For thousands of years, from ancient Mesopotamia through classical Greece and Rome, temples and palaces were the major creditors, coining and providing money, creating basic infrastructure and receiving user fees as well as taxes. The Templars and Hospitallers led the revival of banking in medieval Europe, whose Renaissance and Progressive Era economies integrated public investment productively with private financing.
To make this symbiosis successful and free immune to special privilege and corruption, 19th -century economists sought to free parliaments from control by the propertied classes that dominated their upper houses. Britain’s House of Lords and senates throughout the world defend the vested interests against the more democratic regulations and taxes proposed by the lower house. Parliamentary reform extending the vote to all citizens was expected to elect governments that would act in society’s long-term interest. Public authorities would take the lead in major capital investments in roads, ports and other transportation, communications, power production and other basic utilities, including banking, without private rent-extractors intruding into the process.
The alternative was for infrastructure to be owned in a pattern much like absentee landlordship, enabling rent-extracting owners to set up tollbooths to charge society whatever the market would bear. Such privatization is contrary to what classical economists meant by a free market. They envisioned a market free from rent paid to a hereditary landlord class, and free from interest and monopoly rent paid to private owners. The ideal system was a morally fair market in which people would be rewarded for their labor and enterprise, but would not receive income without making a positive contribution to production and related social needs.
Adam Smith, David Ricardo, John Stuart Mill and their contemporaries warned that rent extraction threatened to siphon off income and bid up prices above the necessary cost of production. Their major aim was to prevent landlords from “reaping where they have not sown,” as Smith put it. Toward this end their labor theory of value (discussed in Chapter 3) aimed at deterring landlords, natural resource owners and monopolists from charging prices above cost-value. Opposing governments controlled by rentiers.
Recognizing how most great fortunes had been built up in predatory ways, through usury, war lending and political insider dealings to grab the Commons and carve out burdensome monopoly privileges led to a popular view of financial magnates, landlords and hereditary ruling elite as parasitic by the 19th century, epitomized by the French anarchist Proudhon’s slogan “Property as theft.”
Instead of creating a mutually beneficial symbiosis with the economy of production and consumption, today’s financial parasitism siphons off income needed to invest and grow. Bankers and bondholders desiccate the host economy by extracting revenue to pay interest and dividends. Repaying a loan — amortizing or “killing” it — shrinks the host. Like the word amortization, mortgage (“dead hand” of past claims for payment) contains the root mort, “death.” A financialized economy becomes a mortuary when the host economy becomes a meal for the financial free luncher that takes interest, fees and other charges without contributing to production.
The great question — in a financialized economy as well as in biological nature — is whether death of the host is a necessary consequence, or whether a more positive symbiosis can be developed. The answer depends on whether the host can remain self-steering in the face of a parasitic attack.
Taking control of the host’s brain/government
Modern biology provides the basis for a more elaborate social analogy to financial strategy, by describing the sophisticated strategy that parasites use to control their hosts by disabling their normal defense mechanisms. To be accepted, the parasite must convince the host that no attack is underway. To siphon off a free lunch without triggering resistance, the parasite needs to take control of the host’s brain, at first to dull its awareness that an invader has attached itself, and then to make the host believe that the free rider is helping rather than depleting it and is temperate in its demands, only asking for the necessary expenses of providing its services. In that spirit bankers depict their interest charges as a necessary and benevolent part of the economy, providing credit to facilitate production and thus deserving to share in the surplus it helps create.
Insurance companies, stockbrokers and underwriters join bankers in aiming to erase the economy’s ability to distinguish financial claims on wealth from real wealth creation. Their interest charges and fees typically eat into the circular flow of payments and income between producers and consumers. To deter protective regulations to limit this incursion, high finance popularizes promotes a “value-free” view that no sector exploits any other part. Whatever creditors and their financial managers take is deemed to be fair value for the services they provide (as Chapter 6 describes).
Otherwise, bankers ask, why would people or companies pay interest, if not to pay for credit deemed necessary to help the economy grow? Bankers and also their major customers — real estate, oil and mining, and monopolies — claim that whatever they are able to extract from the rest of the economy is earned just as fairly as new direct investment in industrial capital. “You get what you pay for,” is used to justify any price, no matter how ridiculous. It is circular reasoning playing with tautologies.
The most lethal policy sedative in today’s mainstream orthodoxy is the mantra that “All income is earned.” This soporific illusion distracts attention from how the financial sector diverts the economy’s nourishment to feed monopolies and rent-extracting sectors surviving from past centuries, now supplemented by yet new sources of monopoly rent, above all in the financial and money management sectors. This illusion is built into the self-portrait that today’s economies draw to describe their circulation of spending and production: the National Income and Product Accounts (NIPA). As presently designed, the NIPA neglect the distinction between productive activities and “zero sum” transfer payments where no overall production or real gain takes place, but income is paid to one party at another’s expense. The NIPA duly report the revenue of the Finance, Insurance and Real Estate (FIRE) sector and monopolies as “earnings.” These accounts have no category for what classical economists called economic rent — a free lunch in the form of income siphoned off without a corresponding cost of labor or enterprise. Yet a rising proportion of what the NIPA report as “earnings” actually derive from such rents.
The Chicago School’s Milton Friedman adopted the rentier motto as a cloak of invisibility: “There Is No Such Thing As A Free Lunch” (TINSTAAFL). That means there are no parasites taking without giving an equivalent value in return — at least, no private sector parasites. Only government regulation is condemned, not rent-extraction. In fact, taxation of rentiers — the recipients of free-lunch income, “coupon clippers” living off government bonds or rental properties or monopolies — is denounced rather than endorsed, as was the case for Adam Smith, John Stuart Mill and their 19th -century free market followers.
David Ricardo aimed his rent theory at Britain’s landlords while remaining silent about the financial rentiers — the class whose activities John Maynard Keynes playfully suggested should be euthanized. Landed proprietors, financiers and monopolists were singled out as the most visible free lunchers — giving them the strongest motive to deny the concept in principle.
Familiar parasites in today’s economy include Wall Street’s investment bankers and hedge fund managers who raid companies and empty out their pension reserves; also, landlords who rack-rent their tenants (threatening eviction if unfair and extortionate demands are not met), and monopolists who gouge consumers with prices not warranted by the actual costs of production. Commercial banks demand that government treasuries or central banks cover their losses, claiming that their credit-steering activity is necessary to allocate resources and avoid economic dissolution. So here again we find the basic rentier demand: “Your money, or your life.”