The Insider’s Economic Dictionary: I Is for Ideology

By Michael HudsonThis piece first appeared at University of Missouri, Kansas City economist Michael Hudson’s website. See the rest of the Insider’s Economic Dictionary here.Ideology:

A set of assumptions so appealing that one looks at their abstract logic rather than how the world actually works. (See Insanity.)

Ignorance: Socrates said that ignorance was the source of evil, because nobody knowingly commits evil. But by pursuing their own narrow interests, the financial and property sector destroy the social unit, which is the essence of evil as viewed from an evolutionary vantage point. Thomas Hobbes wrote in Leviathan (1651) that “Ignorance of remote causes disposeth men to attribute all events to the causes immediate and instrumental: for these are all the causes they perceive.”

Corporate practice has become a combination of the Ken Lay “Enron” defense of executive ignorance (“We didn’t know what was going on”) and the Nuremburg defense for subordinates (“We were only following orders”). The presumption that the assertion of ignorance is a lie is provided by the fact that chief executives were paid millions of dollars in salaries, plus tens of millions of dollars in bonuses and stock options. What were these unprecedented sums paid for, if the executives did not know what was going on and played little role in management except for being fools?

IMF: The International Monetary Fund, created at Bretton Woods in 1944 along with the World Bank.

Immiseration: An economic trend that polarizes the economy rather than improving living standards. Under a tax shift and privatization, progress breeds poverty.

Increasing returns: Over time, increasing returns are the rule for advancing economies as production costs decline in agriculture, industry and services. This results in mathematically indeterminate solutions not preferred by mathematical economists. Their desire to “close” economic models by making them result in a single determinate solution (so-called equilibrium) has led economists to retain the notion that economies are typified by diminishing returns.

Independence: The point at which imperial powers shed their fiduciary responsibility to their colonies and turn purely exploitative without having any reciprocal political or social obligations. Under colonialism the mother country had a fiduciary obligation to administer colonies in a way that developed them. Granting them independence was a means of shedding this obligation, enabling the former imperial powers to under-develop client countries by making them food- and debt-dependent. The usual strategy is to turn control over to client oligarchies. The right to make political decisions can be granted once a country’s hands are tied economically, leaving it with little opportunity to make important decisions that might not benefit the former mother country. Political and control was replaced after World War II by a more globalized creditor leverage applied by the IMF and World Bank. (See Stabilization Programs).

Inflation: Central banks rationalize their monetary austerity promoting high interest rates by claiming that these rates will deter industrial companies from borrowing to invest and hire more labor. The aim thus is to deter wage increases, on which price gains are blamed. This rationale has two fatal errors. First of all, companies do not borrow funds to invest; they finance new investment out of retained earnings. Second, higher interest rates usually are reflected in higher rates of inflation, as debt charges are factored into prices so that “fighting inflation” in this way is counter-effective. (See the Gibson Paradox.)

These days the “inflation” in question almost invariably refers only to consumer or wholesale prices. When asset prices are inflated for stocks, bonds or real estate, it is called “appreciation,” or even more confusingly, wealth creation, as if it were not a cost (e.g., of obtaining a home, office space or other site value, or of purchasing a retirement income stream). Hyperinflation invariably is caused by a collapse in the foreign-exchange rate resulting from the attempt to pay foreign debts beyond the debtor country’s ability to earn sufficient foreign exchange.

Information economy: A frequent euphemism that the FIRE “service” economy (a term whose linguistic root is “servile,” meaning slave). Its economic analysis could equally well be called a disinformation economy. The strategy of financial populism is to convince people that the economy’s bottom 90% are best served by pursuing policies that favor the top 10%.

Stated more bluntly, parasitism succeeds by lying. Camouflage is a kind of lying – pretending to be innocuous but actually being dangerous. Taking control of the host’s brain is supplying disinformation. (See Neoliberalism and Neoclassical Economics.) As Marx put it in the “Afterword” to the 2nd German edition of Capital (Vol. I, [1873], London: Lawrence & Wishart, 1954:25), in the wake of classical political economy, “Scientific bourgeois economics … was thenceforth no longer a question of whether this or that theorem was true, but whether it was useful to capital or harmful, expedient or inexpedient … In place of the disinterested inquirers there stepped hired prize fighters; in place of genuine scientific research, the bad conscience and evil intent of the apologetic.”

Inner Contradiction: An analytic principle of irony pioneered by Karl Marx, based on the tendency of capitalism to impoverish the working class by seeking to make high profits via low wages – thereby drying up the market for the products of industrial employers. Imbalance in one direction (such as asset-price inflation) sets dynamics in motion that counteract it (e.g., debt deflation). The principle of security for private property leads to monopolization, financial foreclosure and hence expropriation. Democratic control of government enables the vested interests to shape voting patterns through their control of the mass media via advertising and direct ownership.

Insanity: Doing the same thing and following the same policy repeatedly, and believing that next time the outcome will be different. In economics, an ideological repetition compulsion. (See Free Market, Ideology and Labor Capitalism.)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.

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.)