The Roles of Capitalism and Socialism in a Mixed Economy

In the book J is For Junk Economics: A Guide to Reality in an Age of Deception by Michael Hudson, there is a section that has a relatively simple explanation of the value of having a mixed economy that includes socialism and capitalism. (I have taken the liberty to change the punctuation of lists to match the style I find most readable. I have also fixed a minor typographical error. I hope I haven’t introduced any errors of my own.)

How many participants in today’s economy understand this way the economy ought to work to be “efficient”? How many people really understand what “free” means in the term “free market”?

Intrinsic cost-value vs. value-free rentier price theory

Factories and farms that produce commodities are different from rent-extractors who set up monopolies as legal tollbooths to charge for access to land, water, and other natural resources, or for credit, roads, and other infrastructure, or drug company patents and information technology. The costs of tangible capital investment in industry and agriculture ultimately can be resolved into the expense of labor to make products, the machinery that produces them, and the raw materials, or other inputs needed for their production. But land rent, natural resource rent, monopoly rent, interest, and financial fees have no intrinsic cost, except that of paying lawyers and lobbying politicians for favors and privileges. The resulting technologically unnecessary charges add to the prices without reflecting real value based on cost of producing the “service” being provided.

That is why socialist economies can adopt technology and operate with lower costs of living and doing business, They are free from having to bear a rentier overhead. This is the kind of free market that classical economists wanted. It is industrial capitalism at its most efficient. It can only exist in a mixed economy,which is now vilified as socialist – which was not a bad word in the 19th century. The question was, into what kind of socialism was capitalism evolving? Into a mixed economy of state socialism, Christian socialism, a utopian plan such as the Fourier communities, or labor socialism?

Whatever the answer, certain common denominators spanned the reform spectrum on classical moral philosophy that viewed economic rent as socially coercive and unfair as well as unnecessary for applying the new industrial technologies.

Landlords, monopolists, and other vested interests defended their privilege to charge what “the market” will bear by denying that there is any such thing as unearned income. High prices that included heavy economic rents were viewed as reflecting consumer “utility” – otherwise, users of monopolies and renters simply would not pay the prices being charged (assuming that they have a “choice” not to eat or live in a dwelling).

The proverbial “idle rich” and other recipients of economic rent applaud economists who depict them as productive and even necessary for society to function. Rentier income and wealth is supposed to “reward” its beneficiaries in proportion to what they are assumed to contribute to the economy’s output. This is the economic theory of John Bates Clark and his followers. It assumes that everyone earns whatever income and wealth they manage to obtain, regardless of how they do this.

The resulting orthodoxy depicts finance, insurance, and real estate as part of the GDP, not as a subtrahend or transfer payment from the economy to rent takers. This practice rejects any distinction between intrinsic value and market price, or between productive labor and credit compared to “zero-sum transactions.”

To cap matters, any transaction is said to be a voluntary exercise in choice by definition – even borrowing to avoid starvation, or sleeping under a bridge. Accepting at face value whatever “the market” obliges consumers and investors to pay for a house, education, or food in a famine sidesteps the classical focus on the extent to which an economy can minimize prices for its services, housing, and other goods or assets. The key for classical economists was to change the tax laws and regulate monopoly prices to bring them into line with “real” costs of production, and indeed to provide goods and services at public subsidy. Today’s economic mainstream has rejected the analytic framework and even the ideology necessary to do this. “Value-free” theory lacks any criterion for regulation. For deregulators, that is its political virtue.

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