[This article was published in the Summer 2016 issue of The Journal of Social, Political and Economic Studies, pp. 84-94.]
BOOK REVIEW ARTICLE
Michael Hudson’s Killing the Host: A Disorganized Potpourri that’s Provocative on Many Subjects, Valuable and Important on Some
Dwight D. Murphey
Wichita State University, Retired
Killing the Host: How Financial Parasites and Debt Destroy the Global Economy
Although we are quick to point out the weaknesses in this book as a hodge-podge of assorted columns and blogs, we find much that’s conducive to serious thought within its pages. Some of it is even quite valuable, as when Hudson reviews the long history of the insight that a significant part of wealth accrues to its owners as a windfall, with only the remainder being due to their own efforts. This insight is often attributed to the nineteenth century economist Henry George, but actually goes back to include such luminaries as the French Physiocrats, Adam Smith, David Ricardo and John Stuart Mill. In this Book Review Article, we discuss this and a number of other topics of considerable interest as raised by Killing the Host.
Key Words: Rent extraction, unearned increment, critique of banking, socialized banking, the Great Recession, criticism of financial bailouts, alternatives to bailouts
There are lots of reasons for a reader not to bother with this book, but there is enough meat in it to merit a serious critique of its main points. If as we examine that substance a reader finds himself wanting to immerse himself in it first hand, he will have to struggle not to be deterred by the hodge-podge treatment that jumps from subject to subject and back again, the lack of in-depth analysis of important points despite their many repetitions, the often opaque explanations, and the lack of an index or bibliography.
Many of these features come from the book’s consisting of a patching-together of assorted articles and blogs without their being worked over and molded into an integrated whole. The book could have been boiled down to one third the length at no cost to its substance. Short pieces don’t lend themselves to detailed explication, and that shallowness isn’t overcome by tacking a number of such pieces together.
But enough of that. We have said there is meat in the book, and it is to that that we wish to direct your attention. In brief, the main areas of discussion are:
1. The insight, common among early economists but mostly lost sight of for somewhat over a century, that a significant portion of what many people earn is not due to their own efforts or contribution to the economy, but is rather in the nature of a windfall. This is an insight with many implications.
2. Hudson’s critique of banking and finance in general from a socialist perspective. If one presupposes free or even subsidized credit, the activity of private lenders becomes a costly redundancy rendering no real service. Interest and fees are extractions from, not necessary facilitators of, the productive economy. Bankers and financiers are free riders (less politely called “blood suckers” by those with more aggressive tendencies).
3. Hudson’s criticisms of the bailouts during the Great Recession, his preferences for alternative ways to have met that crisis, and his comments on the aftermath.
4. Assorted other topics that arise along the way, related mainly to the financial crisis. These include his discussion of LBO (“leveraged buyout”) abuses; the mistreatment of corporations by their insiders, such as through grossly excessive executive compensation and stock buybacks to bid up the price and thereby enhance the value of executive stock options; and the musical chair relationship between government and banking. Broadening to the international scene, Hudson gives attention to the economic plight of Latvia and Greece (although this falls far short of justifying the book’s subtitle about “destroying the global economy”).
Windfall Gains: Economic “Rent”
Hudson performs a singular service by reviving a concept that was central to early free-market economists and that would have worked wonders as an instrument of a classically liberal society if it had not been abandoned by the later theorists of a market economy. If the concept had been embraced and placed at the heart of public policy, the market system would have been made much more serviceable to human needs. Much of the criticism that socialist thought has levelled against capitalism would have been preempted precisely by those who most favor the free market.
His summary of eighteenth and nineteenth century economic thought shows this reviewer that it was not just Henry George who had the insight that much wealth comes to people as a windfall and could well be used as a resource for the whole community. Indeed, it was no less than John Stuart Mill who wrote in 1848 that land owners “grow richer, as it were in their sleep, without working, risking, or economizing.” Some of the rising value of their land may well be due to improvements that the owner makes, but the value also increases because population grows up around the land. Mill asked, “In what would they have been wronged if society had, from the beginning, reserved the right of taxing the spontaneous increase….?” An owner would not be taxed on the increase that had occurred before he became the owner, but only on the unearned increment during his own period of ownership: “The present value of all land should be exempt from the tax,” Mill wrote; “but after an interval had elapsed, during which society had increased in population and capital, a rough estimate might be made of the spontaneous increase which had accrued… since the valuation was made.”
Classical economists, Hudson says, had a name for such spontaneous increase: “economic rent – a free lunch in the form of income… without a corresponding cost of labor or enterprise.” Hudson says the prevention of this “rent,” with a concomitant application of the unearned increment as a fund for the community at large, was a major aim of the French Physiocrats, Adam Smith, David Ricardo, John Stuart Mill, Henry George and others.
The concept has an obvious application to natural resources, the existence of which is not attributable to human effort. Benefit is reaped when that unearned value is mixed with the genius of scientific and technological knowledge, capital, organization, and considerable effort, resulting in wealth that is a mixture of windfall and human intervention. Although much attention was given to land, which was the principal asset during an agricultural age, the classical economists didn’t overlook natural resources in their thinking about “rent.”
Windfall gain also occurs much more broadly. In this reviewer’s book A ‘Shared Market Economy’: A Classical Liberal Rethinks the Market System, he observes how someone in 2030 may receive extremely high compensation for work as a computer genius, combining his intelligence and talents with the work of all those who preceded him and upon whose shoulders he would in effect be standing. A baseball player who signs a contract paying him $175 million will receive income from a combination of his own unique talent and the mass-market infrastructure that was developed over a period of time by a great many others. When we realize the contribution that windfall gain makes, we see how mistaken the view is, as stated in a recent op-ed column by a major American columnist, that “there is no moral case for progressive taxation.” The rationale of Adam Smith and the others says otherwise. It is no doubt true that if progressive taxation is used to confiscate the return that’s due to human genius and industry, or is used to effect a general levelling, it is anti-market. But it will take a giant step toward the workability and legitimacy of a classical liberal society if progressive taxation permits an application of the windfall in a way that benefits the community as a whole. For today’s free-market enthusiasts to realize this will require them radically to redirect their thinking – mentally painful but ultimately beneficial for the very things they value. The need for that redirection will become increasingly evident as tens of millions of people find themselves displaced from remunerated employment by the technology of science, computers and robotics.
These are the thoughts that have led us to credit Hudson’s book with a significant contribution. It should be noted, though, that he has mixed this valuable insight from classical economics with various other ideas that are of a very different nature. Those ideas will be welcomed by those who reject market theory as a whole and would replace it by a return to the medieval concepts of “fair price” and “status,” along with an admixture of pure socialism. Others will find them less congenial, and all will find them diminished by the book’s many flaws, which we noted at the beginning of this review.
His Criticisms of Banking: From a Socialist Perspective
Amidst all of Hudson’s excoriation of banking, finance and creditors, it may take a while for a reader to reach the helpful realization that the vantage point from which he makes his critique is socialist. That it is so, is evident when he says “governments should be the main suppliers of money and credit as a public utility.” People would “receive credit cards, use deposit banking services and get loans provided at cost or at subsidized rates instead of burdened with interest charges, predatory fees and penalties.”
As with everything in the socialist program, a gratuitous, non-market, provision of a desired thing or service has great intuitive appeal. The objection from those who resist this appeal is that the non-market approach centralizes power in the hands of those who administer it. A number of things can be provided as part of a “commons” without a significant prospect of abuse. But others do offer that prospect. If government is the primary source of funding human economic activity, it holds that activity within its grip, with the power to determine who or what receives funding, and how much. This places government in total control of the economy. Such power may be used benevolently, may be an instrument of partisan interests or even of tyranny, or may be something in between.
In this regard, the book has value for those who will find it instructive to see the full range of what historically has been a fairly common sentiment: pro-debtor and anti-creditor. In this age of “victimology,” it fits in well that Hudson invariably sees debtors as put-upon victims and creditors as predatory leeches. He refers to “debt peonage,” say, in the context of many things we take for granted: such things as “taking on mortgage debt to buy a home” or getting a student loan or automobile loan. It is a shame, he says, to take on “credit-card debt just to maintain one’s living standards.” We see from this last point that the breadth of what he considers an entitlement is astonishing.
It’s no surprise that he levels his sights at private banking, with which he finds much fault even without reference to anything we would consider an abuse. He could have joined a number of prominent economists in wanting a radical change in banking, doing away with the “fractional reserve” banking that makes it possible for the banking system to expand and contract the credit that so much contributes to the money supply. He leaves that unmentioned, bypassing it as he prefers the socialization of credit.
An odd thing he says about banking is that “banks largely lend on assets in place,” which causes them not to “finance tangible investment in factories, new means of production or research and development.” Hudson repeats this so many times that we can consider it important to him. The fallacy in it is apparent, and a reader waits in vain for him to look deeper. If a bank lends a borrower money to buy an existing home or business (or whatever), that is a loan “for an asset in place.” But the seller of the home or business receives the money and in all likelihood will buy another home or business, which may or may not be a new one. In any case, the market for homes and businesses is sustained or expanded, and the loans have not been divorced from the great run of economic activity that Hudson calls the “real economy.” His “assets in place” argument is not only spurious, but is for him an unnecessary tangent in the context of his desire to replace the entire banking system with socialized credit.
The Great Recession, Bailouts, Alternatives and Aftermath
Considerable attention is given to the Great Recession, and Hudson’s discussion will be instructive for those who have not read one or more of the many excellent books on the subject. Killing the Host’s defects, however, make it perhaps the least useful source for that purpose. The subjects Hudson covers include: a list of ten causes of the “bubble economy”; mention of the egregious loosening of home-loan guidelines which led to widespread defaults when home prices began to fall; the “securitization” that, like a cancer metastasizing, tainted countless investments with the bad loans; the “deregulation environment [which] proved the genesis of the 2008 crisis”; the obscene compensation paid to executives even as they led their firms to disaster; the financial fraud and recklessness; and the corrupt, elitist culture at the top. All of these are worthwhile topics, but are treated better elsewhere.
The memoirs of Federal Reserve chairman Ben Bernanke, and of Treasury Secretaries Hank Paulson and Tim Geithner, each a major figure in the bailouts, argue vigorously that the collapse of the “systemically important” financial institutions would have been catastrophic to the American (and indeed the world) economy. Many commentators disagree with them, separating the financial world from the “real economy.” There are some who argue that a serious downturn is best met by “letting the bottom fall out” so that the economy can all-the-more-quickly start on the path to recovery. Others argue that government or central bank intervention is necessary, but should come in the form of aid or assured credit to the bottom (often spoken of as “Main Street”). Students of financial crises will no doubt long ponder which of these prescriptions is best.
Although we have reviewed several books on the crisis, we have yet to see one that explores the options, or any one of them, in extended detail, tracing the effects through the various channels and interactions within the economy. The positions are asserted, often vigorously, but not explored. If there are no such books, the subject would seem a prime topic for future doctoral dissertations.
Hudson is one who condemns the “save the top of the system” strategy. He says
If the traditional bank reforms had been preserved, then the FDIC would have closed down Citigroup and the government would have regulated the derivatives market. If the legal system had worked, chief executives of Wall Street’s major investment banks and the crooked brokerage companies that promoted and sold liars’ loans would have landed in jail… Instead of ‘saving the system,’ the financial oligarchy made its move to end economic democracy.
His sympathies lie with the position of Congressman Dennis Kucinich, who asked “why aren’t we helping homeowners directly with their debt burden? Why aren’t we reducing the debt for Main Street instead of Wall Street?” Hudson says “the government could have created money to write down negative homeowner equity… It could have bought bad mortgages at market prices and written down the debts more realistically, in keeping with the going rental value.” He argues that the $4 trillion of “Quantitative Easing” that was done by the Federal Reserve could have been used to “pay off the debts.” [Such a course would have fed the $4 trillion into the system from the bottom, not the top, with the money going to the lenders and on up through the financial system. It is significant that the creditors who were paid for the debt would no longer have both the money and their debt claims.]
As part of the government’s response to the crisis, a mortgage modification program was pursued. It would have been helpful if Hudson had spelled out in much greater detail than he did how small the effort ultimately was and how poorly it was administered. Readers will have to look elsewhere for that. It would have been good, too, for Hudson to have told readers about the seldom-mentioned ideological, political and legal pressure for minority and low-income lending that led to the abandonment of the traditional guidelines for home loans. (This is the “elephant in the room” about the financial crisis that almost everyone either minimizes or finds too “politically incorrect” to mention.)
Because Killing the Host was published in 2015, there was time for Hudson to comment on the Great Recession’s aftermath. What he reports is foreboding: “The Fed’s idea of ‘recovery’ has been to fund a new financial bubble and bid prices back up for existing real estate, stocks and bonds.” As to whether appropriate regulations have been put in place to prevent the sort of abuses that led to the crash, he tells us that “a brief regulatory attempt, the Dodd-Frank Bill, was undone by bank lobbyists.” And although banks paid “hundreds of billions of dollars in civil penalties,” wrongdoers weren’t prosecuted “as was done in the Savings and Loan scandals of the 1980s.”
Assorted Other Topics
Interspersed among Killing the Host’s main themes are a number of other topics. Hudson is strongly opposed to the imposition of austerity policies on debtor nations, which brings him to devote entire chapters to the economic plight of Latvia and Greece. At various points, he speaks of abuses visited upon corporations by their insiders. These include, he says, such things as the executives’ drawing out excessive compensation and the abuse of stock options by having the company do “stock buybacks” to raise the shares’ price and thereby make the executives’ stock options more valuable.
Along these lines, he gives the greatest attention to how LBOs (“leveraged buyouts”) have been used to rape companies, enriching the insiders and stripping even erstwhile well-performing companies. This is a subject that deserves a great deal more attention than Hudson gives it, but at least he flags the issue forcefully and in doing so directs a reader’s attention to it. A good book on the subject is David Stockman’s The Great Deformation. Stockman was the director of the Office of Management and Budget under President Reagan, and after leaving the administration went into the LBO business for seventeen years. Far from defending LBOs, he is contrite about his activity during those years. He says that through LBOs and other abuses “the accumulated equity of American business was strip-mined and transferred mainly to the top 1 percent.”
Hudson gives much information about the musical-chair relationship between Wall Street and high office in government, both within the United States and Europe. He lists several major figures who have gone back and forth between the two. This “incestuous relationship” is often commented on in the critical literature about the crisis. It is part of the even-larger problem of the intimacy between lobbyists, big donors, political action committees (PACs), large business, and other special interests (not the least of which is the “Israel Lobby,” according to John Mearsheimer of the University of Chicago and Stephen Walt of Harvard), on the one hand, and executive and legislative positions in government, on the other. The problem even extends to members of Congress, whom the public elects on the assumption that they will be public servants, an expectation that is thrown into doubt when they leave the Congress to accept a highly paid sinecure in the private sector. Both of the major political parties in the United States are involved in it.
Needless to say, this gives rise to an oligarchical system that runs counter to the “democracy” that is held up as an ideal. Most writers within that system speak disparagingly of “populism,” an attitude that has the implicit premise that there is an elite that deserves primacy and that the public at large should keep its place. It’s not surprising that a populist insurgency has occurred within each American political party in the run-up to the 2016 presidential election.
If oligarchy is a cancer in American and European politics, it is easier to rail against than to solve. In his memoir The Courage to Act, Fed chairman Ben Bernanke points to a benign explanation that is quite apart from venality, greed, class loyalty and power-seeking: “I understand the concern,” he says. “On the other hand, it seems unrealistic to expect government agencies to effectively regulate markets or industries if no one in the agency has relevant experience in that market or industry. I can only say that the Goldman alumni with whom I have worked brought not only substantial financial expertise to their government duties, as one would expect, but also a strong dedication to the public interest.”
This would seem to make sense. But is it a sufficient picture? It is an explanation as if in a vacuum, assuming a normalcy that is contradicted by precisely the greed and power-seeking that has too obviously characterized the current epoch. The very people Bernanke describes admiringly include many who are among those who treat every opportunity as a “cash cow” to gather largesse. Hudson tells us, for example, that Citigroup CEO Robert Rubin, who was Treasury Secretary between 1995 and 1999, “enjoyed the usual enormous salary boost that the Japanese call ‘descent from heaven’ – over $10 million annually” at Citigroup. Bernanke’s is also an explanation that asserts a competency that can only be set forth with a blush, when we consider how little regard was paid to the systemic health of the financial system during the years and months leading up to the crisis. When President George Bush asked “how did this happen?,” he was asking a profound question that should demand an answer.
Even if the whole generation were flushed out and replaced by one with better values and greater wisdom, the problem posed by Bernanke would still remain, although considerably abated. This is not the place to attempt to solve it, and it is doubtful whether it is amenable to anything other than an imperfect solution in any case. Much of the problem would automatically disappear if the culture were to become one where “honor” were again celebrated. To mention that, though, is to show how far we are from the solution.
We have seen that in Hudson’s rambling collection he has touched on a number of provocative topics. Without recommending the book to our readers, we have found much to discuss. In concluding, it is worth repeating what we said earlier: that he has performed an important service in directing attention to the classical economists’ thinking that unearned income could be treated as a legitimate source of funds for the good of the community. It’s a concept that is compatible with a “free market economy” and that can be of great value in the overall structure of a free society.
1 This book is now available on Kindle as an e-book.
2 The prospect of too-intimate intervention is one of the main reasons for worry about a national system of single-payer health insurance (something Hudson doesn’t discuss). If one can assume a strictly professional administration of such a system, this is no concern. But American society today has a great deal of fevered ideology within it that has very little humility about telling people how to run their lives. Healthcare fads, for example, come and go in rapid profusion. The Medicare system for the elderly is much praised, but even there we see that recently it has caused doctors to replace a patient’s annual physical exam with a Medicare-determined “annual wellness visit.” Patients are queried about such a thing as “do you have a railing going downstairs?” No doubt such a question is well-intended, but it crosses an important line whereby even such a thing as a downstairs railing is no longer left to the judgment of people at large. There is almost no aspect of personal life that cannot be made the subject of external scrutiny in a society where there are propensities toward such interventions. Those who see value in “limited government” will prefer a decentralized and market-oriented system.
3 We have reviewed many such books in the Journal of Social, Political and Economic Studies. The reviews may be found, either in the Book Reviews section or the Articles section (when the coverage was treated as a “Book Review Article”) of this reviewer’s website: www.dwightmurphey-collectedwritings.info Several have been collected in a book, The Great Economic Debacle – and Beyond: Reviews and Commentary, published by the Journal as No. 34 in its monograph series.
4 This reviewer has always rejected this position, believing that “let the bottom fall out” accepts economic disaster for the millions of people who have built businesses, gone into professions, raised families, bought homes, and done countless other things in a good faith belief that they were doing precisely what they ought to be doing in a society and economy that is predicated upon people’s individual efforts. In effect, to allow their confidence to be so drastically undercut is to delegitimize the market economy. It is a policy that would destroy capitalism.
5 A book that does discuss the loan modification program’s failures in detail is Neil Barofsky’s Bailout (Free Press, 2012). Barofsky was the special inspector general in charge of oversight of the Troubled Asset Relief Program (TARP). My review of this book appeared in the Fall 2012 issue of the Journal. It may be accessed free of charge at this reviewer’s website (see Footnote 3 here) as Book Review 154 (i.e., BR 154).
6 David A. Stockman, The Great Deformation: The Corruption of Capitalism in America (New York: Public Affairs, 2013). My review of Stockman’s book appeared as a Book Review Article in our Fall 2013 issue, pp. 346-357. It can be accessed free of charge as Article 110 (i.e., A110) on the website identified in Footnote 3 here. A number of books, favorable and unfavorable, about LBOs can be found on www.amazon.com
 This book is now available on Kindle as an e-book.
 The prospect of too-intimate intervention is one of the main reasons for worry about a national system of single-payer health insurance (something Hudson doesn’t discuss). If one can assume a strictly professional administration of such a system, this is no concern. But American society today has a great deal of fevered ideology within it that has very little humility about telling people how to run their lives. Healthcare fads, for example, come and go in rapid profusion. The Medicare system for the elderly is much praised, but even there we see that recently it has caused doctors to replace a patient’s annual physical exam with a Medicare-determined “annual wellness visit.” Patients are queried about such a thing as “do you have a railing going downstairs?” No doubt such a question is well-intended, but it crosses an important line whereby even such a thing as a downstairs railing is no longer left to the judgment of people at large. There is almost no aspect of personal life that cannot be made the subject of external scrutiny in a society where there are propensities toward such interventions. Those who see value in “limited government” will prefer a decentralized and market-oriented system.
 We have reviewed many such books in these pages. The reviews may be found, either in the Book Reviews section or the Articles section (when the coverage was treated as a “Book Review Article”) of this reviewer’s website: www.dwightmurphey-collectedwritings.info Several have been collected in a book, The Great Economic Debacle – and Beyond: Reviews and Commentary, published by this journal as No. 34 in its monograph series.
 This reviewer has always rejected this position, believing that “let the bottom fall out” accepts economic disaster for the millions of people who have built businesses, gone into professions, raised families, bought homes, and done countless other things in a good faith belief that they were doing precisely what they ought to be doing in a society and economy that is predicated upon people’s individual efforts. In effect, to allow their confidence to be so drastically undercut is to delegitimize the market economy. It is a policy that would destroy capitalism.
 A book that does discuss the loan modification program’s failures in detail is Neil Barofsky’s Bailout (Free Press, 2012). Barofsky was the special inspector general in charge of oversight of the Troubled Asset Relief Program (TARP). Our review of this book appeared in the Fall 2012 issue of this journal. It may be accessed free of charge at this reviewer’s website (see Footnote 3 here) as Book Review 154 (i.e., BR 154).
 David A. Stockman, The Great Deformation: The Corruption of Capitalism in America (New York: Public Affairs, 2013). Our review of Stockman’s book appeared as a Book Review Article in our Fall 2013 issue, pp. 346-357. It can be accessed free of charge as Article 110 (i.e., A110) on the website identified in Footnote 3 here. A number of books, favorable and unfavorable, about LBOs can be found on www.amazon.com