This summary of my economic theory traces how industrial capitalism has turned into finance capitalism. The finance, insurance and real estate (FIRE) sector has emerged to create “balance sheet wealth” not by new tangible investment and employment, but financially in the form of debt leveraging and rent-extraction. This rentier overhead is overpowering the economy’s ability to produce a large enough surplus to carry its debts. As in a radioactive decay process, we are passing through a short-lived and unstable phase of “casino capitalism,” which now threatens to settle into leaden austerity and debt deflation.
This situation confronts society with a choice either to write down debts to a level that can be paid (or indeed, to write them off altogether with a Clean Slate), or to permit creditors to foreclose, concentrating property in their own hands (including whatever assets are in the public domain to be privatized) and imposing a combination of financial and fiscal austerity on the population. This scenario will produce a shrinking debt-ridden and tax-ridden economy.
The latter is the path on which the Western nations are pursuing today. It is the opposite path that classical economists advocated and which Progressive Era writers expected to occur, given the inherent optimism of focusing on technological potential rather than on the political stratagems of the vested rentier interests fighting back against the classical idea of free markets and economic reforms to free industrial capitalism from the surviving carry-overs of medieval and even ancient privileges and essentially corrosive, anti-social behavior.
Today’s post-industrial strategy of “wealth creation” is to use debt leveraging to bid up asset prices. From corporate raiders to arbitrageurs and computerized trading programs, this “casino capitalist” strategy works as long as asset prices rise at a faster rate than the interest that has to be paid. But it contains the seeds of its own destruction, because it builds up financial claims on the assets pledged as collateral – without creating new means of production. Instead of steering credit into tangible capital formation, banks find it easier to make money by lending to real estate and monopolies (and to other financial institutions). Their plan is to capitalize land rent, natural resource rent and monopoly privileges into loans, stocks and bonds.
