The Prime Minister, Gordon Brown, speaking on Radio 4’s flagship current affairs programme this morning, repeated something he says regularly: that ‘interest rates are low’ and that his government, through the Bank of England, kept them low. The question the BBC should have asked is this: if interest rates are low, and have been so, why on earth are people/companies/banks having such a hard time paying debts? Surely the Credit Crunch crunched, because debts – of banks in particular – became both too large, too expensive, and unpayable? Do small businessmen/women pay low rates on investments? Mortgages? Credit Cards? Car loans? Does the PM live/work on another planet?
Interest is the ‘rent’ paid for money or capital – and right now, in a world in which millions have unpayable debts, unemployment is rising and incomes are shrinking as a share of the economy – the central banks of Britain, Europe and even the US are refusing to lower the ‘base rate’ or ‘policy rate’ which influences the remaining interest rates paid on capital. In Britain the rate has almost deliberately been kept at a level that will first bankrupt many individuals, small businesses and companies – and then bankrupt their bankers.
Only mainstream economists, dismissive of history, and who have therefore failed to learn the lessons of the 1930s and of Japan after 1990, could come up with such a ‘sound’ financial strategy.
Keynes wrote at the end of his great work ‘The General Theory of Employment, Interest and Money’ that ‘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”.
On the same page, he wrote, somewhat over-optimistically it turns out, that his new framework for ensuring that capital is never scarce could ‘mean the euthenasia of the rentier and consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital”. For, he argued “interest today rewards no genuine sacrifice, any more than does the rent of land.” (The General Theory. Macmillan, 1973. P. 376.)
Keynes defined the ‘rentier’ whose euthanasia he so ardently wished for as a ‘functioneless investor’. I prefer the more democratic Wiktionery definition: “an individual who does not work for a living, but instead receives an income, usually interest or rent, from their assets and investment.” Wall St. and the City of London are awash with members of this rentier class.
Money, or capital is not a commodity – like land. It is a social construct. It is, to put it crudely, a device that society has constructed to facilitate the exchange of goods. It is the thing that oils the wheels of commerce. However, unlike that viscous liquid, it is not dug up from the bowels of the earth. Its extraction is not likely to ‘peak’. It does not grow on trees. For, unlike trees, it is not dependent for its existence on the vagaries of the weather. No society can ensure – or more specifically society’s civil servants at the Bank of England can ensure – that this valuable economic lubrication is never scarce. The ‘guardian of the nation’s finances’ can undertake certain measures to ensure that the rent on this vital ‘ lubrication’ is not scarce and its rent not high for an economy like the UK’s, where many are drowning in debt. Instead society (via its elected politicians) has chosen to allow the Bank of England to hand control over this vital asset to a rentier class.
This happened when the BoE, egged on by the finance sector, abrogated its powers (set up under Keynes) to end the scarcity of capital, and to keep the rent on capital low. Instead it has authorised and overseen the building of a liberalised financial system (by the private sector) that has succeeded – against all the odds – in making capital scarce. Furthermore this private financial system, after blowing up a gigantic bubble of debt, has ratcheded up the rent on these debts, rendering debts unpayable. This incompetence – for that is what it it is – has led to a global financial crisis, described variously as the ‘armageddon’ the ‘credit crunch’ or a ‘financial train crash’ – that is destroying, yep, you’ve got it – the private financial sector. A form of painful self-harm by a rentier class reluctant to take up Keynes’s suggestion that they go all the way and commit euthenasia.
Instead, like Old Testament Methuselas they go on, and on, and on – extracting high rents from capital they have made scarce. And the Prime Minister remains blissfuly ignorant, and the Old Lady of Threeadneedle St. stands by, twiddling her thumbs.
6 thoughts on “Interest rates, Keynes and the longevity of the rentier”
Are you advocating a “commodity money”? It seems that this debt crisis could not have occurred under such
Another question is what to do now. Bailouts seem unethical to me but are happening already even in the UK under the auspices of
the SLS as far as I can tell.
How did we get here. After the bailout in the S&L crisis in the ’80s, why have we got to that point again
(in a much bigger way). How come we failed to improve the system? Perhaps we did in the wrong way ;).
For me, the Austrian Economists are
making some sense but I’m no economist. Unfortunately economics seems like a branch of politics (or philosophy). i.e. lots of competing schools of
thought because the system is too complex to understand.
Making money cheaper –that is lowering interest rates (which is already happening for any bank that asks
for liquidity to BoE and ECB — does not seem the best idea. That’s precisely what American and European and Japanese deregulated investments
banks and FOREX have been doing for the last 20 years or so. Prices — like housing — went up to sky levels. Borrowing from Yen carry-trade became
a world orgy. On the other hand production in general went to China, India, etc. We (Europa-America) all got loaded with funny money (gold went to
China, India, Russia, OPEC parners and so on.) Deloading this entire mess is going to be hard for everyone. America is presently going down with
very low interest-rates policy. Should we copy the recipe?!
An excellent article and blog. I happened to see your commentary in today’s Guardian, liked it and tracked down your blog as well as
the Advocacy Int’l. site. I shall read them often.
In the US (and I suspect similarly in the UK) ceding control over the monetary system by
the govt. to the financial sector over the last several decades has allowed the financial sector (in search of profitable activities) to create a
massively complicated and convoluted financial system. To the extent that in the current “crisis” our Govt. can only state that the proposed bail-
out MIGHT avert a melt-down.
This lack of clarity is the fundamental reason why the package didn’t pass our Congress.
Last May or June,
Robert Samuelson, an economic (orthodox to the nth degree) columnist with the Washington Post, in defending the Financial sector, extolled the
virtues of modern finance and in particular the massive prosperity it had helped engender. Based on?? Well he mentioned that in the 1950’s the
sector accounted for 10% of US GDP. But by 2006 that had grown to over 21%. Hmmm, I must be from another planet, but given the massive level of
computerization over the past 4 decades, it seems to me that procutivity would have resulted in a decrease of the GDP share. That the opposite
happened goes a long way to explain our anemic GDP growth over the last three decades as well as the growth of income inequality, to levels last
seen in 1929, as the Great Depression started.
I hope we don’t require another Great depression to rectify the situation, but we seem to be
on our way.
Thanks for this…and you’re on the money…and the scary thing is that it takes another Great Depression to
subordinate the finance sector to the interests of society….Let us hope this is the last one….
thanks for joining in….Ann
Hello Ann, I like what you write – but I would like to ask you to give more consideration to the part that
the land market plays in the economy.
I dislike the way that economists have changed the meaning of rent so that it further conflates the
returns to land and capital. Can’t the source of current financial crisis be summarised as uncontrolled money piling into an uncontrolled land
market? Haven’t the banks in fuelling the house price boom/bust been collecting pure land rent?
The dotcom crash did not affect the real
economy. Land is different. Not only does it have no cost of production but it can be continually used without wearing out. There are vast
landholdings which are totally idle, which could be producing wealth for all. It’s value is created by whole communities, never by owners. It is
the source of most inherited wealth. Rent, as you say, is totally unearned income, yet it is not taxed in any meaningful way.
There is no
simple (politically acceptable) solution to the banking crisis but there is a very simple solution to the dysfunctional land market – an annual
80%+ tax on land rent.
Respectfully yours. Carol
+1 to Carol’s comment. If either of you have any influence in an opposition manifesto then get that in it.