Michael Hudson on the American School of Political Economy

Too many liberals and progressives are stunningly ignorant of the war of ideas and ideologies hidden behind the staid mask of the academic discipline of economics. A common assumption is that the corporatist authoritarianism we must deal with today is a direct result of the structure of government established by the Constitution. Corporatism and exploitative financial capitalism were "baked into the cake," according to these people. A fairly typical statement: "The founders were focused almost exclusively on maintaining the status quo of property relations, which they already dominated."

I view the issue entirely differently: ever since the surrender of Cornwallis, the American republic has been under unceasing assault by its oligarchical enemies. The question to ask is: how was the American republic subverted and corrupted from within to erode its natural enmity to oligarchs and concentrations of  power - economic as well as political?

The past few years, Dr. Michael Hudson has provided a number of articles and interviews which comprise important parts of this story. He has explained how the economics profession protects the vested interests of rentier and finance capitalism by completely ignoring the concept of economic rent seeking behavior (i.e., pretending that all income is fairly earned, rather than recognizing that some income, such as from usury or speculation, is actually unearned and often quite harmful to the economy) here, and here. Last week, in How the U.S. Avoided Chronic Deflation by Relinquishing Monetary Control to Wall Street, Hudson discussed how the banksters of Wall Street shifted control over monetary policy from the Treasury Department, to the Federal Reserve. The post is important because it clashes with so much conventional wisdom; for example, Hudson explains that government surpluses drain the economy of liquidity, causing financial crashes. It is remarkable how much ground Hudson covers, including how the need to finance the Civil War led to the issuance of fiat currency (the "greenbacks" which the financial powers hated) and the National Bank Act which reestablished a national banking system.

What I think is particularly important is Hudson's brief discussion of the nineteenth century conflict over economic and monetary policies between the Democratic Party, and the Whigs, then later the new Republican Party. (Note that the Republican Party today has entirely repudiated the noble economic ideas of its founding, and now promotes and defends policies that early Republicans such as Abraham Lincoln devoted their lives to defeating.)

"Southern plantation owners," Hudson writes, "sought to support their slaves at a low enough cost to maintain the South’s dominant export position in cotton and tobacco. Creditors on the Northeast Seaboard also supported deflation. The result was a deflationary agrarianism aimed at countering the growth of northern industrial power."

Wow. These three sentences point to an issue of political economy on which the world literally turns. Unfortunately, it is an issue not many people are even aware of, because of how the economics profession has been used to defend the vested interests of rentier and finance capitalism. And it is an issue on which the left is dangerously vulnerable if it continues to believe that the establishment of the American republic, and the adoption of the Constitution, was merely an exercise in preserving the status quo, rather than the end result of the political and scientific Enlightenment finally defeating feudalism. In their 1937 book, The Power to Govern: The Constitution -- Then and Now, Walton H. Hamilton and Douglass Adair wrote,

The medieval world was, to the souls which tarried in it, a place of order. From pope to peasant every man had his place in the great Christian commonwealth, and was expected to live in accordance with the station in life to which God had appointed him. A hierarchy—ecclesiastic and feudal—offered regimentation to a placid society disturbed by the doughty deeds of a small privileged group…. But the intrusion of new devices, new ideas, and new values was too much for the ancient regime of fief and field, of vassal and lord, of mitre and surplice…. A newness had come into every domain of life to release creative energy—and to touch off conflict. A dogmatic learning had to make place for newly discovered facts. A revealed religion had to patch up a truce with individual freedom. Conduct directed by novel circumstance could no longer accord with accepted standards…. throughout Christendom the rightfulness of authority and the duty of obedience were unquestioned. This impulse toward authoritative control—an aspect of the common sense of the times—marked church and feudal system; it was taken for granted in the "self-government" of manor, guild, and voluntary association…. A struggle over policy was everywhere in evidence. It was concerned, not with the power of regulation—which was taken for granted—but with the objectives it should be made to serve. The gentry of England had once been of the land. The older foundations of public policy, far more deeply rooted in usage than in statute, had been rural. A general belief that land alone is the source of all wealth made common sense a defense of the agricultural interest.

Following this tumult of the passage from feudalism and ecclesiastical authoritarianism to the formation of the American republic and its Constitutional mandate to promote the General Welfare, three major economic philosophies were developed in the nineteenth century, and contended for domination. Dr. Hudson provides a spectacularly useful summary in a table in his 2010 book America’s Protectionist Takeoff: The Neglected American School of Political Economy:  (click table to enlarge).

Both British free market / free trade doctrine, and Marxism, are disastrous economic doctrines to pursue, and both are opposed by the one alternative that simply is not taught in USA economics departments. Nor, apparently, in History departments. Consider how ingrained in Americans’ minds is the idea of Manifest Destiny, and how much Dr. Hudson’s account below clashes with the accepted understanding of Manifest Destiny. As Hudson explains in his book:

….economic historians have treated ... the American School [as if it] never existed. The modern abhorrence of protectionism expunged from history the logic that guided U.S. industrialization under Republican leadership from 1860 through 1912. The American School’s trenchant critique of free trade and the theorizing of Ricardo, Malthus and other British writers caused a cognitive dissonance in the minds of professors eager to promote a view of American history driven by an inexorable drive for free trade and westward expansion as Manifest Destiny.

Actually, westward expansion was a Democratic Party policy to extend slavery and plantation agriculture. In an epoch when protective tariffs were the principal source of revenue for the federal government (that is, until the 16th Amendment created the federal income tax in 1913) the South based its cotton and tobacco production on foreign markets, seeking to feed its slaves with low-priced grain from the West. The Whig and Republican industrial program called for concentrating industry in the Eastern urban centers, whose population would be fed by farms that would find their major market at home, not abroad. But industrialization threatened to bid up food prices, eroding the competitiveness of plantation agriculture. This prompted the Democratic Party to urge free trade, small government and credit aimed mainly at export financing not industry. The slave states in particular decried industrialization and urbanization as culturally decadent rather than the key to economic progress. At issue was the kind of cultural, social and political structure America would develop and national trade policy would act to bring about.

….Indeed, what became known under the portmanteau term “tariff debate” was more accurately a debate as to the dynamics of economic growth itself. Its major issue was whether the nation should remain primarily agricultural or industrialize, whether the South should become the focal point of a westwards-expanding slave system, or the Northeastern and Middle Atlantic states become the focal point of an increasingly industrial national economy.

For those wondering: the shift of the Republican Party away from its American School policies began in the 1870s, as "hard money" advocates, railroad magnates, and trust builders such as Morgan literally bought increasing control of the Party - much as corporatist authoritarians are buying control of both parties today in the wake of the disastrous Citizens United Supreme Court decision. Rentier and financier control of the Republican Party was fully congealed by the 1896 election of McKinley (or, more accurately, Mark Hannah's management of McKinley's1896 election). Lawrence Goodwyn provided the best analysis of how this occurred, along with how the 1896 election also destroyed the populist movement, in Chapter 8 of his book The Populist Moment: A Short History of the Agrarian Revolt in America.

The grip of rentiers and banksters on the nation's political system was shattered by the Depression - and the exigencies of rebuilding industrial capacity to provide the combat material of World War 2. That was the basis of the historic opportunity Franklin Roosevelt seized to transform the political system in the United States by fully aligning the Democratic Party with the hopes and aspirations - and anger - of working and middle class Americans. This was, be it noted, the path to a full repudiation of what the Democratic Party had been, and done, during the Civil War and Reconstruction; a repudiation realized in the form of John Kennedy's and Lyndon Johnson's Civil Rights Act of 1964. Which, under the guidance of Nixon's Southern Strategy, further propelled the Republican Party on its rightward lurch toward "free market" theocratic authoritarianism. Basically, a return to feudalism: conservatives conserving tradition and heritage, indeed!

In Contrast to Roosevelt, Barack Obama has proven unwilling to seize the historical opportunity presented by the Great Recession to once again transform the political system in the United States by fully aligning the Democratic Party with the hopes, aspirations, and anger of working and middle class Americans. As a few predicted back in 2009 and 2010, Obama's refusal to repudiate neo-liberalism and its policies of allowing  rentiers and financiers to command the controlling heights of the economy, has led to a general discrediting of the left in USA, and allowed the right to hijack the populist anger against the machinations and greed of the coporatists and banksters. (So we are treated to the spectacles of Chris Christie boasting the he actually prosecuted miscreant pharmaceutical executives, and Carly Fiorina, Rand Paul and other Republican candidates expressing disgust that the too big to fail banks have become even bigger under Obama).  The resurgence of the right is discussed in Thomas Franks’ recent brilliant book, Pity the Billionaire: The Hard-Times Swindle and the Unlikely Comeback of the Right). But even Franks cannot identify the remedy, because he is apparently not familiar with the American School of political economy.

And that is the core of the problem with Obama, and Hillary Clinton, and many progressives and liberals. Is it actual malicious intent on their part to allow and enable the continued banksters' dictatorship, or "dictatorship of the properteriat" as Stirling Newberry memorably phrased it a few years ago? Or is just that they were never taught that there is an American School of political economy, an alternative to both Marxism and British free trade / free market neo-liberal economics?