Tuesday, January 26, 2010

Do not forget Keynes' lesson about the euthanasia of the rentier

Classical economists (A.Smith, D.Ricardo, etc.) distinguished between productive and unproductive labour. Some incomes are not earned such as the rent. The rentier economy is that some economic agents, say banks derive their income through speculation rather than from the productive economy. The source of the present crisis is the rentier system that the last financial revolution engineered since the 1980s. Savings have been lent out without increasing production or living standards to finance speculation and debt leveraging. But the big picture is that the debt overhead has soared without corresponding means in the ability to pay this debt.
In the last chapter of the General Theory (Chap.XXIV), Keynes outlined a vision of capitalism in which he figured out the euthanasia of the rentier:
«Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce. I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating,that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution".
However, Keynes does not explain how this process will be accomplished. As Paul Krugman explained in his introduction* to the General Theory,  this rentier aspect was not transitional neither its euthanasia was gradual.
By that, Keynes meant a debt write-down. This is the only ultimate solution. As Adam Smith noted in 1776, no government ever has repaid its foreign debt. Today one can say the same thing about the private sector. Bankruptcy seems to be the indicated way to wipe it out. Governments are postponing this resolution by bailing out creditors – not debtors. This was not the solution suggested by Keynes: he wanted to minimize debt overhead, not bail out the financiers and builders of debt pyramids.
A key feature of the current global crisis is that we have not learnt the lessons from the past crisis. The excessive share of finance in capitalist economies has led to the formation of asset bubbles and therefore to a dramatic increase of inequalities to the advantage of capital holders (rentiers) and to the detriment of the working class. Rentiers continue to experience an increase in the rentier income share in average in the second half of the 20th century in developed countries**. This phenomenon is clearly related with the accumulation of capital and interest rate reduction.
We need a radical change in the finance, insurance and real estate sector – the rentier system -. The recent Obama experience shows how difficult it is.

* http://www.pkarchive.org/economy/GeneralTheoryKeynesIntro.html
** Trends in the Rentier Income Share in OECD Countries, 1960‐2000  by Dorothy Power, Gerald Epstein and Matthew Abrena.

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