With two renegade economists in one room in London for 90 minutes you can expect some pretty controversial opinions about the current economic establishment. This film has all the makings of a Real Vision classic, as Steve Keen interviews professor and author, Michael Hudson, sharing their radical views and an extraordinary depth of knowledge.
Discussing the complacency and complicity of traditional economic models, as taught in universities and adopted by central banks, Michael and Steve take us on a journey from a solar system to a galaxy of thought, taking in the history of economics to solutions for the ongoing global depression
Steve Keen: Often you’ll see somebody who’s a public speaker – or back in the old days, a public speake, who’d start with saying, “Unaccustomed as I am to public speaking.” Well, this is literally true for me this time, because I’m Professor Steve Keen from Kingston University. And I’m very much unaccustomed to being on this end of the camera, because rather than being the interviewee, I’m being the interviewer for my good friend and fellow rebel economist, Michael Hudson.
Michael, for those who don’t know him, is one of the few who not only saw the crisis coming, but was warning about the fact that we were inevitably going to have one, courtesy of financializing capitalism. And his two most recent books – this is the penultimate, right? [Keen’s comments and questions henceforth in italics]
Michael Hudson: Yes. Penultimate.
Penultimate book. Still, of course, available. The Bubble and Beyond , which I’ve read most of. And this one I haven’t started reading yet, but I’m under orders to read it by the end of the year. Killing the Host .
Yes.
So, Michael, give us a bit of background to these and let’s just have a rave.
All right. Well, Killing the Host will be published in German at the end of the month of November, and, basically, it’s a more popular version of The Bubble and Beyond. And it shows that when the financial sector takes over, it’s very much like a parasite in nature. And people think of parasites simply as taking the life blood of the host and draining the energy. But in order to do that, the parasite has to have an enzyme to take over the host’s brain. And the key thing in nature is they take over the brain, and they convince the host that the free luncher is actually part of the host’s own body, and even its baby to be protected. And that’s what the financial sector has done.
Classical economics was all about separating the rent-extracting sectors – landlords, monopolies, and finance – from the rest of the economy. And that was unearned income. It wasn’t necessary. And the whole idea of classical economics from Quesnay’s Tableau Economique to all the way through Adam Smith and John Stuart Mill was to look at the finance sector and the landlord sector and monopolies as unnecessary. You’re going to get rid of them. You’re going to tax away all the land’s rent or else nationalize the land. And you are going to have public enterprises as basic infrastructure so that they couldn’t be monopolized.
Well, you had a revolution against classical economics in the 1890s and 1900s, and the national income now – accounts make it appear as if the financial sector and the real estate sector and the monopolies – oil and gas – are all contributing to GDP. So a few months ago, you had the head of Goldman Sachs – Lloyd Blankfein – say, the Goldman Sachs managers are the most productive workers in the United States, because we make $22 million a year in salary, and we get bonuses. And that’s all considered as contributing to GDP. That’s the financial services that we’re providing $22 million per manager of financial services.
Now what they don’t realize is that this $22 million per manager in that Goldman Sachs extracts money from the rest of the economy. It’s a zero-sum game. And instead of adding to the GDP, you should have –
A subtraction.
Yes, you should have – all of this is overhead – unnecessary. And since 2008, the 99% of the population in America, and I think in most of Europe, too, have seen their incomes go down. But the 1% have had their financial and real estate incomes go up so much more that there is an illusion of growth. And what’s been growing is the tumor, not the actual economic body.
Yeah. And this is the – I mean, if you look back at Ricardo and look at his arguments for comparative advantage, which has become the one horse pony of neoclassical economics. Everything’s about specialization. And they’ve fallen for this whole pea and shell trick that Ricardo put there to get rid of the corn laws. But when you read it and see, why did he do it – and I know I can say this to you, because you’ve actually read Ricardo, and far more of the classicals than in fact I’ve read, which is I don’t think there’s anybody else in the world I can say that to, but you clearly have.
When Ricardo says why he designed that model, it was so that he could argue for the reduction in the price of corn, which would mean that no change to the real income for the workers, because they still have to get the corn to stay alive. But the price of corn would drop, which meant the money going to the landlords would fall. And that money would instead go to the capitalists, which were therefore enable you to continue growing and grow for longer than you would if all the money was wasted by the landlords and frivolous behavior.
So even that particular absolute core of neoclassical thinking came out of Ricardo’s attempt to get the money away from the rentier class and get it to the capitalists where the investment can occur.
Well, of course, he really wanted it to be to the banks. Ricardo was the bank lobbyist of his day. He went into parliament to be the arguer for the bank. His brothers, by the way, ran the capital firm. They underwrote the Greek debt after 1832 that bankrupted Greece already in the 19th century, just as the IMF and the Troika are doing today.
Ricardo, being the bank lobbyist – how did banks make their money back in Ricardo’s day? You still had a landlord class in England, so they didn’t make their money making mortgage loans. Banks made their money mainly in international trade and international financial transactions.
–and things like that.
And Ricardo thought that if you had a division of labor and everybody specializing, then banks would have this huge market in export-import trade and financing collections outstanding and basically currency swaps. And Ricardo’s example of comparative advantage was let Portugal only produce wine. Let England produce cloth. And in his example, Portugal comes out ahead.
And England does as well, because the –
Yes, but not as much as Portugal. So if other countries will agree to be hewers of wood and drawers of water and let the industrial companies industrialize, somehow the raw materials people will benefit. And, of course, that’s not what happened at all.
So when Ricardo fought against the landlord class represented by Malthus, he basically wanted England to have to buy all of its grain abroad, so the bankers would benefit not only from British industrial exports to Portugal and America, but also get the import trade in grain.
Malthus said, “Wait a minute, the landlords are very productive. We employ coachmen. We buy nice clothes. Who would be the servants? Who would hire all the servants, if it weren’t for us extracting all of the rent?” And he said, landlords also are able to put – if you have protectionism in high prices, landlords are going to improve the quality of the soil, and we’re going to make increased productivity, as we did during the Napoleonic Wars when there wasn’t trade.
Ricardo said that’s impossible here. He wrote at the time, when you had the greatest revolution in agricultural chemistry in history. You had Justus von Liebig. You had all of the increased fertilizers, mechanization. Ricardo said, you have the original indestructible powers of the soil. You cannot destroy the environment.
The Americans broke from all of this and said, wait a minute, you have the slavery system, and the cotton and tobacco planters are destroying the soil. In America, we had the term mining the soil. Soil depletion goes down. If you specialize the way Ricardo did, you deplete the soil, you deplete the environment.
And so it’s this Ricardian model – this narrow-minded tunnel vision that prevents economists today from looking at how the environment is being harmed by oil and gas specialization. They deny global warming. And, most of all, the worst environmental damage is debt pollution. The economic environment is being polluted by running into debt and, of course, that’s what banks produced.
And that’s what Ricardo was advocating for. He had a financial theory that said it’s impossible for any country to have a balance of payments problem. Impossible for any country to have a problem repaying the debt that we’re negotiating with them, because of automatic stabilizers. The magic of the marketplace will mean everybody can always adjust, everything adjusts.
And then, of course, you had the Irish potato famine, and you had Nassau William Senior saying – when he was told that a million Irishman had died, he said, that is not enough. Economics is about equilibrium. For them to have equilibrium, more than a million must die. That’s the equilibrium of the neoliberals today. It lives on.
I mean, I’ve read Ricardo’s principles, obviously. And where did you find – because what I see in Ricardo, when I read Ricardo is the arguments about reducing the money going to the landlords. You must have read much more to get the background on the banker history and so on than I’ve managed to read. Where would they have been in Ricardo?
Well, he wrote – there were two –
Collected works, you read the collected works?
Yes. Ricardo – there were two schools of monetary theory in England. After the Napoleonic Wars, what happened, they had a post-war deflation. They tried to return the price of gold to the original price. This is the same idea of deflation that wrecked the American economy from the Civil War through about 1890, crucifying the price of gold. You had deflation.
There were two schools of thought. There was the banking school that Ricardo headed, the lobbyist for the banks. And there was the currency school with Thornton and all sorts of other great people. The currency school said debt matters. Ricardo said debt doesn’t matter. So the arguments you’re having today all found their predecessor in the 1830s in the bank arguments.
Now this is not taught in any of the history of economic thought.
The history of economic thought isn’t taught anymore either.
That’s the problem. They take mathematics. And mathematics it’s all about taking the existing status quo for granted. And if you had a history of economic thought, you’d know that Adam Smith and the adversaries of Ricardo, and John Stuart Mill, their idea of a free market was a market free from rent, free from the banks, free from monopoly. But now when you have the Austrian School and Hayek’s talk about the free market, they mean free for the parasite. Free for the predatory.
They don’t they mean that half the time. They’re so caught up in their own ideology. But that is a huge part of it. And to them, it’s – in that classic sense, people think Smith is a free
market person as they define free market today. But when looking at Smith’s writing, he was in favor of limits on the rate of interest.
His logic was that if you have – people who are willing to pay well above the rate set by the King are likely to be profligates. Projectors and profligates he called them, and if you give money to them, they’re almost certain to have wasted it. If they want to pay that much for it, they must want it for nefarious purposes. Having the legal rate set slightly below a maximum rate set by the King, means that banks would have to give their money to people who would make productive investment of it. So he was in favor of control of interest.
Now his main rival – and you’d know better than I do on this front, too, but – one of his main-
Jeremy Bentham.
Jeremy Bentham. Bentham coming out saying, he sees – you probably remember how he expressed it about the crying shame of – he was trying to show – to save people from being accused of the crying shame of usury. And saying usury had a bad name, and the rate of interest should be set by the market, etc, etc.
It’s all free market. And the rate of interest I noticed on British credit cards of where I’m staying is 19%. In America, it’s 29% penalty rate. And banks make more money in penalties than they do in interest. After the interest rates hit 20% in 1980, all the usury laws were abolished in the United States. So it’s predatory.
Adam Smith also said something else about money. He said that wars should not be financed by borrowing from bonds. That was called Dutch finance, because the Dutch investors were the main bond buyers. And he said, if wars – like the military spending that England is doing today in NATO – if wars had to be financed by direct taxation, people would really feel the burden of war, instead of issuing bonds, where you have to add the interest onto a tax on necessities. And every war that England went in – and Book V of Adam Smith’s Wealth of Nations lists every single tax on every single – that was added with every new bond issue, pricing England out of the market.
And Adam Smith said, look, interest is a cost of doing business. And if you’re going to have all of these taxes and all of these interests, you’re not going to be able to be a competitive industrial market.
Which is the situation that we’re in again today.
Indeed.
By falling for – the financial sector. One thing that I’ve just written in – wrote my new book is called Can We Avoid Another Financial Crisis? So my little promo here. And as part of that I focus on the level of private debt to GDP as I know you do too. And I haven’t shown you this, yet, but you know the graph of American private debt to GDP. Going from very low in the 1860s up to 140% say roughly of GDP in the Great Depression. Plunging down and then rising again. And every time you look at the American data, there’s this tendency for the level of debt to rise compared to GDP.
I expected the same thing for England. When I plotted it, from 1880 through to 1980, it never exceeded 70% of GDP. And it was a series of humps and ups and downs, OK. But it never went past 75% of GDP. Maggie Thatcher gets elected. Within two years there’s this exponential – like watching a Saturn 5 take off, from about 65% of GDP to 200%.
She was the useful idiot for the banking class.
Yeah. And that’s where the cities come from here, which I’m sure are going to please many of our viewers to call them that way. But this city was enabled by Thatcher, coming really out of her reading of Hayek.
Well, you’re speaking so fast that I want to make sure that the audience gets to –
I’m faster than you?
What? I’m speaking fast, too? Well, I think we have to explain something to the viewers.
Let’s say that debt is equal to 100% of GDP, which it is at least in almost every country. Now, if countries are only growing at 1%, then if you pay interest at usually 5%, a country would have to grow 5% per year – the GDP – just to pay the interest. And if countries are growing at 1%, and the interest rate for average that everybody pays, about 5% or 6%, then you’re going to have the actual economy shrinking every year as there’s this siphoning off of interest. That’s what debt deflation is.
And that’s the situation that England is in. That is turning eurozone into a dead zone. And it’s the situation of the US economy. That all of the surplus is paid for interest – not to mention financial returns, capital gains, and economic rent to the landlord class and to the monopolies.
So no wonder the economy is shrinking. Nobody has enough money to buy what they produce anymore. So that’s why there are so many vacancies in storefronts in New York. Why stores are going out of business. Restaurants are going out of business. There’s a squeeze on.
Yeah. Can you – is that palpable in the States? Because in England it’s not quite so palpable.
Yes. Well, just imagine the average paycheck. I don’t know if it’s similar. In the United States, the big chunk off the top of every paycheck is for housing. Now in America almost all mortgages – 85% of mortgages are guaranteed by the government and banks will write a mortgage up to the limit of 43% of your total income.
So imagine, here’s a family that in order to have a home is either paying 43% of its income on a mortgage, or it’s paying that in rent. The average – average – rent in New York City of
$4,500 a month. Well, you can imagine if the average salary is about $80,000, do the math for yourself.
Now in addition to that, people have to pay maybe 10% more of their income to the banks for credit card debt, student loans, auto debt. And then also taken off the front of every paycheck is 15% of a forced saving of social security and medical care. So that’s taken off. And there’s about another 15% recombination of state and local and federal income taxes. And then you have the value-added taxes. So you add all that up. To the 43%, to 10% to the banks, maybe the 25% for taxes, you have only about 25% of the average paycheck that’s available to be spent on goods and services.
Now think of the circular flow. The whole of economics was founded by a doctor, Francois Quesnay in France that looked at a national income like the circulation of blood in the body. But you have this blood being drained – 75% of the circular flow now is drained for what we call the FIRE sector – finance, insurance, and real estate.
And the ironic thing is that’s actually the way it’s titled inside the American national accounts. When I first heard you say the fire sector, I thought it was a nice acronym, before I’d actually dived into the NIPA –
National Income and Product Accounts.
And there, lo and behold, it’s labeled the FIRE sector.
Yes.
And it’s quite – that was Copland’s work, wasn’t it to put that
Yup.
That was brilliant work when you look at it, because that’s the gold standard of the flow of funds to work out where the money flows actually go. And the crazy thing is that if it hadn’t been for Copeland, we probably would have this information at all, because according to conventional economics, money doesn’t matter. They completely ignore all that stuff.
And everything is productive.
Everything is productive. And this nonsense – I mean, at the same time, you and I are both trying to say, you cannot have a model of capitalism which doesn’t include money and banks and debt.
And debt. And people even who do talk about money, like the monetarists, don’t talk about debt.
Exactly.
And they don’t realize that money is debt. One person’s savings is somebody else’s –
The problem they make there is that they get to the stage of talking about money and debt in the same sense that Fisher beautifully described it back in the debt deflation theory of great depressions is that – no, actually, it was in Booms and Depressions and First Principles. He said, that a man-to-man debt – I’m going to use the sexist language of the ’90s, or maybe the sexist language of today now with Donald Trump.
A man-to-man debt doesn’t matter, because if one person pays down his debt to another person, then his spending power is fallen by the money he had to forego to pay the debt, but the person who receives the money as repayment of debt then has additional cash, and it’s like a seesaw. They balance each other out. The average level remains the level of the fulcrum, it doesn’t go up and down.
But when you include banks in there, and, of course, banks are the people who generate debt, it’s an elevator. It goes up or down. If they are increasing the amount of debt in the economy, then you’re both getting higher. But if you start repaying, you both start heading down towards the ground.
Well, another way of saying this – it’s said in America, the debt doesn’t matter because we owe it to ourselves.
That’s Paul Krugman’s classical cliche.
Right. And the question is who are we, and who are ourselves? The we is the 99%. The ourselves are the banks and the 1%. So when you say, wait a minute, white man –
But it is it goes beyond that because, again, if that was the mantra that we were borrowing from the wealthy people, there’d be no money creation involved. There’d be debt creation without money creation.
Yes.
And that’s the link that they haven’t got right. Whereas when you know that when banks – and this is where the Bank of England must deserve a big pat on the back from people like ourselves that they came out and publicly said, as a highly respected official organization, banks create money when they lend, and, therefore, as well as providing –
And that creates deposits. They create money by creating deposits. You go to – for the audience – you go into a bank, you borrow money, the bank credits your checking account, and adds to the loan. It’s done by a computer. It’s not somebody’s savings. It’s not a recycling of the savings.
And this is the hassle you and I are having. We’re both arguing in favor of things like debt abolition in some sense. People think, oh, if you write off debt, what about the poor lender. Lender’s being ripped off. And that’s seeing in the sense of a man-to-man debt. That if you lent me $100, and I didn’t repay you, I’ve stolen $100 that you had to earn. You had to save and put aside to have.
But when you take it from a bank, the bank is making an entry in the asset in increasing its assets, making an entry into liability side in giving you a deposit. It isn’t a money warehouse, it’s a money factory.
That’s right.
And that’s the interest in producing as much as it can, because by producing debt, that’s their means to make a profit.
Debt is the bank’s business – and you call that endogenous money, and that’s what you write about in your articles.
Yeah. But you go into the parasite side of things.
Well, there’s a strategy for all of this. I used to work for Chase Manhattan for many years. And I worked for other banks. I was a bank analyst, so I saw how it was done.
While I was working for the bank, I was taking my PhD At New York University. And the courses had this fantasy about how banks work. I would say, wait a minute, this is not how – here’s how banks actually work. Here’s what happens, and I used the example – I was the economist for the central bank for the savings banks – and pointed out the idea that – well, I won’t even get into the details, but I got a C minus, because –
You got a C minus?
Yes, a C minus, because it was explained to me exactly what Nobel Prize winner Paul Samuelson and others say, you don’t understand, Mr. Hudson. Economics is all about assumptions. It’s about whether the logic is internally consistent. What you’re saying may be realistic, but it’s not internally consistent with the body of mainstream economics that we’re talking. You have to suspend disbelief. You have to act – we’re in an as-if world. And I thought, my god this should be in the literature department as science fiction, not in an economics school.
Yeah. This is actually where I meant to get this. How did you become a rebel in economics? I know you’ve got a family background.
My family. I was born a rebel, basically – I was born in Minneapolis, which was the only city in the world where being a Trotskyist was a career advancement opportunity. My father was fighting against the Stalinist trade unions. As soon as America went to war was thrown in jail for advocating the overthrow of the government by force and violence – the Minneapolis 17 – because there was a deal between the mafia – the mobsters that wanted to take over the truckers union that was organized by Trotskyists of Minneapolis and the Stalinists that promised Roosevelt not to go have any labor strikes during World War II if they’d throw the Trotskyists in jail.
So your dad ended up in jail over that particular ruse by the mafia?
Yes. And so everybody I knew growing up – I thought the draft, and people were drafted, I thought everybody was going to jail. I didn’t know really there was a war on. I thought it was just a class war. I didn’t know it was actually a military war. You know I’m at three or four years old.
Well, I went to New York, thinking I was going to be – I inherited the copyrights of Leon Trotsky when his widow died.
You actually, this is one thing that you better mention here, who your godfather.
I don’t want to mention that.
OK, OK, all right.
Well, nobody was interested in these, so I had to get a job. I met the Chief Economist for General Electric, a man who had been. He was the most – in one evening, he was the most brilliant man I’d ever met. My friend Gavin –
How old are you at this stage? In your early 20s or?
I was 21 years old. And my friend Gavin MacFadyen had gone to school with his daughter, and said, you’ve got to meet this man. And he talked about how the change in the water level – in the sunspots and in the weather would affect the water levels in the Midwest and that would affect the autumnal drain, where the farmers had to draw money from the banks, from the east and almost all the crises almost always happened in October, because of the autumnal drain. And he described it and it was such a beautiful, aesthetic flow of funds that, believe it or not, I got into economics, because it was beautiful and aesthetic.
And Terence, I must have talked to him every day for an hour a day for 30 years. And he said he would work with me if I would read – he had made the first translation of a book that was banned almost all over the world. Banned in Russia. Banned in China. Karl Marx’s history of economic theories called his Theories of Surplus Value.
It was banned at the time, was it?
There was no English translation. It was the only thing that wasn’t translated, because it was Marx’s history of thought outlining how a national income account should be made. And by doing – he showed that what Russia took as its national income account was thinking only material labor is productive. And so Russia’s national income accounts were not based on Marx, they were based on Adam Smith. And so they did not want the history of economic thought really discussed.
So, indeed, I went into – I studied basically classical economics. And classical economics from Smith, Mill, the others, all sort of – Marx was the last classical economist. And he pushed it to the logical extreme, because his principle was that capitalism itself is revolutionary. Capitalism in order to do what we talked about at the beginning of the show-
– in order to get rid of the landlord class, in order to get rid of the idle rich, in order to get rid of the monopolies, in order to get rid of the banks and make that a public utility, that’s socialism. And the logical tendency of industrial capitalism is toward socialism. Well, that was a radical thought.
Well, it turned out that when I went to Wall Street first for savings banks and then at Chase, by about 1968, all of the leading – there were about four leading economists. And Lazard Freres and other companies. We’d all meet once a month on Thursdays at a Japanese noodle place.
And on one occasion I remember at 9:30 in the evening, we were all discussing Volume III of Capital –
Bloody hell, OK.
Where Marx discussed the interest and rentier money as an unnecessary faux frais, false cost of production. And then we broke out laughing, wouldn’t it be – what if people knew that we’re supposed to be the bank economists, and we all have a Marxist background, and here we are discussing Volume III of Capital.
When Terence translated – Terence McCarthy – translated the Theories of Surplus Value as A History of Economic Doctrines – he founded Langland Press to do it – the Stalinist operatives broke into the printing house and poured acid over all the plates of Volume II of it. The Volume III is in actually three parts, three volumes, I mean the Theories of Surplus Value is three volumes. So Terence is only able to publish the first volume, not the other two volumes. Then the Stalinists came out with another translation confusing value and price. And mistranslating it.
That’s actually the Progress Press volume. Because the volume, I’ve read the Theories of Surplus Value in the Progress Press edition, which is from the Russian edition. Now –
There was a bad Stalinist version through London & Wishart. But finally, Progress Press did come out with a very good scholars edition of all three.
All right, which is probably the one I’ve read.
And that’s good.
But they tried to stop it.
Initially. I mean, finally they figured nobody cares about Marxism anymore in Russia. If Russia would have known about – Russia’s really the only country that has no Marxist background at all. If they would have known about Marxism, they never would have privatized and fallen for neoliberalism in 1991.
Yeah, well again, the labor theory of value, I think was a magic contributor there, because that whole ideology became a huge part of the politics and the way they tried to organize industry as well. And to me the false vision that labor’s the only source of surplus.
But what they didn’t – what was the function of the labor theory of value. It was to isolate all those elements of price that were not an element of value. That were not necessary for value. And rent was the excess of price over intrinsic value.
Now that’s the principle that the national income accounts should be on. You want the basic cost value. What does it cost to produce the goods and services in the things that you need. And then everything that’s not necessary for this, that’s extractive – whether it’s land rent or natural resource rent or monopoly rent or financial returns – this is not actual cost. Because we know that you could have countries like Soviet Russia, America, China, and Japan all having the same technology, but having completely different relationships with
the financial and the real estate and the monopoly sector. And you need a technological core, and then you show how much is unnecessary, how much is institutional in nature.
Your point about the bank chief economists all sitting down discussing the third volume of Capital. Trying to imagine that happening today is just impossible. If they discussed the third volume of anything, it’d be the third volume of Mas-Colell. Micro-economic theory. The horizons of modern economists are so limited that if we talked – I just imagine if we actually bumped into a modern neoclassical, knowing the training they’ve gotten in an academic world these days. If we mentioned the classics, they would think we’re talking about –
Hayek.
Lucas and econometric problems in price inflation. Or Muth on the cobweb cycle.
Well, it wouldn’t even be that. When I worked for banks, until about the 1970s, banks really had a research department. I did actual research and statistics. After I left the bank, they changed the name to research and publications. And it was all public relations.
Law suit stuff.
Citibank led it all. It was all lobbying, and it was all fictitious stuff.
And at least when I was at the bank, I had to do a study once with the oil industry, and David Rockefeller said, we want you to tell us really what the facts are. We want to figure it out. I’m telling you, if we don’t like it, we won’t publish it, but write whatever you want. Don’t think you have to please us and whitewash this. Give us the facts.
This was actually one of the Rockefellers telling you this?
Yeah. David Rockefeller. And I met with the head of Standard Oil and Socony, New York, there. And so I was always given completely free reign. I had to code everything. They were just worried that the Senate might subpoena my documents, because –
Too much information.
And figure it out. They didn’t. They wanted to know. But it was actual research. Later – today, it’s all public relations from the bank, and you’re just not going to get anything. I think the Bank of England is the only really innovative central bank that I can think of.
Well, certainly in terms of central banks.
And I can’t think of – I mean the Federal Reserve is still so dominated by the neoclassical canon, you don’t get anything interesting out it.
A precondition for getting a job at the Federal Reserve is not understanding how the economy works. If they mention your name, and people say, oh, yes, Steve Keen, I’m sorry, you’re over qualified for the position.
Actually, I do know. I had some colleagues working in a couple of hedge funds who told me that they had a meeting with Bernanke once. And one of their female staff had just transferred from the hedge fund to working at the Central Bank and she came along for this meeting. And Bernanke was actually questioning her about the mechanics of money transfers because he didn’t know it. And you find – literally, she found herself – she thought she’d be talking to a superior she could learn a lot from, and she found the guy’s actually quizzing her about the actual mechanics of money transfers.
Yeah. That’s what happens when you go through a PhD, and you actually spend your time in school, instead of in the real world.
But you spent – where did you do your PhD at?
New York University, because all they wanted was my money, not my mind. And other universities they actually insist that you actually go along and agree with what they say. And New York University, the biggest private university in America is just a business – all they wanted was the money, and that’s what I wanted. So I actually learned everything I know about economics while working on Wall Street. But I got the union card, which is a PhD that you need in order to get the job.
And what was your PhD on?
Well, it was on Erasmus Peshine Smith, the leading American economist of the 19th century who developed the energy theory of GDP. He thought product was ultimately reducible to energy.
I agree with him. And I’ve got to show you some maths on that shortly.
Yes. He was the economy – in 1853, the year the Republican Party was created in America, his manual of political economy outlined the Republican policy for half a century. Protective tariffs. A national bank. And internal improvements. And this was the old Whig policy of Henry Clay.
Peshine Smith was the law partner of William Seward, who everybody had expected to be the presidential candidate. But by being so outspoken against slavery, they decided to get a gray figure. Someone nobody had ever heard of that was – they hoped would be completely mediocre. Abraham Lincoln.
Are you kidding?
He made William Seward secretary of state, and after Seward resigned, he made a trip around the world and went to Japan. And they said, we want to break away from England’s free trade policy. So he sent Peshine Smith over to be an advisor to the Mikado, who they waited till the British ambassador went on vacation, passed protective tariffs. And Smith went native and had a Japanese mistress and wore a sword when he went out in a kimono and everything and introduced protective industrial policy to Japan.
Which is what turned it from being a rural colony of totally feudal in 1868 through to an industrial super power that could challenge the Germans and the Russians in the First World War.
Yes, and in the process Smith broke up with the coolie trade. A Japanese ship stopped a coolie transporting Chinese coolies to America. The case went I think to Bismarck or some to referee, and it blocked the coolie trade between China and Peru.
China and Peru?
Yes. But that stopped it for the whole new world. The whole Western hemisphere. The ship was on – Maria Luz, I think it was, going to up Peru, and Smith stopped that.
He’s somebody I’ve never heard of.
There’s a reason – isn’t that surprising that the most important economists of the 19th century, who shaped American policy, nobody’s not only heard of not Peshine Smith, but there was a whole American school of economics. It’s very interesting.
America did something that has relevance for America for today. After the North won the Civil War, they thought how are we going to teach protectionist, non-Ricardian, non- Malthusian economics. And they say, most of the economic courses were taught at prestige universities, and most universities in America were founded by religious orders to train the priesthood. And the political economy course was taught in the seniorly years, you know, the final one, and it’s all, markets are great.
So the solution was that you can’t reform these academics. They’re hopelessly tunnel visioned. So America founded state colleges with a different faculty, new people teaching rational, protectionist economics, and the business schools. And the first business school professor was Simon Patten at the University of Pennsylvania, the Wharton School, which was funded by industrial protectionists. And so you had in America this whole body of theory that now has been whitewashed out of textbooks into a kind of Orwellian memory hole.
Wow. And in some ways we’re reproducing the same struggles today.
Yes. And you can’t do it through the universities –
Again, I can’t – being at Kingston University, which is one of the recently converted polytechnics here. Way down the bottom of the picking order of the English university system. The same applies to the University of Missouri, Kansas City, for the modern monetary theory group. The New School, where all the – University of Utah. That’s where the non-orthodox thinkers are.
Whereas the top universities are reproducing the religion. And the thing is this is quite a successful strategy when you’re fighting an ideological war. But it’s not a successful strategy when you’re trying to manage a capitalist economy. And, unfortunately, they’re trying to do both at once. And, of course, what that leads to is the debt deflation episode we’re seeing now. Because according to the theories of this high priesthood, such things can’t happen.
Yes, reality doesn’t exist.
So we’ve got the same thing happening again now. That this high priesthood dominates the Cambridges and the Oxfords and the MITs and so on. And they’re like the religious colleges you were talking about in the 19th century. And then the approach – the groups that are critical of theory – not necessary critical of capitalism, in fact, because you’d say they’re trying to achieve capitalism, rather than the feudal system that the financial sector is taking us towards.
We’re all forced to teach in the low-rank universities, where the priests don’t want to work. And we find ourselves in badly funded institutions, poor administrations, poor locations, and the students, who don’t know any better, think that they’re going to get a better education by going to the top places, so we don’t necessarily get the good students, unless they themselves also revolt like we ended up doing ourselves.
Right. And what they get is an expensive Andy Warhol instead of a Durer.
Yeah. And with Andy Warhol, it’s just a photograph, guys, he didn’t really do any art to draw them.
So it is such a pain, because in this sense we’re seen as critics of capitalism. And as you said, like your father being thrown in jail and things like that. That sort of thing is we’re traitors, we’re the ones who are trying to bring capitalism down. But what we’re really trying to say is unless you control the financial sector, the financial sector will bring capitalism down.
Will control you. Yeah. You own the banks or the banks will own you. You own the public-
and that’s what mayor Tom Johnson of Cleveland, Ohio, said a century ago. If you don’t own the public utilities and the transport system and the streetcar system, the public utilities are going to own you.
Yeah. And that’s what ended up happening.
Yes, and Dennis Kucinich, who was a later mayor tried to prevent it, and the banks all tried to gang up on him and said, look, if you privatize the electric utilities, we’ll push you for governor. We’ll make your career. Privatize, and if you don’t, we’ll smash you. And Dennis said, I’m not going to privatize it. I’m going to save Cleveland the price in electricity, and they got rid of him. And it was 25 years later, they realized he was right all along, they elected him to Congress. And pushed him for the presidency.
But he didn’t get there.
He wasn’t the tallest candidate.
That’s a problem, isn’t it. He’s actually – the visuals are – if only he was the height of his wife, he might have had a chance of success.
Yes, they did give her as much visual as they could.
You and I are both campaigning for debt abolition?
Yes.
What you think our odds are, now after the last 10 years?
There are a lot of problems – people are realizing that it seems unthinkable to cancel the debts, but it’s also people have an avoidance of thinking, what happens if you don’t cancel the debts.
Exactly.
If you don’t cancel the debts, they’re going to keep growing, and all of the growth and national income is going to go to the creditors. And so the fact is that the debts aren’t owed to the we – to the 99%. The debts are owed to the 1%. 1% of the population has 75% of the financial assets. So and all of this – their growth has occurred since 1980. So what you’re doing is – the question is, who are you going to save? The economy or the banks?
And when President Obama came in, he promised that he was going to write down the debts. The mortgage debts to – especially the junk mortgages – to the actual real value of the homes that the junk mortgage people had taken out. Or and set the debt service – the money you have to pay every month to pay the mortgage, amortization, and principal, and interest to what the normal rental value of this would be.
Well, of course, as soon as he was elected, he dropped it all. He invited the bankers to the White House and said, boys, I’m the only guy standing between you and the pitchforks out there. Don’t worry, I can deliver my constituency to you.
So, basically, the Democratic Party broke its voters into a black constituency, a women’s constituency, a LSGBQ constituency, and they’re all for Wall Street. Instead of saving the economy, Obama bailed out and saved the banks by keeping the debts in place. And once
you have to pay that, it’s curtains. And so the end – everybody’s going to end up in Greece. Greece is where you’re going, if you’re don’t.
Unless you abolish the debts.
Yeah.
Yeah. There was that mortgage reset policy.
But it wasn’t policy – it was only in paper. Banks didn’t do it.
I think about what three – from what I understand about 300 people actually had their mortgages reset.
Yeah. It was all just a fiction.
Out of about 50, 60 million.
10 million. It was all fraudulent.
There was a particular individual as well I think who was involved in that, who was quite useless, the head of the organization as well. You might not know that particular detail. But again, even the person was put in charge of it was against the whole concept of debt writing off to begin with.
Well, no, you had the SIG Inspector General write a very good memoir as soon as he left, saying how Tim Geithner at the Treasury undercut everything that he was trying to do. And Sheila Bair head of the deposit insurance organization also explained how she was just sabotaged by the fact that Obama put all of the Wall Street lobbyists in charge of the Treasury and the Justice Department, so no banker would go to jail, because it was the bankers’ lobbyist who was the head of the Justice Department and as people.
And regarding the debt cancellation, people think it’s – how do you do it in the modern time. It’s impossible. Well, there is a perfect debt cancellation that should be the model. And that’s the German economic miracle of 1848. They canceled –
1848 or 1948?
1948.
1948, yeah.
Did I say, 18? That was the revolutions that didn’t go far enough, a century earlier.
That’s the one. Sorry, I thought you were getting your centuries mixed up.
Yes, I do that all the time.
Well, in 1948, because most of the debts were owed to the Nazis, people who had been Nazis in the war. All of the debts were annulled except for the debts that employers owed their workers, labor debts. And everybody had a minimum working – you could keep your minimum working balance up to a given amount. So they did a debt cancellation that was the German economic miracle. That was the free market.
But the trouble is this time around – look, if you go back to the original debt cancellation back in the time of the Sumerian civilization, because another part of your background is an archaeological focus. And just a bit of personal curiosity, how did that come about? Because as well as doing your research on 19th century economists we should have learned from and didn’t, you also got involved in archaeological research about the origins of money and culture.
Well, in 1979, there was – I was an advisor to UNITAR, the United Nations Institute for Training and Research for about three years. And I was writing a whole series of reports on the fact that the third world debt couldn’t be paid. This was just before Mexico –
Which year was this? 1970?
1982.
OK. I was doing similar work in Australia for the Freedom from Hunger campaign. Curious.
Well, we had a meeting in Mexico, organized by the Mexican president, who’d wanted to be head of the UN and thought if he had UNITAR come. So you know I gave the position of the rest of the staff. And I’d brought along a whole group, including some radical Canadians, including Kari Polanyi, was there.
Daughter of?
What?
Kari Polanyi?
Yes, the daughter of Karl Polanyi.
Right. OK.
Or Kari Polanyi. And so I gave my speech and saying that the debts couldn’t be paid. It turned the reparteur was, I suspect, a CIA plant, who gave the summary of my speech, saying that it would be hard, but third world could pay the debt.
I stood up and said, I’m pulling out the American delegation. I insist on an apology from the President of Mexico for this. This is a willful and malicious falsification of everything I’ve said by a lobbyist for the US banks and for the government. There was a riot. And then they tried to beat up all of the Americans they could find.
In this conference?
In Mexico City. I had a girlfriend who was part of a Dadaist painters group that was having a ballet, and I hid out, literally, on the ballet stage, while they were trying to look for me to beat up in Mexico. So I realized that debt cancellation was very political. And I just said, I’m going to write a history of debt cancellation.
And so I – it took me about a year to go back through the medieval times to Rome and to Greece, to Solon’s debt cancellations.
This is reading at this stage, rather than doing archaeological research?
Reading. So I went back – I had just moved down to Wall Street from where I was living to the Tribeca, one block from the World Trade Center. And then I got all of a sudden, there were references in the Jewish jubilee year to the Babylonians
But there was no economic history of Babylonia. So I begun to read about Sumer and Babylonia. And I found that every new ruler for thousands of years – from 2,500 BC down to about 500 BC – would start their reign by abolishing all of the debts owed to the palace and temples, all of the consumer debts. Not the business debts. The business debts – silver debts – were left in place. But the personal debts – the usury – that were paid in grain would be annulled.
When there was a failure of grain and people – the debtor’s, the harvesters, the citizens couldn’t pay their debts, the ruler would proclaim a clean slate. The word the rulers used in Babylonian was andurarum. And that’s the word that in Hebrew, deror, used for the Jubilee year. in Leviticus 25.
Then I did more reading, and I realized that when you know what these words mean, when Jesus gave his first sermon, reported in Luke 4 – the first sermon that he gave. He unrolled the scroll to Isaiah and said, I have come to proclaim the year of the Lord. The year of the Lord was the word for deror, for debt cancellation. And what he’d said was I’ve come to insist in abolishing the debts. And his rival was the chief rabbi of the pharisees, and who said who had the prose book – the small print, every debtor to borrow money had to sign, I will not insist on my rights to have the debts canceled in the jubilee year.
So I wrote a book – a history of this – by about, I think, 1988 and 1990, and submitted it to a university press. They submitted it in a right wing Assyriologist that said, it’s impossible to cancel the debts, because if you cancel the debts, no one would lend you money.
Take it in the first place.
But the problem – most debts didn’t arise from borrowing money. Most debts arise just like they do for the third world countries today. From not paying a bill. You ran up – if you were a Babylonian, during the crop year, you’d go to the bar, to the ale woman, and you’d – and we have all this on record. And you’d have put it on the tab, and they’d keep a tab for how much you would owe for the beer you drank to be paid on the threshing floor when the harvest was in. And if there was a failure in the harvest, or if there were just a new ruler wanting to restore balance in the economy, they would – the debts wouldn’t have to be paid.
Well, they actually had a model – a number of models in Sumer and in Babylonian times. We have the economic models taught to the students in 1800 BC. They’re more sophisticated than any model used today except for yours. Because the model had on the one hand compound interest. And we have the test exercises. How long does it take a debt to double? Any interest rate is a doubling time. Well, it took five years to double it 20%, which was –
Linear. Compound. Yeah.
Back then. And there was no compound interest. You couldn’t let the debt compound.
But it doubles in five years. How long does it take to quadruple? 10 years. How long does it take to multiply 64 times? The answer is 30 years. So you can see that –
It was simply unsustainable. It was obviously unsustainable.
Now in addition to doing the debt, they had what is the growth of a herd. And then they had growth of output. And it was an s-curve, just like almost every curve of whether it’s refrigerators or television sets or iPhones –
Which is the saturation point.
It’s always an S-curve. So they had the s-curve, they had the compound interest growing through it. And you can see that at a certain point, the debts mount up in excess of the ability to pay.
Now modern theory – mathematical theory – says, wait a minute, equilibrium means everybody can pay. There’s no unpayably high debt. And they don’t see what for 2000 years was basic principles of rulership in Mesopotamia. The Greeks know it. This is what really should be taught.
Well, I was when I was teaching money and banking at the New School in the ’60s and ’70s, I couldn’t fit it into the curriculum. And that was why I stopped teaching. I thought the whole curriculum didn’t have room for debt and rent and the kind of things that I wanted to talk about finance. I had a big following of students, but they weren’t the core courses in the curriculum there.
And same thing with Kansas City. When the graduates, who learn what you and I are talking about money, graduate, they can’t get jobs, because jobs are conditional upon being able to publish in prestigious economic reviews, and they’re all controlled by University of Chicago and by neoliberals.
And the genius of Chicago free market theory is you can’t have a free market Chicago style unless you have a totalitarian state that will prevent any alternative to the theory. When they went to Chile, Harberger is said to have sat in a hotel room saying, here are the professors you have to kill. Pinochet and the American embassy said, here are the labor leaders you have to kill. And here are the intellectuals you have to kill.
You cannot have a free market neoliberal style unless you are willing to either kill or exile or suppress or censor any alternative to your theory, because the theory doesn’t work. It’s fiction. It’s junk economics.
Well, what we find – this is what I found is quite intriguing right now, because the mainstream actually do believe in their theory. They actually – they genuinely –
Useful idiots.
Useful – and they also believe that their theory is a good way to manage the system. So what they’ve had by the purge they’ve managed to achieve – not quite as drastically as Chile, thank god – but the purge they managed to achieve in intellectual economics to make them just that the sole mainstream and knock out any alternative arguments meant that they took over economic policy as well as economic theory. And pushing it forward led them to the financial crisis that they could not see coming, because they didn’t even include the variables that cause the financial system in their models.
That’s right.
Now what you’re seeing 10 years after the crisis is, finally, some awareness coming through that our models are completely at variance with the real world.
Well, my next book is called J is for Junk Economics. And I’m going to have that out in December. I’m just correcting the page proofs now. But I’m juxtaposing our reality economics to their junk economics.
But as to where – I mean, will we succeed? I mean the classic thing is you and I are both fighting for realism. Now realism with an edge, because we’ve seen the impact of unrealism right back from Roman times forward to now. But capitalism needs realism to function. But it doesn’t need realism to maintain its ideology.
But they put the propogandist in charge of the planners. It’s just like the banks. It’s as if the banks are run by the public relations people who have this patter talk about debt is good for you, debt will make you rich. And it’s one thing to have them there to advertise for the people – the usual Orwellian deception. But you have to have somebody who knows what’s happening.
At the same time.
And they don’t have any one who knows.
That sense of you need someone like you – you need two bank research units. One for like yours giving the actual information to the Rockefellers of what’s actually happening and the other public relations for the public.
Yes, that’s what they need. Yes, but they don’t.
But the reality is they got rid of the back one. And what I find amusing about all the conspiracy theorists – the right wing and left wing conspiracy theorists that see this all being like a Rothschild plot and stuff like that. They think the banks are operating with you in the back room and the public relations people in the front. But no, they’ve got the public relations people in the front and in the back. And, therefore, giving completely misleading advice about how the system works.
That’s it.
It’s worse than think, funnily enough.
This is what Thorstein Veblen called educated incapacity or trained incompetence. You’re trained not to understand the reality when it comes up.
You have – you’re the only person I can think of who’s read far more of the literature than I’ve read. When you read, when you did read, what did you do? Did you take massive written notes of everything and have stacks?
I haunted the bookstores. I’m a little older than you. So in the ’60s – I mean, I knew all of the book dealers, and I’d ask – I had to get the books that Marx talked about and the history of economic theories. But I also asked, are there any other sort of strange books? I’d – what’s this book here? And I’d found books by people who’d nobody ever heard of. Like A Clue to the Economic Labyrinth by Michael Flursheim. Great books. And I found the American protectionists. I found Peshine Smith.
That’s how you discovered him before you did your PhD.
Yeah. I couldn’t have discovered him after I did the PhD about him.
No way.
So I found Calvin Colton and Alexander Everett and Henry Clay and Henry Carey and Simon Patten and all these books that – what are these books. And so, I said, if you, let me know more. And I was the only guy who bought them. Most people wanted first editions of Adam Smith. And I was the only guy that wanted –
All the obscure texts that they had all the same.
Yeah.
Have you still got that collection?
No, I had to sell it. I decided when I moved – once I got this feeling that I wanted to write on debt cancellation, I mean I sold my art collection. Most of it was burgled, actually, and I never got it back – the money from the insurance company. But I sold the books, because I’d read them already. And, essentially, thought I’d rather have my own free time than have the books. So, essentially, I sold what I had, had my free time to do the studies, and, I mean, I ended up OK. But I can’t carry the books around. That would be like a shell.
What about what about the notes? Did you take massive handwritten notes? Have you got those? Or you typed?
Yes. I typed up notes on everything. Yes.
OK. So you’ve those sitting somewhere.
I’ve got all the notes that I took.
Because when I read your books, that’s what I find. The voluminous references. And what look like in anybody else, they’d be in footnotes, if they existed at all, because they couldn’t be, because nobody else has read as much as you’ve read of the literature. But then you just find this – you put it together in your brain in a way that – like we’re going through this talk right now, I’m sure people watching and thinking, how the hell does he recall all this stuff. And it’s an amazingly organized structure of knowledge, far broader than any modern economist actually accumulates.
And it’s really because I always had an end in mind. The first discussion that I had with Terence McCarthy, who got me into economics was to realize that the debts couldn’t be paid. And he told me if I read tried to read everything ever written on usury, I still couldn’t
read it during my lifetime. But he said the big problem of our time is the debt. They don’t realize that –
So he was inspiration for that particular ?
Yes.
What about your – l mean, the line, every time I use it, I say my good friend Michael Hudson’s line is. I embellish it a bit. I’m saying, the debts that can’t be repaid won’t be repaid. And what I add is all you have to work at is how you’re not going to repay them. Which is it.
He wanted me to study that. And that’s why he wanted me to work on Wall Street. And from the very beginning, my focus was on the ability to pay debt and the financial side – looking at the financial system and the flow of funds, and so everything that I was reading, I was organizing.
You know, every economic theory begins with a conclusion and they work back from the conclusion is what kind of logic is going to lead to this.
Exactly.
It’s a reverse of – it’s not empirical. So the is free market people said, how can we tell people that a lower wages are good.
Make a model that the free market gets to equilibrium.
How can we tell people that austerity is good for you? Well, what assumptions are necessary to believe the IMF austerity plan –
Is going to work.
Is good, and all the IMF riots are bad. And so they have the fictitious line of reasoning that they engineer for that. And I was free of that.
And partly because of my political background, I always – I had to go to a school where we had to read Mein Kampf in class. This was the University of Chicago Lab School.
You had to read Mein Kampf in class?
Yes. The Social Science teacher had a sign over his board, “Give them all what the Rosenbergs got.” And I thought he meant communists. But he meant Jews. And in the class, he would call me a commie. But we had a real Stalinist in the class. Danny Landau. And he called me a fascist. And for the first time – the only time in my life I was the voice of reason in the middle.
I converted the class into Trotskyism. Recruited what became basically the leadership of the Young People’s Socialist League, and the Trotskyists, and my friends. And that was the time in my life when I was right in – that was my idea of being in the middle – a centrist.
Yeah. And this is as a school student, like 16?
It still seems realistic to me and this should be the center. So that was my radicalizing high school experience, where I realized – everybody should have a schooling experience where the teacher is in authority and completely so wrong that all of the students know that it’s all full of bullshit, and they lose their trust in authority, and they realize they have to think for themselves. If education did its job, it would be a radicalizing experience by giving you these incompetents and accusers.
I had a similar – like I benefited from a similar sort of thing in some ways. There were two teachers in particular I can think who did exactly what you’re talk