By Michael Hudson
This piece first appeared at Michael Hudson’s website. See the rest of the Insider’s Economic Dictionary here.
Malthus, Thomas Robert (1766-1834): British economist and spokesman for its landlord class. His Principles of Political Economy (1820) countered Ricardo’s critique of groundrent by pointing out that landlords spent part of it on hiring coachmen and other servants and buying luxury products (coaches, fine clothes and so forth), thus providing a source of demand for British industry, and part capital improvements to raise farm productivity. This emphasis on consumption and investment endeared Malthus to Keynes, but did not deter Ricardo and the financial classes from pressing to repeal the Corn Laws in 1846 so as to minimize domestic food prices and hence groundrent.
Matters have worked out in a way that neither Malthus nor his adversaries anticipated. Most rent is paid to the mortgage bankers as interest by owners who have bought property with borrowed funds. This phenomenon has led bankers to drop their opposition to economic rent, and to view landed property and monopolies as their largest loan market.
Most notable in Malthusian population theory was his contrast between compound and simple rates of growth, borrowed from earlier debates over the expansion path of interest-bearing debts. Malthus shifted the focus away from finance, blaming the poor for their poverty by warning that they would respond to higher wages simply by having more children, thereby keeping their wage levels down. However, the normal response to rising incomes has been for fertility and reproduction rates to slow, as families spend their income on elevating the educational and living standards of their children.
Marginalism: An approach to economics focusing on small changes that do not affect the economy’s institutional and policy structure. Marginally diminishing returns are viewed as adding to prices, while marginally higher supplies are supposed to reduce market demand. This approach takes the technological and institutional environment as given rather than making policy and social reform the major aim of economic analysis, as was the case with classical political economy. The antitheses of marginalism are thus institutionalism and Systems Analysis. (See Structural Problem.)
Marginal utility theory: In the 1870s, classical political economy began to be replaced by a predominantly British and Austrian theory focusing on small changes in psychological pleasure or “pain” resulting from small units added or subtracted from a person’s consumption. As such, marginalist analysis is a synonym for asocial analysis, viewing economic relations in terms of individual psychology based on a crude supply-and-demand schedule of satiation, ignoring the wealth addiction that characterizes rentier income.
Market economy: Every economy is a market economy in one form or another. There are three major modes of market relationships, and they typically co-exist: gift exchange in a system of reciprocity; redistributive exchange at allocated prices; and flexible price-setting markets. Anti-government ideologues usually try to limit the definition of market economy to the latter form, claiming that attempts to regulate prices are inherently futile. But the earliest documented prices are found in Mesopotamia in the third and second millennia BC, in a remarkably stable set of price equivalences among key commodities, salary rates and interest rates administered initially by the palaces and temples and spreading to the economy at large. Standardization always has been primarily a public regulatory function. (See Mixed Economy.)
Market fundamentalism: The belief that the optimum common interest is only achievable through a market equilibrium resulting from individual decisions by market participants seeking to maximize their own private gains. Epitomized by Margaret Thatcher’s declaration that there is no such thing as society, its policy conclusion is that “free markets” should not be distorted by public regulations enacted in the name of the common good. Hence, it has become a synonym for rentier economy, in contrast to progressive economic policy. (See Chicago School and Deregulation.)
Market Bolshevism: The coup by Yeltsin’s oligarchic “family,” so-called because the intolerant and covert means by which financial operators seized power are reminiscent of Lenin’s coup in 1917. Financialized “free markets” require as much centralized planning as does a Keynesian or socialist state, but it is done by large financial institutions. Rather than generating profits in the traditional classical sense of a rate of return on the costs involved in productive investment, the economic surplus takes the form of economic rent – extortionate pricing – as public utilities and natural monopolies are turned over to insiders.
Market price: What the Native Americans sold Manhattan for to the Dutch traders. A power relationship masquerading as a voluntary exchange, as in “Your money or your life.”
Market socialism: Inasmuch as all suppliers attempt to set prices, the main question to ask is who sets them: monopolies, financial managers, or government. Market socialism is a system in which public agencies regulate or administer prices and incomes rather than leaving this function to private suppliers and monopolies. The public objective is to ensure that prices reflect necessary costs of production rather than watered costs, interest or rent; or (in the case of public infrastructure) to subsidize prices for key products or services.
Marx, Karl (1818-1883): Author of Capital (whose second and third volumes were edited by Marx’s collaborator Friedrich Engels posthumously) and its “fourth” volume, Theories of Surplus Value (edited posthumously by Karl Kautsky), the first history of economic doctrines regarding value, rent and price theory (itself three books long, equaling Capital in length). Although acerbic and irascible as an economic writer, Marx was an optimist of the Victorian era in Britain, Marx developed the method of dialectical materialism (irony), which held that financial, political and other social institutions evolved so as to reflect the mode of production, which he viewed in a primarily materialistic, technological light although making it clear that the key consideration was the relationship of labor to ownership of the means of production.
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).