Michael Hudson: Marxism, Economic Parasites, and Debt Cancellation | naked capitalism

Yves here. Get a cup of coffee. This is a wide-ranging post which discusses many of the topics that Hudson has examined over time, including some of the reasons they attracted his interest. One is how even ancient economies exhibited boom and bust cycles, and how those drivers, above all debt, resemble the ones of our era. Another key discussion is of how pre-Greek and Roman societies had markets that do not conform to libertarian tales of how they must operate.

By Roinson Erhardt. Originally published at his YouTube channel

Robinson: Michael, I read in your book, Killing the Host, that you decided to become an economist after meeting one named Terrence McCarthy, who explained to you why financial crises tend to occur in the autumn after crops are harvested. And this was an interesting question. What’s the story and why was it so compelling for you?

Michael: Well, most economies used to be agricultural economies. That was the center and there was something called the autumnal drain. In other words, when it was time to move the crops, banks needed to provide the credit for the wholesale buyers of grain to pay the farmers for their crop, to buy the crop. That would drain money out of the banking system and if banks were too highly leveraged, if they didn’t have enough backing and reserves, they would go insolvent. Sometimes the debt tended to build up, but there was a kind of rhythm. And I was entranced by the fact that there was a regular rhythm to all of this, almost a calendrical rhythm, not only to the timing of the crashes, but the fact that the crashes got bigger and bigger and bigger as the debt burden grew, until finally the whole system crashed and a lot of debts were wiped out by bankruptcy.

What I didn’t know at that time and what I have discovered in the last 40 years of studying how credit and money began in the third millennium BC in Mesopotamia was that economies from the third millennium right down through feudal Europe and into modern times only used money really at one time of the year when the crops were in. What did farmers do when the crops were being were planting and maturing? Well, people lived on credit. And the idea was that you’d get by after you planted the crops, and you’d buy beer. I mean, we actually have the records from Babylonia that cultivators would buy beer. They’d run up tabs at the bar, which were run by ale women. And just as in modern times, you’ll have wage earners going to the bar and running up a tab until payday. The payday for ancient societies right down through the 20th century was autumn when the crops were in. And in Mesopotamia, the debts all had to be paid on the threshing floor. And that was the only time when you actually needed money for settlements. Same thing in medieval Europe in the 13th century already. You have credit due then. And after fractional reserve banking came in to Europe and North America, you still had the habit of farmers having to spend a lot of money, often on credit, to plant the seeds. They’d run up a tab. They’d hire workers to help with the planting. They might have to rent machinery or in earlier times rent a plow oxen to do some of the plowing. All of these debts came due in the autumn. And so there was a bump.

I think that gave birth in America to the idea that there were business cycles. And of course, it wasn’t simply a cycle. A cycle goes on and on regularly forever, but it was a cycle with a rising amount of debt. And I realized then that a debt crisis was inevitable, not only for the agricultural sector, but all society was becoming in a way like the agricultural sector. Companies would borrow and landlords would borrow to buy buildings all expecting to pay them later. Something would happen, especially if the crops would fail.

Imagine if banks had made loans to the farm suppliers, to the seed companies, to all the others, and all of a sudden there was a crop failure. The water level would go down and there would be a drought. Well, that would cause a failure and there would be defaults all along the line. And what Terrence was talking about was the fact that the water level in the Midwest tended to rise and fall and there was actually an environmental cause of the timing of the financial collapses. So that entranced me and I found economics suddenly to become artistic almost. It was fascinating. And I went to work on Wall Street for banking to decide this because Terrence had convinced me that ultimately the debts couldn’t be paid and there would be a crisis. And that was going to be the big problem facing society. And this is already in 1961.

Robinson: Well, this is just going to be a brief meta-digression, but you’re clearly not just an economist, but you’re an historian of economics. And for my philosophical education, in my philosophical education, we’re constantly looking back, even in writing contemporary papers to Aristotle or Plato or medieval philosophers, because they were often thinking about the same questions that we’re thinking about today. They had brilliant insights and sometimes they were correct. But in the economics case, which I’m much less familiar with, why is it, or can you put your finger on why the history of economics going all the way back to Babylonia in this case and ale women is so important to your theorizing about today’s problems?

Michael: Well, once I began to study the balance of payments statistically for the Chase Manhattan Bank beginning in 1964, my question that they asked me was how much money can Argentina, Brazil, and Chile afford to borrow from us? Can you tell us their ability to pay off the debts and how much debt service they can afford to pay?

Well, I quickly found out that they were already at what seemed to be the limit of their debt service. Again, this was 1964, 65. It was obvious they were already pretty much loaned up. And the Federal Reserve and the government told Chase and other banks, well, don’t worry. We’ll lend them the money to pay you the interest. We’re not going to let them go under because it’s in America’s interest that you lend them the money so they will continue to remain in a US dollar centered economic system. And the Commerce Department would publish through the Bureau of Economic Analysis, the balance of payment statistics every three months in the survey of current business. And table five was their table of US government role in the balance of payments. And they had a whole category for foreign aid in the form of aid to foreign countries for them to pay interest back to the US banks. So what I realized was that much of the American foreign aid never involved a foreign currency at all. And none of the money ever left the United States. The government wouldn’t really send money to Brazil or Argentina or Chile to put in their currency and then they change it back to pay the US. The money would be paid from the treasury right into the New York banks that made most of the loans to these countries. So I saw that countries couldn’t pay the debts that they owed and after I left chase and went on to work for Arthur Anderson and the Hudson Institute.

By the late 1970s, I became the economist for UNITAR and wrote three big articles for UNITAR on third world debt, explaining why the southern countries couldn’t repay the debt that they were on unless the United States government kept lending the money to these countries to pay the US banks, growing exponentially. Well, UNITAR had a meeting in Mexico around 1980, 1979 and 80. The president of Mexico wanted to become head of the United Nations and sponsored this meeting. And I gave my paper there explaining that there was going to be a debt crisis. This was in, I think, 79, three years before the Mexican default triggered the whole Latin American debt bomb. Well, there was a riot.

I realized that the idea that debts couldn’t be paid was unthinkable to most people. They couldn’t imagine debts not being repaid. They could imagine the autumnal drain. They could imagine a business cycle of bankruptcy. They could imagine farmers not being able to pay periodically. But they couldn’t imagine that the system itself was bound to collapse. So I got interested in the history of debt cancellations. And I began to write a history of them. And I was able to go back to Athens and advocacy in Rome, to Athens to Solon, canceling the agrarian debts to avoid a crisis in Athens. And I read the Bible and got back to the Jubilee year and came across isolated reports that there were Babylonian antecedents to all of this, that all of this had come earlier in the Near East. So I began to look and read whatever I could in the Near East. And I discussed my findings with a friend of mine, Alex Marshak, who was a specialist in Ice Age society and writing. And he introduced me to his chairman, Carl Lamberg-Karlovsky at Harvard, who ran the Peabody Museum, which was Harvard’s anthropology department, and they appointed me a research fellow in Babylonian archaeology. So I spent the next eight years studying everything I could in Babylonian, Sumerian, and I found out that there were many, many references to debt cancellations being regular in the ancient Near East. But if you looked in the index of books and articles, debt didn’t appear, debt cancellation didn’t appear. It was just talked about in passing. So I had to read a huge amount.

Well, finally, I convinced Harvard that this is really an important topic to fund. How did debt begin? Why is it that when we have the first interest charges, the rulers decided, okay, we’re going to have interest, but we know that there’s going to be a collapse periodically. If you read Hammurabi’s laws, he knew that there were going to be droughts or floods. So one of Hammurabi’s laws said, when the storm god Ad-Ad hits, there’s going to be a debt cancellation and you don’t have to pay the personal agrarian debts. Well, we decided to set up a series of professors to begin writing an economic history of the ancient Near East. How is it that almost all of the modern economic practices, weights and measures, the equivalent of coinage, metallic, weighed pieces of metal that were used for money, account keeping, interest charges, contracts, all of these developed in the ancient Near East, but almost all of the histories look at Western civilization as beginning in Greece and Rome, instead of much earlier in the ancient Near East. So we decided to do a series of publications of colloquia, and the first one was going to be on privatization in general to discuss what’s the role of the palace in the state relative to the private sector? How is it that rulers were able to cancel the debts and there wasn’t any opposition? Everybody acknowledged the need to cancel debts. Every new king, when they would take the throne of Hammurabi dynasty and the Sumerian rulers before him in the third millennium, every new king would begin rule with a clean slate, restoring a debt-free status quo ante, they would do what became literally the Jubilee year in the Jewish Bible, Leviticus 25. They would cancel the personal debts that were due, not the business debts that were denominated in silver, but the grain debts that farmers owed. They would liberate the debtors who’d been reduced to bondage, and they would return the land that had been forfeited to creditors so that you would have a self-supporting, independent, citizen army of cultivators to be there.

Well, there was general disbelief at the time that the Jubilee year in Judea ever was really followed. There was a disbelief that any society could have actually canceled the debts. And already before we started our colloquia at Harvard, I drafted a history of the debt cancellations and submitted it to the University of California Press. They submitted it to a friend of mine, but he was busy and submitted it to a very rightwing scholar who was a literary critic but didn’t know economic records. And he said, well, just like Rabbi Hillel said, “If you cancel the debts, how are you going to get creditors to make loans again?” Well, the answer was that most credits were owed to the palace and to the temples. And it’s easier to cancel debts if they’re due to you, as China’s government knows. That’s why China doesn’t have the kind of debt problem that America has. It can write down the debts and not drive company’s bankrupt, not drive a financial class broke and not drive the banks broke because the debt’s a road to China and it can create as much money as it wants. Well, that was the situation at the very beginning of banking, the very beginning of credit and interest rates.

I found out that interest bearing debt and the regular need to cancel these debts were woven into the beginning of civilization. And all of this lasted from about maybe, let’s say, 2500 BC. The earliest records we have are debt cancellations by Legash, a port city.in Sumer. Well, this lasted down till about 1200 BC and even into the first millennium, the Assyrians cancel the debts, the Babylonians in the first millennium cancel the debts.

Then there was bad weather around 1200 BC and there was a dark age from the Near East to Europe. The Greek palace economies lost record keeping. There was a population shrinkage and depopulation. And it took about four or five centuries for trade to resume. And in the eighth century BC, finally you had Venetian traders and other Near Eastern traders beginning to move and trade with the Aegean and the Mediterranean and they brought the practice of interest bearing debt to Europe and Europe apparently had no background in actually charging interest on debt. The idea of charging interest is not international, it’s not universal, it was created in one part of the world, Sumer and Babylonia in southern Mesopotamia. This idea of charging interest was communicated to the people that the Near Easterners traded with, namely the local chieftains. And the local chieftains had the idea of chieftainship, but they didn’t have the idea of what archeologists call divine kingship that you had in the Near East. They didn’t have a central authority that had a pledge to obey the gods of justice and cancel the debts when a new ruler came into being. And very rapidly, you had the interest bearing debt, reduced the population to bondage and losing the land.

And all throughout Greece, there were revolutions. The first revolutions were in the just north of Athens and in the Isthmus of Greece. You had the so -called tyrants, meaning populists, overthrowing the aristocracy, canceling the debts, and redistributed the land. You had the same thing happen in Sparta, where they not only canceled the debts, they went so far as to ban money as well as to ban interest. And the last country, the most reactionary country in Greece was Athens. And at the very end, the idea of revolution overthrowing the rightwing oligarchy led to a crisis where Solon was appointed as archon. And he realized the need to cancel the debts and everybody expected him to do what went with it. But he didn’t redistribute the land and his role was not very popular as a result and he actually went into exile because the aristocrats didn’t like the fact that he’d wiped out the mortgage debts that they had. Nobody’s quite sure about exactly what these really debts but he did liberate debt bondage for the Athenians, but he didn’t give the land back to the actual citizens. So it was left to Pisistratus and his sons to actually introduce democracy.

Well, when I had to go to school, I went to a very rightwing school, the University of Chicago Lab School and the University of Chicago, and they represented Pisistratus as being dictators. Well. why were they dictators? Because they had bodyguards. And why did they have bodyguards? Because the oligarchy kept trying to kill them. That’s a problem with reformers. People always try to kill you, just like they do in the modern world. And so, Pisistratus and his sons did many reforms, but then what happened in Athens at the end of the sixth century, was just about what happened in Corinth. A member of a minor branch of the aristocracy canceled the debts and redesigned the whole Athenian political system, Cleisthenes. Morgan, in his great book, Ancient Society, dates the origin of the Greek democracy, not to Solon.but to Cleisthenes and his massive reform. So finally they did reform and this was, the result was of course the Athenian takeoff of all of that.

Well, needless to say, most histories that I’d read of Greece downplayed this fact. And when I went to the University of Chicago, one of the great focuses there was on Aristotle and Plato, who you mentioned. They were mainly Aristotelian, I always liked Plato, but we had to study the synthesis course there, organizations, methods, and principles of knowledge. We had to read Plato’s Republic. And I got the rightwing, bowdlerized theory of what Plato and Socrates were saying in the Republic. And what we were told, well, it’s all about you want a noble dictator. You want a smart person who can run everything. In other words, someone like Robert Hutchins wanted a dictator for the United States. This was a very rightwing faculty. And for them, it’s all about you need a guardian, an intelligent guardian. They had many words for that social king. They expurgated the entire frame of Plato’s Republic, which it may be relevant for our discussion. Shall I mention it?

It began where Socrates is talking to an Athenian. He was complaining about the fact that he has to pay a debt to somebody. Socrates said, well, you know, do you really have to repay something you borrowed? Suppose that somebody has lent you a weapon and you know that if you give that you need you maybe you need to fight in the army for a while or whatever reason you have to give him back his weapon. But you know that he’s a psychotic killer. You know that he’s a dangerous man. Is it right to repay a debt to give the weapon back to this man who you know is going to use it to injure other people? And the Athenian, you know, isn’t really sure. And Socrates says, well, let’s then talk about this debt that you owe. Suppose you give the money back to the creditor and the creditor uses this money to lend to other people and he lends to a poor cultivator and the cultivator ends up having to work off the debt by working on the creditors land, not on his own land. Suppose that the creditors get together and they take over society and all of a sudden they’re running the government and they’re exploiting society and it’s a crisis. Is it right that you should repay these people?

The Athenian says, well why would creditors act in so self-destructive a way? Can’t we just have really smart rulers that are going to prevent this kind of crisis? And Socrates says, well, there’s something about the mentality of wealthy people that’s called wealth addiction or money love. And you have Athenian drama. Aristophanes writes plays about wealth addiction and hubris causing a downfall. And Socrates says it’s really very much like hubris. They can’t help but just wanting more and more. Socrates explained that the whole basis of modern neoclassical trade theory is absolutely wrong.

Neoclassical trade theory says when you get more bananas, you get satiated and each new banana gives you less and less pleasure and so you want to drop it. But Aristophanes and Socrates and the whole of Athenian drama and philosophy in the fourth century said, love of money is not like eating bananas. Unlike food, money is addictive. And the wealthy class, Socrates says, are going to get so addictive that they’re going to just pursue their self-interest and greed of their money love to destroy society. And the Athenian says, well, there must be some way. How do we get out of this trap? And Socrates said, well, for one thing, you’re going to have to have a very special kind of ruler. You’re not going to want to pick your ruler from the rich families because if they come from the rich family, they’re going to grow up with wealth addiction, with money addiction. You’re going to have to have the ideal ruler not have wealth of his own. And he described, you know, how do you get somebody that’s freed from this debt, this creditor disease? That’s what the Republic’s all about. Not a word for that did I ever get at Chicago. They’re all for the creditors. Of course, it was called Rockefeller University. John D. Rockefeller endowed it as a Baptist college.

So I didn’t realize that until I began to write my economic history of antiquity, the collapse of antiquity, and went over all of these. I had to read all the drama and all the philosophy again, and I realized that what the Athenians and the Spartans and almost all the Greeks realized was you have to have some way of canceling the debts, but that requires a political system that does not let an oligarchy develop.

Well, Aristotle then, Plato’s student, took a study with his students of all the constitutions that they could find in Greece. And he found out that all of the constitutions claimed to be democratic, but they were actually oligarchic. And what appeared to be a democracy was yet everybody could vote, but that the political system was centralized in the hands of the wealthiest classes meant that in fact it was an oligarchy. And that was the problem that all of antiquity had. You of course had it much more in Rome that waged war on Athens, burned it to the ground, totally destroyed Sparta at the end of the third century BC, and then began to move up into Macedonia and other areas whose rulers also tried to cancel the debts to hold the loyalty of the population there.

The result was that in Rome, you had the votes weighted pretty much like it is in the United States. The rich people’s votes were worth maybe 10 to 100 times as many votes as the lower people. They had organized by wealth class, just like in America, it’s the donor class that decides how much money to give to the political candidates and whoever can give the most money for them to buy television time and pay bribes and get their judges in control, win. So we’re in exactly the same kind of oligarchy. So Greece, Rome, and all the way down to modern society have never solved the problem that the ancient Near Eastern rulers did. Hammurabi, the Sumerians, the Assyrians, all over the Near East.

It turns out that in order to have what is economic democracy, liberty, freedom from having to run so deeply into debt that you end up working off your debt to the creditor class, the only way is to have a central authority figure who’s pledged to cancel the debts owed to the creditor oligarchy. Well, that seems unthinkable today. They call it socialism. And of course, that is socialism. And you had a century ago, people like Karl Kautsky writing, well, you know, was original Judaism socialistic? Well, in many ways, there was an argument for centuries, over seven centuries with in Judea and Israel over the fight between the wealthy people and the creditors who wanted to monopolize all the land and the debtors. And that’s why we now know that as a result of translating all of this Babylonian economic literature and the pronouncements of kings taking the throne and proclaiming economic liberty, the word was “andorarum” in Babylonian, which is a cognate to the Hebrew word, duroor, duroor andororum. And again, word for word, it was a jubilee year. And it turns out that the jubilee year was not a utopian idea that would have just destroyed economic balance.

Canceling the debts preserved economic balance. That not canceling the debts led to imbalance. And you had that spelled out again and again not only in the Babylonian and Near Eastern literature, but even in Greece. You had a military manual written by a man—I think Greek names must have been taken as pseudonyms, or you’ve got a new Greek name at some point in your life, a man called Tacticus—and he wrote a book about the defense of cities and the attack of cities. And he said, how does a general attack a city? What’s the tactic? Well, the first thing he said was, you promise the citizens you’re going to cancel their debts. They’re going to come over to your side. And then he said, how do you defend a city against the general attacking? You promise the citizens you’re going to cancel the debts. You may or may not free some of the slaves, but you certainly free the debt bondsmen. And that’s what you do. All of this was woven into the very fabric of the ancient mentality.

And what our Harvard group that’s published five volumes of symposia found is that this idea of restoring economic order was based on the understanding that there’s no automatic self-correcting economy, which is the myth of modern time that is promulgated by oligarchs who want to destabilize the economy. But if they know that if they can convince you that whatever is happening is a natural process of economy stabilizing by giving them all the money and impoverishing the 90%, then you’re not going to do anything about it.

People all know how Egyptian hieroglyphics were translated from the Rosetta Stone. They don’t know that the Rosetta Stone was debt cancellation. It was canceling the tax debts to the pharaoh because most debts in antiquity were owed to the palace. As I said, the palace was canceling debts to themselves. And you got Roman Empire, emperors finally, in the tsecond and third century canceling debts, but the debts they canceled were the tax debts. Unfortunately, mainly owed by the wealthy people by that time because everybody else was broke. But this is somehow left out of account.

There’s a book from Plato to NATO that shows how the reconstruction, the fake history of antiquity, the fake history of Greek and Roman philosophy, was all meant to wipe out the context for what was this philosophy all about? What were the social problems they were dealing with? And if they realized that the natural tendency of economies is to polarize and to become unstable, then you need a deus ex machina. You need someone, a ruler from without to override it and say, okay, we’re not going to sacrifice the economy, polarize it, and bring on a dark age just because we support the idea that all debts must be paid. It’s more important that society as a whole survive than that the richest 1% of the population gets even richer by impoverishing the 99%. And that turns out to be the first 3,000 years of ancient philosophy. Not a word in Western civilization.

There’s this myth that Western civilization begins with taking all of this economic and financial and social context into a new context without any of this in the Greek and Roman oligarchies, as if the oligarchy founded civilization instead of did everything they could to destroy it. And once you realize that, you realize that today, why is it that China is pulling ahead? Because it’s centralized the money creation, debt creation, banking and credit as a public utility, which it was in Sumer, Babylonia, Assyria, all over ancient society. It’s a whole different concept of how you structure society. Well, I guess to you, that would be a philosophical problem. To me, it was an economic problem except there’s no role in the economics curriculum to introduce it because they no longer teach economic history and they no longer teach debt.

Well, what shapes the market? You had a market in third millennium BC. Every economy, somebody has a market. But the economists say, no, no, the only market is where there’s no government intervention, no government oversight of weights and measures, no government prevention of monopoly, no government concern for the common idea. Well, this is a rightwing philosophy and quite frankly, it’s neofascist and that’s called neoliberalism today or even worse, libertarianism. The idea of libertarians is you need a centralized economy, a centrally planned economy, but the centrally planners are going to be on Wall Street, not in the government. You have to have it all in the private sector. The banks will be the planners. You can’t have any regulation of the banks. Let them go ahead and impoverish everybody. The neoliberals and the libertarians are on the far right wing oligarchic part of the spectrum. And the socialists have somehow not picked up on this. The socialist parties of Europe have all endorsed neoliberalism as if somehow it’s technological. And so there’s really a blind spot in Western civilization, not only of how civilization really began in the ancient Near East and diffused, but what the basic dynamic is that has polarized Western economies and is leading today to the Western economies polarizing just in the way that the that Rome’s empire ended in a dark age.

Robinson: That was a terrific response. There’s so much to chew on, but I’ll just excuse me. I’ll just throw out a couple of thoughts. First, just quickly, the idea of canceling the debts of an opposing army or the citizens of an opposing nation is just amazing. And of course, that would come up somewhere in history, but I had just never thought of it before. And then the story of Socrates from the Republic. It reminds me not of a contemporary case of debt, but taxation, though you just referred to tax debt. So maybe I’m closer to the mark than I realized. But anyway, a case in which one might not in the present day wish to pay taxes to the United States on the basis that some fraction of that revenue might go to a certain war going on in the Middle East right now that one might conscientiously be objecting to. But just to maybe summarize one purpose you pointed out in your response of looking through the history of economics is that it’s a gold mine, not just for cases, but ideas and successful ones in the case of the ancient Near East that are neglected in contemporary academic economic circles, since you mentioned that they no longer teach debt or economic history. And in this case, it gave you an abundance of evidence for the success of periodic debt cancellation for keeping the economy healthy.

Michael: Yes.

Robinson: OK, perfect. Another sort of bigger question that just comes to mind is you mentioned socialism, you mentioned libertarianism, there’s Marxism, there’s capitalism and so on. I’m wondering if you identify with some particular ism or if you have your own ism, your own sort of name.

Michael: I guess you’d have to say the later because there were many people think that theleft wing is marxist. Marx saw the debt problem. Marx, more than any other economist in the nineteenth century, collected every kind of quotation that he could on the dynamics of compound interest and how rapidly debt tends to double. Any interest rate is a doubling time of some years. There’s a rule of 72. I have a whole chapter on this in the book that we’re discussing today. Marx showed that there would be an inability to pay these debts. And he quoted, for instance, from Martin Luther.It’s ironic, immediately after I read that quote in volume three, I went out and bought a copy of Luther’s economic writing that’s published by the Lutherans. And I found they didn’t have his speeches on usury that Marx quoted. The only place where you can read what Martin Luther wrote about religion and the role of interest is in volume three of Marx’s capital. The Lutherans have expurgated it. That’s not our Martin Luther! It’s just amazing. Just like the Lord’s Prayer, beginning with Augustine, when Christianity was made the official Roman religion, the one thing Augustine did was to follow the anti-Semitism of Cyril of Alexandria and himself. He called on the Roman army to come in and begin killing all of the Christians that they could find, the real Christians, the ones who were called the Donatists, who did not follow the Roman leadership. And Augustine said, what Jesus wrote about is not about debt cancellation, even though Jesus’ first sermon was, he’d come to restore the Jubilee year. He unrolls the scroll of Isaiah and said he’s come to do that. So Augustine said, no, no, it’s not about canceling debt. It’s about sin and especially sexual sin. Let’s have the whole Catholic church all about sexual sin and sexual egotism. And we all have it. We’re inborn with sin from Adam. And the church said, that’s great. And you can expunge the sin by paying the church for an indulgence that’ll get you to heaven. Oh, that’s fantastic. So you have the Lord’s Prayer bowdlerized and to say, forgive us our trespasses as we’ve forgiven our trespassers or whatever. And the word in many languages like German, schuld, means offense and also the payment for settling the offense, as in the vergild. You have not only in all the Indo-European languages, the word for sin and debt payment to be the same because in ancient European society, the main debts people would owe, you didn’t borrow to have to rent land or to live, but you did owe money if you injured somebody and owed them a payment so that you’d make things whole and you wouldn’t have the families feuding with each other, paying vergild, a debt payment to the injured party. If you didn’t pay it, your family would pay it because you didn’t want the families fighting each other in a long feud.

Well, the Catholic Church essentially took debt out of the Lord’s Prayer and by the 13th century, actually already by the 12th century, when you had the Roman church waging the crusades against the other Christians. People think the crusades were against Islam. It was mainly against other Christians to subordinate them to Rome. And in order to fight the Cathars in southern France, in order to fight the Germans who resisted paying tribute to Rome, in order to avoid paying the leading Christian church, the Eastern Orthodox Church of Constantinople. The popes hired warlords to come in, the Normans. And the church made a deal beginning around 1050. First of all, in southern Italy and Sicily, a deal that we will recognize Robert Guisgard as the king if you pledge fealty to become a Roman vassal state. We’ll make sure that the population supports you, but you have to kill all the Christians and the real Christians who were loyal to Constantinople, and you have to kill the Byzantine areas there. Then in 1066, they made a deal with another warlord, William the Conqueror, that, we’ll say that you’re the king, but you have to pay us Peter’s pence and tribute. And if you have to pay us tribute, you have to let us nominate the bishops so we make sure that you’re not going to keep the church income for yourself, but they’ll pay it to us, the popes. And the whole 13th century was all about this fight between the local aristocracy and trying to stop the kings from borrowing money from the bankers who were sponsored by the Vatican, by Rome, to lend money to the Norman kings to fight the enemies of Rome. And that’s how the Magna Carta came into being under King John and reaffirmed under his son, Henry III. To limit his ability to go into debt, the Pope, I think innocent, Pope Innocent III excommunicated anyone who was opposing paying interest to the bankers, Italian bankers, who they sponsored to make the loans to the king to go fight in Southern Italy and Sicily against the Germans, which had gained influence there. So you had Christianity ending up worshipping debt, not its cancellation. This is not in most histories of the Crusades. But the first crusade was against Sicily, Southern Italy, and England.

And it was on the basis of that, that the Pope then was able to mobilize massive armies to end up attacking Constantinople and what’s now Yugoslavia, and take over the alternative churches to Rome. There were five patriarchy: Constantinople, Alexandria, Antioch, Jerusalem, and Rome was at the very bottom of the list. It was a disaster in the whole 10th century. Even the Catholic Church says, well, this was the pornocracy, the rule by the Harlots, when local families were able to just appoint their own members as popes.

I’m now writing a history of debt from the crusade to the modern times, and I didn’t realize how the whole context for the reappearance of debt in Western civilization was all led by the Church, culminating in the Medici Pope Leo X in 1515 having a big conference legitimizing the charging of interest ever since. If you look at the history of how economies have evolved and how society has evolved from the point of view, what are their debt relations? You get a completely different perspective of causality and what has been shaping the politics, the political system, the social system, religion, the social values. And you realize how the big fights of all of the church councils, the economic fights, the peasant revolutions of the 14th century, 15th century onward, they were all about debt. And yet the topic is as expurgated from thought today as much as sex wasn’t talked about before Freud. So what I want to do for debt is what Freud did for sex. It really is important.

Robinson: That’s awesome. Speaking of compound interest and the book we’re talking about today, Killing the Host, it should be obvious to our listeners from the title that the main analogy you’re drawing is between something and then a parasite. So for those of our listeners who might have heard the acronym FIRE, but might not be familiar with it, what is the FIRE sector today? And how explicitly do you liken it to a parasite?

Michael: Well, the fire sector is finance, insurance, and real estate. And when I went to school to get my Ph.D. in the 1960s, the the textbooks all had happy pictures of banks lending money to a factory. And the factory would be employing workers, carrying their lunch boxes, you know, to work. And then the workers would borrow from the, borrow, spend money and buy a house. And it was all part of a circular flow. But that’s not what banks lend money for. Banks don’t, never made loans for factories or new means of productions. Banks make loans against collateral. They’ll make a loan to you to buy a house, but they have the houses as a collateral. They’ll make loans for a company to buy an existing industrial corporation but they won’t make loans for an industrial corporation to build up its business and to expand its business. That’s usually done by the stock market or initial public offerings, but mostly by retained earnings. Corporations self-finance themselves, just like movie makers. A lot of movie makers begin by borrowing against their house that their family had left them to get the money to make a movie and end up having a movie to show the producers to try to get going.

So it turns out that 80% of bank loans are collateralized by real estate. The biggest market all the way from the third millennium BC has been loans against real estate, against land. And today, that means that the banking interest, the finance, insurance, and real estate sector…. Banking and real estate are in symbiosis. As is the insurance companies that insure the house, a bank will not give you a mortgage unless you buy insurance for it, usually from a friend of the bank. So they’re all part of a financial layer. And this bank lending does not increase income except their own income. It doesn’t increase production because it’s making loans. All the mortgages are against properties that already exist, against houses that exist or office buildings that exist or corporations that exist. And they’ll make loans for you to come in and break up and destroy a corporation. You’ll make loans to a private capital company to borrow money to buy Sears and drive it bankrupt. You’ll lend the money to buy Toys R Us and drive it bankrupt, but not to increase the business, just to smash it, carve it up, fire the labor, or buy a company and then fire the labor and move it offshore and use Chinese or Asian labor instead.

So the banking sector is basically parasitic in the sense that it doesn’t generate its own income. What a bank lending does is it goes up and up and up and increase the price that it costs to buy a house. Banks continue to lend more and more money against houses. I won’t go into that. But the result is that somehow they’ve, instead of saying, well, what banks do is increase the amount of debt that you have to take on to buy a house of your own to live in, to increase the amount of debt that a corporation has to take on just so it’ll have debt. So, no corporate raider will want to borrow money to take it over because the company has already taken a poison pill of running into debt to buy a competitor or some other use just to pay out as dividends to management, just to protect itself.

So what you’ve done is a whole change in how people perceive reality. Economists are taught not to understand how reality works. They’re taught science fiction. They rightly should be a literature department in the humanities section for science fiction because they talk about a parallel universe. So that’s when I came upon the metaphor of parasitism. People think of parasitism as doing what certainly banks do. They siphon money out of your income. You have to pay in America and Europe more and more of your wage income as interest to the banks. Corporations have to spend more and more of their income on debt service. The government today has to spend more and more of its income on the interest payment to bondholders of its public debt.

How do you get people not to think of this? Why is it that people think the banks are our friend? They are what enables us to buy a house, even though it enables them to buy a house that requires the whole population to end up paying more and more of their income for housing. No longer just 25% of their income as was the norm for bank loans when I was working on Wall Street in the 1960s, but now the average American has to pay 42 % of their income, all government guaranteed in order for their housing. So they’ve more than doubled, just about doubled, the amount that many families have to pay for their housing and that’s parasitism.

And what I realized the parasitism is not only taking more money, it’s taking over the brain so that people think that the financial sector is actually helping them and actually contributing to national income and gross domestic product. You had a few years ago, the head of Goldman Sachs come out and saying, you know, Goldman Sachs’ partners are the most productive workers in the United States. Look at how much money they get paid as their bonuses. All of their bonuses are counted as GDP. All of the interest that people pay, interest is a cost of doing business, as if all of this helps business. That’s added to GDP. If wage earners fall behind in their credit card debt and the credit card interest says, oh, now you have to pay a penalty rate. We’re raising it from 19% to 30%. All that added percentage is counted as providing a financial service and it’s counted as GDP. So the financial sector has taken over the very concept of what economic growth is, the very concept of GDP and national income to make it think that yes, the bankers and Goldman Sachs, the financial sector, the corporate raiders, Blackstone and BlackRock, they’re all adding to our prosperity. Well, the result is you have rightwing critics like Krugman saying in his editorials in the New York Times, “How can the American public be so stupid? They don’t realize how wonderfully we’re doing. Look at the rich people are buying better yachts than ever. They’re getting bigger and bigger houses. They’re getting wealthier and wealthier. Why is it that voters don’t think that they’re doing better under Biden and the Democrats?”

Well, what Krugman has is the precondition for being taken seriously. The Nobel Prize for libertarian, for neoclassical economics. The condition of being an economic guru is not understanding how the economy works. If you understand how the economy works, largely financially, and how economic planning is centralized in the financial sector, that disqualifies you. You’re called overqualified or overeducated. That’s not economics. We call that an externality. Well, debt is an externality, global warming is an externality, crime and homelessness is an externality. Everything that’s a problem is called external to what economics is all about, which is how you can get richer by borrowing from the bank and going further into debt and the creditor will help you.

Well, this is science fiction and the parasite has taken over the brain in a sense that they’ve taken over the financing and endowing of business schools, of colleges to make sure that the economics professors that are appointed teach this mythology of how the economy really works on barter. You don’t really have to look at debt because we owe it to ourselves. Well, when we owe it to ourselves, that means the 99% owe it to ourselves, the 1%. Reading 1984 will give you a help in understanding what Orwell meant with double speak and double think and all that. That is basically how economic graduates end up being miseducated, and they’re hired really as public relations representatives for the financial and banking sector.

Robinson: The multiple sort of applications of or facets of the parasite analogy make it quite cool. So, one idea that you’ve just been alluding to, like the cordyceps mushroom that takes over an ant’s brain, the fire sector takes over the brains of the consumer. But do you also see it as taking over the brain of the host in the form of the government?

Michael: Yes, because after all, who is the government going to appoint as a Treasury officials and central bank officials? The donor class, the financial class, for instance, will look at, well, who are the members of the Senate Banking Committee and the House Banking Committee? Well, for the Democratic Party, for instance, committee chairmen have to raise a given amount of money to contribute to the Democratic National Committee. And who is going to raise the most money? Well, the donors are going to say, well, we now have our guy, or our lady running the banking committee. Let’s make sure that we give a lot of money to his campaign. And if that committee head would do something that we don’t like, we will give campaign contributions to his or her opponent, whether it’s a Democrat or a Republican. It doesn’t really matter. They have different rhetoric, but they both represent the donor class. Same thing with pharmaceuticals. The drug companies will decide, you know, who do we want to be the committee chairman, the military industrial complex will be, who do we want to head of the foreign affairs and the military committees? We want our guys to be there.

So essentially you have a privatization and financialization of the congressional committees that make the laws, that appoint the bureaucracy, that enforce or fail to enforce the laws. And this all is invisible. They call it a democracy because the Americans do get to vote for who have been able to raise the most money from the donor class, but the game’s already fixed. They have a Tweedle Dee, Tweedle Dum choice. And no matter who they pick, it’s going to be who the donor class has selected to represent them in Congress in one party or the other.

Robinson: Well, now that we’ve talked about the parasite side a fair amount, but the host now. So killing the host, the host is the economy. What constitutes the killing of the host? Is it a financial crash or is that just like a symptom of the sickness of the host?

Michael: Well, the crash usually ends the parasitism because the crash brings down the parasite too. A smart parasite in nature wants to keep the host alive until finally it’s just about over and that’s when it lays the eggs and the eggs will eat the host’s body. The economics actually uses, its vocabulary uses the word host country. A host country to investors is a country that lets foreign investors buy its infrastructure or its companies in order to gain control of them. So the country will let an American or European company in and the American affiliate will then borrow money from a US bank or perhaps a consortium with European banks and they’ll borrow the money to invest and they will essentially not pay taxes to the host country government because they’ll pretend to borrow the money from a wholly owned affiliate offshore in a country that doesn’t have any income tax. It could be Liberia, it can be Panama, a country that isn’t a real state, that doesn’t even have its own currency, which would pose a devaluation risk, but uses the US dollar as its currency. So essentially the government is starved for money. And the International Monetary Fund and the World Bank will encourage countries to develop exports that, for instance, plantation exports and tropical agricultural products, that don’t compete with American products, basically, not growing their own food. You’ll have the IMF and the World Bank encouraging a debt profile that ends up where countries have to borrow more and more money to maintain their foreign exchange rate. And the IMF will subsidize a country going fastest to ruin, as Adam Smith would say. It’ll keep lending them money as long as they follow policies that enrich American corporations and their countries, or that help the kind of world specialization of labor that American economic strategists want to see in order to make America the indispensable nation, the only nation that can wreck other economies if the Americans decide to impose sanctions or go to war or finance regime change or political assassination or do to them what it did in Guatemala, in 1950s in Iran, in 1954 in Libya, and making sure that the world remains dependent on the United States.

So the countries have to go further and further into debt. They have to borrow more and more money from bondholders. And you’re seeing that in Argentina these days. Argentina, again and again, is ruled by probably the most rightwing oligarchy in Latin America. It may be the most rightwing oligarchy in the world for the last 100 years, certainly, even more so than Pinochet’s Chile. And you’re having a basket case. The oligarchy basically taxes the economy as a whole so heavily that it really can’t have its own industry. It can’t have its own independent agriculture. And all the debt is borrowed in US dollars to maintain the ability to repay the bondholders. Well, the Yankee bondholders that are being attacked all the time in the press are really Argentinians themselves that are operating offshore in the Dutch West Indies and Panama and other places holding Argentina’s foreign dollar bonds, pretending, oh yeah, these dollars are awful, but they’re American bondholders are afraid to buy Argentina’s debt because they’re understandably looking at these statistics like I did 50 years ago, 60 years ago, and saying that, well, there’s no way they can pay unless America lends to them. It’s all just an artificial bubble.

Basically, countries are kept afloat until finally they’re about to go under. And that’s when the IMF will talk to the oligarchs and say, well, we can’t really make any more loans to them. Move your money out now. We’re going to make, lend enough money to Argentina or Chile or other countries to support the currency. Move your money out of local currency into dollars as quick as you can. And then we’ll pull the plug and we’ll let the currency collapse. And of course then, because we know that you’re going to be voted out of power by a socialist group. And then they’ll say, look at how the economy’s collapsing. It can’t pay the debts because we’re not lending it any money. Like we only lend money to rightwing neofascist governments. And if you’re not a fascist, you don’t get the money. That’s Janet Yellen’s basic principle. If you don’t have an oligarchy, you’re not getting the money. If you try land reform, we’ll do to you what we did to Guatemala. You don’t get any money, you get regime change. Essentially they squeeze them until finally people are so desperate they vote for a nutcase like Mr. Miley in Argentina who will just say, well, you know, to hell with it, let’s just adopt the US dollar itself. Let’s go back to using dollars because then the wealthy people won’t lose any money at all. For you people, you know, the 99%, it doesn’t matter because you don’t have any savings anyway. But we want to dollarize so we don’t even have to worry about foreign exchange rates, the country’s completely a basket case.

And as I mentioned, this goes back a hundred years. Herman Kahn, my former boss at the Hudson Institute, used to give a point saying, you know, the 1950s, the 1960s were really a great period and yet there was a malaise back then. People didn’t realize how good it was. He said, one country realized how good it was. That was Argentina, because they weren’t good. They weren’t getting any of it. And in fact, way back in the 1910s, 1920s, before World War I, everybody thought Argentina was going to end up the richest country in the world. It had everything, a great environment, rich land, herds of cattle, seemed to have everything. But it also had this truly parasitic ruling class. And it was fascist before there was fascism. And it’s always had a stranglehold in Argentina. And Argentina is a case where there’s no solution to the economic problem in the existing structure of the economy and society. It would require a Maoist revolution to clean out this oligarchy, and somehow enable Argentina to use its land, its oil, its raw materials, its mineral rights, all for the economy at large, for the population at large. But it’s not going to do it because the Americans funded a huge terrorism program in the wake of Pinochet in the 1970s, mass terrorism and mass murder of labor leaders, of progressive economists, of land reformers and essentially any attempt at progressive economic reform in Argentina is a death penalty. So to answer your question, that’s what happens when finally the parasite realizes it’s got everything it can, let the economy die, carve it up and take what you can and move your money out of Argentina into new countries, into Africa, into Asia and repeat the process.

Robinson: Taking a country like Greece, for example, I think the conventional wisdom is that you heal an alien economy with austerity measures. And I’m wondering where you see austerity measures as fitting into this story that you just told. And if they’re not the solution, then what is?

Michael: Well, the role of austerity is to prevent economic growth. The role of austerity is number one to prevent labor from raising its wages. One of the key things that IMF borrowers have to agree is you break the labor union movement. The American National Endowment for Democracy will come in and do what democracies do. You kill the labor leaders and their organizations. Austerity prevents an internal market from growing to enable a domestic industry to start because there’s no market because you have austerity that impoverishes the economy so that the wage earners cannot afford to buy what they produce if any employer would try to produce industrial goods. So austerity maintains other countries’ dependency on the United States and prevents their economic growth into competing in any way with America and its client states that used to be Europe until America decided they’d better break up Europe Argentina-style as well.

Robinson: Well, maybe returning to the case of the United States and the fire sector. I think last time we discussed the fact that there would probably be, or there would certainly be immense opposition to massive debt write downs that would require a serious political revolution. But something that we didn’t talk about is what the fire sector ought to look like. So assuming that there were debt write downs and student debt, all these housing debts, these sorts of things were wiped out, how would we prevent this from occurring again? What should the fire sector look like going forward?

Michael: Well, this is exactly what Adam Smith, John Stuart Mill, Ricardo Marx, Alfred Marshall, the entire 19th century British political economy, classical economics, was all about that very question. That’s why it’s not taught. That’s why there’s no more history of economic thought in the economics curriculum, because they discussed it and they pretty much solved the problem. They said, what we have to do to prevent this and to enable industrial capitalism to grow is get rid of the remnants of feudalism. The parasites to Adam Smith and the French physiocrats before him and the British socialists who followed were the landlords. This is the hereditary heirs of the warlords who were sponsored by the Catholic Church to conquer England, inherited the land, and charged rent. And Mill said, they make rent in their sleep. Well, the common policy supported by all classical economics and in fact was also, the first plank of the Communist Manifesto was a land tax. The value of the price of land has rises and rises as communities become more prosperous, as the rent of location goes up, as living in a good neighborhood with schools, museums and parks rises. The price, what people are willing to pay and rent rises. But you don’t want this paid to a landlord class because they just use it to buy more land. This should be the natural tax base. And people now associate that name with Henry George, who was a journalist in America that promoted it, but it was the basis of all classical economics that was based on value and price theory. And the distinction between value and price was price is the excess of value that represented economic rent. Value was the cost of production. But land doesn’t have a cost of production. Nature produces land and the owner will have a privilege of charging rent on it. But this rent, because it’s not productive, it’s unearned income. This rent is a natural tax base.

And as late as 1913 in the United States at the end of the year, when they introduced the income tax law at the beginning of World War I soon thereafter, only 1% of the American population had to file an income tax return because the cutoff didn’t begin until you were rich enough to be either a wealthy landlord or a banker. Finance, insurance, and real estate income were basically the only forms of income that were taxed. And under classical economics basically said, well, we don’t want a landlord class. We don’t want a predatory banking class that just doesn’t make money to help the economy grows, but just is exploitative. So banks should be a public utility. Land should be a public utility. And housing should be a human right. And insurance should basically be public. And monopolies should not be privatized because if you have a monopoly and usually banks will insist that governments pay their debt by creating monopoly to sell off. That’s how England created the East and West India Company, the South Sea Bubble in France, John Law’s Mississippi Bubble and the Bank of England was a bank monopoly created to sell off 1.2 million pounds sterling to retire Britain’s war debt.

So the idea is classical economics was economies should be based on value, not rent. You get rid of the rentier classes, you get rid of the landlord class, the monopolist class and the financial class. And that was where everybody called themselves socialists in one way or another in the last quarter of the 19th century. You had Christian socialism, Marxist socialism, you even had libertarian socialism. You’d have utopian socialism, scientific socialism. I mean, you could look, just Google and find all the different kinds. But the common denominator of all of them was you tax economic rent. And if the economic rent of increasing location is paid as taxes, then it’s not available to be paid to the banks. Well, right now, America and Europe no longer have a hereditary landlord class. What they do have is a hereditary financial class. The landlord ended up becoming bankers and financiers. They sold the land. And now anybody can buy land. You don’t have to have an ancestor who killed the local population to take it over. You can buy your own home and land, but you have to borrow the money in order to afford to do it. So the banking sector today, the banks are in the same position that landlords were in the mid 19th century.

And so the ideal, you ask what’s the solution, the ideal would be Adam Smith’s idea of a free market, a market free from economic rent, a market free from landlords, a market free from monopolies, a market free from a predatory banking sector. Well, now that you have today’s economic curriculum that has expurgated this whole discussion of classical economic philosophy, they’ve redefined what a free market is. A market free from government regulation, a market free from government anti-monopoly regulation, a market free from taxing the land so that the economic rental value will be paid to the banking class that’s lending you money to bid up the price of land. And the bankers are playing the same parasitic role that the landlords played in the 19th century. And if you read Adam Smith and John Stuart Mill, Principles of Political Economy, and some of their applications to social philosophy, you realize how Marx was simply in the train of the classical economics. And he sort of refined classical economic analysis. And that’s what volumes two and three of Capital were all about, rent theory and debt theory. Financial theory is basically debt theory. And that’s why the fight against Marxism isn’t really against Marx alone, it’s against Adam Smith. It’s against John Stuart Mill. It’s against the whole 19th century classical economic reform of scientific economics itself.

Robinson: Wow. Well, again, Michael, as with our last discussion, your encyclopedic knowledge of these issues is pretty astounding to be on the other end of. And thanks again so much for taking the time to have this conversation with me.