An Exchange of Views with Michael Hudson
on Henry George's
Treatment of Interest
Edward J. Dodson
[An email sent in response to comments made by
Michael Hudson, 18 March, 2011. The subject of the email was: What did
Henry George actually teach and what do most others who teach based on
HG teach?]
Michael Hudson Re interest/profit, here’s what I wrote
Lindy. George uses the term “interest” for profit.
Ed Dodson Below is what Henry George actually wrote in
Progress and Poverty (pp.156-157):
"In all politico-economic works we are told that
the three factors of production are land, labor, and capital, and
that the whole produce is primarily distributed into three
corresponding parts. Three terms, therefore, are needed, each of
which shall clearly express one of these parts to the exclusion of
the others. Rent, as defined, clearly enough expresses the first of
these parts -- that which goes to the owners of land. Wages, as
defined, clearly enough expresses the second -- that part which
constitutes the return to labor. But as to the third term -- that
which should express the return to capital -- there is in the
standard works a most puzzling ambiguity and confusion.
"Of words in common use, that which comes nearest to
exclusively expressing the idea of return for the use of capital, is
interest, which, as commonly used, implied the return for the use of
capital, exclusive of any labor in its use or management, and
exclusive of any risk, except such as may be involved in the
security. The word profits, as commonly used, is almost synonymous
with revenue; it means a gain, an amount received in excess of an
amount expended, and frequently includes receipts that are properly
rent; while it nearly always includes receipts which are properly
wages, as well as compensations for the risk peculiar to the various
uses of capita. Unless extreme violence is done to the meaning of
the word, it cannot, therefore, be used in political economy to
signify that share of the produce which goes to capital, in
contradistinction to those parts which go to labor and to
landowners."
A bit further on he adds this affirming statement:
"Thus, neither in its common meaning nor in the
meaning expressly assigned to it in the current political economy,
can profits have any place in the discussion of the distribution of
wealth between the three factors of production."
Michael Hudson I deplore the "3-factor" theory.
Land is NOT a factor of production; it's a rent-extracting
opportunity.
Ed Dodson Land is the passive agent in wealth production.
Teaching political economy based on the interaction of the three
factors of production, one can say that CONTROLLING some portion of
nature provides to the individual or entity holding such control a "rent-extracting
opportunity." However, land is the source of the opportunity;
rent is that portion of production that justly belongs to all but is
commonly extracted by individual claimants based on the strength of
their legal or extralegal powers.
Michael Hudson Rent is not profit. So I absolve George
himself of that post-Georgist claim. But as you know from the Henry
George School, the word Georgists use for the profits of industrial
capital is "interest."
Ed Dodson Well, I for one, do not know from the Henry George
School what you assert. If any teachers at the HGS are describing the
return to capital (goods) as "profits," I suggest they need
to study Henry George's system of political economy with greater
rigor. "Profits" is an accounting or finance term; and, as
George wrote above, has no relevance to political economy and the
distribution of wealth.
Michael Hudson Where in the three-fold division of output is
"financial interest." It is an extractive rent for the
privilege of credit creation. George imagined money-interest as a
return to savings which he thought of as saved-up labor.
Ed Dodson George's treatment credit, the issuance of
currency, and the interest charged when loans are made (whether the
loan is made by the bank or by one individual to another) is more
sophisticated than you given him credit for, Michael. Note, for
example, is explanation of the distinction between "interest"
paid on government bonds versus interest earned by capital goods:
"The immense sums which are thus taken fro the
produce of every modern country to pay interest on public debts are
not the earnings or increase of capital -- are not really interest
in the strict sense of the term, but are taxes levied on the produce
or labor and capital, leaving so much less for wages and so much
less for real interest." (Progress and Poverty, p.190)
Michael Hudson In my view, finance and banking should be a
public utility, and as such, kept in public hands. Profit is the net
return to capital investment, as the classical economists used the
term.
Ed Dodson Whether finance and banking ought to be a function
of government or a quasi-government authority versus private (but
regulated) has been part of the long debate without consensus.
Whenever I discuss profits I simply explain that it is an accounting
term that indicates a business has greater revenue (from whatever
sources) than expenses.
Michael Hudson As my
American Journal of Economics and Sociology (AJES) article
showed, George’s contemporaries IN HIS OWN DAY left him behind,
because he refused to support other Progressive Era reforms. So people
like Veblen poked fun at the Single Taxers. I quote the criticisms in
my article (Tolstoy, Flurscheim, etc.)
Ed Dodson My reading of the history of the period suggests
that Henry George's campaign was doomed from the start, particularly
in North America where land speculation was part of the national
psyche going back to the founders. What we can be thankful for is the
intellectual effort exerted on our behalf.
Michael Hudson The key problem is that the economy is
centrally planned by the financial sector today. Banks have replaced
landlords in the commanding heights. Largely, this is a result of the
transformed mode of credit since World War I, and the failure to treat
banking as a public utility. Perhaps George might have come to endorse
this. But his major followers certainly don’t. So they’ve
become part of the problem, not part of the solution.
Ed Dodson Is the structure of banking the problem, or is the
absence of accountability on the part of banking (i.e., corporate)
executives for their actions as much or more of the problem? Since the
1970s when deregulation of the financial services sector accelerated,
thousands of banks -- some rather large -- have failed. Shareholders
lost their investments, but bank executives collected bonuses, sold
huge stock holdings prior to insolvency and went on to some other
grossly-overpaid position at another institution. Where was the
government oversight and regulation? Where was the Justice Department?
As for banks replacing landlords, corporate entities (including many
financial services corporations) own huge amounts of real estate. They
are major land speculators and landlords in their own right.
Among the handful of Henry George's "major followers" who
actually dwell on the money question I find no consensus as to what
reforms ought to be pursued. I wrote my final paper for the Master's
degree on the global monetary system, came to the conclusion that the
answer was to resurrect the original deposit banking system based on
the Bank of Amsterdam. Nothing I have read since convinces me there is
a better way to put a lid on monetary inflation.
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