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M for Marginalism

Posted on Jan 24, 2014

By Michael Hudson

(Page 2)

Mediocrity: The belief that one is doing a very good job when in fact the performance is short-sighted, self-defeating and hence incompetent. Psychologists have found that the more intelligent test-takers tend to question their answers and worry that they might have done better. The more mediocre people imagine that they have done an excellent job, thanks to the narrow scope in which they frame their thoughts. Prime economic examples include monetarist ideas that the way to increase prosperity is to impose austerity, shrinking markets. Self-serving double standards usually are a sure sign of mediocre thinking, e.g., bosses who think that the way to make workers produce more is to pay them less – while paying themselves more as an “incentive.”

Military junta: A regime usually associated with Client Oligarchies, by which free markets are imposed on democracies that reject the Washington Consensus, e.g. in Chile under General Pinochet and elsewhere in Latin America. A related kind of regime is that of the neoliberal reformers in Russia under Yeltsin’s “family.”

Military spending: Under a nominally free-market regime, military spending under a national-security umbrella is the major way for governments to subsidize high-technology research and development. The cost-plus system of billing severs the link between profit-seeking and economic efficiency, by maximizing costs rather than minimizing them. (See Pentagon Capitalism.)

Mixed economy: Every economy is a mixed economy, with public and private sectors co-existing much like the intertwining spiral strands of the DNA molecule. The public sector normally guides and regulates the economy, providing military security, law and basic economic infrastructure (especially in the sphere of natural monopolies). (See Government.) The “private” individualistic or family-based sectors tend to be more entrepreneurial but also short-term in outlook. A wide range exists for potential imbalance between these two sectors, depending on which ideology or political constituency is in power.

It should be noted that by seeking their own power, the public or private sectors both tend to become extreme, ranging from Stalinist Russia to financialized neoliberal regimes. When the private sector becomes centralized, it typically is in the hands of the financial sector. When the government bureaucracy becomes overgrown, it tends to work in its own self-interest and to benefit not by direct ownership (which remains in public hands) but in control of the flow of revenue and hence the economic surplus.

Mill, John Stuart (1806-73): His Principles of Political Economy (1848) has been called a half-way house to the socialism of Karl Marx and Henry George. Mill went beyond Ricardo’s critique of landlords by urging that the state take over land ownership, on the ground that landlords enjoyed rising land prices “in their sleep” as an “unearned increment.”

Monetarists: Economists who view money as a thing like coinage, a commodity to be bartered. They relate consumer prices to the money supply without taking into account credit, debt and its carrying charges, and claim that financial and international payment imbalances are self-curing. Identified mainly with Milton Friedman at the University of Chicago, their theory is basically that of David Ricardo and the “banking school,” so called because their views were useful to bankers who claimed that only those with hard money – the banks – should create credit, not the government. (See diminishing rate of understanding and contrast to the State Theory of Money.) In thus serving the financial sector’s predatory incursions into industry and government, Chicago School monetarists thus are essentially free-market economists. (See Neo-serfdom.)

Money: All money is credit in one way or another. But today it is government-backed or government-created credit, as its defining characteristic is the government’s willingness to accept it in payment of taxes or other public fees. The classic analysis of money is Georg Friedrich Knapp’s State Theory of Money (Die Staattheorie des Geldes,1904, translated into English in 1924). (See Chartalism and State Theory of Money.)

Money Illusion: Irving Fisher and other monetarists used the term “money illusion” to refer to the tendency of workers and consumers to imagine themselves better off when their wages or salaries rose, without comparing this gain to the prices of the goods and services they buy. If wages and prices increased together, the monetarists argue, consumers are no better off in terms their income and outgo. This is not strictly true, of course, because the debt principal is reduced by inflation, although higher interest rates may counter this benefit to debtors.?

Monetarists are asymmetrical in not complaining about the asset-price illusion, that is, the feeling that the economy is better off if their net worth rises, even when their debt servicing obligations also rise and the access price to housing and other property increases.

Money managers: Investment bankers, mutual funds, pension funds, stock brokers and insurance companies. Whereas in the past the financial sector made its returns primarily as creditor – by charging interest on loans and often foreclosing on the property of insolvent debtors – since the mid-20th century it has made almost as much money by charging commissions for managing society’s savings and means of payment, and underwriting stock and bond issues, above all on privatizing public enterprises. Money managers are now seeking the pot of gold at the end of the rainbow by privatizing Social Security and, in many countries, the postal savings system.

Monopoly: The ability to charge more for a product than is warranted by its cost of production (including normal profit), by limiting the ability of customers to choose alternatives or to make rational choices that recognize less costly alternatives. Such rights usually are created by public fiat, especially for natural monopolies, such as transportation and communications, which were long retained in the public domain.

Moral hazard: Government liability for “socializing risk” by bailing out investors who lose money on bad loans or other savings. The effect is to shift assets and income from the public at large (“taxpayers”) to the financial sector. (See Trickle-Down Economics.) The most notorious examples include U.S. Government reimbursement for depositors in high-risk S&Ls in the 1980s, leading to insolvency of the Federal Savings and Loan Insurance Corporation. Also in the 1980s, Brady Bonds were issued to reimburse holders of third-world debts that banks knew (or should have known) could not possibly be repaid. Moral hazard increased when Citibank embarked on a series of risky ventures, secure in the knowledge that the government would bail it out on the ground that the New York bank was “too big to fail.”

Murabaha loans: Moslem law bans the charging of interest (usury), but permits loopholes that achieve a similar economic effect in practice (see Agio). A murabaha mortgage loan is extended without nominal interest to purchase a house or other property, but the borrower pays a rental charge set high enough to incorporate what is in effect a rentier interest charge.

Michael Hudson is Distinguished Research Professor of Economics at the University of Missouri, Kansas City and president of The Institute for the Study of Long-Term Economic Trends (ISLET).


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