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Tech Bubble: Who Benefited? An Interview with Michael Hudson

Who Benefited from the Tech Bubble? an Interview with Michael Hudson

by STANDARD SCHAEFER

During the boom of the 1990s, neoliberal economists and the financial press promoted the the high tech revolution for its ability to reduce production costs. As long as government did not interfere with markets, technology would lead to an improvement in the quality of life. The ultimate beneficiary was supposed to be the consumer. This did not happen.

The main beneficiary was Big Finance. Finance capital, long assumed to play a facilitating role, not a dominating one, actually led to scaled back and distorted technological innovations. Deregulation in finance and the privatization of public services lead to market manipulation, and record consumer debt. Legal protection of intellectual property rights also allowed corporations to keep prices higher than consumers had been lead to expect.

Workers felt they were getting rich as prices for their property boomed, along with the relatively modest stockholdings in their retirement funds. It seemed as if everyone might look forward to becoming a millionaire, not by saving out of their salaries but as investors.

People ran up debts to buy better homes, and then borrowed against the rising market value of their property to pay off the credit-card debt that was financing much of their rising consumption. Low interest rates helped fuel the real estate and stock market bubble by making the debt side of the balance sheet less expensive, creating a "wealth effect" as people came to believe that rising property and stock-market prices would be able to pay off their obligations.

In this interview, Professor Hudson explains how financial engineering rather than technological engineering was the fundamental force behind the bubble. Rather than becoming the anticipated force for social and cultural progress, technology became a vehicle for financial exploitation. Companies sought to keep productivity gains for themselves in the form of economic rent (income without costs) rather than lowering product prices or raising wages. This decoupled the traditional relationship between technology and living standards. Consumer spending no longer occurred in proportion to earnings. The impact of these debts can be felt in the energy sector, medicine, and the labor market.

Employment, productivity and technology

STANDARD SCHAEFER: During the bubble Alan Greenspan rarely was criticized except for the relatively weak employment figures during what otherwise was considered an economic boom. His explained this in terms of increased productivity, and cited technological advance as displacing workers, creating unemployment.

Michael Hudson: There certainly seemed to be a riddle as to why wages were rising so slowly despite historically low unemployment levels. But I don’t think Mr. Greenspan’s explanation focused on technology. In February 1997 he explained to the Senate Banking Committee that the practice of out-sourcing labor and privatizing public services–which in practice meant shifting to non-union labor–was making employees feel so insecure about their jobs that they were afraid to press for higher wages. Under normal conditions, he said, unemployment at the rate then being registered–about 5.4 percent, the same as in the boom years 1963 and 1979–would have led to rising wage levels as employers competed to hire more workers. But stagnating wage gains were more like those of the 1991 recession (when the unemployment rate topped 8 percent) and 1982 (when unemployment reached 11 percent in the aftermath of the Volcker-Carter interest-rate spike).The reason, Mr. Greenspan explained, was heightened job insecurity:

In 1991, at the bottom of the recession, a survey of workers at large firms indicated that 25 percent feared being laid off. In 1996, despite the sharply lower unemployment rate and the demonstrably tighter labor market . . . 46 percent were fearful of a job layoff.

If workers felt as secure as they had fifteen years earlier, they would have pressed for wage increases. But the character of the labor market was shifting sharply in favor of employers, apart from unionized baseball players. Larger companies in particular were being downsized, making workers too worried about being laid off to ask for raises. Commenting on Mr. Greenspan’s remarks, David Hale of Kemper/Zurich International pointed out that as a result of Europe’s more "rigid" (that is, unionized) labor markets, "If France or Germany had enjoyed America’s success in reducing unemployment, their trade union movements would be pushing up wages aggressively and setting the stage for a monetary tightening to slow down the economy’s growth rate." Yet despite the fact that U.S. unemployment rates were so low that employers found themselves obliged to hire and train people from society’s most marginal groups, "corporate restructuring [has] produced widespread anxiety about economic security among middle class Americans."

Under these conditions labor "flexibility" became a euphemism for flexibility in one direction–downward. Workers agreed to go on a part-time basis, acting as consultants or other off-payroll status so that their employers would not have to pay for medical insurance, Social Security and pensions. So to refer to technology is simply to distract attention from the institutional changes that are taking place.

SS: What role has increased productivity played, if any?

MH: There are two kinds of productivity. Most people think of capital equipment increasing output per workhour. Labor does the same amount of work, but produces more. And as it produces more, it does not need to work as hard, because capital saves labor by doing jobs more quickly and cheaply than manual labor, or doing work that people can’t do at all. This is the kind of productivity that one associates with investment in machinery, computers and information technology (IT).

However, today’s productivity is taking a different form. It is associated with laying off employees and working the remaining workers harder. There is little technology at work here, but rather the kind of drudgery from which technology was supposed to free employees. Work has become more unpleasant and stressful as companies let their work force shrink by attrition. When workers leave, their work is distributed among the remaining employees.

Working labor more intensively is occurring most of all in the so-called high-technology sectors such as information technology and computer programming, as well as finance. The higher an employee is paid, the more intensively he or she tends to be worked. So while someone may be making, say, $150,000 a year, in effect they are doing the equivalent of three 35-hour-per-week jobs that pay $50,000 each. The effect is a rapid burnout. Workers are being used up and discarded.

Employees who do not agree to work late (without overtime pay) find themselves criticized for not showing enough "company spirit" and giving 110 or 150 percent. These are the next ones to be let go, frightening the remaining workers to fall into line.

None of this has much to do with increasing technology through new capital investment or technological innovation. It is more a cultural phenomenon, a change in attitudes. It is simply a case of working employees more intensively. This increases worker discontent and causes resentment in an environment of fear–the kind of tension that led to British-style class war and ended up lowering productivity because of the constant labor-capital strains. Yet the statistics show it as increasing productivity, and the process is called "rationalization," which is another euphemism for downsizing the labor force.

Over the long run it may not seem to have been so rational when America suffers from the "British disease" of class antagonism. This was the disease that continental European social democracy aimed at curing, but the cure is now being denounced as government intrusion into free markets.

In the sphere of public-sector employment, cities and states are privatizing public services. This means shifting to provider companies that employ non-union labor, which lacks the power to protect itself against downsizing and more intensive working conditions and forced overtime. I suppose one might call this the "technology of intimidation." But it has involved control of government and cultural attitudes, not technology as most people understand the term.

Everybody likes technology in principle, so that is the term applied to make bad situations appear as something inevitable and inherent in progress, not as a dysfunctional social change. Nobody likes intimidation, except corporate managers. So the vocabulary has been loosened accordingly, in a way that George Orwell would have found familiar.

SS: How is this different from past productivity booms, and what was the effect on workers back then?

MH: Working conditions were much less stressful back in the 1960s. The booming economy was creating a demand for labor that obliged employers to meet basic social standards. Employees left at 5 o’clock. President Kennedy’s wage-productivity guidelines said that when labor productivity increased–as measured by output per workhour–then wages should rise proportionally. This was the principle embodied in the 1962 steel settlement, for instance.

The 1960s also saw workers receive profit-sharing and pension plans, as well as medical insurance. Today, mergers and acquisitions are being "engineered" to wipe out many of these benefits, emptying out the pension funds to pay the financial institutions that have put up the money for the corporate raiders. All this merger and takeover activity has been ruled legal rather than prosecuted as racketeering, as it was widely perceived to be as recently as the early1980s, when some companies tried to use RICO laws against Drexel Burnham during the Michael Milken years.

So the corporate merger movement has aggravated the problem, and it is being managed by the large financial investment bankers. The motive for these mergers is not technological, and in fact most mergers do not even increase earnings, but result in simple asset stripping. The labor force is also stripped of its most experienced and loyal members.

In this setting the new financial managers have replaced earlier personnel practices with an adversarial attitude toward labor. Rather than seeking to retain workers, many companies seek a high turnover, precisely to minimize their non-wage benefits.

SS: What is the long-term effect?

MH: The kind of productivity envisioned from the Industrial Revolution down to the rosy forecasts made around 1945 saw machinery doing more work and freeing labor for more leisure. Instead of this occurring in recent years, just the opposite has resulted. From the 1950s onward, more and more women have been forced to go to work to help their families make ends meet.

This was welcomed as opening the full range of intellectual and economic opportunities for women. And indeed this was the most positive result. But the basic impetus of economic need became apparent as men and women, mothers and fathers, both had to work longer and longer hours to break even, and even had to hold two jobs–a full-time job and part-time job moonlighting.

Statistically this appears as the labor force producing more output per worker and per workweek. But actual labor productivity per hour has not increased by anywhere near as much. Workers are spending more hours–and more of the year–working than do their counterparts in Europe.

The reason is that they can’t afford to pay their bills without working more, and even so most are going further into debt.

SS: What about high productivity and the promised leisure society? How does the relatively high unemployment undermine worker’s ability to demand decent wages?

MH: It seems ironic that American workers, who are reported to have nearly the highest international labor productivity, are obliged to work longer days, with fewer vacation days, than their European counterparts, without the overtime paid by employers in the other leading industrial nations, and without their health and injury protection or other social insurance. Responding to the wishes of the retail store-owners’ lobby seeking to minimize overtime pay, the Bush administration pulled a trick on workers by reclassifying many of them as "management" and depriving them of the right to collect overtime payments. On June 30 a group of Democratic senators and Congressmen sought to reverse this plan, pointing out that "At least one in five employees now has a workweek that exceeds 50 hours. Protecting the 40-hour workweek is vital to balancing work responsibilities and family needs." And this is from a Republican president who claims to be pro-family. The source of this scrimping on overtime pay has nothing to do with technology displacing workers, but rather with the power of industrial lobbies contributing to the campaigns of politicians who pledge themselves to cut back labor rights in a way that European social democracies would not dare to do–yet. This is why Margaret Thatcher and Ronald Reagan aimed so much of their hatred against Germany, whose unions have more political clout and even more important, cultural influence, and much less class warfare exists. But American labor has not been confronted with the kind of class war situation that is being waged today in a rather one-sided way.

SS: Conservative pundits argue against increasing the minimum wage on the ground that if employees were paid more, it would lead to higher unemployment–and more unemployment would derail consumer spending and ruin the economy. But you say that this spending already is in jeopardy. Can you explain?

MH: First of all, you need to look at just who the economists saying this are, and who they are working for. Graduate economics courses have become classes in rhetoric. The idea is to make plausible and logical arguments based on assumptions that need not be realistic at all. The criterion for economic theory is simply whether it is internally logical, not its realism. That is what makes economics a non-science in the sense that the physical sciences require not only a consistency of assumptions, but realism as well. The task of economists is to come up with a set of assumptions that will lead to the conclusions promoted by their employers. Academic programs train economists to succeed in this endeavor.

SS: If we had a more objective, non-biased economic analysis, what would it show?

MH: The problem of inadequate consumer demand to fuel an economic recovery does not lie with the cost of labor so much as with the fact that it is now normal for families to pay a quarter or even a third of their income for debt service. This diverts spending away from goods and services. The Bureau of Labor Statistics reports that this proportion rises to 40 percent for home-owners who have taken out big mortgages to buy their homes as the real estate bubble has pushed housing further and further out of reach of families that in the past could have afforded to buy similar properties with their earnings. Many companies are in a similar strapped position. They are not able to invest in new physical capital equipment or buildings because they are obliged to use their operating revenue to pay their bankers and bondholders, as well as junk-bond holders. This is what I mean when I say that the economy is becoming financialized. Its aim is not to provide tangible capital formation or rising living standards, but to generate interest, financial fees for underwriting mergers and acquisitions, and capital gains that accrue mainly to insiders, headed by upper management and large financial institutions.

The upshot is that the traditional business cycle has been overshadowed by a secular increase in debt. Instead of labor earning more, hourly earnings have declined in real terms. There has been a drop in net disposable income after paying taxes and withholding "forced saving" for social Security and medical insurance, pension-fund contributions and–most serious of all–debt service on credit cards, bank loans, mortgage loans, student loans, auto loans, home insurance premiums, life insurance, private medical insurance and other FIRE-sector charges.

Hardly any economist has been so outrageous as to claim that this Financial, Insurance and Real Estate (FIRE) overhead is "technology." It has not even been mentioned that the growth in this financial and rentier overhead has outstripped the contribution of productivity gains for most workers economic welfare.

SS: Isn’t the growth in wealth and saving recycled somehow to become a demand for goods and services? I’m referring to Say’s Law of Markets–the idea that supply creates its own demand.

MH: This circular flow is interrupted by FIRE-sector charges siphoning off the revenue which employees normally would have available for spending on the goods and services produced by their employers and other producers.

SS: Wasn’t this the criticism that Keynes levied against Say’s Law?

MH: Not really. He saw saving simply as non-spending. The problem is that savings are turned over to financial institutions, which lend them out at interest, which leads debts to double and redouble. As this debt service grows, consumers have less net ready money to spend, because they are obliged to pay more interest and amortization on the loans they have been obliged to take out just in order to break even, to pay for their education, to achieve the American dream of home-ownership, to pay for their children’s education, and simply to retain their social and economic status by keeping up with their neighbors. The irony here is that these neighbors themselves are running into debt for just the same reasons to participate in today’s economic rate race. Yet most people think that the problem is theirs alone, and blame themselves for a change that has become society-wide.

As consumption and home ownership have become financialized and debt-ridden, earnings growth is eaten up in payments to creditors. Debt repayment, along with Social Security, Medicaid and pension fund contributions, are euphemized as "savings," as if they are available to people to cope with their current needs, or may be available later rather than wiped out by new predatory financial scandals. Meanwhile, the interest charges on these unavailable quasi-savings accrue to the financial sector to lend out to yet new borrowers, extracting yet more interest from the economy at large.

The upshot is debt deflation. This occurs when debt service absorbs an amount larger than the increase in income, leaving less net revenue available for spending on current goods and services.

SS: If profits were being eaten up in this way, how is it that the stock market bubble was attributed to problems in digesting the rapid pace of technological breakthroughs since the 1980s?

MH: It’s only playing with words. Certainly the explosion of internet usage spurred public offerings in dot.com companies, while privatization of telephone companies throughout the world, and new communications technologies for high-speed information technology led telecom companies to become the largest investors–and also the largest debtors. What brought stocks down was not a technological slowdown or mere overcapicity but rising debt to buy property rights–the radio and communications frequencies being auctioned off by governments, on which companies could charge rent just as landlords charge rent for their locations and sites.

The workers were not better off, but neither were many companies or even their stockholders (who included their own workers via captive pension plans). Bankruptcies were concentrated in the highest-technology sectors, that is, the most debt-intensive. These were the sectors that permitted their fortunes to be steered by investment bankers and other financial advisors. These financial interests got the richest gains.

SS: When you say the economy has become financialized, you are suggesting that its character has changed. Jobs today certainly require more technical knowledge, and this requires more education. That costs money, and most students now need to take out loans to afford it. Some economists say that the United States doesn’t need the old-fashioned "rust belt" jobs. We’ve exported the demand for manual labor–the traditional working class–and the economy may become a nation of service- and technology-oriented workers. Isn’t this the dream of a "post-industrial economy"?

MH: It could almost as well be called a lapse back into the pre-industrial usury and rent economy of European feudalism.

SS: But that was not an economy of productive services, or of goods or even wage labor. Can you be more specific as to what is unique today?

MH: Small and medium-sized companies have been responsible for the growth in private-sector U.S. employment since 1990. These companies range from small manufacturing establishments to retailers, real estate management companies and law firms. Most of these companies are domestic, not multinational. That means that they are more likely to pay federal, state and local taxes, as they are unable to use intra-company pricing via tax-avoidance banking centers abroad, or other techniques that the financial industry has promoted for larger companies.

If one breaks down employment by sector, the statistics show that employment in manufacturing and other sectors that classical economists called "productive"–primary production in agriculture and mining, secondary production in industry, power production and transportation–has not risen since 1929. All the growth has been in services and in the government sector, mainly at the state and local level in the case of public employment.

However, state and local employment has been cut back as a result of the fiscal squeeze on local government imposed by Pres. Bush’s tax cuts on the higher wealth brackets and their capital gains. The circular flow between wealth-creation, tax payments and the supply of public services has been broken. The gap can be closed only by running yet more deeply into debt–or in reversing the growing tax giveaways to the FIRE sector since 1980.

Industry also has become debt-ridden. This is especially the case for the largest firms, for these have been where most merger and acquisition activity (a euphemism for corporate raiding) has been concentrated. The sharpest declines in private-sector employment have occurred in the "high-tech" industries whose balance sheets have become so debt-ridden that they have been obliged to cut back their investment in order to use what revenues they have to pay their bankers and bondholders.

The most serious bankruptcies, bond defaults and layoffs have occurred in companies that have borrowed to acquire other companies or to buy up the public domain that is being privatized. Investment bankers found "wealth addicts," ambitious CEOs who could be persuaded to pay enormous consulting fees to the bankers and accounting firms to arrange for them to borrow money to buy other companies or public rent-yielding assets being auctioned off.

The problem was that these mergers and takeovers did not create new wealth, that is, new capital formation. They merely upped the price of existing companies and their property claims on income–their ability to charge for access to the domain they controlled. That was the essence of the telecom and dot.com bubble. What Mr. Greenspan and the media taking his statements at face value called "wealth creation" was a process of loading the high-technology sectors down with debt, while issuing shares at enormous commissions and instant capital gains that were made possible by convincing the population that "peoples’ finance capitalism" had arrived and everyone had a chance to become a millionaire in the new Wall Street casino.

It is true that part of the debt was used for capital spending on industrial equipment, hoping to achieve a monopoly position. But by far the bulk of debt was used to buy rival companies, as occurred when MCI bought Sprint, and when European companies bought hitherto public monopolies.

As in most casinos and lotteries, the clients end up losing. That is why casinos have become such good business for their proprietors. Their technology is ancient, by the way, not new.

SS: Supposedly, this is where market forces are supposed to come in and clean shop. It’s going to be hell on workers when they get laid off as companies are forced to downsize and sell off assets or entire divisions and affiliates to pay debts. Meanwhile, their bankruptcy procedures wipe out employee pension plans invested in the stock of their employers, and employee savings in general.

This is euphemized as the "corrective" method of the marketplace, at least of financial markets stripped of public protection for employee savings in favor of Big Finance. A lot of speculation in military contractors occurred after 9/11, and has continued to this day. So it seems the market thinks the defense industry will be where the growth is, providing a political umbrella of subsidies for new high-tech ventures.

The privatization of medical care has proved to be a boon to biotech and pharmaceutical research, and DARPA is now giving money to these sectors as well. So my question is whether these booms in R&D spending are likely to bolster the economy and employment even if they fail to lead to new technological breakthroughs.

MH: Even military spending and its related high-technology spending won’t be enough to offset the debt overhead that is stifling new investment in today’s financial environment. It is too narrowly focused to be able to save California, Long Island and Massachusetts.

Although interest rates are falling, new direct investment will not be undertaken at less than a 15% expected rate of return on equity. It is easier to make money financially than by new direct investment. Most corporate bonds were issued when interest rates were much higher, so the companies have to pay them. The beneficiaries of falling interest rates have been mainly the bondholders, not new borrowers, because only a fraction of existing debt represents new debt at the recently falling rates–which now are rising once again.

A large proportion of corporate and real estate debt was not issued to create new wealth and new sources of income, but to buy property already in place. In this sense it was what classical economists called unproductive debt. To the extent that "wealth creation" takes the form of debt-financed property and securities transfers, it has created deadweight on the economy’s tangible wealth and income.

SS: At what point do increasing interest payments on the national debt interfere with the return on these securities?

MH: Interest payments are deemed "non-discretionary." This means that they cannot be cut back. Either "discretionary" spending must be reduced–social welfare, new infrastructure investment and military spending–or the money must be borrowed or new government money must be created. Something must give somewhere.

Borrowing more will require still more interest charges. Cutting back government spending will reduce private-sector income, making it even harder to carry the corporate, real estate and personal debt overhead, so the debt problem will snowball. This is what systems analysts call positive feedback.

Energy and the debt crisis

SS: Peter Schwartz and like-minded futurists haven’t put much emphasis on debt. They promise that the internet and information technology can pull us out of the crisis. How do you respond to the futurists who still pound the table for technological advance?

MH: Back in 1976, I got into an argument with Herman Kahn over just this question He asked me to project GNP growth exponentially for the third world. His objective was to show that with only 2 or 3% growth, the per capita GNP of these countries would double and redouble in time, bringing their living standards up to those of North America and Europe today.

I couldn’t make myself do the simple calculations. I pointed out that only debts grew exponentially, year after year, and they do so inexorably, even when–indeed, especially when–the economy slows down and its companies and people fall below break-even levels. As their debts grow, they siphon off the economic surplus for debt service, capped by late charges and foreclosures–or in the case of third world countries, privatization sell-offs of the public domain to financial interests in the creditor nations.

The problem is that the financial sector’s receipts are not turned into fixed capital formation to increase output. They build up increasingly on the opposite side of the balance sheet, as new loans, that is, debts and new claims on society’s output and income.

The assumption made by financial lobbies to insist that debt is not a problem is that technology will produce enough profit to carry the interest and debt repayment charges that are due. But as I just pointed out above, debt problems actually are highest in the "high-technology" sectors, precisely because they are the most capital-intensive sectors and because their monopoly position has been bid up in price with borrowed funds.

In this respect the technology bubble has convinced people that earnings–their own personal income, and that of the companies in which they invest–may outrun the growth of debt. This has been an illusory dream for centuries. It neglects to distinguish the financial sector’s exponential dynamics from the technological and industrial sector’s earning power, which is dependent on market demand net of debt service.

The most serious shortcoming of many futures studies is the tendency to view technology as a force in itself. The problem deterring economic recovery today is not a slowdown in technological innovation, but the exponential expansion of debt. This means that the volume of debt grows more rapidly than the economy’s ability to create an economic surplus to carry this debt.

The point of intersection looks like it has been passed for the information and real-estate sectors at the top of the economic pyramid, and for lower-income debt-strapped families at the bottom. When this occurs the economy and its technology become over-indebted, and property begins to pass from debtors to creditors. Stockholders are wiped out as bankers and bondholders take indebted assets into their own hands.

The financialization of medicine

SS: So you contend that workers and consumers have not benefited from the technology boom.

MH: Obviously it has greatly increased the range of consumer goods. It has vastly lowered the cost of telephone service and other communications, as well as information processing. It has made capital gains for stock-market speculators, gains that have spilled over to homeowners as the economy’s asset prices have been inflated across the board. The technology boom also has provided new medical techniques, new drugs and other positive breakthroughs. But, the supply price of delivering medical care and even many of the hitherto public services that have been privatized has increased.

Look at how medicine and health care have been financed. Most of the profits generated by nursing homes and managed health care have been absorbed by mortgage debt, stock dividends and executive salaries–including stock options and capital gains. The largest short-term gains of all have come from underwriting new stock issues. To the investment bankers the technology boom simply meant more commissions and day-to-day trading gains, a churning of accounts.

Medical technology and pharmaceuticals provide a good illustration of one of the best-known set of breakthroughs whose promise has been absorbed primarily by financial overhead since World War II. It shows why doctors, nurses and other practitioners of the new technology as well as patients have found themselves squeezed rather than benefited in the way that was widely anticipated. Most observers back in 1945 would have thought that the technology would prove to be a bonanza for doctors. Certainly the American Medical Association did everything it could to make this the case.

What they did not anticipate was how the financial sector would create the "managed care" industry as an outgrowth of the FIRE sector’s insurance component. The way in which things have worked out has monopolized the lion’s share of earnings from the new technology for debt service, insurance and other FIRE-sector returns.

A precondition for doctors opening their practice, for instance, is to outfit their offices with expensive diagnostic equipment and treatment facilities. Hospitals have bought even more expensive technology. This equipment does indeed produce an income, but doctors don’t get to keep most of it. They have to pay much of their revenue in principal and interest charges and have to employ almost a full-time office accountant to deal with the insurance and managed-care companies to get fees which are steadily reduced to squeeze out as much profit as is available after meeting basic break-even operating costs.

Meanwhile, the "human capital" that represents the cost of their graduate medical education finds its counterpart in education loans, also at interest. It takes most doctors many years just to work their way out of debt and get to the "zero" mark. In this sense they are analogous to most professions. Modern men and women are born into debt, and spend their working lives trying to extricate themselves. The more capital-intensive and patent-intensive (that is, rent-yielding) the technology is, the harder it is for its practitioners and consumers to work their way out of debt. It’s as if debt has become the post-modern version of Original Sin.

The medical sector has been "financialized" most notoriously by a shift away from traditional family doctors to impersonal HMO’s. The practice has nothing to do with technology as a "mode of production." What is at work is rather a mode of financing. Its development shows the degree to which the financial sector’s power is so strong that it overshadows the impact of technological advance.

We see here the tendency of finance–and of pro-finance legislation­ to adopt a social philosophy that breaks up traditional long-standing family relationships. The former coherent world is cut apart. Each time a worker changes jobs, or even each time the employer changes its health insurance carrier, employee-patients are obliged to change their doctors or at least their specialists–or else pay exorbitant rates due to the doctors’ own financial overhead.

These practices make privatized medicine more expensive than socialized medicine. That too has problems, to be sure, but they are a different kind of problems, and are more amenable to streamlining than financialized technology.

The moral is that anyone trying to forecast the future on the basis of technological determinism is bound to be overly optimistic. Technology represents potential. Finance represents constraint.

SS: What is the common denominator at work here?

MH: In many cases technology has simply been a vehicle to induce its users (and the companies supplying it) to run into debt. In this respect its major consequence has been financial, and this has been largely left out of account. The economic surplus is being absorbed by interest charges on the loans that have financed the capital investment that doctors make, telecom companies make, and that the big information technology companies have made, without generating the profits needed to pay off this debt.

Most people are now coming to see the costs that are left in the wake of this kind of financialized technology. Attorney General Eliot Spitzer’s prosecutions depict Wall Street as using technology as an opportunity to charge heavy fees for underwriting and promoting stocks, and seizing the opportunity to make quick trading gains. These gains have accrued to finance capital, not physical capital. The result–and in many cases even the aim–of technology has not been to benefit society, but to create management fees, consulting fees and lending opportunities for the financial sector.

The supposed beneficiaries you asked about earlier–the consumers–are being squeezed. The employees in these new high-tech industries are being squeezed, and as employees they are being squeezed even more by being overworked, and then laid off. Many have defaulted on their home mortgages and other debts. Small investors who put their savings into these companies are likely to find themselves wiped out by the insider dealing and financial maneuverings that have been engineered–and without any serious criminal prosecutions to date!

It is an ominous sign of our times that the term "engineering" is now being used more in reference to corporate balance sheets for "financial engineering" than to physical research and development.

SS: Much of what we think of as technological progress from the modern era like easy access to electricity required government intervention. Rural electrification came together under LBJ in the 1960s because power companies didn’t want to spend the money to connect those areas to the grid. The above-mentioned Peter Schwartz says that just as the 20th century expanded on the wave of low-priced energy, the coming century will expand on a wave of low-priced information. How do you respond?

MH: Let’s look at the August 2003 blackout. Neither the power generation companies nor the distribution companies had a "market" motivation to supply sufficient power. Just the opposite. The power companies realized that they could make more by not investing, leading to shortages that would enable them to charge crisis prices, Enron-style, than by investing to keep up with the growth of demand–in this case, peak demand. Distribution companies for their part had little "market" incentive to build more transmission capacity that would only be used at peak hours. In this sense the power crash was created by the deregulation philosophy pursued since the Market Fundamentalists gained control of public policy in the 1980s. And their philosophy in turn was sponsored by the financial sector, in order to gain rent-yielding resources and manipulate balance sheets to as to avoid paying taxes.

Many engineers have been warning that the present crash was bound to occur. Here again the cause was not technology as such, but economic ideology.

SS: The economy is reliant on power for growth in output. There is a correlation between kilowatt-hour consumption and GDP. What do the changes in power production and costs mean for future economic growth?

MH: Energy has produced power less expensively than horse-power or manual labor. Information technology does not lower costs so much as provide a new array of services. Some people have suggested that as much time has been absorbed by using information technology for these new purposes (games, e-mail and activities like reading of this interview) than has been saved.

SS: How would you summarize your views on how finance capitalism has shaped technology, in a nutshell?

MH: My basic point is that the 1990s were not so much a decade of technological innovation as financial innovation, including the political deregulation of companies being financialized. This financial innovation has not spurred technology and industry but has worked to strip capital formation, research and development. "Economic research" consists largely of looking over balance sheets to engineer corporate takeovers rather than improve production techniques. The so-called rationalization of labor and production has consisted mainly of working labor harder and burning it out earlier, while stripping away the responsibility for employers to pay medical and retirement insurance by out-sourcing labor and moving it off the balance sheet. The result has intensified the drudgery of labor rather than freeing labor.

SS: This seems to be a good point to break this interview, and hold the next one on the effect of today’s New Finance on the legal system, culture and politics.

Professor Michael Hudson is an independent Wall Street financial economist. After working as a balance-of-payments economist for the Chase Manhattan Bank and Arthur Anderson in the 1960s, he taught international finance at the New School in New York. Presently, he is Distinguished Professor of Economics at the University of Missouri (Kansas City). He has published widely on the topic of US financial dominance. He has also been an economic adviser to the Canadian, Mexican, Russian and US governments. His books include Trade, Development, and Foreign Debt (Pluto, 1992, 2 vols.). He is the author of Super Imperialism.

STANDARD SCHAEFER is an independent economic journalist, a cultural historian, literary critic, poet and short-story writer. He teaches at Otis College of Art and Design. He is the non-fiction editor of the New Review of Literature. He can be reached at ssschaefer@earthlink.net.

© 2003 Michael Hudson and STANDARD SCHAEFER. This interview is part of a work-in-progress. Any reproductions or excerpts are subject to request.