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The Insider’s Economic Dictionary: I Is for Ideology

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Posted on Nov 29, 2013
Pink Sherbert Photography (CC BY 2.0)

By Michael Hudson

(Page 2)

Institutionalism: The technology of production is common to most economies at any given point in time. Where economies differ is in their institutional structure, above all with regard to property and finance external to the technology of production. Free-market advocates oppose the study of property and finance on the ground that these institutions are created and regulated by society rather than inherent to economies, and thus are social in character – and implicitly regulatory and self-directing. The political objective of free-market advocates is to concentrate this planning power in the hands of the financial and property sector rather than government, and hence describe the study of these institutions as lying outside the sphere of economics, which is supposed to be limited to markets as they would exist in a “pure” or closed system as if governments and society did not exist. Institutionalism sometimes is held to be devoid of theoretical content, on the ground that institutions are not inherent and “natural,” hence not a subject for “scientific” economics.

Interest: Antiquity had no distinct word to distinguish interest from usury. The distinction was drawn by medieval Churchmen to contrast commercially productive loans with personal usury, on the logic that commercial creditors shared in the risk of profit-making business ventures under traditional legal terms that freed merchants from debt in cases where they lost the money through no fault of their own. In such cases commercial interest was supposed to cover the banker’s or other creditor’s cost of doing business, plus compensation for risk. (See however watered costs.) This Church ruling enabled credit to be extended to finance foreign trade (see agio). In practice, what legitimized the charging of interest-usury was borrowing by governments to spend on war.

Henceforth, the ancient term usury was limited to interest charges in excess of the legal maximum. The maximum limit was raised steadily over time, and finally removed altogether by the 1980s when interest rates peaked at 20 percent.

Interest, compound: See Compound Interest.

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Interest, mortgage: Mortgage interest represents about 70 percent of all interest charges in the U.S. and British economies. This revenue now absorbs all the otherwise taxable profits for the commercial real-estate sector, leaving no revenue available for the tax collector (and in fact creating “book losses” that investors use to offset income earned on their other operations).

Investment: In colloquial speech this word often refers to the sum total of one’s assets. Only a part of this represents the investment in new tangible capital formation in the form of means of production. Increasingly, it represents opportunities to extract rent. Thus, whereas industrial capital produces profits, rent is a return to rentier claims. This technical word is needed in order to overcome the rhetorical confusion that finance capital has promulgated in its pretense of being productive tangible capital.

Investor: Not all buyers of assets are investors. The traditional connotation of investors is that they create means of production. Rentiers buy up existing preconditions for production in search of interest and dividends, rent or capital gains.

Invisible Hand: Adam Smith made this term famous by postulating that the economic universe was organized in such a way that self-seeking producers and other individuals were led by an Invisible Hand to increase economic prosperity by seeking their own self-interest. But he also pointed to another kind of invisible hand – that which occurred when businessmen of any profession got together and conspired against the public good by seeking monopoly power. Less invisible were the efforts of landlords to obtain property and “reap where they have not sown.” But increasingly, rent recipients have sought to avoid taxation by making the value of their holdings invisible to the tax authorities. Britain has not conducted a census of property for over a century, since 1872. The operative principle here seems to be that what is not seen will not be taxed or regulated.

To top matters off, mainstream economics has averted its eyes from land, and also from monopolies, treating them both as “capital” in general, despite their different economic dynamics and the fact that their income takes the form of (unearned) rent rather than profit as generally understood. The fact that most monopolies are obtained by insider dealing and hence corruption gives a more sinister meaning to the term “invisible hand.” (See Devil.)


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