“The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country.”
— Edward Bernays
The U.S. and other western nations are blindly marching themselves into an intractable societal conflagration. Debt rating agencies have been measuring social-cohesion as a risk factor across the U.S. and Europe for over a decade. However, the unnamed risk is not just poverty but uber-wealth concentrations at levels not seen since the French revolution or the height of the British Empire.
Headlines in January 2019 claim that 26 individuals have as much wealth as half of the earth’s population (here). This is a stunning reversal of the previous 240 years, over which time classical economics expanded the economy, resulting in massive wealth creation, broad income opportunities and an upward shift in the standard of living for all.
This reversal of fortunes, from the many to the few, happened under the stewardship of neo-classical economic policies over the last 40 years. Much like the feudal and aristocratic past, this concentration of wealth has led to the accumulation of massive debts, economic stagnation and the subordination of sovereign states under an increasingly rentier-based (here)economy. It is everything that classical economics set out to eradicate.
All broad measures of economic outcomes across the U.S. and other western economies that have adopted neo classical economics confirms that the long-term application of these policies increasingly serves the interests of financial actors at the expense of everyone else, resulting in the concentration of wealth into fewer and fewer hands.
The rise in support for political actors like Donald Trump, Bernie Sanders and the ‘Infamous AOC (Alexandria Ocasio-Cortez)’ only reflect a deep-cycle trend in history. Today’s massive wealth inequality reflects the pre-classical world’s cycle of rising socialist, communist, anarchist and revolutionary movements.
History suggests that these sorts of political actors will increase in proportion and intensity with further increases in economic inequity, resulting in social, economic and geo-political instability and eventually war(s).
To understand how this happened we must first explore what neo classical economics is and the history and process of how it displaced classical economics: the dominant model for the first 200 years of American history.
But first, let’s begin with the history of economics as it evolved from a zero-growth feudal & aristocratic system to classical economics, a system based on the measured outcomes of empirical observation, to neo-classical economics, a system based on mathematical modeling and self-referential theory.
A Brief History of Economic Evolution
Historically the nascent profession of economics was an adjunct agent of the Crown. Its primary function was to offer up various justifications for the ways, means and mechanisms of conducting the economy for the benefit of the Crown. It provided a pan-European ethical construct for conducting business among and between people of a similar skin tone and faith. The Church provided a more aggressive construct for dealing with everyone else.
During the feudal and aristocratic periods, the Crown’s interests incorporated the interest of the noble & aristocratic class, the landed gentry and the bankers. Early economic thinking was constrained by the regimentation of the prevailing feudal / aristocratic systems and the large outstanding debts of the sovereign.
Under these systems ‘economic gain’ was largely based on conquest, funded by the bankers and the Crown’s transfer of title (and titles of nobility) over productive lands and estates – it was a zero-sum game for everyone but the bankers.
The industrial revolution and the development of a new continent radically altered these systems. Development, industry, trade and commerce, conducted largely by the non-nobility, altered potential economic outcomes. The pie had become larger and new rules of conduct were needed if the Crown was to retain its share of wealth and power. That new system evolved into the science of classical economics.
Classical economics proved to be good for the Crown, the European colonial economies and bankers because it subjugated the relative status of the aristocracy, noble classes and landed gentry: the rentier classes.
The rentier class, is comprised of all non-productive economic actors whose income is based on rental income, income from debt, monopoly income, usury income, inherited wealth (passive investments) or income from agricultural production under feudal-serf, share-cropper or slave holder relationships.
The Finance, Insurance and Real Estate industry (FIRE) are the dominant rentier actors in today’s economy. None of these industries actually produce anything.
For example, finance is nothing more than a transaction cost, or friction in the system. The Finance industry is the most loathsome as it equates to a top-line cost on the formation of real physical capital (plant & equipment). The finance industries ‘take’ on the overall economy has increased over 400% since the turn of the 19thcentury, from less than 2% to over 9%, while costs in all other non-FIRE industries fell over the same period (here).
Insurance is also a non-productive expense to the system that exists to protect the interests of investors and financial backers of a commercial enterprise, and to an equal extent, the underlying business.
Real estate, measured as residential buildings and structures (brick and mortar), do not produce wealth in the classical sense of producing manufactured goods. Classical economics viewed physical real estate as a non-productive asset.
Historically much of the real estate used for domestic residences and agricultural production were owned by the landed gentry, noble classes or the Crown, who collected rents from the working population.
In classical economics “rent(s)” were equated with freeloading, as in the rich collected rent in their sleep.
Today, the defense, pharmaceutical, legal, communications and energy industries also enjoy rental income, income above unfettered market rates, due to government controls, other protections or barriers.
All of these actors extract rental income from society at large.
The new system was challenged by various competing economic narratives until the neo-classical model successfully trans-mutated classical economics, with the goal of inverting outcomes, while demonizing all other schools of economic thought.
Today neo classical economics and its bag of economic policy prescriptions are applied in all G-20 nations, to varying degrees. Most other nations are forced to integrate or conform to its more exploitive features if they want to utilize or benefit from institutions like the IMF, World Bank, various international trading facilities or other NGOs (non-governmental organizations).
Non-compliant actors like Cuba, Venezuela and Iran are subject to monetary manipulation (here), sanctions and covert actions that are designed to generate the appearance of internal instability, with the objective of regime change (spoiler alert: this is what your CIA directed tax dollars are used for).
The Origin of Scientific Principles in Economics
During the later-part of the 18thcentury a dynamic shift in England and Continental Europe’s many burgeoning Colonies had evolved, to varying degrees, into various hybrid economic systems. These systems, unlike a purely feudal agricultural system, were demonstrating real organic growth.
The early classical economists turned their eyes to this new phenomenon; subjecting it to intense scientific study. What they found was that these economies had evolved into a semi-gentrified system of traditional rents and monopolies and the emergence of something entirely new: private businesses, independent ventures & trading companies. Unfettered by feudal constraints and the direct control of the Crown, these new economic features gave rise to something new: organic growth and the entrepreneur.
Early classical economists could see the vast potential of these new systems. Adam Smith’s work, and that of the other classical economists (excluding Ricardo, who promoted the interest of banker and other rent seekers), adapted the scientific method to study these new economic systems – putting them under close inspection and evaluation, with the goal of establishing the conditions and parameters of both growth and stagnation.
Classical economics measured the interaction of independent actors (with the tools available at the time), subjected to varying degrees of influence from the Crown and rentier actors, against resulting economic outcomes. It was the first science-based economic system: employing the scientific method to measure outcomes against various conditions, policies and predictions.
What they confirmed was that feudal and rentier-based economies were incapable of internal organic growth and that monopolistic pricing caused economic stagnation and privation for many.
Growth, internal organic economic growth, was only possible when economic actors were free of traditional feudal, monopolistic and rentier constraints. All of these conclusions were offered up as a blue-print for establishment of modern economies in Smith’s master-work “The Nature and Causes of the Wealth of Nations”.
One of the objectives of classical economics was to minimize or eliminate rentier and monopoly practices, viewed as a hold-over from the economically stagnant feudal and aristocratic past.
Smith, primarily, was an unabashed ‘economic nationalist’and patron of the new entrepreneurial class. His goal was for the establishment of a more liberal form of mercantilism. He was for eliminating market barriers for productive actors but also encouraged regulation and taxation of rent seeking actors.
Smith and other classical economist understood that the profession of economics gained much of its validation from the Crown. So, it is no surprise that his overarching argument for freeing markets was justified on the condition that it enhanced the competitiveness of domestic business and enriched the Crown. In short, Smith was a neo-mercantilist.
This is in contrast to what is taught in most undergraduate and graduate economics courses. Today all universities teach that Adam Smith was a rabid anti-mercantilist. This is an obvious falsehood if one bothers to read Smith’s Wealth of Nations in context (but no one does).
It’s a curious reversal of our history that “economic nationalism”, the foundational-basis of classical economics, is now a pejorative term.
The 18th, 19thand much of the 20th century flourished under this new hybrid economic system, reflecting the interests of the Crown and the new entrepreneurial class. It was a system of neo-mercantilism among the colonial powers and the exploitation of non-European people, resources and lands.
Mutiny of the Moneyed Class
These principles did not sit well with powerful and long-established interests with their feet planted deeply in the economic past.
Legacy interests were increasingly subjected to ‘liberal’ government policies, such as paying taxes to the Crown like everyone else. The noble, aristocratic and landed classes’ historical entitlementswere fading. The gross economic disparities of the past were slipping away because craftsmen, traders and entrepreneurial class were no loner encumbered under the feudal and aristocrat system that locked everyone to their ‘respective’ place in society. Push-back was inevitable.
In response to the rapid expansion of classical economic policies alternate economic narratives were put forward to defend and reinstate the feudal, monopolistic and rentier practices of the past.
These early narratives focused on the merit of the ruling classes, rejecting any contributing economic factors from the state, universal taxation, regulations or the un-anointed emerging class.
Some of these economic ideologies eventually morphed into the Austrian School of Economics, an ideology reflecting the beliefs and interests of the established legacy-ruling-class and rent seekers.
Its relatively small audience failed to effect the desired change mostly because governments were protective of their own interests that were now attached to an expanding electorate, largely connected to labor, skilled workers and the emerging entrepreneurial class.
Ultimately the Crown deferred to its own interests and the classical economist carried the day.
Enter the Neo-Classical Priesthood
Money never sleeps, it stays awake and makes plans for an ever more prosperous tomorrow, built on the probability of infinitely compounded returns. The resulting aspirational goal was that Money would become the master and arbiter of all things: naturally…
For that to happen Money had to overturn classical economics; all questions regarding national interests, obligations to employees & local community, questions of morality, egalitarian taxation & economic participation must be eliminated from economic policy. Money had to be free of communal and collective mores.
Beginning in about 1970, the moneyed class set out to establish an ideological challenge to classical economics. The goal, or result, was to create a narrative economic construct that negated all ethical & moral question in economics.
The problem was that the classical system had gained a reverential reputation over the last 200 years. Classical economics was a humanities-based science. Its underlying premise was collective. To openly dismantle the system was problematic.
A solution was found in the voice of Milton Friedman and the Chicago School of Economics. By using the techniques of Edward Bernays, Friedman and others simply ‘re-branded’ their preferential outcomes within the language of classical economics: a faux-classical economics 2.0.
In truth, neo-classical economics is not ‘new’. It has more in common with feudal economics than classical economics, but is dressed up in modern terminology and its self-referential models.
Friedman and others hid their contrarian designs in simplistic narratives supported by self-confirming mathematical models, circular proofs and technical sounding terms, but wrapped it in the language of Smith and other classical economists.
Members of Congress and the public in general had come to trust the basic principles of classical economics and simply deferred to the expertise of these self-anointed agents of modernization.
From 1970 onward, neoclassical economists published self-confirming semantic dictums and policy prescriptions designed to enhance the power of money & capital, but packaged it in classical language.
Unlike classical economics, that subjected itself to measured outcomes, neo classical economists freed themselves of this loathsome task through the magic of mathematics. According to neo classical economist’s the rigor and elegance of their mathematical models were superior to measuring real world outcomes. Consequently, none of the economic outcomes resulting from their policy prescriptions are subject to empirical observation or measurement.
Neo classical economics expanded rapidly across academia and found its first patron and practitioner in Augusto Pinochet’s military junta in Chile (here), (here).
Beyond the mass disappearances and extra-judicial killings, the ultimate economic goal of this experiment was to transfer Chile’s wealth and resources into the hands of U.S. / multi-national corporations. The long-term consequential outcome for Chile was a measurable failure.
Back in the U.S., one of their first sematic deviations was introduced in the early 1970s, something called a “multi-national corporation”. The term was innocuous enough, but it empowered formerly U.S.-centric corporations to divest any allegiance to their home country and to define corporate responsibilities exclusively by the interest of their shareholders. It was a reversal of classical economics’ nationalistic foundation.
Central to all of this was the core neoclassical principle of shareholder primacy, the most pernicious scheme employed by neo classical economists. Simply put, it commands that the interests of the shareholder reigns above all others.
This made it possible to eliminate social and ethical issues from the corporate decision-making process; placing employees, community, bond holders and national interests outside the boardroom calculus. Today every publicly traded company in the western world is bound to these principles under corporate bylaws and its regimentation is assured under ‘modern’ financial accounting standards.
Shareholder supremacy allowed management, board members and shareholders to establish compensation incentive systems that direct management to manage for stock price above all other measures. The obvious conflicts are buried within the self-confirming neo classical model: as in, ‘all of the conspiring actors are also shareholders’, sort of logic…
Neoclassical economists also successfully achieved the aims of its ideological predecessor’s by undermining the need for government regulations with a simplistic ‘free market narrative’that inexorably resulted in self-regulating markets (more on this later). This was ‘confirmed’in self-referential formulas and proofsderived from something called efficient market theory (more on this later)
Never mind that when used as directed, your ideological product would always result in inverted outcomes.
Friedman’s neo classical policies also found a home within the Regan Administration. It manifested itself in leveraged buyouts, tax policies that rewarded short term transactions over capital formation, deregulation and the sale of public assets. These policy prescriptions, better known as ‘trickle-down economics’, became the centerpiece of U.S. economic policy ever since.
What follows is a short list of classical economic terms and neo classical public policy prescriptions that were semantically distorted to hide their desired outcomes from the public, regulators and policy makers.
Free Trade: The neo-classical argument for ‘free trade’, conditioned on the elimination of tariffs and trade barriers, is literally the opposite of the classical arguments set forth by Smith and others.
Classical economics, as outlined in “Wealth of Nations”, allowed for tariffs (here). Tariffs were used to raise revenues for the Crown, retaliate against foreign obstructions to trade and to promote domestic industry so that they could compete or dominate in international markets.
Managed tariffs were the engine of America’s economic power for its first 200 years and are now successfully utilized by China to manages its economy today – results speak for themselves.
The neo-classical definition allowed multi-national corporations to capture price differentials in non-comparative economies that were formerly reflected in tariffs.
This resulted in the transfer of pricing and costs-differentials across unequal economies for the exclusive benefit of the corporation while the loss of industry, taxes and displaced workforce fell on the host government and working-class people.
The long-term result of allowing corporations to pocket trade differentials that were traditionally moderated by tariffs is reflected in our government’s massive budget & trade deficits, national decay, failing infrastructure and rising social instability.
Trickle Down Economics: In Smith’s time ‘trickle down’ economics would have represented the type of economic deformations that the classical economists set out to eliminate. Trickle down policy expressed itself as massive tax breaks, including passive investments and other forms of unearned (rentier) income, for the wealthy. In other words, this is a rebranding of rentier economics – nothing more.
The neoclassical policy prediction asserted tax breaks for the wealthy would trickle down to the working class and the poor. What actually happened was that the wealthy benefited from an orgy of short-term financial transactions, leveraged buyouts and the off-shoring of technology and jobs. All of these gains were passed on to management and shareholders, via stock market gains, while all of the costs were passed on to the public at large.
Other noteworthy neoclassical frauds and failures:
Efficient Market Theory: This neoclassical ruse states that markets will always arrive at optimal pricing, on all things, in the absence of government interference. This theory was successfully argued to deregulate the financial industry, utilities and the elimination of other regulatory protections.
The fraud of this argument is overwhelmingly obvious, but ignored. If the market was “efficient,” as in fully reflecting all information, then market ‘corrections’, sudden price changes in commodities, interest rates & equities or fraudulent IPOs, accounting scams, Ponzi schemes and public externality cost like pollution would be impossible.
Of course, neo classical economics blames all of these failures on tangential government regulations in its self-referential framework.
Deregulation (financial markets and other): Smith specifically argued for the regulation of bankers and other rentier actors. Everything else was subject to the interest of the Crown.
However, the neoclassical argument is that regulations on financial transactions and the existence of public assets restricts wealth creation and distort optimal ‘efficient market’ outcomes (self-referencing again).
Neo classical economists argued that deregulation and the sale of public assets would result in maximizing efficiency and wealth creation.
Presumably these gains would be shared with all, but the current level of wealth disparity tells a different story.
In regards to the sale of sale of public assets into private hands, ‘efficiency’ gains typically corresponded with reduced maintenance of formerly public assets, in order to maximize profits, resulting their degradation over time.
Other forms of deregulation resulted in the elimination of costs related to access / universal service, quality standards, labor-safety or environmental concerns in order to raise profits.
Financial deregulation’s ultimate objective was to externalizes costs and shifted risk to the public domain (specifics follow).
The 2008 banking failure is a perfect example. Greenspan famously stated that deregulation would “unleash the creative powers of modern finance”. It unleashed something – that is for sure.
Shareholder Supremacy & Wealth Creation: The neoclassical argument states that prioritizing shareholders above all others is the only way to maximize “wealth creation” within corporate structures.
Shareholder supremacy ultimately resulted in what amounts to self-dealing between executive managers, the compensation committee (also a beneficiary of these schemes), board members, investment banks and shareholders as corporations conspire to manipulate stock price and accounting measures at the expense of the underlying business.
Under this subterfuge the symbiotic relationship between corporations and their local environs were killed-off. The expectation that corporations would conform with local, state or the federal governments’ interest died giving birth to the multi-national corporation and the respective interests of the shareholder.
This ruse did not result in wealth creation as promised, but wealth transfer and the liquidation of much of our nation’s legacy capital.
It is important to understand that shareholders are transient by nature. They exist to capture gains and then move on to the next company. Historically this behavior was moderated by high transaction and capital gains taxation costs.
Today, capital gains and transaction cost are inconsequential. As a result, the majority of all equities, on all exchanges, are traded via computer based high frequency, quantitative & momentum-based models. Neo classical economic policy has transformed rent-seeking into a global-pandemic virus transmitted at something close to the speed of light.
By applying the rules of modern game-theory, and in practice, it amounts to looting of the underlying assets.
Service Economy: I think it is fair to say that the much-touted transition away from a manufacturing-based economy to a service economy did not conform to any of the neo classical economic predictions.
By classical economic standards ‘service economy’ work ranks near the bottom in terms of its economic contributions the broader economy and the interests of the Crown. True wealth creation happened on the factory floor or agricultural fields across America.
Today many of these ‘service’ jobs are performed outside the U.S., manufacturing was mostly off-shored and the agricultural economy is drowning in debt (here)(here).
The Global Economy: Neoclassical economists and financial pundits never tire of stating that the new global economy will benefit all.
This would be true if you defined “all” as the top 5% or less of the U.S population. Honest economics would require that the lower prices at Wal-Mart must be discounted against the loss of formerly gainful-employment by most Wal-Mart shoppers.
The neo classical goal of promoting a ‘global economy’ is about the unimpeded flow of capital so that it can capture unequal price differentials in taxation, labor and environmental standards across national economies. It is the ultimate slippery slope to the lowest common denominator; and that denominator is capital.
From a U.S. economic standpoint this neo classical policy prescription has grossly distorted domestic capital formation through off-shoring, capital & IP divestment & dislocations for one-time gains (passed along to the transient shareholder and exiting upper management through higher stock prices) and largely contributed to the unconstrained growth in state and federal debt, urban decay, underemployment and the attrition of high skilled workers.
These outcomes are exactly the opposite of their promised benefit, unless you are a multi-national corporation or one of its shareholders.
Austerity Programs: Promoted as neo classical and Austrian economic theory, the standard IMF prescription of austerity includes the sale of public assets; ultimately transferring tax revenue producing assets from the delinquent state into private hands (here).
Austerity results in fiscal deflation, shrinks the economy, lowers employment, causes capital flight, the loss of tax revenue and the transferring of public assets into private hands; making loan repayment even more difficult. The result, and goal, is to set the country up for another round of austerity and privatization of public assets. IMF and World Bank activities in many less developed economies is nothing more than a confiscation racket.
Austerity programs do not violate classical economic theory if they are used to exploit third world countries for the benefit of the Crown — but they are repugnant. However, today they are also use on first world countries for the exclusive benefit of financial actors.
Consider Ireland who was forced to nationalize the private debts of domestic banks to assure against losses for the larger multi-national banks, or Greece who was stripped of its public assets and democratic institutions to make larger EU bankers whole.
All Economists know this, but few dare speak the truth (here).
Lower Corporate Taxes: The mantra that lowering corporate taxes would create jobs has resulted in the opposite outcome.
Beginning in the early 80s, these tax breaks helped fuel an acquisition spree (leveraged buyouts) that primarily resulted in massive layoffs, downward pressure on wages, accumulation of corporate debt, soaring stock prices for the target and acquiring corporations and the breakup and hyper-sectoring of corporations: making them less resilient to economic turn-downs.
There is no empirical data that even modestly suggests that this stunt has ever worked as advertised.
Despite its measurable failure over the last 30 years the Trump Administration instigated a new round of tax breaks for corporations. The resulting corporate ‘income’ (tax transfers) was primarily used for share buybacks, pay raises and one-time bonuses to officers & directors and dividends to shareholders. Specifically, share buybacks increased 71 percent over the previous record year of buybacks, exceeding $1 trillion (here). Corporate domestic spending on new factories, updated equipment and R&D remained flat or fell, relative to historic trends, as of the publishing of this paper.
Thus managers, directors and board members conspired to spend this taxpayer funded windfall to pump up stock prices ‘for the benefit of shareholders’ (and themselves) with no regard for the underlying operational or capital investment requirements of the business and no concern for the predictable long-term consequences of forgoing investment into the underlying business.
In other words, U.S. tax policy subsidized shareholder gains and corporate executive bonuses – making the likes of Jeff Bezos and Mark Zuckerbergultra-uber-welfare queen’s under this policy ?.
This outcome is the exact opposite of the ‘predicted’ neo-classical policy prescription and undermines capital formation & the efficient utilization and distribution of capital as defined by classical economics.
Lower Capital Gains Tax: The claim that lower taxes on stock market transactions somehow creates jobs is comical, as lower capital gains alters long term investments into a profiteering racket.
Lowering capital gains on stock market holdings, commodities or currencies reduces investment horizons to near-zero as transaction cost are lowered.
This ultimately puts pressure on ‘investment’ horizon’s and corporate decision making as it relates to R&D, fuzzy accounting practices, reinvestment, and the liquidation or monetization of real assets to buy back shares.
By definition this translates into the rapid divestment of capital.
There is no real-world data that suggests otherwise.
Lowering Financial Transaction Costs: This fraud is typically promoted as benefiting liquidity or democratizing markets, but its only measurable effect is in lowering investment horizons to below one-millionth of a second time-intervals, or High Frequency Trading.
High Frequency Trading, the majority of all trading on U.S. exchanges today, allows large investment banks to front run their clients and the market in general. It also promotes momentum-based investments: something that is in strict conflict with classical capital formation and contributes to the creation of asset-class bubbles. This only exacerbates the problem as financial traders make money in ether direction: up or down.
If economists would bother to apply behavior and game theory concepts to a ‘market environment’ with near-zero transaction cost operating at close to the speed of light their models would replicate High Frequency Trading – a trading format that operates nearly-exclusively on non-fundamental data (price momentum & volume data) and can only result in the degradation of capital formation.
fyi: raising transaction and capital gains costs would proportionately reduce high frequency trading and greatly expand investment horizons for real assets. That is how it used to work back in the day…
All of the above were promoted to the public, policy makers and regulators as policy mechanisms that would enhance economic activity, wealth creation, market transparency & self-regulation, U.S. living standards and capital formation.
The ultimate outcome for each of these policy prescriptions is the opposite of the stated prediction (unless you consider accounting gimmicks, short term profiteering and off-shoring to enrich shareholders, management and board members as wealth creation – as neo classical economist do).
The predicable failures are all obvious but the neo classical economic profession never applies scientific standards to its prescribed policy outcomes.
The broader ‘economic profession’ remains silent.
The “Liquidity” Deception requires a section of its own:
Derivatives, hailed by Alan Greenspan and others as “financial innovation”, are complex, unregulated, interdependent, heterogeneous and highly leveraged financial instruments beyond the constraints and controls of any regulatory body.
Western banks and financial institutions now hold over $1 quadrillion of these “financial weapons of mass destruction (Warren Buffet)” and are not on the hook for them if things go horribly wrong.
This sleight of hand was accomplished under the cover of the 2015 Continuing Resolution and Omnibus Spending Actthat amended provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Actregarding derivatives. The change allows banks to book derivatives along-side other regulated and insured debts, giving derivatives seniority over bank creditors. Those bank creditors, under normal accounting standards and as defined under Dodd-Frank Under Title II, Section 209 (b), include the savings and checking accounts of the American public (here), (here). Similar bail-in ‘banking reforms’ were also instigated in the EU (here)).
This mix of what is largely the hypothecation of bets on bets, counter-bets, contingency bets and hedges on bets has resulted in a web of un-extractable collateral interdependencies across all asset classes and across all western economies.
This has no place in classical economics.
High Frequency Trading, a mechanism used by investment banks to front-run their clients and public and private pension funds, amounts to sanctioned criminal activity.
Ditto.
Collateralized Mortgage Obligation (CMOs) styled investment products now include home loans, auto loans, student loans, credit card debt, pay-day loans and just about anything else you can find in a dumpster.
Ditto.
Dark Pool Exchanges, now equal to 40% of all exchange trading, represent the continuing de-democratization of markets. Again, the opposite of what neo classical economist want us to believe.
Ditto.
All of the above are promoted to regulators and the public as mechanisms for enhancing market liquidity, but all are in fact and effect designed to asymmetrically mitigate or transfer risk and costs to others.
Based on the long history of easily observable ‘outcome failures’ one must conclude that these inverted outcomes are intended and that neo-classical economist are not economist at all, but instead, partisan actors seeking the uneven, inefficient and inequitable distribution of wealth and financial outcomes for the benefit of their patrons.
If these inverted outcomes are not accidental, as I assert that they are not, one must also conclude that the ultimate goal of these ‘failed’ outcomes is to reverse all of the historical gains of classical economics, with the net effect of transferring economic power to the financial classes.
Intended or not, the outcome is the same. The global financial system, linked as it is through central banks, investment banks and bond markets, has gained sovereignty over the traditional nation state.
The Assent of Money
Throughout history all monarchies and nation states have jealously guarded their sovereign powers against ‘the money lender’. Greek and Roman statesmen, many leading figures in American’s revolution of independence, members of Congress and past Presidents have prophetically warned against the evils of debt. Throughout history leading figures of government and public policy have proclaimed that debt as the mortal enemy of democratic or republican institutions.
Despite these warnings, debt is now the foundation 0f most of this nation’s ‘wealth’ in our excessively financialized economy. The global financial system is predominantly debt. Global regulated banking debts now exceed global GDP, but unregulated banking debts are at least double that number in something called the shadow banking system (here). Total global public and private debt has reached an all-time high of $215 trillion in nominal terms, or the equivalent of 325 percent of global GDP based on 2017 data(here). However, most public and private real assets are pledged against various forms of debt, re-hypothecated and cross-collateralized into something called derivative instruments that are 7 to 17 times larger than the total global economy (here). The world is drowning in debt and debt in the hands of the creditor equates to wealth and power in this system.
Today even human capital is monetized through debt, as student loans. The current level of debt attached to the future earnings potential of a relatively small proportion of the U.S. population now exceed $1 trillion. As a consequence, America’s managerial, technical and medical professionals now enter the workforce as indentured servants (here).
The judicative superiority of debt over real assets is central to all of this. It is not widely recognized, but in the U.S. and other western economies debt, in its multiplicity of forms, is assigned legal rights, seniority and even super-seniority over and above the underlying ‘owners’ of real assets — allowing economic actors to use debt and financial instruments (think interest rates and financial futures) as a weapon.
The value of debt is determined by interest rates. Central banks, like the Federal Reserve, actively manipulate interest rates for the benefit of their owners: large private banks, investment banks, and the financial industry at large.
Debt is now the most powerful economic agent in the world. Today nearly all public and private assets are subordinated to debt, directly or indirectly. This fact stands traditional “capitalism” on its head.
Global Finance Has Become A Game of Three Card Monty:
With this as our shared history, how is it that essentially all modern democratic representative governments have fallen victim to this destructive menace?
History is nothing more than a timeline-narrative of economic trends and change. But change in a representative democracy,one would argue, is subject to the perceived self-interests of history’s actors.
Unfortunately. the larger public was unable to assess or protect its interests due to the misleading semantics and technical jargonused by neo-classical economists. It was a silent and un-perceived coup.
In short, the collective governments of the western world were fooled by a simple ‘rebranding’ of feudal and rentier economics. Debt gives neo classical agents power over all things, including sovereign governments.
In practice, neoclassical economics has resurrected what amounts to a super-sovereign rentier based global monetary economy with unbounded deference to debt, finance and capital. The state is subordinated and the citizenry is largely reduced to financial serfdom (here), (here).
Neo classical economists established what amounts to a pre-classical economic system that once favored noble, aristocratic, landed, rentier class, monopoly and banker interests — the precursor of the so-called deep statethroughout our collective history: but now Money itself is the state, the noble class and the aristocracy. It is the new almighty trinity.
Who Is The Fat Kid On The Teeter-Totter:
Historically, industry and labor were powerful political actors in the pre-1980 classical economic era. Banking and finance were second and third string actors.
Neo classical economics required a different balance. This change in balance was achieved through the multi-decade attrition of manufacturing (mostly off-shored), related technologies and the high skilled jobs supporting these industries.
The transition was buoyed by the empty promises floated by neo classical economists, promoting the new service economy as the American worker’s new promise land. It is largely ignored that most of these service jobs were also eventually offshored – again, neo classical economists do not measure outcomes.
The transitional pain and dislocation were partly anesthetized with near-universal access to easy credit and recycling a fraction of the one-time gains from off-shoring jobs and industries into the financial market.
With the introduction of broad participation in 401Ks and other financial devices the American workers were told that they were now owners, participants and partners in the ultimate arbiter of wealth: the market.
The last political domino to fall was when President William Jefferson Clinton rang Wall Street’s bell and consummated the Democratic Party’s open relationship with Wall Street.
More specifically, by allowing Travelers Insurance to merge with Citi Bank, including the integration of its investment banking and brokerage assets and the consequential passage of the Gramm-Leach-Bliley Act, Clinton effectively overturned the Glass-Steagall Act of 1932 (here), allowing for a decade of mergers between regulated banks and insurance companies with unregulated investment banks, brokerages and mortgage originators & dealers, making the 2008 and future economic collapses possible / inevitable (here).
Global Monetary Sovereignty
This section explores how and why democratic governments and their electorates were collectively induced into political and economic servitude. It is a story of wealth corrupting our democratic institutions and why the natural balance of power has shifted away from the state.
Neo-classical economics has radically distorted the global economic order to the advantage of their patrons: the banking and financial classes.
Money, finance and capital have achieved super-sovereignty. Money, without borders, has become paramount. The state has become subservient.
It all happened in plain sight.
Over the last few decades this nascent phenomenon could only be discerned through the growing comparative negotiating strength of large multi-national corporations and investment capital against local, state, regional and national governments.
For example, hot money can negotiate concessions and exemptions in developing economies or massive tax incentives and out-sized financial packages in larger, more advanced economies.
Over time the interests of financial and corporate capital gained political leverage over the EU and the U.S. for very different reasons.
In the EU, with its constricting single monetary system and overarching centralized EU bureaucracy, corporate and financial interests were initially able to leverage against the comparative advantages in labor costs between individual EU states and the promotion of ‘liberal’ immigration policies. The mass immigration of cheap labor benefited corporations but destabilized social norms. Over time corporate and financial interests were able to integrate their interests into the EU’s vast bureaucracy of interlocking institutions.
In the U.S. the financial class gained leverage from the expansion of money in the political process, culminating in the Supreme Court’s Citizens United decision (here), .
This was compounded by a rapidly shrinking industrial base and the related loss of manufacturing and other skill-based jobs.
This financial arms racepushed both political parties deeper into the arms of Wall Street. As a result, the interests of the electorate were displaced and financial interests, via corporate dollars, increasingly direct government policy.
On a technical note the Democratic Party’s gets much of its financial support from the same unholy trinity as the Republican Party: Wall Street, defense contractors and PACs (political action committees that largely represent the interest of individuals). Opposition politics, a functioning two party system, is impossible if all of the political actors are pandering to the same institutions and wealth individuals.
These ever-increasing powers were recently aggregated and codified within the Trans Pacific Partnership (TTP) and Transatlantic Trade and Investment Partnership (TTIP) agreements.
The TTP & TTIP, in essence, amounted to a ‘Declaration of Independence’ for all large economic players against what now amounts to the parochial interests of individual and collective nations. When these laws are universally passed representative democracy will cease to exist within all signatory states (and all states subjected to the powers of this new financial amalgamation).
The Emperor Sheds His Clothes
The naked power of the financial institutions was in full display for all to see in the post 2008 banking crisis.
The international banking industry, unconstrained by national borders or regulatory controls and directly enabled by most ‘western governments’, was able to transfer its massive private losses onto the public and in some instances assume dictatorial powers that displaced national democratic institutions. It was all done under the auspices of financial stability.
As a result of this self-inflictedcrisis the “too big to fail” became “too big to prosecute”. All post 2008 financial regulations in the U.S. amount enabling devices (here). As Wall Street continues to roll back Dodd-Frank, its primary function has devolved into an irrevocable ‘hall pass” that codifies most of the high-risk financial activities that caused the 2008 crash into law. In its current form the public is once again on the hook when anything goes wrong.
What followed this entirely self-inflicted economic crisis were the muted mea- culpas from the financial industry, financial regulators and economic elites who were responsible for promoting these ideological policies and deregulation (here).
These confessions and the expansive collateral damage were lost on all as Eugene Fama was awarded the Noble prize for his post 2008 gift of absolutionto the Federal Reserve, regulators and everyone else in the financial industry. Fama’s work basically asserted that ‘markets, perfectly efficient as they are, do not need regulation’. The irony of this was apparently lost on all.
The Scepter of Power
What is the basis for the financial industries power over world governments and how was it that they were able to preserve their undemocratic and anti-nationalistic powers from re-regulation?
Their secret weapon was revealed in their expressed threat to crash global markets through their ‘control’ over a $1 quadrillion network of unregulated derivatives, a complex web of interdependent financial interconnections across all asset classes, in all markets, across all borders: and it worked.
No meaningful regulations were imposed on the banking industry and their unregulated derivatives markets have continued to grow.
Today Money, largely wielded as some form of debt, has become a new borderless anti-state: a financial-super-sovereign interlinked across the globe through the world’s central banks, investment banks, bond markets, stock markets and controlled and coordinated through a vast digital leger of wealth and power.
They operate freely in our congress, national parliaments, inter-governmental agencies and multi-national organizations across the globe. They hold no allegiance to any country, people or this planet.
They have altered the understanding of capitalism,free marketsand history through the inversion of classical economics. This poisonous ideology has successfully morphed into a monetary theology that controls our society.
The age of monetary feudalism has arrived, a new global political economy based on the sovereignty of money over the nation state. This is an observable and measurable fact, yet this fact is largely ignored by the media, academics and the broader economic profession.
The colonial empire model is nearly played out. The third world has been largely monetized. There is little left to exploit outside the pan-European and U.S. theater. Global financial interests have turned inward. They are now feeding on the U.S. and other western governments. Europe and the U.S. are now just soup du jour. Monetary cannibalism is the here and now.
The vector of continued wealth aggregation only weakens the state and undermines social norms and institutions as the aggregators of financial power assume ever greater political capital. States and democratic institutions are crumbling under the weight and power of money.
Conclusion
Today the center of power has changed. The Crown has been dethroned. The moneyed-class has asserted itself as the central sovereign figure in global economics. Nation states are now supplicants to Wealth.
This transition from independent democratic institutions to a system of global monetary sovereignty was built on a foundation of semantics: nothing more.
The continued denial of these observable realities confirms that neo classical economic, the dominant economic ideology, is nothing more than a public relations industry for one-tenth of the 1 percent and we are all its dupes.
Failure to reform will render the larger economic profession’s role in history to that of an accessory. The economic profession must evict all neo classical ideology, principles and prescriptions from public policy before the powers of this new global monetary super-sovereign fully monetize, amortize and depreciate this planet to extinction.
To remain silent is to willfully submit under the yoke of this economically reductive system as it moves us all towards a global financial singularity.
In conclusion, I am promoting an open assault on the anti-scientific methods and asymmetric public policy prescriptions of neoclassical economics that are nurturing a world-wide dystopia of monetary sovereignty and neo-feudal servitude that has deformed our governments, degraded our economies and off-shored our collective futures.
I am openly promoting the re-revolution of classical economics.
