An Exchange of Views on the Economic Theories
Relating to Capital Goods, Credit and Financial Reserves

Edward J. Dodson, Editor

[The following exchanges occurred over a period of several days during January 2009. The primary participants included: Fred Foldvary, Mason Gaffney, Michael Hudson, and Jeffery Smith. Edward J. Dodson, has afterward inserted a number of comments but did not participate in the actual exchange]

MICHAEL HUDSON
… ... the HGSNY... diagram ... capital receives interest.
… I have for a long time suggested that the HG Schools and Institutes stop using the term "interest" for the return on capital goods. HG used the term that way, but it is antiquated, and it is confusing to call this "interest" when economists and most folks think of interest as the financial return on funds.
… The return on capital goods can be called a "capital-goods yield" or "return on capital goods" or "rental of capital goods."

ED DODSON (afterward)
… So long we in the Henry George Schools and the Institute use Henry George's books as text for the courses, we cannot ignore George's use of "interest" as the return to capital goods (or, expressed differently, as the appropriate claim on total wealth produced by owners of capital goods). What most of us do as teachers, I believe, is to explain to students the different uses of the term by political economists, economists today, and the business world.

MICHAEL HUDSON
… Also I have long argued for calling the factor "capital goods" rather than "capital," as this makes it clear that it refers to the input rather than to money or other financial capital. But HG schools have stuck to their confusing term "capital."
… It seems to me that the HG Schools do understand that "capital" and "interest" refer to capital goods and its return, rather than financial capital, but their terminology invites confusion.

ED DODSON (afterward)
… In my own teaching, I do use the term "capital goods" consistently. This emphasizes the point made by George that what we include as wealth must be material in nature and be produced by labor and other capital goods. Others who teach George's political economy will have to speak for themselves.

MICHAEL HUDSON
… "Profit" can be a return to any factor, so it would not be apt to call the specific return on capital goods "profit."

ED DODSON (afterward)
… I tell students that the term profit describes what happens when businesses take in greater revenue than they expend producing goods, providing services, or as a result of successful arbitrage, speculation in commodities, the stock market, futures investing and any other endeavor where financial reserves change hands.

MICHAEL HUDSON
… I think the meaningful meaning of interest is the premium paid to shift purchases from the future to the present day. Interest is about time. Profit is any revenue minus cost. Time-based interest can be a return to any factor, not just capital goods.

ED DODSON (afterward)
… This is one aspect of why a person with financial reserves is willing to allow another person to temporarily take possession of the lending party's purchasing power. The borrowing party makes a calculation of the costs of these funds versus the benefits associated with whatever use the funds will be put.

MICHAEL HUDSON
… HG had a faulty explanation for interest, i.e. the gain in value due to natural increases in crops etc., and he did indeed mix up interest based on time and interest as a return on capital goods.

ED DODSON (afterward)
… My own study of George's presentation of interest is less critical. He was far less concerned with the specific calculation of the return to capital goods versus the return to labor than subsequent generations of economists have been. His main observation was that under competitive conditions the return to capital goods is steady - high enough to stimulate postponement of consumption in order to create capital goods but not so great as to result in the kind of wealth and income concentration he observed in all societies where capital goods production was significant.

***

MICHAEL HUDSON

… "Money-interest is payment for privilege, the monopoly granted by law to commercial banks to create credit and monetize the debts they create for their customers.

FRED FOLDVARY
… We need to distinguish the economic interest rate due to time preference, a natural phenomenon, from monopoly-induced premia that get added to what Swedish economist Knut Wicksell called the "natural" interest rate, or also the forced reduction of interest rates, subsidies to the financial firms and landed interests from the Fed money expansion. Without privilege, there is still a premium for shifting purchases from the future to the present, caused by the general preference for goods now rather than later (time preference).
… Indeed we should now be focusing on the relationship between land rent and financial follies.

***

MICHAEL HUDSON

… …interest is imposed from ³outside² the ³real² economy.

FRED FOLDVARY
… You reject time preference?

MICHAEL HUDSON
… It thus eats INTO profit and siphons off rent and wages as well.

FRED FOLDVARY
… In a pure market, entrepreneurs seek to borrow funds in order to start or expand enterprise. Time prefernece creates a quantity demanded for funds greater than the quantity supplied from savings at a zero rate of interest. This generates a positive rate of interest to clear the market for loanable funds.
… The interest payment is voluntarily agreed to because the benefits of having funds sooner is greater than the interest expense. So in a pure market, interest does not eat into other gains. In today's economy, government-granted privileges to FIRE indeed siphon off rent and wages. But this is subsidies rather than interest per se.

***

MICHAEL HUDSON
… To me, rent is unearned and extractive

FRED FOLDVARY
… Yes

MICHAEL HUDSON
… Not a return to a "factor of production."

FRED FOLDVARY
… But land is a factor, e.g. an input. Land users pay for the use of that factor. That payment is a "return" to whomever has a legal or contractual right to that income. So I don't understand your statement that rent is not a return on the land factor.

***

MICHAEL HUDSON
… The payment is for the right to USE land. As such, it is an access fee. If "land" is a factor of production, then so is air. It is "there." copyrights, etc.
… The key is, what has a COST to be REMUNERATED. As I said in my earlier note to Mason, the argument here is much like the wave vs particle theory of light. I'm not saying the other is wrong. But for my purpose of value/price analysis, I focus on land rights. It's the site value -- which is a legal creation.

***

FRED FOLDVARY
… In a pure market, entrepreneurs seek to borrow funds in order to start or expand enterprise. Time preference creates a quantity demanded for funds greater than the quantity supplied from savings at a zero rate of interest. This generates a positive rate of interest to clear the market for loanable funds.
… The interest payment is voluntarily agreed to because the benefits of having funds sooner is greater than the interest expense. So in a pure market, interest does not eat into other gains. In today's economy, government-granted privileges to FIRE indeed siphon off rent and wages. But this is subsidies rather than interest per se.

JEFF SMITH
… In a true free market, you may have such a level playing field and so much savings and so little old-fashioned growth that you could have more venture capitalists than borrowers, so investors would merely expect a percentage, instead of a fixed rate, and banks might not charge borrowers but depositors, like house-sitters can get paid, instead of tenants paying. So, your "interest" can be a feature of an unfettered market but not a necessary or exclusive feature.

***

MASON GAFFNEY
… I have suggested that indebted landowners be taxed on their equity, and the mortgagees be taxed on the value of their unretired notes.

FRANK WALKER
… An interesting concept, Mason. I assume putting this proposal into practice will require the tax assessor/collector to (1) keep track of the unpaid balance of notes secured against land and improvements thereto; and (2) pro-rate loan balances between (a) the value of the improvements which serve as part of the collateral and (b) the value of the land; and (3) assess tax only on that portion of the loan balance which is allocated to land value.

***

YISROEL PENSACK
… This statement from Michael Hudson underscores what I wrote earlier about his financial-legal-institutional approach to social-economic analysis:

Michael Hudson: "...for my purpose of value/price analysis, I focus on land rights. It's the site value -- which is a legal creation."

Libertarians tend to share that fallacious perspective that site value -- and land value in general, for that matter -- is merely a legal creation.
… Georgists do not see it that way; we see it as an outgrowth of natural law, not dependent on man-made law. In the old Soviet Union, supramarginal land still had imputed or imputable rent value even though there was not a private land market. And that is ALWAYS true in all times and places regardless of the legal system or lack of one, or the existence of a "land market" or lack of one. Rent simply exists (if there's more than just one grade or quality of land in use), regardless of whether rent is "paid" or not and regardless of whether there's a legal right to "collect" it or "demand" it or not.

***

FRED FOLDVARY
… But land is a factor, e.g. an input. Land users pay for the use of that factor. That payment is a "return" to whomever has a legal or contractual right to that income. So I don't understand your statement that rent is not a return on the land factor.

MICHAEL HUDSON
… The payment is for the right to USE land. As such, it is an access fee. If "land" is a factor of production, then so is air. It is "there." copyrights, etc.
… The key is, what has a COST to be REMUNERATED. As I said in my earlier note to Mason, the argument here is much like the wave vs particle theory of light. I'm not saying the other is wrong. But for my purpose of value/price analysis, I focus on land rights. It's the site value -- which is a legal creation.

***

MASON GAFFNEY
… "Finance" is an abstract term, though. How about identifying its members, with names and specifics and degrees of influence? There are millions of small pensioners who are the savers behind the firms who represent them.

RESPONDENT (unidentified)
… Well, the problem IS abstract. It's the idea of 'financializing' pensions, Social Security, etc. These savers are part of a financial system that is itself not necessary. Much as I like to engage in ad hominum arguments regarding Georgists (where personalities DID scuttle Georgism), the financial system is a structure that is itself the problem much as absentee land ownership would be.
… Instead of pointing to individuals, I¹d point to the lobbying behind rewriting the bankruptcy laws. I guess Paulson and Bernanke behind the $8 trillion bailout would qualify, topped by bubblemeister Greenspan. But even he was only a shil for the system, which is what provided the vast sums to finance the same public relations ³think tanks² such as American Enterprise, Cato etc that oppose land taxation as much as they oppose financial reform.

***

MICHAEL HUDSON
… Michael Hudson: "What gives the FIRE sector its power is the rising power of finance to act as central economic planner. Georgists don¹t like landlords; but behind landlords stand the financial interests."

MASON GAFFNEY
… Mason here. Mortgagees are a power, I agree; some Georgists are inadequately aware of this, and you, Michael, perform a useful role in raising their consciousness on the point. For a symbol, the NAREB rents its D.C. offices from a labor union; the Mortgage Bankers Assn (MBA) owns its own palatial building.
… Be aware that J. Rupert Mason of San Francisco, a patron of the HGSSS there, was hypersensitive on municipal bonds and the conflict between them and holders of notes on individual landholdings.
… "Finance" is an abstract term, though. How about identifying its members, with names and specifics and degrees of influence? There are millions of small pensioners who are the savers behind the firms who represent them.

***

MICHAEL HUDSON
… Right, finance extracts interest from revenue other than land rent. But 70% of bank loans are mortgage loans."

MASON GAFFNEY
… Mason here. That is a recent cyclical development. For several decades after the 1930s most bank assets were U.S. bonds. I rather expect after the current shakeout we'll get back to that situation.

***

MICHAEL HUDSON
… RSF delegated total authority to its 'project director' Cliff. His position is therefore their position.

MASON GAFFNEY
… That was certainly true for a while, to my surprise. Cliff has stepped down now, I couldn't say if he still dominates the Board by some kind of hypnosis. I'm not sure who's in charge now. Note, though, that Cliff seems to be a separate power center from "the AIER crowd", so there has been some rotation.

***

FRED FOLDVARY
… I think the meaningful meaning of interest is the premium paid to shift purchases from the future to the present day. Interest is about time. Profit is any revenue minus cost. Time-based interest can be a return to any factor, not just capital goods.

MICHAEL HUDSON
… This is Austrian theory, and it is antithetical to everything that I understand about George. It cannot be claimed today. Interest-bearing debt is created as a privilege by banks.
… The antiquated idea that "interest is about time" came from somebody saving up real money. Today, the link with gold and "money" and ³saving² that represented labor no longer holds.
… Debt creates savings. Bank loans create bank deposits. This is basic post-Keynesian finance. I don¹t expect you guys to agree with me, but I want to get on record the serious disagreement I have with people who do not understand finance, such as the Austrians. One cannot be an Austrian and a Georgist.
… I'm not saying this ad hominum. Fred DOES correctly understand the Austrian posotion. At issue is the definition of "money" and "saving" at the most basic level. (Randy Wray, Hyman Minsky and our UMKC group have been pressing this for many decades, as have our Berlin group.)

***

MICHAEL HUDSON
… Yes, of course I reject time preference, for reasons in my previous post.
… I also reject the idea that there is such a thing as a ³pure² market.
… Fred's confusion explains why we need statistics. CEOs today borrow to take over other existing enterprise, to buy back their shares, and to pay dividends.
… They do NOT borrow to ³expand enterprise.² This is a fatal, fatal error. Capital investment is financed out of retained earnings.
… My point is that instead of trying to think of science fiction about a parallel universe in your head, why not look at the facts.
… Unless Georgists do this and use everyday vocabulary to describe these facts they will be treated as cultish and off-the-wall. When Fred makes statements such as in this and the previous post, I rest my case.

***

MICHAEL HUDSON
… interest is imposed from "outside" the "real" economy.

FRED FOLDVARY
… You reject time preference?

MICHAEL HUDSON
… It thuseats INTO profit and siphons off rent and wages as well.

FRED FOLDVARY
… In a pure market, entrepreneurs seek to borrow funds in order to start or expand enterprise. Time preference creates a quantity demanded for funds greater than the quantity supplied from savings at a zero rate of interest. This generates a positive rate of interest to clear the market for loanable funds.
… The interest payment is voluntarily agreed to because the benefits of having funds sooner is greater than the interest expense. So in a pure market, interest does not eat into other gains. In today's economy, government-granted privileges to FIRE indeed siphon off rent and wages. But this is subsidies rather than interest per se.

***

MICHAEL HUDSON
… I think we're arguing at cross purposes here.
… You're absolutely right: there IS a site value. Ted above all has shown this. And it was a failure of the soviet system not to recognize that you shouldn't put a chocolate factory in a prime location just across the Moscow River from the Kremlin.
… I'm a big fan of von Thunen. Site value DOES exist. Often via public transportation, as Fred Harrison has shown.
… But my focus is that this site valuation does not entail a COST, except for that of public infrastructure (not the land itself, which nature provides freely).
… As in my discussion with Mason, I think (hope?) we agree on what actually is happening. The question is how best to express it in language.
… There can be different expressions for different purposes. As a classical economist, my point of reference is (market) price minus (cost) value. This is how I measure unearned income.

***

YISROEL PENSACK
… This statement from Michael underscores what I wrote earlier about his financial-legal-institutional approach to social-economic analysis:

"...for my purpose of value/price analysis, I focus on land rights. It's the site value -- which is a legal creation."

… Libertarians tend to share that fallacious perspective that site value -- and land value in general, for that matter -- is merely a legal creation.
… Georgists do not see it that way; we see it as an outgrowth of natural law, not dependent on man-made law. In the old Soviet Union, supramarginal land still had imputed or imputable rent value even though there was not a private land market. And that is ALWAYS true in all times and places regardless of the legal system or lack of one, or the existence of a "land market" or lack of one. Rent simply exists (if there's more than just one grade or quality of land in use), regardless of whether rent is "paid" or not and regardless of whether there's a legal right to "collect" it or "demand" it or not.

***

MICHAEL HUDSON
… The payment is for the right to USE land. As such, it is an access fee. If "land" is a factor of production, then so is air. It is "there." copyrights, etc.
… The key is, what has a COST to be REMUNERATED. As I said in my earlier note to Mason, the argument here is much like the wave vs particle theory of light. I'm not saying the other is wrong. But for my purpose of value/price analysis, I focus on land rights. It's the site value -- which is a legal creation.
br> ***

MICHAEL HUDSON
… To me, rent is unearned and extractive.

FRED FOLDVARY
… yes

MICHAEL HUDSON
… not a return to a "factor of production."

FRED FOLDVARY
… But land is a factor, e.g. an input. Land users pay for the use of that factor. That payment is a "return" to whomever has a legal or contractual right to that income. So I don't understand your statement that rent is not a return on the land factor.

***

MICHAEL HUDSON
… CEOs today borrow to take over other existing enterprise, to buy back their shares, and to pay dividends.

FRED FOLDVARY
… Agreed. But firms borrow for other reasons also.

MICHAEL HUDSON
… They do NOT borrow to "expand enterprise."

FRED FOLDVARY
… Never, not even small business?

MICHAEL HUDSON
… How do you know?

FRED FOLDVARY
… Capital investment is financed out of retained earnings.
… Always? What about new firms? MICHAEL HUDSON
… why not look at the facts.

FRED FOLDARY
… We are observing different facts. I have seen reports of businesses unable to borrow to pay for inventory and other expenses. A restaurant in Berkeley near my residence recently shut down because it was not able to borrow funds. Are these not facts?

MICHAEL HUDSON
… When Fred makes statements such as in this and the previous post, I rest my case.

FRED FOLDVARY
… Resting your case does not make untrue my observation of a firm shutting down because it could not borrow, even if you don't consider this a fact.

***

FRED FOLDVARY
… interest is the premium paid to shift purchases from the future to the present day.

MICHAEL HUDSON
… This is Austrian theory, and it is antithetical to everything that I understand about George.

FRED FOLDVARY
… It is antithetical to George's explanation of interest, but why of "everything"? It is not about land or rent.

MICHAEL HUDSON
… It cannot be claimed today.

FRED FOLDVARY
… Why do folks borrow to buy a car rather than waiting until they have sufficient savings?

MICHAEL HUDSON
… Interest-bearing debt is created as a privilege by banks.

FRED FOLDVARY
… It is, but there is also other debt.
… Are credit unions a privilege?
… It is possible for one individual to lend to another, creating debt. Of course empirically most borrowing is from banks, but debt is not inherently only from privilege.
… Your statement does not refute time preference.
…You seem to be mixing current institutions with basic theory.

MICHAEL HUDSON
… "Saving" that represented labor no longer holds.

FRED FOLDVARY
… Is it not possible to save some income from labor?

MICHAEL HUDSON
… Bank loans create bank deposits.

FRED FOLDVARY
… True. But savings from wages and other income also become bank deposits.

MICHAEL HUDSON
… One cannot be an Austrian and a Georgist.

FRED FOLDVARY
… It is not clear what "Austrian" means here.
… Mason has adopted Austrian capital-goods theory, distinguishing fixed and circulating capital.
… Does that make him a non-Georgist?
… It is also not clear here what "Georgist" means.
… If one accepts Georgist rent-tax theory but not Georgist interest theory, is he a non-Georgist?

***

YISROEL PENCHAK
… Libertarians tend to share that fallacious perspective that site value -- and land value in general, for that matter -- is merely a legal creation.

FRED FOLDVARY
… Please give us their explanation of how land value is a legal creation. I don't understand this, and have never read anyone say this.

***

MICHAEL HUDSON
… Your summary is quite concise, Mason, and I have no problem with it. Yes, the rent-of-location exists, and it is functional to make land rent cover the benefits it confers. Stalinist economies don't recognize this.
… I think I mentioned that when I was in Cuba, we noticed prime waterfront property that could have been sold as million-dollar condominiums let out to workers. I suggested that inasmuch as Cuba needed money for vitamins and other things, to lease out this prime real estate. "Oh, but that would change the CHARACTER of our worker-equality country," Cuba's real estate commissioner told me.
… "Right," I said.
… So we have no argument there.
… The problem is the privatization of this site and who GETS the rent. I thought that the "people" should get it, and laid out the land-tax plan. As Ted will tell you, the delegates to the meeting went wild with approval over this. We had a great presentation.
… But without Castro's go-ahead, nothing was done. Everyone looked to him uniquely.
… In this country, the bankers end up with the rent; in Cuba it's wasted.

***

MASON GAFFNEY
… Michael, I see land rent as both parasitic and functional. It is functional in that owners seeking the highest rent serve to allocate land to its highest and best use; it is parasitic in that private owners need not collect it in order to supply land.
… The FIRE sector also serves to create and allocate and conserve capital. These I see as vital economic functions. I am not clear on how you see them - please explain.
… Politically, the owners of capital and their agents in the FIRE sector tend to make common cause with owners of land, which confuses matters. It is not always thus, however. Early French Calvinists, for example, allied with labor to fight landowners. Only after winning and gaining some power did the capitalists spurn labor and ally with landowners. Something similar happened in the U.S.A. when the Progressive T.R. Republicans gave way to the "New Era" Republicans who put up Warren Harding as their cat's-paw, with Nicholas Murray Butler at the center of the scheming, and J. Edgar Hoover and Andrew Mellon as the cat's teeth.
… I don't worry about whether your views or mine are Georgist or not. George on capital is pretty muddled, IMHO, and sometimes self-contradictory. Let's just work something out that makes sense.

***

MICHAEL HUDSON
… Your observation does NOT say that the restaurant wanted to borrow for capital investment. It probably wanted to borrow to cover a deficit.
… The Fed has statistics on bank loans. Corporate balance sheets show this, and the NIPA provide data on capital spending, cash flow, etc.
… By all means, Georgists should finance good statistical analysis into all this.

***

MICHAEL HUDSON
… CEOs today borrow to take over other existing enterprise, to buy back their shares, and to pay dividends.

FRED FOLDVARY
… Agreed. But firms borrow for other reasons also.

MICHAEL HUDSON
… They do NOT borrow to "expand enterprise."

FRED FOLDVARY
… Never, not even small business? How do you know?

MICHAEL HUDSON
… Capital investment is financed out of retained earnings.

FRED FOLDVARY
… Always? What about new firms?

MICHAEL HUDSON
… Why not look at the facts.

FRED FOLDVARY
… We are observing different facts. I have seen reports of businesses unable to borrow to pay for inventory and other expenses. A restaurant in Berkeley near my residence recently shut down because it was not able to borrow funds. Are these not facts?

MICHAEL HUDSON
… When Fred makes statements such as in this and the previous post, I rest my case.

FRED FOLDVARY
… Resting your case does not make untrue my observation of a firm shutting down because it could not borrow, even if you don't consider this a fact.

***

FRED FOLDVARY
… …your "interest" can be a feature of an unfettered market but not a necessary or exclusive feature.

JEFF SMITH
… I don't know what you mean by "exclusive," but interest is necessary and existing in any economy because it originates in the human mind.
… The human lifespan is limited, and the future is uncertain, so most folks tend to want things sooner rather than later. Future goods thus have a discount relative to present-day goods, and the rate of discount is the rate of interest.
… People pay a premium to purchase stuff sooner rather than later. This premium can take many forms, but the premium is inherently interest.
… Islamic banking, for example, has no explicit interest, but when the bank becomes a partner by putting up cash, and then gets a share of the revenue, it is implicit interest even if they don't want to call it that.
… Somebody has gotten money from a bank to shift the purchase from the future to the present, and paid back more than the initial fund.

***

MICHAEL HUDSON
… I've made it a principle not even to argue with Austrians. I shouldn¹t have begun. The examples you cite are marginal, not the main ones. Of course there are credit unions. I¹m talking about interest on the great bulk of credit, which is bank credit, and is created as mortgage debt for buyers of real estate and companies.

***

MICHAEL HUDSON
… In this country, the bankers end up with the rent.

FRED FOLDVARY
… Yes, but don't the depositors get a little of it?
… If banking were not a privilege but a competitive enterprise, would depositors not get all of it (before taxes)?
… Also, you stated that there is no such thing as a pure market. Does that imply that even conceptually there is no such thing as the elimination of all privileges?

***

MICHAEL HUDSON
… the great bulk of credit ... is bank credit, and is created as mortgage debt for buyers of real estate and companies.

FRED FOLDVARY
… Yes, of course. We don't have pure interest today; what is called "interest" is skewed by government-granted privileges to FIRE and also distorted by taxes. Some "interest" is really risk premium, and other "interest" is subsidy. Some is a tax premium. It's a mess.
… MICHAEL HUDSON
… One cannot be an Austrian and a Georgist.

FRED FOLDVARY Mason has adopted Austrian capital-goods theory, distinguishing fixed and circulating capital. Does that make him a non-Georgist?
… Leland Yeager is an Austrian but also agrees with taxing land and admires Henry George.
… I agree with Austrian capital-goods theory and Georgist land-value-tax theory.
… So these labels are not that clear or useful.
… My approach is to combine the best theories of all schools of thought.

***

FRED FOLDVARY
… The human lifespan is limited, and the future is uncertain, so most folks tend to want things sooner rather than later.
… Future goods thus have a discount relative to present-day goods, and the rate of discount is the rate of interest.

JEFFERY SMITH
… True, but not exclusively true. That is, people can do just the reverse, being different people with different preferences, or the same people at a different time.

***

MASON GAFFNEY
… Fred is right that I have adopted the distinction of fixed and circulating capital, which was once associated with the original Austrians. However I no longer call it "Austrian", because today's so-called Austrians have gone over almost completely to reactionary politics. The von Mises Institute exemplifies the point. There is one modern Austrian, Roger Garrison, who continues the older tradition, and there is our own Fred, who combines it with Georgism. Lew Rockwell and his retinue at Auburn, OTOH, ... well, subscribe to their newsletter and decide for yourself.
… 3-4 years back they contacted a von Hapsburg, a pretender to the throne of the Austro-Hungarian Empire, and feted him as royalty. They are monarchists, too! (Actually old Joseph II, in the era of Benevolent Despots, was a strong physiocrat, as well as the patron of Mozart - but that wasn't what Rockwell had in mind. My impression is that he would welcome a new Metternich.)

MICHAEL HUDSON
… Dear Mason,
… Are you referring to Little Otto? David Rockefeller hired him for CMB, and he would go around the world collecting gossip on coup d'etats, and send in his reports on onion-skin papers. I was in charge of getting them, and would save them up for Friday afternoon's relaxation time for the weekend.
… I'd call my pals in from the Economics Dept at Chase and we'd read them aloud, laughing uproariously. Each report was an Eric Ambler thriller in miniature about some forsaken African or other Southern Hemisphere country, sometime about gossip from Europe. I don't think David ever bothered to get any of these reports. Once little Otto actually came by our offices. So you can say when you meet people, "This is the hand that shook the hand that shook the hand of Otto von Habsburg."
… Who really needs Austrian theory when you have a line like that?

***

MASON GAFFNEY
… I have suggested that indebted landowners be taxed on their equity, and the mortgagees be taxed on the value of their unretired notes.

FRANK WALKER
… An interesting concept, Mason. I assume putting this proposal into practice will require the tax assessor/collector to (1) keep track of the unpaid balance of notes secured against land and improvements thereto; and (2) pro-rate loan balances between (a) the value of the improvements which serve as part of the collateral and (b) the value of the land; and (3) assess tax only on that portion of the loan balance which is allocated to land value.

***

FRED FOLVARY
… The human lifespan is limited, and the future is uncertain, so most folks tend to want things sooner rather than later. Future goods thus have a discount relative to present-day goods, and the rate of discount is the rate of interest.

JEFFERY SMITH
… True, but not exclusively true. That is, people can do just the reverse, being different people with different preferences, or the same people at a different time.

FRED FOLDVARY
… I said MOST folks TEND to want things sooner, and the social consequence is that at a zero interest rate, the funds people want to borrow is greater than the funds available. Some folks would save even at zero interest, but the amount others want to borrow would be greater. It is possible that in some society, everybody is totally satisfied, but in today's world, human desires tend to be unlimited, so they borrow today to have a car or house rather than waiting years to have enough savings.

***

FRED FOLDVARY
… I said MOST folks TEND to want things sooner.

JEFFERY SMITH
… Yes, but ... FRED FOLDVARY
… How people act in an unjust economy may differ from how they act in a just economy.

JEFFERY SMITH
… Economists never if ever study anthropology. Their conception of human nature is stilted. Remember the survey that found of the disciplines economists were the most selfish? Was in "Why Garbagemen are worth more than economists". You know the author.

FRED FOLDVARY
… human desires tend to be unlimited, so they borrow today to have a car or house rather than waiting years to have enough savings.

JEFFERY SMITH
… All true, but contexts do and must change.

***

MICHAEL HUDSON
… Mason, the distinction between fixed and circulating capital is basic classical economics, including Marxism. Why even mention the Austrians at all? Best to ignore them.
… Re the supposed "time structure," all this is rendered obsolete by the fact that credit can be created ex nihilo by banks, as long as they can find customers to sign IOUs. "Loans create deposits," hence monopoly credit privilege creates savings.
… The wealthy don't get that way by "postponing" their desire. The ancients knew it best, in describing "wealth addiction." Who could be more avaricious and impatient than a Wall Street fund manager? That's the problem with oligarchies -- they live in the present. For Milton Friedman and the Chicago School, the short term IS the long term.
… The key to understanding economics is privilege, which is extracted from the state by oligarchies; the key is NOT "individualism," save for the study of greed, which is insatiable (in contrast to the theory of diminishing marginal utility).

***

MASON GAFFNEY
… Fred is right that I have adopted the distinction of fixed and circulating capital, which was once associated with the original Austrians.

FRED FOLDVARY
… It is still in Austrian-school theory. A key element of Austrian theory is the time-structure of capital goods, from "lower level" circulating capital such as inventory, that turns over quickly, to "higher level" long-duration investments such as real estate construction. Austrian theory says that a lowering of the interest rate steepens the structure, as there is more investment in the higher order capital goods (fixed capital) as more sensitive to interest rates. This then becomes central in the Austrian Business Cycle. This capital-goods theory is still the heart of Austrian theory. We can also learn from Austrians to call produced goods "capital goods" rather than "capital."

MASON GAFFNEY However I no longer call it "Austrian", because today's so-called >Austrians have gone over almost completely to reactionary politics.

FRED FOLDVARY
… You should not judge the whole Austrian school from the royalist views of one branch of it. But you may of course call the capital-goods theory what you like. I hereby dub it "Gaffnian."
… My point is that classic Austrian theory can be combined with Georgist theory, as you, Mase, have done excellently.
… Georgist business cycle theory is incomplete, as it does not include capital goods and interest rates, and as I see it, Austrian theory complements it nicely, as Mason has shown brilliantly.

MASON GAFFNEY
… Thank you, Fred, for them/thar kind words. Please tell me, though, who beside you and Garrison is writing about Austrian capital theory nowadays?

***

MASON GAFFNEY
… The time-preference rationale is arguable, and Jeff clearly will argue against it indefinitely. I wonder if it isn't simpler to note how all businesses require front money: merchants to carry stock, builders to put up structures that won't pay out for decades. Governments require it to build infrastructure and, tragically, to fight wars.
… Look what is happening currently because so many businesses and governments cannot get the front money they need to carry on even routine daily operations, let alone repair roads and bridges and reservoirs.
… Investing is the independent force that "animates all the work of society" - Turgot, 1767. Keynes revived this idea in 1936.
… That makes it clear, or so it seems to me, that we need capital to make the world go round.

***

MICHAEL HUDSON
… Mason, the distinction between fixed and circulating capital is basic classical economics, including Marxism. Why even mention the Austrians at all? Best to ignore them.

MASON GAFFNEY
… Mason here. The Austrians kept it alive when the neoclassicals, led by Clark and Knight, eliminated it.

MICHAEL HUDSON
… Re the supposed "time structure," all this is rendered obsolete by the fact that credit can be created ex nihilo by banks, as long as they can find customers to sign IOUs. "Loans create deposits," hence monopoly credit privilege creates savings.

MASON GAFFNEY
… This idea that valid ideas are "rendered obsolete" by some new gimmick is a serious error, IMHO, and a way of brushing away the mental effort they call for. I seriously disagree with your view of deposit creation, since every new deposit is a liability of the bank that creates it, payable on demand. As to novelty, note that banks have been in this business for centuries. But let's not open that box here, I sense that our audience wearies of this whole thread, which is why they don't participate.

MICHAEL HUDSON
… The wealthy don't get that way by "postponing" their desire. The ancients knew it best, in describing "wealth addiction." Who could be more avaricious and impatient than a Wall Street fund manager? That's the problem with oligarchies -- they live in the present. For Milton Friedman and the Chicago School, the short term IS the long term.

MASON GAFFNEY
… When you go on laying about you with a shillelagh you grow less persuasive!

MICHAEL HUDSON
… The key to understanding economics is privilege, which is extracted from the state by oligarchies; the key is NOT "individualism," save for the study of greed, which is insatiable (in contrast to the theory of diminishing marginal utility).

MASON GAFFNEY
… For some people that is so. See attached on "Auri sacra fames", which cites you. Note, though, that unlimited greed can apply only to assets that do not spoil, like untaxed land. Note how cleverly God squelched greed among the starving Hebrews when he dropped manna from heaven, and made it spoil overnight. For most humans, w.r.t. most forms of capital, I believe the marginal utility of wealth is diminishing, which is why taxing land will increase the propensity to save.

***

MASON GAFFNEY
… The time-preference rationale is arguable, and Jeff clearly will argue against it indefinitely.

JEFFERY SMITH
… Clearly I haven't even started yet! To say immediate gratification s not all people ever do is not against it, unless such desire desires to monopolize all human situations. Noting when it applies and not is not against it. It's merely getting a better look at it.

MASON GAFFNEY
… Investing is the independent force that "animates all the work of society" - Turgot, 1767. Keynes revived this idea in 1936.

JEFFERY SMITH
… Aren't investing and lending different?

MASON GAFFNEY
… Yes and no. Keynes defined investing as an "income-creating expenditure", meaning hiring workers to produce something. It was "net social" investing, i.e. not offset by disinvesting by sellers.

JEFFERY SMITH
… Gradually, anti-labor types regained control of the profession and silently changed the meaning so buying land became part of investing.

MASON GAFFNEY
… Turgot's meaning was similar to Keynes', although not made so explicit.

***

MICHAEL HUDSON
… Good point, Mason. People seem to have been more clear conceptually as one goes back in time. So much for the theory of progress.

***

MASON GAFFNEY
… The first part is right, but the second part not. He fails to distinguish land from buildings; and old buildings from new.
… When Walter Heller devised the ITC he took care to limit it to NEW capital only; and to CAPITAL only.

MICHAEL HUDSON
… What do you guys think of this, from David Kay Johnston in Mother Jones:

Demolish the Mansion Deduction

Much as middle-class homeowners cherish it, the mortgage deduction functions mostly as another upside-down subsidy: Less than half of homeowners can use it, and for each dollar saved by those making between $30,000 and $40,000, those making $1 million or more save $380. (Canada, by the way, does not allow mortgage interest to be deducted at all, yet its home ownership rate matches ours.) If the goal is to help people get into their own four walls, a tax credit for principal paid by home buyers in the first few years of ownership would do far more. For a home worth $100,000, for example, such a credit could reduce income taxes by $2,000 a year for the first two years and $1,000 annually for the next three, saving the buyer $7,000.

***

MASON GAFFNEY
… "Finance" is an abstract term, though. How about identifying its members, with names and specifics and degrees of influence? There are millions of small pensioners who are the savers behind the firms who represent them.

MICHAEL HUDSON
… Well, the problem IS abstract. It¹s the idea of ³financializing² pensions, Social Security, etc. These savers are part of a financial system that is itself not necessary. Much as I like to engage in ad hominum arguments regarding Georgists (where personalities DID scuttle Georgism), the financial system is a structure that is itself the problem much as absentee land ownership would be.

MASON GAFFNEY
… Instead of pointing to individuals, I¹d point to the lobbying behind rewriting the bankruptcy laws. I guess Paulson and Bernanke behind the $8 trillion bailout would qualify, topped by bubblemeister Greenspan. But even he was only a shil for the system, which is what provided the vast sums to finance the same public relations "think tanks" such as American Enterprise, Cato etc that oppose land taxation as much as they oppose financial reform.

MICHAEL HUDSON
… What gives the FIRE sector its power is the rising power of finance to act as central economic planner. Georgists don¹t like landlords; but behind landlords stand the financial interests.

MASON GAFFNEY
… Mortgagees are a power, I agree; some Georgists are inadequately aware of this, and you, Michael, perform a useful role in raising their consciousness on the point. For a symbol, the NAREB rents its D.C. offices from a labor union; the Mortgage Bankers Assn (MBA) owns its own palatial building.
… Be aware that J. Rupert Mason of San Francisco, a patron of the HGSSS there, was hypersensitive on municipal bonds and the conflict between them and holders of notes on individual landholdings.
… "Finance" is an abstract term, though. How about identifying its members, with names and specifics and degrees of influence? There are millions of small pensioners who are the savers behind the firms who represent them.

MICHAEL HUDSON
… Right, finance extracts interest from revenue other than land rent. But 70% of bank loans are mortgage loans.

MASON GAFFNEY
… That is a recent cyclical development. For several decades after the 1930s most bank assets were U.S. bonds. I rather expect after the current shakeout we'll get back to that situation.

MICHAEL HUDSON
… RSF delegated total authority to its ³project director² Cliff. His > position is therefore their position.

MASON GAFFNEY
… That was certainly true for a while, to my surprise. Cliff has stepped down now, I couldn't say if he still dominates the Board by some kind of hypnosis. I'm not sure who's in charge now. Note, though, that Cliff seems to be a separate power center from "the AIER crowd", so there has been some rotation.

***

MASON GAFFNEY
… Jeff, we've been through this before, and you haven't budged, so I'll say it for others' sake, briefly.
… 1. There's never been a time in my experience or knowledge when many businesses did not borrow routinely to meet their capital needs
… 2. If interest rates fell to zero, as you theorize they might, land prices would rise to infinity
… 3. At zero interest no one need work, you could borrow infinitely to consume infinitely.

***

JEFFERY SMITH
… Mase, let's be thankful only economists are reading this, not normal people.
… 1. Business behavior in an unjust economy only approximates BB in a just economy. The amount of borrowing could change. It could be replaced entirely by investing once the playing field is level.
… 2. No need to theorize. Japan once had lending rates even below zero. Prices of land nor anything else did not rise to anywhere at all.
… 3. What works in an internal mental system does not always work in an external reality. That's why logic, theory, postulates all need testing. In algebra, you can make 1 = 0.

***

MASON GAFFNEY
… Michael, Air IS a factor of production, it is part of land.
… What with cap and trade systems, air is being partially privatized.

***

MICHAEL HUDSON
… Mason, the Fed's interest rate recently has been 0.25%. That's nearly zero, as it was in Japan after 1990. Land prices plunged in Japan at near-zero interest rates, and are plunging now.
… Shylock's loan was a zero-interest loan, and the debtor still was liable for his pound of flesh.

***

FRED FOLDVARY
… In a pure market, entrepreneurs seek to borrow funds in order to start or expand enterprise. Time prefernece creates a quantity demanded for funds greater than the quantity supplied from savings at a zero rate of interest. This generates a positive rate of interest to clear the market for loanable funds.

JEFFERY SMITH
… The interest payment is voluntarily agreed to because the benefits of having funds sooner is greater than the interest expense. So in a pure market, interest does not eat into other gains. In today's economy, government-granted privileges to FIRE indeed siphon off rent and wages. But this is subsidies rather than interest per se.
… In a true free market, you may have such a level playing field and so much savings and so little old-fashioned growth that you could have more venture capitalists than borrowers, so investors would merely expect a percentage, instead of a fixed rate, and banks might not charge borrowers but depositors, like like house-sitters can get paid, instead of tenants paying. So, your "interest" can be a feature of an unfettered market but not a necessary or exclusive feature.

***

MICHAEL HUDSON
… Ok, Touche.
… My focus is on the disparity between price and cost-value. The difference is economic rent. I use "factor of production" in the classical sense of entailing a cost that must be covered for production to take place (wages and profit), not "return to a class interest" (rentiers).
… Our problem here is definitional. We both agree on what's happening and on who gets what. The question is, how best to chart it and explain it -- and for what policy purposes (public collection of rent).

MICHAEL HUDSON
… Mason, the Fed's interest rate recently has been 0.25%. That's nearly zero, as it was in Japan after 1990. Land prices plunged in Japan at near-zero interest rates, and are plunging now.
… Shylock's loan was a zero-interest loan, and the debtor still was liable for his pound of flesh.

MASON GAFFNEY
… Michael, the Fed's interest rate you refer to has little to do with the rate at which you or I or most people or firms can borrow. A zero i.r. as a general phenomenon would mean anyone can borrow any amount for any term. Otherwise, when you hit the limits, there is a positive i.r.
br> ***

MASON GAFFNEY
… Jeff, If you'll seize on any trumped-up excuse to throw out rational thought you become a cultist, and forget about getting through to reasonable people. You could raise up an army of cultists, as various politicians have demonstrated, but they won't be Georgists. Economics entails balancing the books; this entails arithmetic; algebra is just an elaboration on arithmetic, where 2+2=4.