickey said...

This brings out a more important point. Most people assume that human consciousness reflects reality, which is known philosophically as naive realism and if developed the various forms of philosophical realism like Lockean realism. Lockean realism is the next stip up from naive realism, and Aristotelian realism, incorporating intellectual intuition, is a step up from that. But all philosophical realisms have some idealistic foundations, too. Only naive realism holds that what you see is what you get.

But there are various philosophical positions based on different ontological, epistemological, ethical and aesthetic assumptions. These also get embedded in cultural conventions and customs as well as institutionally arrangements and get "inherited" as social memes. These memes are configured into memeplexes that result in ways of seeing, so that what is seen is shaped by the way of seeking. The result is different world views.

Worldviews are not necessarily either sophisticated or internally consistent. However, they are normative in the sense of providing fundamental criteria for judgment.

Different ways of seeing result in different worldviews, which are different approaches to the world cognitively, affectively and behaviorally.

There is arguing worldviews since there are no criteria that transcend worldviews, a worldview being normative in the sense of the locus of criteria.

The best method (supposedly) for resolving conflicts over knowledge is the scientific method. But there are also disagreement regarding this as a criterion or set of criteria. So-called facts, if they are at all complex, are theory-laden, so there is often disagreement over the "facts." Some even reject science in principle, relying on a "higher" criterion or set of criteria.

So we can argue some things across worldviews forever without resolution unless one party is converted to the other party's worldview.

A lot of economic reasoning and argument is based on one's view of human nature. There are many ways to view human nature. See for example Twelve Theories of Human Nature by Leslie Stevenson, David L. Haberman , Peter Matthews Wright, and The Study of Human Nature: A Reader by Leslie Stevenson.

We already see this here at MNE since regular commenters here express different viewpoints reflective of different worldviews.

The challenge of globalization in the 21st century is already about the interface among the many different facets of human mindsets that will eventually accommodate into a workable world hypothesis that will continue to develop dialectically roughly in the way that Hegel foresaw in his Philosophy of History. For a sociological investigation see The Sociology of Philosophies: A Global Theory of Intellectual Change by Randall Collins