This is the sixth installment in a seven-part series that began last week. Read the first, second, third, fourth and and fifth parts.

From Debt Peonage to Neofeudalism

Today’s finance capitalism is more impersonal than the Viking conquests that parceled out Europe’s land among the conquerors. In due course the land, natural resources, and monopolies that feudalism privatized were sold to banking families that lent money to fight for more property and trading rights. Appropriating and expropriating resources is now an autonomous financial dynamic, working more covertly and even in a more democratic political context than military conquest. An almost impersonal array of banking institutions replaces seizure by force of arms.

Unlike serfs, debt peons are free to live wherever they wish—or at least wherever they can afford. They may buy land by taking out a mortgage and paying its rental value to the bank. But wherever they live they take their debts with them, from student loans to credit card debt.

Also unlike military warfare, financial conquest does not kill people directly. It is much more genteel. Debt deflation causes poverty, discourages family formation, marriage and birth rates, and shortens lifespans. This prompted Vladimir Putin to note that neoliberal policies and privatization along kleptocratic lines had destroyed more of Russia’s population since 1990 than the nation had lost in World War II. Instead of the “Seven Boyers,” Russia had its “Seven Bankers” after Boris Yeltsin’s 1994 loans-for-shares privatization of the nation’s most valuable natural resources and monopolies.

Rome’s creditor-oriented economy collapsed into the Dark Age, plunging the Empire into debt peonage. It became the first major society not to cancel its debts. Predatory legal and political systems drive populations into debt, yet may survive longer than mathematical models would expect, despite infrastructure falling apart and employment drying up. It took from the first century BC’s Social War (133-29 BC) to the fourth century AD turning point for economic life to be decentralized and revert to self-sufficient landed estates.

Today a similar problem of debt deflation is polarizing society and imposing austerity, drying up the internal market. The dream of bank marketing departments, after all, is for all disposable income (over and above spending on basic needs, to be kept to the minimum) and corporate cash flow to be paid as debt service. During the upswing of debt, this was called “treating your home like a piggy bank” by taking out an equity loan. But that was not a fair analogy. Buying a home has become a means to drive populations into debt. And now the debts remain in place, leaving the banks with the power—which they have used to buy control of governments.

Unless the world changes its path, the “final” stage of finance capitalism threatens to deteriorate into debt peonage so widespread as to become neofeudalism, relinquishing control of the economic surplus to a financial elite making itself as hereditary as the old landed aristocracies.

It Doesn't Have To Be This Way

In addition to the moral fairness of bringing prices in line with cost-value so as to free society from special privileges that create “unearned” rentier income without work, classical economics was a guide to making societies more productive and efficient. Governments seeking to nurture their national industry saw it as a strategy for how to modernize. So the same logic that evolved into socialism via Saint-Simon, Marx and other reformers provided the model for the industrial classes to make France, Germany, and other economies more competitive so as to overtake Britain in the 19th century.

As noted above, the thrust of classical political economy was to free society from rentier charges that simply added “empty” pricing to the cost of living and doing business: land rent, monopoly rent, and financial charges. The major beneficiaries of reforms designed to minimize these economic rents were industry and labor. Pro-labor reformers characterized themselves socialists, and pro-industrial reformers often have been characterized as “state socialists.” Despite their opposing class interests in terms of employer-employee relations, they shared a common interest in freeing society from the heavy overhead rents extracted by landlords, monopolists, and the financial sector.

These special rentier interests sought to remain free of rent taxes and price regulations. To them, a “free market” was one that was free for their unearned income to remain free from public taxation. This led them to oppose government power, at a time when democratic politics was aligned against them and was minimizing the ability of the House of Lords in Britain and upper houses in other nations from blocking progressive taxation and its associated classical policies.

The classical program of free markets—that is, markets free from prices in excess of cost- value—was to tax land rent (or at an extreme, nationalize it), and to keep basic infrastructure and natural monopolies in the public domain so as to provide basic services at cost or at subsidized rates. This meant a mixed economy, not only a one-sided private sector. An active public sector was to absorb the cost of infrastructure, education, health care, and pensions—mainly by taxing the rental value of land and natural resources.

One of the most systematic defenses of this policy was voiced by Patten, mentioned above as the first professor of economics at the Wharton School of Business at the University of Pennsylvania from the 1880s up to World War I. He described public infrastructure as a “fourth factor of production,” whose return was measured not by the profits and price markup it made, but by its ability to lower the national price structure. This was the strategy that guided industrial development in the United States, Germany, France, and Japan. These and other nations provided a widening array of basic infrastructure services at subsidized rates, and indeed free of charge, e.g., roads, education, and so forth.

Likewise, public money creation—most notably America’s greenbacks issued during its Civil War—would save taxpayers from having to pay bondholders. Patten’s term “Economy of Abundance” held out hope for an overlap (or at least an olive branch) between industrial “state socialism” and labor socialism. Both lines of development were based on value, price, and rent theory applied on a national level in a mixed public/private economy.

In the monetary sphere the thrust of this movement was more diverse but centered on replacing interest-bearing debt with equity profit-sharing arrangements, and on public money creation replacing private bank credit. Lending was to be productive. In the sphere of public debt, the way to minimize an economy’s fiscal overhead was to refrain from wars. Since the time of Adam Smith, the logic of free market reform was one of peace. The rivalry that was envisioned was commercial, between old-style rentier economies and reformed “statist” economies.

When World War I broke out, there was widespread belief that complex industrial economies could not afford war. Many economists forecast that the Great War would have to end in just a few months as countries ran out of money. But governments soon discovered that central banks could create much more money than was anticipated. As the United States had shown in its own Civil War half a century earlier, it was not necessary to tax or to borrow.

The implication was that an all-powerful commercial banking class was no more necessary than a dominant landlord class. Taxes were not necessary so much to finance government as to tax unearned income to preserve a fair society and prevent vested special interests from developing. This is the thrust of Modern Monetary Theory, centered at the University of Missouri- Kansas City and allied schools. This line of analysis was not pressed by the victorious Allies, nor was it retained in Germany. By the 1920s, an alternative to the classical economic reform program was being crafted by the rentiers.

In fact, by the time America succeeded in surpassing Britain as an industrial power, it had little interest in promoting its protectionist public investment policies in other countries. Its strategists wanted to “pull up the ladder.” By the 1980s, the classical economic reform program had become consigned to the realm of unhistory, excluded from the academic curriculum.

The new idea of competition was based on privatizing infrastructure on credit, just as real estate ownership rights were sold. The definition of good management was to create rent-seeking opportunities—financed by interest-bearing debt. Education, health care, and medicine were to become privatized as rent-extracting opportunities. Pensions were to be financed by saving in advance and living off the interest or capital gains achieved financially, not necessarily industrially.

If this “future” had been forecast a century ago, most economic observers would have found it so unlikely as to be unbelievable. Their first question would have been how an economic system can win if it is made high-cost rather than low-cost? Would not basic competitive forces bring about a world free of rentiers, a peaceful world with less class warfare between these old postfeudal classes and the “real” economy of industry, production, and consumption?

No major economic writer expected the rentier classes to fight back with any great success beyond protesting that taking away their privileges was akin to communist dictatorship. And indeed, who would have thought that libertarian or “Austrian” ideas of a stateless economy (dominated by rentiers, headed by bankers) would spread beyond navel-gazing academics living in an “as if” world? Governments were moving toward progressive income taxation, investing in infrastructure, and establishing public banking and monetary systems.

But the counter-reform movement has convinced many voters and public officials that there is indeed no alternative. To make sure that this will be the case, history is being rewritten, above all that of economic thought. Pro-rentier lobbyists recognize that to impose their travesty of free markets, they need totalitarian control of the academic discussion, censorial power over the press, and ultimately the threat of violence. This is what the Chicago Boys realized in Pinochet’s Chile with their 1973 dress rehearsal for neoliberal policy. Their first act was to close down every economics department in the country, and inaugurate a Latin American assassination campaign, Operation Condor. This is the Inquisitional side of free-market economics.

Today’s creditor interests are pursuing much the same road to feudalism that Rome followed two thousand years ago when its oligarchy initiated a century-long Social War (133-29 BC) by political assassination and widespread violence. This was by no means an exercise in creative destruction. It ended up indebting the citizenry and left imperial looting (“spreading peace”) as the last available gain-seeking opportunity in a shrinking economy.

Originally published by Levy Economics Institute