By Michael Hudson, Michael-Hudson.com. Hudson is Distinguished Research Professor of Economics at the University of Missouri, Kansas City, who has advised the U.S., Canadian, Mexican and Latvian governments as well as the United Nations Institute for Training and Research. He is a former Wall Street economist at Chase Manhattan Bank, who also helped establish the world’s first sovereign debt fund.
Last week I attended a wonderful conference in the university town of Tübingen, Germany, on “Debt: The First 3500 Years,” to bring ancient historians together to discuss David Graeber’s book Debt: The First 5000 Years.
I was enlightened by two papers in particular. Doctoral fellow Moritz Hinsch from Berlin collected what Socrates (470-399 BC) and other Athenians wrote about debt, and the conference’s organizer, Prof. John Weisweiler, presented the new view of late imperial Rome as being still a long way from outright serfdom. The 99 Percent were squeezed, but “the economy” grew – in a way that concentrated growth in the hands of the One Percent. In due course this bred popular resentment that spread in the form of debtor revolts, not only in the Roman Empire but that of Iran as well, leading to religious reforms to limit the charging of interest and self-indulgent greed in general.
I had not been in Tübingen since 1959, and it was my first chance to meet with David Graeber since he moved to England to teach at the London School of Economics after being hounded out of his apartment in New York City in the wake of the police and FBI crackdown against Occupy Wall Street. Our mutual German publisher, Klett-Cotta, sent its senior editor from nearby Stuttgart to discuss their German translation of my Killing the Host, to appear in November, as Der Sektor: Warum die Globale Finanzwirtschaft uns Zerstört.
Socrates’ views on whether bad debts should be paid
In Book I of Plato’s Republic (380 BC), Socrates discusses the morality of repaying debts. Cephalus, a businessman living in the commercial Piraeus district, states the typical ethic that it is fair and just to pay back what one has borrowed or received. Socrates replies that it would not be just to return weapons to a man who has turned into a lunatic. Because of the consequences, paying back the debt would be the wrong thing to do.
At issue is not the micro-economic morality of paying a debt, but how this act affects society. If a madman is intent on murder, returning his weapon to him will enable him to commit unjust acts. The morality of paying back all debts is not necessarily justice. We need to take the overall consequences into account.
A similar logic may apply to today’s debate over whether Greece should pay back the IMF and European Central Bank (ECB) for the money that they have provided since 2010 to save bondholders from losses on loans (largely by French and German banks). The terms oblige the Greek government to pay in full instead of writing down debts to reflect the actual ability to pay.
The IMF staff calculated repeatedly that Greece had no way of paying off these debts, so the IMF violated its own articles of agreement (and its “No More Argentinas” rule) that it should not lend to countries which, in the judgment of its research staff, have no foreseeable means to pay. IMF board members also protested to the bondholder bailout – all to no avail.
The morality of paying off the IMF and ECB is analogous to paying off the madman discussed by Socrates. At issue is what should be saved: wealthy creditors from loss (and the morality that all debts should be paid), or the overall economy from unemployment and misery leading to emigration, worse health and shorter lifespans. They have used their debt leverage to demand that Greece impose austerity, increase unemployment (now running at an enormous 25 percent for IV-2015 – I-2016), scale back pensions to retirees, and privatize public infrastructure to pay creditors – while running a budget surplus to suck even more money out of the economy.
When the Greek people voted in 2015 to reject these demands, the ECB and European Union insisted that referendums didn’t matter. Shifting economic policy from voters to bankers already had led Frank Schirrmacher to write an article in the Frankfurter Allgemeine Zeitung, “Democracy is Junk.”
What really is at issue is the selfish and abusive behavior of creditors. Later in the Republic (Book VIII, 555d-556b), Socrates talks with Glaucon, pointing to the “negligence and encouragement of licentiousness in oligarchies.” Their greed, Socrates explains, inserts the parasitic “sting of their money into any of the remainder who do not resist.” The effect is to burden many Athenians with debt, to suffer foreclosure on their land and disenfranchisement, fostering “the drone and pauper element in the state.” This leaves the people (the demos) to “conspire against the acquirers of their estates and the rest of the citizens, and be eager for revolution.”
The way to quench this disaster in the making, Socrates suggests, is to enact “a law prohibiting a man from doing as he likes with his own, or in this way, by a second law that does away with such abuses.”
“What law?” asks Glaucon.
“The law that is next best … commanding that most voluntary contracts should be at the contractor’s risk. The pursuit of wealth would be less shameless in the state and fewer of the evils of which we spoke just now would grow up there.”
This obligation of creditors to share in the risk of non-payment is precisely what the IMF staff and other critics of the European Central Bank’s pro-creditor line are now belatedly insisting. It is the principle that American bank reformers urged after the 2008 crash: Banks that made junk mortgage loans beyond the ability of debtors to pay should have their reckless and often fraudulent “liars’ loans” downsized to reflect reasonable rental values and real estate prices instead of being allowed to foreclose and push the U.S. economy into debt deflation.
Concentration of wealth by Rome’s One Percent leads debtors to revolt
Roman emperors sponsored a market economy that aimed at producing a fiscal surplus, which was used largely to pay mercenaries. Wealth and political power were concentrated in the imperial bureaucracy, army leaders, and their suppliers and provisioners. The tax reform of Diocletian (ruled 284-305), enacted in 297, taxed the hitherto exempt wealthy landowners as well as the rest of the economy. His successor, Constantine (ruled 306-337), enacted a monetary reform in the 310’s, basing the military-fiscal state on the gold solidus.
The effect was monetary deflation. “Like the gold standard of the nineteenth and twentieth centuries,” Prof. Weisweiler explained in his paper on the Late Roman economy, “the introduction of the solidus was a golden age for capital-owners but a dark period for lower strata of the population.” Yet Medium-sized farms survived without being reduced to serfdom, and wage labor was available for hire at harvest time. The proportion of Italy’s population enslaved is now deemed to have been around 15 percent.
There were no slave revolts, but debtors rebelled or defected to invaders, as they had done earlier in antiquity. Prof. Weisweiler described how, when a Gothic army defeated that of Rome at Adrianople (now Edirne, in northwestern Turkey) in 378, local guides brought the victors “to the villas of great landowners, who were then plundered by a coalition of Gothic soldiers and local residents. When in 408 the Romano-Gothic military leader Alaric for the first time besieged the city of Rome, his forces were swollen by many debtors who left the imperial capital to join his army.”
Richard Payne of the University of Chicago gave a paper explaining how peasant revolts against Persia’s Sasanian rulers a century later sought to “restore” an egalitarian Zoroastrian order as a protest against the extreme polarization that widened the gap between luxury and poverty. The new morality of economic balance rejected silk garments, silver wine vessels and other status symbols of the elites. Interest was condemned, as it had been under Christianity and would be under Islam. All religious urged mutual aid and warned about abusive wealth-seeking by the elites. What occurred culturally was a revulsion against luxury and hubris – a Greek word that connoted not only arrogance, but arrogance that took the form of injuring others.
Ideology and antiquity
Creditors were the typical class singled out as oppressive and destructive of society. Their self-centered wealth addiction was seen as stripping society to serve their own compulsive drives. It was to praise moderation and even to prefer a poverty of equality to indulgence in luxury that Christianity, Islam and other religious movements of the early first millennium AD took root.
By the 14th century the great Tunisian Islamic philosopher of history, Ibn Khaldun, described societies gaining prosperity through “group feeling,” only to lose it within about 120 years as the ruling dynasty succumbed to self-indulgence and greed – paving the way for their land to be conquered from without or taken over from within.
My own paper for the conference described how Ibn Khaldun’s “rise and fall” view of history in The Muqaddimah was echoed in Giambatisto Vico’s The New Science (1725), and later by the French and Scottish Enlightenment by writers such as Adam Ferguson, who endorsed Montesquieu’s statement in Spirit of the Laws (1748): “Man is born in society, and there he remains.” To survive, people need to cooperate in a system of mutual aid. “Man is, by nature, the member of a community; and when considered in this capacity, the individual appears to be no longer made for himself. He must forego his happiness and his freedom, where these interfere with the good of society.”
All this teaches the opposite of today’s two guiding economic premises: “Greed is good,” and “There is no such thing as society.” Economics used to be called moral philosophy, but it has succumbed to individualistic extremism. Homo economicus has replaced zoon politikon. Debts are supposed to be paid without concern for how this impoverishes the economy.
It was to resist personal gain-seeking at the expense of the body politic and group solidarity that the world’s major philosophies and religions for the past two thousand years urged self-control, generosity, care for the weak and poor, and rules to limit the luxurious self-indulgence and anti-social egotism it bred in ruling elites. Excluding this intellectual legacy from the curriculum has paved the way for inverting today’s moral attitude upholding creditor claims against the rest of society.
It should not be surprising that modern financial elites are fighting back against democratic moves to limit their wealth, adopt progressive taxation, write down debts by bankruptcy reform, and shift control of government away from landed aristocracies and banking centers. These vested interests are behaving exactly as Ibn Khaldun described the terminal decadent generation of dynasties as acting with anti-social selfishness.
Ferguson described how prosperity lay the groundwork for undermining the commercial stage: “man is sometimes found a detached and a solitary being: he has found an object which sets him in competition with his fellow creatures, and he deals with them as he does with his cattle and his soil, for the sake of the profits they bring. The mighty engine which we suppose to have formed society, only tends to set its members at variance, or to continue their intercourse after the bonds of affection are broken.”
The financial takeover of government is not new. Ibn Khaldun described how what today is called the “deep state” (often run by foreigners or other interlopers) gains control of dynasties. Lacking traditional royal authority, they must work outside or behind the scene of politics, as finance does today:
In gaining control, he does not plan to appropriate royal authority for himself openly, but only to appropriate its fruits, that is, the exercise of administrative, executive, and all other power. He gives the people of the dynasty the impression that he merely acts for the ruler and executes the latter’s decisions from behind the curtain. He carefully refrains from using the attributes, emblems, or titles of royal authority. He avoids throwing any suspicion upon himself in this respect, even though he exercises full control. … He disguises his exercise of control under the form of acting as the ruler’s representative.
Today’s Treasury Secretaries, central bank heads, IMF economists and client academics serve the world’s cosmopolitan financial ideology that money and credit, debt and taxes are purely technocratic, and hence beyond the sphere of voters or the politicians they elect to “interfere” with. We are back with the Thatcherite financial Taliban (the Arab word for “students”): There Is No Alternative.
That is the protective myth that elites have wrapped around themselves and their privileges from time immemorial. To succeed, it must erase knowledge of history and live in a highly censored “present” in which the financial class takes the land, public infrastructure and government into its own hands.
It has all happened before – and so have revolts by debtors and other exploited victims of such “economism.”
The term for justice is dikaiosyne, meaning “right behavior,” from dike, cognate to dexterous. I am indebted to Moritz Hinsch of Berlin for drawing my attention to this passage in his paper on “Private Debts in Classical Greece,” delivered to the international conference on “Debt: The First 3500 Years” in Tübingen, Germany, June 11, 2016.
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