This piece first appeared at the website of University of Missouri, Kansas City economics professor Michael Hudson. Read the rest of the Insider’s Economic Dictionary here.
Factoid: A hypothesis, rumor or story so consonant with
peoples’ preconceptions that it is accepted as a fact or working
assumption, even though it often is made up a priori. Among the most
notorious examples are the ideas of diminishing returns, equilibrium,
that privatized ownership is inherently more efficient than public
management, and that trickle-down economics works. (See Junk Science.)
Factor of production: Labor and capital are the two basic
factors of production, creating value. Many classical economists also
treated land as a factor of production, but it is rather a property
right. It is needed for production, like air, but as a legal right it
becomes an institutional opportunity to charge rent, via a legal claim
permitting landlords to levy a toll for access to a given site. In this
respect air, water, technology, patents and similar inputs are not
strictly speaking factors of production, which involve costs that
ultimately are reducible to labor inputs. Interest-bearing debt claims
hardly can be treated as a payment to a “factor of production,” as if
they were an inherent part of the production process.
Fallacy, economic: Economic fallacies are often generated by
language coinage in the political arena and the popular press to be
carried forward into subsequent eras. For example, S. Dana Horton
pointed out in his Silver and Gold (1895) that “The fallacies that lurk
in words are the quicksands of theory; and as the conduct of nations is
built on theory, the correction of word-fallacies is the never-ending
labor of Science. … the party in this country, one of whose great aims
was, at one time, the perpetuation of slavery, owed much of its popular
vote to the name Democracy.” Like so many public relations and lobbying
efforts in the present era, seemingly bland economic and business
characterizations can stultify generations of economic thought.
Falling rate of profit: In Marxist economics, profits were
expected to decline as production became more capital intensive, leading
depreciation (a return of the capital invested, in contrast to a return
on capital) to rise as a proportion of overall cash flow. Strictly
speaking, this did not mean that profit rates as such would fall, merely
that the role of capital recovery would rise.? Under finance
capitalism, profits fall because of the rising debt-intensity of
production as more corporate cash flow (see ebitda) is paid out as
interest, leaving less available as profit.
Federal Reserve System: The U.S. central bank, established in
1914 (seven years after the 1907 financial panic) to decentralize
monetary authority from the U.S. Treasury to the commercial banking
system and regional business, in conjunction with providing more
flexible credit via the banking system. In 1951 the Fed reached an
accord with the Treasury regarding the conflict of interest in which the
government sought to borrow at the lowest possible interest rate, while
banks wanted high rates, ostensibly to fight inflation. But as the
Gibson Paradox illustrates, trying to fight inflation by raising
interest rates often tend to aggravate it. Fed policy along these lines
led to stagflation by the end of the 1970s under Fed Chairman Paul
Volcker, while the reversal of this policy, flooding the economy with
low-interest credit under Alan Greenspan, fueled asset-price inflation
after 1992, much as had been the case in the 1920s under Fed Chairman
Benjamin Strong.
Fictitious costs: Costs over and above labor and capital that
are factored into pricing, especially of regulated monopolies such as
railroads in 19th-century America. The most notorious costs are interest
charges (which are treated as a cost of doing business rather than as a
business decision to leverage one’s own investment), stock options and
bonds issued to financial and political insiders, as well as the
management and underwriting fees charged by money managers and
investment bankers. Neoliberal reforms greatly expand opportunities for
such pseudo-costs to proliferate.
Fictitious costs are book-keeping costs not economically necessary
for production to take place. As such, they are costs accruing to
fictitious capital, most notoriously in the form of “watered stocks”
that railroad barons and other captains of industry or emperors of
finance issued to themselves around the turn of the 20th century. Such
costs are institutional in character, associated with the transition
from industrial capitalism to finance capitalism.
Fiduciary responsibility: Money managers look at their clients
in much the same way a lawyer does: “How much can I make off this
person without formally breaking the law?” The answer usually depends on
how much the client has, and how high a commission the money manager
can make. The norm among many insurance-company managers and brokerage
houses is to unload bad securities onto the client (as companies such as
H&R Block and others did with Enron stock), or to “churn their
accounts” to generate trading fees. Even quicker money has been made
recently by negotiating a complex derivative straddle almost guaranteed
to wipe out the hapless risk-taker. The objective of money managers thus
is to minimize legal restraints on fiduciary irresponsibility,
euphemized as “responsibility.” The post-Enron prosecutions of New York
Attorney General Eliot Spitzer provide a compendium of stratagems that
money managers, banks, insurance companies and stock brokers have been
able to get away with by “stretching the envelope” of fiduciary
responsibility.
More far-sighted money managers of long-term funds have no way of
knowing how much money their clients may accumulate over their working
life, but are satisfied simply to take a commission on whatever is
invested – say, 2%. This is as much as most stocks yield in dividends
these days. The money manager’s objective in agreeing to this fee is
thus to obtain all the earnings on the current return their clients
receive.
The biggest bonanza of all would be to gain responsibility for
managing the Social Security system’s compulsory saving. Its
privatization would steer funds into the stock market, producing
financial gains to savers and higher commissions for money managers. A
rise in price/earnings ratios would increase proportion of current
income absorbed in management commissions. If the manager guesses wrong
and stock prices decline, the manager’s commission will be paid in any
cases. Only the losses belong fully to their clients. (See Bubble, Labor
Capitalism.)
Finance Capitalism: A term coined by Bruno Hilferding to
signify the evolution of industrial capitalism into a system dominated
by large financial institutions rather than industrial firms.
FIRE sector: An acronym for Finance, Insurance and Real
Estate, combined in the national income accounts to reflect the
symbiosis between these sectors. See Rentier.
Fiscal surplus: A deficit for the economy at large, paid to
the government as taxes and user-fees. The monetarist idea that a fiscal
surplus can be “healthy” overlooks the deflationary effect that such
surpluses have on economies, whose major source of monetary growth
typically consists of the economy’s surplus with the government, that
is, a Keynesian-type fiscal deficit. (See Chartalism, Debt Deflation,
Sinking Fund, State Theory of Money and Treasury.)
Forced saving: In Communist economies, the deduction of wage
credits to build up accounts to prepay for consumer goods that will be
delivered at a future time. In the United States, wage withholding to
prepay for public Social Security and medical insurance, as well as for
pensions. (See Labor Capitalism, Pension-fund Capitalism, Savings and
Tax Shift.)
Fragility: Financial markets become fragile as the volume of
debt service expands at compound interest to a point where it exceeds
the ability to pay. The term was coined by Hyman Minsky, who explained
that financial markets tended to turn into Ponzi schemes, the stage of
the credit cycle in which debtors borrowed from the creditors the
interest payments falling due. The effect was to add the interest that
fell due onto the debt balance. This is how Latin American countries
financed their foreign debt until the system imploded in 1982 with
Mexico’s insolvency. Debt leveraging collapses at the point where income
and new loans are unable to cover the interest charges, resulting in a
break in the chain of payments. (See Debt Deflation.)
Free lunch: Most business is now all about seeking a free
lunch, that is, payment for goods or services that have no counterpart
in actual costs of producing them. (See Economic Rent and Parasitism.)
In order to deter public regulation against this practice, its
recipients adopt the cloak of invisibility provided by Milton Friedman’s
claim that there is no such thing as a free lunch. His doctrine
promotes free markets (q.v.), which open the way for rent-seekers to
obtain a free lunch at society’s expense. (See Chicago School.)
Free markets: Markets dominated by the financial and
propertied classes whose objective is to secure all discretionary income
for themselves, ultimately by asset stripping, leaving the economy
without freedom of choice except to pay the rentier class. Hence, a
market in which choice is minimized, by stripping away all government
protection against monopoly and predatory behavior. (See Free Lunch,
Kleptocrats, Military Junta and Race to the Bottom.)
Fundamentalist: If one is going to invent an ideology, the
line of least resistance is to claim that one is going back to its
origins to restore its “fundamentals.” Christian, fundamentalists
supporting the rich against the poor have expurgated the Bible’s
economic message, replacing Biblical sanctions against usury and
economic selfishness with a diversionary focus on sexual intolerance.
(See Crusade.)
chelsea.parker.photo (CC BY-ND 2.0)
