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The Insider’s Economic Dictionary: F Is for FIRE Sector

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Posted on Sep 23, 2013
chelsea.parker.photo (CC BY-ND 2.0)

By Michael Hudson

This piece first appeared at the website of University of Missouri, Kansas City economics professor Michael Hudson. Read the rest of the Insider’s Economic Dictionary here.

Factoid: A hypothesis, rumor or story so consonant with peoples’ preconceptions that it is accepted as a fact or working assumption, even though it often is made up a priori. Among the most notorious examples are the ideas of diminishing returns, equilibrium, that privatized ownership is inherently more efficient than public management, and that trickle-down economics works. (See Junk Science.)

Factor of production: Labor and capital are the two basic factors of production, creating value. Many classical economists also treated land as a factor of production, but it is rather a property right. It is needed for production, like air, but as a legal right it becomes an institutional opportunity to charge rent, via a legal claim permitting landlords to levy a toll for access to a given site. In this respect air, water, technology, patents and similar inputs are not strictly speaking factors of production, which involve costs that ultimately are reducible to labor inputs. Interest-bearing debt claims hardly can be treated as a payment to a “factor of production,” as if they were an inherent part of the production process.

Fallacy, economic: Economic fallacies are often generated by language coinage in the political arena and the popular press to be carried forward into subsequent eras. For example, S. Dana Horton pointed out in his Silver and Gold (1895) that “The fallacies that lurk in words are the quicksands of theory; and as the conduct of nations is built on theory, the correction of word-fallacies is the never-ending labor of Science. … the party in this country, one of whose great aims was, at one time, the perpetuation of slavery, owed much of its popular vote to the name Democracy.” Like so many public relations and lobbying efforts in the present era, seemingly bland economic and business characterizations can stultify generations of economic thought.

Falling rate of profit: In Marxist economics, profits were expected to decline as production became more capital intensive, leading depreciation (a return of the capital invested, in contrast to a return on capital) to rise as a proportion of overall cash flow. Strictly speaking, this did not mean that profit rates as such would fall, merely that the role of capital recovery would rise.? Under finance capitalism, profits fall because of the rising debt-intensity of production as more corporate cash flow (see ebitda) is paid out as interest, leaving less available as profit.

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Federal Reserve System: The U.S. central bank, established in 1914 (seven years after the 1907 financial panic) to decentralize monetary authority from the U.S. Treasury to the commercial banking system and regional business, in conjunction with providing more flexible credit via the banking system. In 1951 the Fed reached an accord with the Treasury regarding the conflict of interest in which the government sought to borrow at the lowest possible interest rate, while banks wanted high rates, ostensibly to fight inflation. But as the Gibson Paradox illustrates, trying to fight inflation by raising interest rates often tend to aggravate it. Fed policy along these lines led to stagflation by the end of the 1970s under Fed Chairman Paul Volcker, while the reversal of this policy, flooding the economy with low-interest credit under Alan Greenspan, fueled asset-price inflation after 1992, much as had been the case in the 1920s under Fed Chairman Benjamin Strong.

Fictitious costs: Costs over and above labor and capital that are factored into pricing, especially of regulated monopolies such as railroads in 19th-century America. The most notorious costs are interest charges (which are treated as a cost of doing business rather than as a business decision to leverage one’s own investment), stock options and bonds issued to financial and political insiders, as well as the management and underwriting fees charged by money managers and investment bankers. Neoliberal reforms greatly expand opportunities for such pseudo-costs to proliferate.

Fictitious costs are book-keeping costs not economically necessary for production to take place. As such, they are costs accruing to fictitious capital, most notoriously in the form of “watered stocks” that railroad barons and other captains of industry or emperors of finance issued to themselves around the turn of the 20th century. Such costs are institutional in character, associated with the transition from industrial capitalism to finance capitalism.

Fiduciary responsibility: Money managers look at their clients in much the same way a lawyer does: “How much can I make off this person without formally breaking the law?” The answer usually depends on how much the client has, and how high a commission the money manager can make. The norm among many insurance-company managers and brokerage houses is to unload bad securities onto the client (as companies such as H&R Block and others did with Enron stock), or to “churn their accounts” to generate trading fees. Even quicker money has been made recently by negotiating a complex derivative straddle almost guaranteed to wipe out the hapless risk-taker. The objective of money managers thus is to minimize legal restraints on fiduciary irresponsibility, euphemized as “responsibility.” The post-Enron prosecutions of New York Attorney General Eliot Spitzer provide a compendium of stratagems that money managers, banks, insurance companies and stock brokers have been able to get away with by “stretching the envelope” of fiduciary responsibility.


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