Islander VI’s interview of Michael Hudson presents several real problems but provides no good solutions. I don’t just mean that it fails to provide solutions; Hudson tries. The solutions he offers, however, are problems in themselves, broken reeds and poisonous medicine. Government interference is not the solution, as a rule, to the problems he observes; even where it is, the type of interference which would actually have a long-term salutary effect lies far distant from his proposals’ range.

Part IIa–IIb–IIc–IId-IIIa-IIIb-IV

But First, the Theology

Hudson has the kindness to bring up the ‘year of Jubilee,’ found in Leviticus 25. That ordinance commanded a limitation to debt, wherein the man who has sold his patrimony and his own self away to pay his debts is given relief (slavery being a method to pay by labor what could not be paid by capital-on-hand). Under that law, Israel should have put an end to all debts of Israelite-with-Israelite every fifty years, albeit they did not practice it for much of their history (Chr. 36:21), combined with the every-seven-years removal of debt between Israelites in Deuteronomy 15. Hudson also has the perspicacity to recognize that Christ’s message in the New Testament was a call, “to go back to the original Judaism, to Leviticus and Deuteronomy, the Mosaic Law, the Torah” (p. 43), albeit he misidentifies what that “original Judaism” was.

Unfortunately, that’s where my compliments for Hudson on Biblical matters must come to a sharp end. He accepts, clearly, the ‘Higher Criticism’ idea that much of the Pentateuch and other pre-Exilic Scripture was written or edited extensively in the post-Exilic era, after the return from Babylon, as he specifically credits the year of Jubilee to imitation of Babylonian custom, citing Hammurabi’s state-imposed debt cancellations (a means of conquest) (p. 42). Worse, he does not seem to recognize that Christ’s message was not merely a return to “original Judaism”; it was the completion of the Old Covenant promises, the perfection of the Law and the Prophets (Matt. 5:17-18) in the coming of salvation (Mark. 9:2-13).

Further, I find his assertions on church history highly suspect. He holds that Christianity was part of a contemporary anti-creditor movement on the part of debtors in Israel; he further asserts that socioeconomic ties with Rome led to an alteration of this purpose, particularly citing Augustine as a turning point towards an obsession with sex (!) as the main sort of sin, rather than debt. These smack of seeing what one expects in church history, rather than really understanding it. The most that seems probable from this is that social and economic ties in the church helped to file away the application of certain parts of the debt laws in the late early church, albeit the church did maintain a (misunderstood) law against usury until the early modern era.

Debt & Morality

Hudson, on page 43, brings up a point we would do well to recognize: ‘debt’ as a concept is deeply tied to morality. Now, debt can be merely a matter of power: I say that you will pay me or else. That’s how taxes work, nowadays, and protection money, and much of debt (on an analysis of practice). Yet debt has legitimacy on integrally moral terms.

Separated from its analysis as self-protection (pay or else), we pay debts because we ought, and we ought because we owe. If you re-read that sentence, you will realize it is circular. Why? Because the fundamental idea of obligation which is the substance of debt is the substance also of morals. Beware: to say, as Hudson does, that morality and debt are identical, that risks a mistake. Morality is better summed as ‘duty’ than as ‘debt,’ and while duty can be stated in terms of debt, our usual concept of debt operates as a subfunction of duty (and of morality), rather than as a permutation of it. Morality is larger than economic debt; debt is actually an economic manifestation of morality.

Fair Warning

Economics, as a topic, circles in on itself. Discussing A implies B implies C implies A; understanding A requires understanding B which requires understanding A; A is defined using B which is defined using C which is defined using A. It is not an unbreakable circle (Explaining why it’s not.). Once a foothold is gained at one point, the adventurer can exploit that foothold to understand other points. But the order may well be idiosyncratic, particularly when you’re approaching it in a work not calculated to build an entire structure from the ground up. As such, this series of articles may require multiple work-throughs to grasp in full- first, to find the foothold; then, to find each other element that slots in behind that foothold. I recommend also looking into the basics of Austrian economics, particularly the supply-demand curve, to jumpstart certain conceptual links.

Rent

Here we’ll start engaging with the economic nitty-gritty of Hudson’s statements. His discussion focuses heavily on the concept of ‘rent.’ ‘Rent’ is for him ‘profit in excess of the cost of production plus normal profit’ or ‘profit in excess of value.’

We may conceptualize this as any increase in valuation (realized or not) which does not rise from internal alteration of the thing’s nature. Thus, a landlord’s profit off of renting out his land is ‘rent’ (in the technical sense) because it originates from an alteration of the outside world in relationship to the land (a person moving in) rather than from the land outputting some good. Thus, a monopoly produces rent (‘monopoly rent’) because the monopoly company can increase its price (offering a lower supply), maximizing the sale-profit of the total market (itself) rather than maximizing its share of the market (as a seller in a competitive market does), even at the cost of reducing the profit of sellers as a group. Thus, real estate has ‘rent’ added to it by adjacent public works because the existence of those public works (a thing external to the land itself) increases the ‘value’ of the land (well… see article III).

Hudson’s definition of value, notice, excludes the relational element. He assumes that value is “the necessary cost of production” or as “the basic cost of production, including normal profits” (p. 39). But ‘cost’ is determined by all the traits of a thing which are known to the participants in the transaction, including its market value (we’ll be back to this later); in fact, as Hudson uses it, ‘cost’ must be equal to the ‘market value’ (what people are willing to pay) of the thing. Among the important traits for determining the cost of what goes into an item is the potential profit (price) of what the input could produce. In other words, the costs of production are partially determined by how valuable the thing produced will be, because the inputs will be priced according to what they can output.

Thus, the cost of production is determined in large part by the relationship of the input items with the rest of the economy; the cost the landlord bears in using his property (to rent it out) is proportional to how much people will pay to rent it (its ‘market value,’ i.e. its cost, whether treated as opportunity cost or just as value). Costs of production (an intrinsic quality; a part of Hudson’s ‘value’) are therefore heavily extrinsically determined, meaning that by excluding them, rent will turn out to exclude not only all intrinsically derived value (as it does by Hudson’s definition, in excluding all that goes into making a thing) but also much of extrinsically derived value, which ‘rent’ is supposed to encompass.

Rent, as will be seen in article II, can only exist (barring certain false assumptions) when the producer does not bear the full cost of production- i.e. when the ‘value’ of a thing (as Hudson defines it) results in part from an input he did not pay for. Otherwise the ‘cost’ (the market value of the input) is determined by the market value of the output, and in Hudson’s terms no profit (no value increase) occurs at all. (Of course, as per the next section, ‘profit’ happens because different people value different things, so that a transaction with a net zero market value change can profit all parties. More on that in article IIa).

Value

This all is complicated by how we understand ‘value,’ note, because Hudson’s explanation of what value is does not align with what the word actually means, what it must mean in order for its use to contact reality (the worth of a thing). He defines ‘value’ as “the necessary cost of production” or as “the basic cost of production, including normal profits” (p. 39). This explanation in no way comports with the common use of the word, the use he appeals to in his economic prognostications. It implies, for instance, that a broken DVD player (broken by the impact of a sledge hammer) is worth the DVD player’s cost of production, the cost of the sledgehammer (minus the share paid by its other uses), the labor of the hammer’s wielder, and a cut of profit for each person in the chain. Most people will agree that, if it has that value, it can have that value in the trash.

The theory also implies the only method of value creation is by “normal profit,” as that is the only disparity between a thing’s cost of production (value put in) and its own value.

‘Value’ as a phenomenon is, quite bluntly, the worth people associate with something. Value is not inherent to a product; value is a relational property, attributed by a person to something else. Thus we can value anything which which we can have a relationship; that value may be appropriate or it may not be, but in a sense it is a ‘true’ value, inasmuch as it is the value a person attaches to the thing. Another way of putting this is: ‘value’ is how much you want it (and therefore how much you’ll give to get it). This fact of value explains the voluntariness of transactions in a free economy: I value your watermelon as more valuable than my $5, while you, remembering something you could get for $5, value my $5 more than your watermelon. We exchange, and both of us end with a greater value of personal property, as self-assessed, than we began.

(This principle renders a free economy self-ordering towards efficiency. My capacity to use A to make B renders A more valuable to me than somebody who could not so use A; if somebody else comes along who can use A to make C and C is more valuable overall than B, he’ll pay more for A than I will (assuming supply cannot manage both of us) and in result A will be used to achieve the greater value-increase, C-production rather than B-production.)

‘Value’ interacts with the market to produce ‘market value.’ Say I have a house. This house is worth $300K to me, personally; in other words, in a vacuum, I’d take $300K and be on my way. I know, however, that my house can probably be sold for $350K, with a little patience. In light of that fact, I value the house closer to $350K, adding to how I evaluate it the trait ‘can be sold for $350K, probably.’ This $350K valuation, meanwhile, is a function of how much people tend to value the qualities my house possesses- its construction, aesthetics, location, age, reputation, etc. Somebody might come along who lived there when he was a kid and values it at $365K (would be willing to spend that much); he will, however, be willing to buy it for cheaper than that. The market value thus represents not what the owner or buyer value the thing at but the value which the sales process assesses as the valuation most likely to produce a sale. The market value, abstracted from a specific sale, is the value a hypothetical sale could expect to get.

Such a valuation must be above the specific seller’s valuation and below the specific buyer’s (or the transaction will not happen), and the larger the gap between a personal valuation and the market value, the better off the evaluator is (i.e. if I buy a $300K house which I would value at $800K, I make a massive profit in personal valuation, albeit my market profit may be minimal to nonexistent).

Money

Money is not value, but money is typically how we measure value. This results from money’s nature as a means of transmitting value. While money has a little value in itself (we rarely value money in itself), it has value as a means of storing value. Money has value because money allows us to obtain other things- food, water, shelter, entertainment, personal security, etc. Money is a means of storing and thus of transmitting value from me to you or vice versa, so that I can give you money in return for something I find to be valuable (more valuable than the amount of money I pay) and you, taking that money which would be valueless to you in the absence of this use, can exchange that money in turn for something you find more valuable than said currency, realizing the potential value-gain of our transaction.

(In a sense, the potential of that realization made the money valuable and thus caused immediate realization, but that’s arguing semantics, a matter for another time. Or the comments, if you’re kind to me.)

I should note that money can also be a commodity with value as something other than a value-storage mechanism, as in the case of gold currency. Such currency may be valuable to an individual for either for its transaction potential, for its other potential, for its own traits (we must recognize that ‘for its own traits’ can also be dissected down to why that trait is valuable; a moneylover typically loves money because it fulfils his desire for power or suchlike), or for some combination of the three. Market value will reflect a combination of all of them, as the market is a combination of all economically-relevant individuals.

Money, incidentally, may be fairly easy to make. A bank note, like the ‘Dixie’ so famous in the antebellum South, had much more value to people than the cost of running its printing press would suggest. Why? Because it allowed people to access things they found valuable. Its value was not in the “cost of production” plus “normal profits” but a function of what it could do (a product of what it was). 

Conclusion

This article began my consideration of Hudson’s positions with a lot of groundwork. We saw where Hudson promotes directly theological falsities, including the ideas of Higher Criticism (a viewpoint intolerable to a Christian who understands the matter). We acknowledged his correct connection of ‘debt’ to morality (something that will come back with a vengeance in article IV). We then inspected his idea of ‘rent,’ incompletely, and of ‘value,’ both of which will be much interrogated in article II, including a clarifying analysis of how money relates to value.

Next week we’ll start considering whether ‘economic rent’ really is the fundamental problem of our economies.

God bless.