In the end notes to his 1936 'General Theory', John Maynard Keynes said that he looked forward to the "Euthanasia of the Rentier", to be replaced by “communal saving by the agency of the state; maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce”.
In his time and in so-called "classical economics" a rentier is a person who lives on interest income, called "rent" received for the loan of capital and productive assets in the form of money, not to be confused with the "rent" of landowners who receive payments for the loan of property in the form of land. Labour rent is another subject, but through corporatism in the form of guilds, labour unions and associations of workers, labour can become another form of "rent".
More complicated, definitions of capital rent today include any debt obligation and derived asset, public or private, which yields periodic, annual or semi-annual payments, usually but not necessarily fixed amounts over a long term.
Usual media presentation of Keynes paints a picture of a post-World War II founder of the existing international system of economic, financial and commercial regulation through organizations such as the IMF, World Bank and WTO, loosely based on theories developed by Keynes and other economists during the 1930s Great Depression. The theory and subject of capital rent as a brake on economic growth and human wellbeing was heavily promoted by Keynes, but in the 19th century both Ricardo and Marx already attacked the role of rent, albeit from different political or ideological stances.
Ricardo in the early 19th century, laying down the concept of free trade and go-anywhere industries locating to wherever labour, raw materials and land were cheapest, claimed that landlords’ interests ran against the national interest of industrial expansion. By the 20th century the theory morphed further, to the theory that rentiers are a brake on capital accumulation of any kind. Ricardo and Marx were certainly on the same wavelength when they said that individuals who obtain their income from neither labor nor capital investment are parasites, living off the efforts of both the laborer and the entrepreneur-capitalist. Under Keynes, this twosome was increased to the threesome of the state, organized labour, and organized capital.
THE WEALTH OF NATIONS
What is called "Keynesian economics" is already light years away from the late 18th century ideas and inferred ideals of writers like Adam Smith and Robert-Jacques Turgot, who each produced a book with the title 'The Wealth of Nations', in the 1760s. At the time, industry was still in its infancy, coal was only beginning to replace wood fuel, only one city on the world - London - had very recently attained 1 million population, but the struggle between rentiers on one hand, and the state and labor on the other, was already under way. Rentiers were already criticized for actively discouraging economic and social change in defense of their vested interests in property rights and money-yielding rights of all kinds, for example tolls on highways and customs or port duties.
The bases of the French Revolution of 1789 had been set because even at that time, rentiers were struggling to defend the purchasing power of their interest income and at least preserve the capital value of their wealth. This put them in open conflict with the "traditional rentiers" of the monarchy, nobility, religious orders, and a few other players, who for political survival engaged in creating new and allied rentiers, giving them what French call "une rente de situation" for their personal political benefit, as well as personal financial or economic benefit. This was nothing to do with the national interest, it almost goes without saying.
Inflation is the first enemy of the rentier, but was also the friend of the state - basically the monarchy - in France throughout the 18th century. The very first "asset bubble" organized for and on behalf of the French monarchy by Scotsman John Law, before 1720, the Mississippi Company bubble, was aimed at destroying the real cost of debt owed by the monarchy and its associated nobility, to "the rentiers". Law's action, a Ponzi-type scam, had overkill effects. Some historians argue this first modern asset bubble, aimed at firstly inflating paper asset values, exchanging them against debt owed by the monarchy to rentiers, and then collapsing the bubble helped sow the seeds of the 1789 revolution through decades-long unwillingness of "the rentiers" to lend, after this asset implosion.
Rentiers seek and prefer deflation. They prefer conservative government policies of balanced budgets and deflationary conditions, even at the expense of economic growth, capital accumulation and high levels of employment. As early as 1820, this was a major theme of David Ricardo. Today, especially in Japan, it is intense daily action by the state and its central bank, seeking by all means to create inflation because "when there is inflation, the economy is still alive", and of course the cost of debt in real terms will fall.
This underlines the fatal flaw in Keynesian-type economics: high inflation, and-or extremely low or zero interest rates, "for prime borrowers", firstly needs rentiers to supply the capital to borrow. Before that, the capital has to be formed or accumulated. If both processes are unsure, uncertain, or inoperative the result can only be economic decline.
The problem today is starkly simple. Without massive money printing and issue, the dearth of capital would be so striking that the New Poverty of the world would be impossible to ignore. The global banking system, at latest since 2008, has vastly overvalued collateral or "assets", and a long-term basic trend, intensifying since 2008 of deflating balance sheets. Governments of all major OECD countries with a combined GDP of about one-half of the world's total output, through their central banks, are each day back-stopping the banks, which are insolvent institutions, flooding them with sovereign debt and fiat money, and manipulating credit markets to maintain apparent valuations.
THE NEW POVERTY OF NATIONS
Without this "window dressing", the reality is that the private sector economy is still contracting four years after the credit bubble burst. It is only concealed by the expansion of government spending and fiat money issue. Governments possibly do not understand they are in the midst of an economic collapse and will be the last to admit it, but as in previous epic struggles between the vested interests in play in a society and its economy, for example in the run-up to the French Revolution, the manipulation of credit, values, money and prices has made it impossible to accurately monitor the economy.
Due to political ideology conflict, between "the free market" and "communist planned" economies, the political collapse and economic failure of the communist states from 1989 is still today used by government-friendly media as a "morality tale" of what happens when there is undue state interference. In fact what happened in the Soviet Union, was action by ordinary people, in their own self interest, to bring about the downfall of their economically disastrous government. As the collapse of the Soviet Union, showed, this action is not necessarily highly violent, but is inescapably impoverishing in the first case and for several years.
Avoiding or delaying "a reset to zero" of the economy is the present quest, not only of G8 but also G20 leaderships, therefore concerning all major economies worldwide. This is through "confidence building" action, but what confidence gives in the shape of declining costs for rolling over debt, for example present lower cost trends for sovereign debt sales of Europe's PIIGS, lack of confidence can just as suddenly take away. This is especially true if the underlying issues haven’t been resolved, and neither in Europe, the US or Japan have they been resolved. Particularly in Europe, conditions are getting worse, and this again concerns politics and ideology, as much as the economy.
The defensive concept of Fortress Europe facing the world is a basic plank of what led up to the European Union of 27 nations, through the 56 years since the Rome Treaty of 1956. The economic concept of Europe, linked to the defensive Fortress Europe stance, was of Europe becoming "a level playing field", uniformised and homogenized, and stripped of the national rivalries which had created two world wars in 40 years. Usually not noted, this was rather close to the Soviet model of Russia, the Warsaw Pact countries and central southern Muslim republics forming "a single economy" despite their vast differences. The creation of "the single money" euro, in Europe, was similar to the Soviet ruble which was a major tipping point in the economic unraveling and break-up of the Soviet Union. The euro's role in the probable break up of the European Union, which is under way since 2008, is now openly discussed and could be major.
The main difference of the present crisis, compared with previous "local" crises, is the extent of country coverage. It is an easy bet that any return to 2008-2009 conditions of very rapid global economic slowdown will quickly raise the threshold of "systemic breakdown" to cover all or most major economies, whether OECD or not. Fundamental reasons for this include what we can call the "new rentier crisis", similar to the French process at the time of the world's first modern stock market collapse in 1721, and its local sequels which "froze investment" for decades.
Too many "new rentiers" had been created, too quickly. As noted above the French term is "rente de situation", meaning the rapid, uncontrolled and arbitrary creation of new rentiers feeding off a stagnant or declining economy. The social and political results are very easy to predict!
Examples of tipping points in the process of creating too many rentiers are multiple, for example the global carmaking industry. This is now completely dependent on government intervention, selling into a market which in a large number of countries is already saturated. As a "new rentier" the car industry both expects and relies on state bailouts and hand-outs, misallocating, misusing or "hijacking" capital from more productive ends and diminishing the national capital stock. In the 1920s as we know, the expansion of the US car industry was a major driver of economic growth - but can be linked with the sequence of financial and economic events that also produced the 1929 crash. Today, the role of the car industry has been reversed: it is a destroyer of the national capital stock
Whether it concerns the French Revolution, the Soviet Union break up, or the present economic, political and institutional crisis in Europe, however, in all cases we find that the economic process in play always results in impoverishment.
This necessarily has a political impact, with a growing number of countries such as Spain, Greece and Egypt possibly moving towards outright civil conflict intensified by a "non-performing" economy in which the number of cases, types and forms of "rente de situation" has spiralled.
By Andrew McKillop
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights
Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012
Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.
© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.
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