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The Great Coup of Ideas

May 20, 2012
Adam Smith; engraving

Adam Smith; engraving (Photo credit: Wikipedia)

Just before the end of the Nineteenth Century through their mouthpieces, neoclassical economists, the élite classes came up with the greatest coup of ideas to justify their existence since the Devine Right of Kings.

Prior to that the classical economists beginning with Adam Smith and his contemporaries, observed that all production required three things. Land, Capital, and Labor. For example take a brick factory. The building and oven needed to create the bricks are the “capital” – the owners are the capitalists. The people making the bricks is the “labor” – the people doing the actual work. The Land the factory occupies and the clay used to make the bricks is the “land” – the owners of the land are the “Rentiers”. Any money made by selling the bricks is then divided up between these three groups: the rentiers, the capitalists, and the workers.

According to Adam Smith only two of the three groups made any real contribution to the production process. The workers contributed their time. The capitalists contributed their capital, but is now used and worth less than before. The Rentiers contributed their land, but have lost nothing. Once done with the manufacturing of the bricks, they get their land back and it is still worth the same as it was before. Any income they made by renting out their land they made without work, and without risk to their assets. There is a word for someone who only takes, but doesn’t give back: a parasite. Smith and those who carried on his work used the nicer term, Rentier. This is where the phrase “economic rent” originates. It originally described a no value added landlord.

Adam Smith and his contemporary classical economists existed in a time where the noble families of medieval Europe were still the large landowners. The nobles had just turned into Rentiers. Because they owned the land, they were able to rent it out to capitalist and workers and claim some of it as their profits and wages by charging “rent”. They were able to do this without ever working. It was unearned income.

Much of the work done by economists from Adam Smith until the late Nineteenth Century was all about finding and identifying “rent-seeking.” These classical economists didn’t want to overthrow capitalism, they wanted to free it from the “rent-seeking” parasites.

Then along came the so-called “neoclassical” economists. The neoclassical economists and their élite supporters, perhaps terrorized by the growing popularity of Henry George and his theories, decided to begin treating land and capital as the same. If one treats land  as capital, then the concept of rent can effectively go away and those who reap what Smith referred to as “unearned income” suddenly became “Capitalists” and their unearned income became “profit.”

Rent-seeking” is not just “ownership of the land”. It can take several shapes. Rent-seeking is any unearned income. An alternative definition is “profit without a corresponding cost of production”. “Economic Rent” can come from ownership of land and just “renting” it out for money. It can also come from collecting so much capital that a firm now has a monopoly and can set the price independent of supply and demand considerations. It can originate in a government monopoly granting, control of other “land” like our rivers, broadband spectrum, or “mineral rights” of land. It can come from control of financial assets like capital gains, dividends, and interest on loans (especially usury). It can also come from political favors from the government.

Once the neoclassicists removed the entire concept of “rentier” from economic analysis, and eventually political, conversation, it was all capitalism and capitalists in their world.

Now when some people object to the obscene profits made for example on Wall Street (e.g., derivatives) specifically that portion that is the unearned income of the rentiers, they lack the vocabulary to properly express what is happening. Instead, the mouthpieces (Lawyers, lobbyists, economists, etc.) of those making the unconscionable amount of unearned income try to make it look like those complaining are railing against capitalism itself or against businesses in general. Often, however, the criticism of the “excesses of capitalism,” are actually an objection to the parasitic rentiers that are hurting the true capitalists as much as the workers.

“Wealth creation” by debt leveraging – that is, asset-price inflation – was celebrated as a post-industrial economy, as if this were a positive and natural evolution. But in reality it is a lapse back into a rentier economy, and even into a kind of neofeudalism.

When a company has a monopoly and can charge whatever they want, that’s not being a capitalist or an entrepreneur, that’s being a “Rentier.”

When oil company’s make “windfall profits” as the price of oil goes up, that’s not profit, that’s “economic rent.”

When a drug company can keep the government from negotiating lower prices, that isn’t capitalism, that’s classic “rent-seeking” behavior.

Much of the money made on Wall Street is nothing but pure rent-seeking. Companies lobbying for tax loop holes is just more unproductive rent-seeking.

Unfortunately, the vast majority of influential economists are still neoclassical and don’t believe land and rentiers exist. They can try to deny their existence, but when the top 1% of the country make more money in one night while they are sleeping then most will make working at their job for 6 months, it’s hard to deny their existence. It’s unfortunately that our intellectual class “lost” these words and concepts from the mainstream discussion.

One could argue history is repeating itself. 200 years ago, the conservative vs. liberal mantra was that conservatives were fighting to keep the power of the nobles and large landlords intact. The liberals were the ones trying to free themselves politically and economically from their control. Today it’s the same. Conservatives are fighting to maintain the privilege of the Rentiers by pretending to defend capitalism itself. And once again, liberals are fighting to free the market from the parasitical Rentiers.

Recently the economic commentator Michael Hudson wrote:

“The classical free market economists endorsed taxes on unearned income: land rent and natural resources, monopoly rent and financial privilege. These categories of income have no counterpart in a cost of production undertaken by the rent recipient. The more that governments can shift the tax burden on to land and property, the lower housing prices will be – and the less governments will need to tax labor by income and sales taxes.

Bankers back anti-government ideology because they want to obtain all of the untaxed rental revenue as interest. So taxes that otherwise would be paid to the government will be paid to the bankers. The result – what you’re seeing today in Europe and North America – is an economic grab that is in many ways like that which gave birth to European feudalism. But this time around it is financial, not military.”

(Note: Most of this is an adaptation of a blog written by someone else with which I agree. I decided to revise it for “This and that….”)

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