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The Insider’s Economic Dictionary: P Is for Ponzi

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Posted on Apr 13, 2014

Photo by Andymag (CC BY 2.0)

By Michael Hudson

This piece first appeared at economist Michael Hudson’s website. See the rest of the Insider’s Economic Dictionary here.

Panic: The abrupt culminating stage of the business cycle, in which inflated asset prices collapse in price as financial securities and properties are sold to pay off debts.

Parallel Universe: The objective of modern economic methodology. A hypothetical exercise in science fiction depicting a world that conceivably could exist, given a sufficient number of internally consistent assumptions. (See Neoclassical Economics.)

Parasite: A “free luncher,” from the Latin word meaning an uninvited guest brought along to a meal or crashing the party. Parasites avoid detection by camouflaging themselves as part of the host itself, and then disable the host’s brain to prevent it from taking counter-measures to protect its own growth. The economic analogue most often cited as parasitic is rentiers. The objective of such rent-seeking activity is to obtain something for nothing – income or price without real cost-value. Financial parasites tend to ride on the backs of real estate investors monopolists and lobby politically to support and un-tax their rent-seeking activities.

Parasitism: In biology, parasites develop a strategy of gaining control of the host’s brain in order to obtain nourishment by masquerading as its natural progeny or as a part of its body. For economies, the brain in question is the government. The rentier or monopolist masquerades as contributing to the production process so that its revenue appears to be earned rather than siphoned off in a zero-sum activity.

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The most successful biological parasites establish a symbiosis with their host in which they actually help the host in seeking nourishment and growth. Unsuccessful parasites devour the host without regard for the consequences, as is the case with most economic parasitism. In the case of financial parasitism, bankers and money managers have become more destructive over the centuries. (See also Debt Pollution.)

Pension-fund capitalism:A term coined in the 1950s to reflect finance capitalism’s new way of exploiting labor by withholding part of its salary to invest in stocks. Early abuses in America (and most notoriously in Chile at the hands of the Pinochet junta with the aid of the Chicago Boys) occurred when companies invested the money in their own stocks, increasing equity prices not so much by raising earnings as by organizing a flow of funds into their purchase. (See Labor Capitalism.)

Pentagon capitalism: A term coined by Seymour Melman in the 1960s to describe the U.S. Government’s practice of drawing up military procurement contracts on a cost-plus basis. Under the terms of these contracts, suppliers make profits by maximizing their production costs, not by minimizing them as in traditional market competition. (See Military Spending.) Under such conditions political lobbying and campaign contributions lead to insider deals, as when Halliburton Vice President Dick Cheney became U.S. Vice President and gave Halliburton contracts in the Iraq War without competitive bidding or meaningful government oversight.

Pension-fund socialism: A system whereby employers (in the public as well as the private sector) pre-fund pension commitments by setting aside funds to invest in stocks and bonds rather than government securities. The effect of these set-asides is to bid up the price of financial assets. The main beneficiaries of the buildup are venture capitalists taking firms public with IPOs, corporate managers exercising their stock options, and speculators. When the demographic dynamics shift and more workers retire than join the labor force, sale of these securities to pay their pensions threatens to reduce stock and bond prices, depriving the retirees of their anticipated gains.

The result is neither especially capitalist nor socialist, as it is primarily a financial phenomenon rather than one based on industrial profits. Attempts by corporate managers and raiders to increase stock prices typically are made at labor’s expense, not for its benefit.

Physiocrats: French followers of Francois Quesnay (1694-1774), who created the first national income account, the Tableau Économique. Hence they were called Les Économistes. As a surgeon to the royal family, Quesnay’s idea of the circular flow of income was inspired by the circulation of blood within the human body. And as the name Physiocrats indicates, the model was primarily physical. Just as the cardiovascular system is different from that of muscle, bone or for that matter fat and parasites in the blood, so the Tableau Économique left out of account depreciation (the replenishment or accumulation of seed and capital goods) and debt service.


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