Yves here. As many of you know, despite being willing to give economists with a broad range of views a hearing, Putin’s approach to the economy has been pretty neoliberal, particularly in hewing to strict budget orthodoxy. The latter was arguably necessary when Russia had a chronically weak currency and a dollarized financial system. But the absence of any bank collapses during the shock and awe economic sanctions showed that, unlike the 1990s, Russian banks no longer made use of foreign currency financing.
However, consider this section of a 2006 Brookings paper on Putin’s economics dissertation, which received an award equivalent to a PhD:
There’s one important aspect of Putin’s learning process that has become the leitmotif of stories about his childhood but is rarely projected onto his professional life. This is that he always remembers his challenges — and especially his failures — and always draws lessons. He is patient and persistent in his attempts, and when he understands the ineffectiveness of his actions, or when he fails, he makes sure never to repeat the mistake. In light of this observation and in the context of the dissertation, we single out a few major events that were a challenge to Putin and resulted in his initial failures to adequately counter them, and then I emphasize the lessons that he learned from his experiences….
The test of how well Putin learned the lesson of basic food security came unexpectedly with the breakup of the Soviet Union….
In Moscow, Yury Luzhkov, a deputy mayor at the time, struck a deal with Gazprom to assist Moscow in purchasing food for the city during the first post-Soviet winter. Gazprom sold gas to Central Europe in exchange for basic foods: Moscow received 600,000 tons of potatoes and 100,000 tons of apples and onions in exchange for 1.5 billion cubic meters of natural gas in a deal negotiated between Luzhkov and Polish deputy prime minister Leszek Balcerowicz.
In Leningrad, Putin, then a member of the City’s Committee on Foreign Relations, was assigned to negotiate similar resources-for-food agreements. He assigned several private trading companies to facilitate the barter schemes, because the city lacked its own independent mechanisms to execute them. In other words, he delegated authority to the emerging private
While Vladimir Putin realizes that market economy is the only system capable of effectively delivering on the set goals, he accepts its introduction in Russia with caution and some reservations. He contends that since Russia’s natural resources bear critical strategic properties for the state, their management should not only be heavily regulated but also controlled by the state. Therefore, mineral resources should always remain at the ultimate disposal of the state — regardless of their ownership and the model of the economy. He sees the state as the only institution that can responsibly secure resources for the long-term development of Russia rather than for private corporate interest sector….
To make the story short, Putin’s scheme failed. The deals for the most part fell through because companies never fulfilled their obligations, delivering only a fraction of the initially agreed quantities of food. Luckily, the winter was not a severe one, and household food stocks, a traditional, almost instinctive, survival mechanism, helped to relieve the shortages.
This early experience and failure in his public career taught Putin two lessons. First, in addition to reinforcing his belief in the importance of food security and essential survival, Putin realized that the ultimate currency that a Russian official can have at his disposal is raw materials. It is therefore not surprising to find a lengthy list of strategic materials in Putin’s 1999 article, where he lists basic foods along with uranium, oil and gas, and other materials. To sum up the first lesson, during cataclysmic events, Russia’s ultimate guarantee of survival, and subsequently of wealth and development, is natural resources. Since they are essential to Russia’s survival and security, they should always be kept in strategic reserve.
Putin drew a second lesson from his mismanagement of the resources-for-food schemes: private companies can’t be trusted. Therefore, the state has to exercise some degree of control. Having trusted private companies, he failed because in an unstable and unpredictable environment, private companies may often disregard their obligations and act exclusively for their private interest. In the ideas he expressed in the dissertation, Putin favors a market economy with strong state regulation and preemptive power in the economy….
At the time of completion of the dissertation, Putin’s approach to management and governance was fully developed. He argues that the cornerstone of his policy — to provide for the well-being of the population and ensure stability — is economic security, and that raw political power and patriotic commitments of governing and enforcement structures need to be complemented with economic state order. To him this order is only sustainable through various control mechanisms over essential strategic commodities. As a former deputy mayor of a large industrial city, Putin is aware of the inefficient and uncompetitive nature of the existing manufacturing sector and Russia’s economy in general. He sees Russia’s mineral resources as the only “hard currency” that ensures not only the economic and political security but also the very survival of Russia. Mineral resources are the ultimate insurance for overcoming any crisis, and they represent a disaster contingency plan. And, of course, they are the source and engine of Russia’s economic and political recovery.
While Vladimir Putin realizes that market economy is the only system capable of effectively delivering on the set goals, he accepts its introduction in Russia with caution and some reservations. He contends that since Russia’s natural resources bear critical strategic properties for the state, their management should not only be heavily regulated but also controlled by the state. Therefore, mineral resources should always remain at the ultimate disposal of the state — regardless of their ownership and the model of the economy.
So one could argue that Russia’s neoliberalism under Putin was partly a financial necessity, a response to the banking failure of the 1990s, and also due to following the long-standing Russian impulse to orient towards Europe, which meant to a fair degree accepting their economic model. In keeping, Alexander Mercouris pointed out that the reason Belarus and Russia only recently have moved to considerably more economic integration was that Belarus’ long-standing president, Alexander Lukashenko, had seen Russia’s economic model as too neoliberal to allow for much integration. Russia has now moved towards more dirigisme, which reduces frictions.
Published by Geopolitical Economy Report
What follows is an edited transcript. Square brackets indicate material which has been corrected for factual accuracy or in order to provide differentiating information.
RADHIKA DESAI: Hi everyone, welcome to the seventh Geopolitical Economy Hour, a program about the political and geopolitical economy of the fast-changing world of today. ‘m Radhika Desai.
MICHAEL HUDSON: And I’m Michael Hudson.
RADHIKA DESAI: And as some of you know I just got back from Russia which is why we are doing this show with a week’s delay.
Of course it’s been a really interesting time there. I attended many conferences, talked to loads of people: economists, political observers, commentators, etc.
Michael and I thought that what we’d do today is talk about my impressions, and also weave them into a broader discussion about how the world order is changing towards multipolarity. So many things have happened.
President Xi went to Russia, and President Macron went to China, and so many things are going on. So we’ll weave all of that into a broader discussion about my impressions from Russia.
So what Michael and I thought we’d do is focus on two particular points that we thought were interesting that I picked up when I was in Russia is that during the whirlwind of conferences that I was at, at which some very prominent Russians spoke, the one thing that I heard that was really interesting is a decisive statement coming from some of the most influential speakers, that essentially Russia is moving away from the West and will never return.
And the second idea, which is also very fascinating, is that increasingly the Russians are now thinking of themselves as part of a world majority.
Right, Michael? To us these are the two most interesting things.
MICHAEL HUDSON: The important point is that once you break away from the West, what are you going to break to?
And while you were in Russia talking about how they wanted something new, the whole West was in a turmoil. We’re really at a turning point of a civilization, probably the biggest turning point since World War I.
Where, in order to not follow the West, there has to be a whole new set of institutions that are non-Western. A new kind of International Monetary Fund (IMF), meaning some kind of a means of financing trade and investment among the non-Western countries.
Some kind of a new World Bank. Well so far we have the Belt and Road Initiative for a new kind of investment.
And what we’re really talking about, since a theme of our talk all along has been Biden saying that this split is going to go on for twenty years, we’re really talking about the split between Western finance capitalism and the global majority moving towards socialism.
RADHIKA DESAI: Exactly. And it seems as though there has been an increasing consciousness of this in Russia. So, just to elaborate on the first point, which is of Russia turning away from the West.
I was at a conference at the Higher School of Economics, and it’s important to underline this is a very prestigious, post-communist institution which was designed in order to essentially develop and entrench neoliberalism in Russia.
And in the hallowed halls of this institution, which by the way is very beautiful. It was a former military academy. They have an annual conference every year on economic policy and so on.
And this is where, in a [panel] on the “world majority”, as it was entitled, I heard Dmitri Trenin make a really interesting statement.
Now, Demitri Trenin is also interesting and important. He used to be, again, part of this larger pro-Western, pro-neoliberal group of people. He headed the Carnegie Institution in Moscow and interestingly particularly after 2014, and after 2022, when many people of his ilk had left Russia, he has decided to stay and he is still very much in the forefront of the commentariat in Russia.
He said, — When the war is over, he said, — Russia will not strive to be part of the West. That chapter, he said, — is over.
So that’s really fascinating. That somebody like he should say that. And just as a matter of settled fact.
And this is interesting because if you sort of cast your mind back, you know, Lenin, from the earliest days of the Russian Revolution, and even before realizing that Russia’s fate was tied up with the East.
But then in particular, after the Second World War and Khrushchev all that, you saw an increasing turn to the West and Russia has remained very oriented to the West. And now this is over.
And the chair of the session was an elderly professor called Sergei Karaganov. And he had been one of the founders of the Valdai Club. Again, the Valdai Club, which is sort of the equivalent of the Council on Foreign Relations in the United States.
The Valdai Club was also set up as a way in which Russian intellectuals would meet Western intellectuals and think about Russia as part of the West.
But Sergei Karaganov also concluded the session by reiterating, and he said, — Russia, he said, — Russia will never come back to the West. It’s done there, he said. So I thought this was really fascinating.
MICHAEL HUDSON: Well the interesting thing there is that while you’re talking about what Russia’s future is with China, Iran, and the rest of the Shanghai Cooperation Organization, there was a sort of frantic talk in Washington, especially at this week’s meetings with the IMF and the World Bank about, —Well, if Eurasia goes that way, what is going to happen to what we call the Global South. What’s going to happen to Latin America and Africa?
Well you’ve had the first Mr. Blinken of the US, and then Vice President Harris go to Africa and to say, — We want to make sure that we have your cobalt, we have your raw materials, and that you leave all of the US and NATO investments in place and do not give any of the cobalt or lithium or other raw materials to China and Russia and Eurasia.
So, essentially, the southern hemisphere countries are being faced with a choice. What’s so interesting is what makes this choice different from what it was in, say, 1945.
After World War II, the United States had all sorts of economic arguments as to why capitalism was going to offer prosperity to the whole world, including the southern hemisphere. And Soviet Russia at that time was pushing communism.
Well, there’s no ideological discussion today.
On the one hand, the West doesn’t have any attempt to justify joining the US and NATO bloc. All it says is, — If you don’t join us, we’re going to do to you what we did to Libya, and we’re going to do to you what we did to Ukraine. Use pure force.
The question is now what the global majority and what Eurasia is going to say. — Well, we’re not going to force you. We’re not going to attack you. We’re not going to have a color revolution. But here is the economic future and the way of organizing the international trade and investment market that is going to help you.
Well, you can just imagine if Jesus had come in and tried to found Christianity by saying, —We’re going to kill everybody who disagrees with this.
That would not have ever taken off.
I think that the neoliberal plan today has about as much chance of taking off. You’re not going to get the world to follow you just by threatening to bomb it, but that’s all that America and NATO have to offer: refraining from bombing other countries if they don’t leave things the way they used to be.
RADHIKA DESAI: Exactly. All the West has to offer is sticks. Whereas China comes loaded with all the carrots that you can imagine. The juiciest carrots that you can imagine.
So this world majority concept that’s come up is essentially all the non-Western world, the world majority, can see these carrots, they are responding to these carrots.
And the other interesting thing is that these carrots are not neoliberal carrots. This is the other thing that is very clear.
But let me just first deal with this world majority thing, because again, at the same conference, it turned out that the session was titled “Development for the world’s majority”.
And so the the chair of the of the meeting, Professor Karaganav, also said that this idea had actually come up at the Higher School of Economics in some kind of a brainstorming session in which the purpose was to say, — Okay, Russia is not the Third World, Russia is not the developing world, so Russia is part of the post-communist world, so how do we conceive of a single entity of which Russia is now very active part, and is going to be one of the leaders of this?
And so, having brainstormed a lot, somebody came up with this idea of world majority. So increasingly, the Russians are thinking of themselves, not as being part of the West, whose attractiveness is shrinking and whose borders are also rather small if you think about it.
The bulk of the GDP and people in the world are outside the West. And this is also becoming increasingly clear. The West now accounts for about 30% of world GDP, so this is the rest of the 70%. And it’s only going to grow.
Meanwhile, the West’s neoliberal policies are accelerating the decline of this.
And Michael, we’re going to talk about these institutions in a second, but let me just say one other thing about the domestic policy which you touched. Then we’ll move over to the institutions that the world majorities work to create.
And that is that, we attended another conference as well at the start, that’s where we arrived, the St. Petersburg Economic Forum].
And the St. Petersburg [International Economic Forum] is another annual event. And what really struck us this time, we attended the plenary session at which a lot of very important people, including Sergei Glazyev, who is leading the Eurasian integration process in Russia, spoke.
The President of the Free Economic Society of Russia spoke. A number of important ministers and others also spoke.
And at this conference, what was remarkable is that, barring the one or two diehard neoliberals who also spoke at the main plenary session, the overwhelming majority of the speakers voiced an anti-neoliberal consensus.
Neoliberalism is finished in Russia. The overwhelming consensus is that behind some sort of a developmental state that is going to engage in a fairly effective, high degree of state intervention to ensure that Russia does not lag behind technologically. That Russian industry is revitalized. That Russia, in trade terms, is in a winning situation.
Basically, across the board there was a consensus against neoliberalism which I thought was really remarkable.
MICHAEL HUDSON: Well, the problem in what you say is the word “finished”.
It’s one thing to say, — We are going to have a new non-neoliberal new order. And of course that’s what Russia, China, and Iran, and the other countries, India, are all trying to do.
But the problem is that there still is a neoliberal world order that covers a lot of the world majority.
And what are we going to do about the survival of these neoliberal institutions? What are we going to do about all the massive foreign debt that’s owed to the West by what we can call here the Global South, because that’s really who owes the debt, not the world majority.
And that’s really what has been under discussion in the United States while you were in Russia.
How do they use this carryover, this legacy of debt, as a stranglehold on the Third World countries?
Well, there have been a lot of articles about what China has to say about this.
The Americans and NATO are all in agreement. South America and Africa can of course pay their debts if they don’t pay China. They’re blaming China for everything, who’s the last newcomer of all and is the least neoliberal.
China says, — Well wait a minute, we are not going to write down our debts to Africa and South America just so they can afford to pay you, the bondholders, for your loans that have gone bad. A loan that has gone bad is a bad loan and should be written off.
But there isn’t any system for government bankruptcy because the whole purpose of having a financialized world order and finance capitalism is, you never let other countries declare bankruptcy and wipe out their debts like you can do in America and Canada and other domestic countries.
You want to keep this debt forever as an irreversible burden so that an indebted country can never break away from the US and NATO.
So the question is: How will these new organizations, these alternatives to neoliberalism for trade and investment, that you’ve been hearing them talk about, how are they going to deal with countering this legacy?
President Biden says, —You’re either with us or against us.
So how are the rest of the countries going to choose which bloc they want to join?
RADHIKA DESAI: Well I think that the whole issue of debt, world debt in particular, has become a really important issue at this point, and it’s become an important issue because precisely now China is such a large part of the scene.
I remember going back to the earliest days of the pandemic when Third World debt had also figured as a major issue. Already at that point, the key reason why the debt issues were not going to be settled is because the West could not come to terms with the fact that it had to deal with China, and that it had to deal equitably with China.
Because what the West wants to do is precisely to get China to refinance the debt owed to it so that Third World debt repayments go to private lenders.
And China is basically questioning the terms of all of this, because for example China is saying, — Why should the IMF and the World Bank have priority? Why should its debt not be canceled?
And the West is saying, — But this has always been so.
And China is saying, — Well, if you don’t want to reform the IMF and the World Bank, then we are not going to accept their priority. If we have to take a haircut, they will also have to take a haircut.
They simply do not accept that these institutions, the Bretton Woods institutions, have any sort of priority.
And this is part of the undermining, as you were saying. This is one of the biggest changes since the First World War. And part of these changes is that the world made at the end of the Second World War by the imperialist powers, who are still very powerful, is now increasingly disappearing.
MICHAEL HUDSON: You and I have been talking about this since Covid began in 2020, and it’s only right now that finally the IMF and the World Bank meetings are getting around to finding this out, three years too late.
They didn’t want to confront that finance capitalism has a problem. The debts ultimately cannot be paid. The debts mount up faster, especially on the Third World.
And the reason we discussed it and they didn’t was they didn’t want Africa and South America to deal with the problem. They wanted the problem just to go on and get worse and worse.
So now the IMF has published charts saying, — Wait a minute, most of the Third World countries are now in crisis.
They are not attributing the crisis to the sanctions against Russian oil and food exports. They’re not attributing it to the increase in the dollar’s exchange rate by the Federal Reserve. They’re just blaming statism.
Well obviously, the one thing the characterizes the new global world majority order is a mixed economy where other countries will do what China has done. They will make money and land, meaning housing, and employment into public rights and public utilities instead of commodifying them and privatizing them and financializing them as has occurred in the West .
So we’re really talking about, in order to move away from the dollar-NATO-sphere, we’re not really talking about just one national currency or another.
It’s not going to be a question of the Chinese yen and the Russian ruble and other currencies replacing the dollar. It’s a whole different economic system.
That’s the one thing that is not permitted in the mainstream media to discuss. They’re still on the “There Is No Alternative” Margaret Thatcher slogan, instead of talking about: What is the alternative going to be?
Because obviously things cannot last the way they are now.
RADHIKA DESAI: Absolutely. And I think that we want to talk about exactly what these new institutions are, because the thing is that you see two very different things going on.
On the one hand, there are a number of bilateral and multilateral arrangements being made on a regional basis, whether it’s the BRICS or the Shanghai Cooperation [Organization] and what have you. These arrangements are being made.
But on the other hand, people are also talking about trying to create some sort of universal system, some kind of bancor or International Clearing Union arrangements.
But the problem with them is that of course, at the moment, precisely because the West is taking the position that it’s taking, it is not going to cooperate in anything universal, and without that we will not have a universal agreement.
And in that sense, what we will see is necessarily the emergence of regional agreements, maybe quite substantial, but nevertheless they will still be regional.
MICHAEL HUDSON: Well, the question then is: What kind of a revolution is there going to be?
Pepe Escobar just wrote an article a few days ago saying that what’s happening now is, the world’s in another 1848, meaning a revolution.
But the 1848 revolution was a bourgeois revolution. It was the progressive force of industrial capitalism against the landlords, and against the banks, and against the rentier class that had survived from feudalism.
What was needed is a further revolution, obviously, a 20th century revolution, in order to not only free capital from the landlord and the banking class, but to free the whole population from the capital class in general.
That’s what nobody dares talk about.
And obviously you’re not having China proselytize. It’s not coming out and saying, — Here’s our economic system as opposed to yours.
And yet all of this philosophy is going to be implicit in any kind of restructuring that they’re going to have.
And so the question is: What will be the guidelines behind this?
To what extent are they going this far in the discussions you heard?
RADHIKA DESAI: That’s a really interesting point. I wanted to also say that, the impression one got when in Russia was: you didn’t get the impression that this is a nation at war.
There was no jingoism. There were hardly ever any of those “Z” signs to be seen. Maybe I saw a total of two or three of them, maybe perhaps all total during my travels around Russia.
And in many ways, support for the war is there, and it’s a very quiet kind of support. Whatever view one may have, everybody can see that Russian victory is absolutely essential, that a NATO victory would be disastrous for Russia and the rest of the world.
All of this is very clear. And in many ways it is a criticism of the Putin administration made by those who are some partisans of his developmental state. It is that the Putin government has not used the opportunity created by sanctions to move more decisively.
On the one hand, to mobilize for war more decisively, both in terms of mobilizing troops as well as economic mobilization, in order to win the war.
And then as part of the economic mobilization, the point that people would make, and some critical economics have made, is that the Putin administration is still leaning a little too much in the direction of neoliberalism.
For example, capital controls aren’t as extensive as they should be. Monetary policy is far tighter than it should be. The state has not tried to intervene in sectors other than defense production in order to try to increase production.
In all of these ways there is a criticism of the Putin administration. It comes from the fact that he has not been decisive enough.
So I would say that a couple of things emerged from this.
On the one hand, sanctions have definitely created the objective conditions in which anti-neoliberal direction of policy and developmental state direction of policy has become a necessity.
And I think that this is most important to remember: I think most countries will find that, if they wish to create any kind of development, they will have to adopt anti-neoliberal developmental policies.
So in that sense there are residual effects of neoliberalism, but circumstances are going to ensure that neoliberalism is essentially finished, because any successful attempts at creating development will have to involve the kind of state interventionism which is sort of “this far” away from socialism.
MICHAEL HUDSON: Well, while you were there both President Putin and Foreign Minister Lavrov have been using the same word over and over again, and that is “multipolarity”.
But multipolarity, that’s the sort of modern world for the 1648 [Peace of] Westphalia that ended the Thirty Years’ War.
The Westphalian system was that no nation should interfere with the policies of other nations.
And that was the law that governed basically all international relations until 1945 when the United States said, — Well, we get to interfere with every other nation, but no nation has any authority over us. And we will never belong to any organization in which we do not have veto power, as America has in the UN, IMF and the World Bank.
You can see the first stage of this. Countries are trading with each other. The recent deals between Saudi Arabia, China, Russia, to denominate their trade in their own currencies.
Well, this means that countries are going to hold, in their foreign reserves, each other’s currencies.
And the first question is: What will this mix of foreign currencies be?
Well I think the natural solution would be for the mix of currencies to reflect the proportions in which a country’s foreign trade is in.
Because China is the major trader of so many countries, obviously the Chinese currency is going to play a major role.
But as we’ve talked about before, this does not mean that China’s currency is going to replace the dollar. No currency will replace the dollar because there will never be a dollar standard again.
There will never be anything like one country controlling other countries with the ability to grab their money at will to cause a crisis by cutting them off from the SWIFT bank clearing system, from doing the things that the dollar did.
But much more than just holding each other’s currency, there’s the whole superstructure of how the economy is going to be structured behind that.
You and I have talked before about, given the fact that many countries now are having difficulty, to put it mildly, paying their foreign debts, the countries that agree to join with Russia and China and Eurasia are going to have access to a new kind of international bank.
And this international bank will create something that, in one sense, is like gold, in the sense of being a currency, a vehicle, that countries can use to pay debts to each other. That governments can use with each other. Not to be spent domestically.
Under the gold exchange standard, nobody was paying [domestically] in gold in the 1930s and 40s, or 1950s and 60s, but gold was used amongst central banks.
So we’re going to see something like the Keynes’s bancor currency that you and I have discussed so much, or like the International Monetary Fund’s SDRs, except that the new international bancor will not be created just to give to military countries to wage war against countries that the United States doesn’t like.
RADHIKA DESAI: Exactly. Moving towards that sort of situation, the bancor-like situation, would be very helpful. Because if you think about the principles that Keynes took into account when designing the International Currency Union and bancor and so on, what were some of the key things?
I would say the first and most important thing is that countries would implement capital controls. Which is why central banks would retain their power to settle balances with this multilaterally-agreed international currency, which is not the domestic currency of any country.
So capital controls are also important because look at it this way.
One of the key reasons why a kind of sensible economic policy of the sort that you and I would endorse, a developmental economic policy, one that is designed to create a productive economy and a broadly-based prosperity, one of the key hindrances to this is the excessive financialization of the dollar system, and all the elites in various Third World countries and the world majority countries, including Russia, that participate in this dollar system.
So I would say that imposing capital controls would be critical.
Another really important thing that comes out of this system is that Keynes’s system, the International Currency Union, was designed to minimize imbalances, persistent imbalances.
Countries would never have persistent imbalances in terms of trade or investment or anything. There would be no persistent export surpluses, no persistent trade deficits.
This is also the opposite of what we have right now. The US dollar-based system in fact relies on the systematic creation of imbalances in which the United States must run current account deficits in order to provide the world with liquidity.
And of course the United States and the Federal Reserve have also, in order to make the dollar more acceptable, sponsored the massive financialization of the dollar system generally.
And it would also therefore be a more stable system, and it would also be one in which the development of some parts of the world, and the underdevelopment of other parts of the world, does not become a perpetual part of the system.
Because what does balanced trade mean?
If one country starts generating too much export surpluses, and this is discouraged by taxing their earnings at the level of the International Clearing Union, then this creates an incentive for the country that is the most successful to invest in the success of other countries so that trade rises, but it does so in a balanced fashion.
So that is another principle.
And a final point I would like to make is that this new currency order that will be created, and I’m sure that when it’s already coming into existence the question is only: To what extent can it become a universal order?
But this new currency order will have one very important advantage, which is that the dollar system has always rested on the systematic devaluation of the currencies of other countries, which means that the rest of the world has to work its guts out in order to export vast volumes to First World countries, which is of course one of the key reasons why inflation has been so low in Western countries in the neoliberal period.
So they have to work harder and harder to export vast volumes and earn tiny amounts in value terms. So the discrepancy in the volume and value of Third World exports, or world majority exports, is massive.
If the rest of the world, if the world majority, starts getting a better value for their exports and starts enjoying a better exchange rate, essentially, then it will be better remunerated for its efforts.
And I think this is going to be very important for so many world majority countries.
MICHAEL HUDSON: Well you’ve made the key point right there. The dollar system has produced austerity. The international financial system’s result is austerity, and one way that it locked this in is in forcing other countries to devalue. They try to throw more and more of their currency onto the world market to pay their foreign debt.
Now, when a country devalues, what’s really devalued? The price of raw materials isn’t devalued. There’s a common world price for all raw materials. There’s a common world price for oil and energy. There’s a common world price for food. There’s a common world price for machinery and capital goods.
When you devalue, only one thing is devalued: the wages of labor, and domestic rents.
So when the IMF talks about austerity, what it really means is, our class war against labor to make sure that we can increase profits in the US-NATO core by continually reducing what we have to pay for labor that’s paid abroad.
And of course the sin of China was not letting its labor be devalued, but instead using industrialization, and even its financial links to the West, to build up and increase living standards, not roll them down.
So if you realize that the whole point of the financial system is: How do you make a financial system that doesn’t result in debt peonage and degradation of labor?
Well then, you may not want to use central banks. Central banks are created by the commercial banks, against the rest of society. It’s the central banks that have helped destroy industrial capitalism in the West.
You really only need the treasury, which is what you had before central banks, and what China uses.
Its Bank of China is really an extension of the treasury. It’s not an American- or European-style central bank whose job is to support real estate prices and make housing more expensive so that the domestic labor has to go into debt to buy more and more debt-leveraged housing, and that’s not to push up stock and bond prices of the 1%.
The treasury would represent the population as a whole.
Now, this used to be called democracy. But President Biden calls it autocracy. So “autocracy” is supporting labor. What he calls “democracy” is the financial war against labor, just to get the Orwellian vocabulary straight.
RADHIKA DESAI: Absolutely. Michael, you know better than me that the very origin of the word “tyrant” comes from the fact that debt crises in Rome regularly led to the election of rulers who ruled in the interests of the majority of the people, the debtors, and against the interests of the small number of creditors, which is why the creditors ended up calling them tyrants.
In fact, apparently the word tyrant does not mean anything bad, but it’s come to mean something bad because basically we live in a world in which our vocabulary tells us that anything that is against the interests of a tiny minority is somehow against everybody’s interest. But of course this is not so.
Michael, what you say makes me think of several things. Just one tiny clarification, and that is of course you’re absolutely right that the central banks as we have in the United States and most European countries are totally agents of big financial capitalists. I agree completely and that’s how they have behaved.
In a sense, the idea of a central bank is precisely to act as a buffer between the internal domestic economy and the external economy in a way that it acts as a kind of shock absorber, that if there are external shocks that the vast majority of the people are not to suffer them.
And that should be the case. Of course, this is subverted, but therefore central banks are important.
As you say, they should become arms of a broader financial system which is aimed at creating productive growth, stable growth, of course in our time ecologically sustainable growth. So just a small clarification about central banks.
But then three quick points.
Number one, you were pointing to how the dollar system bakes austerity into our system, and of course, again, Keynes’s design of the International Clearing Union and bancor was also interesting from this perspective because its thrust was the opposite.
Of course, capital controls was a keystone of the system. You have to have capital controls, and the purpose of doing that was to ensure that all governments, if they so wish, that is to say, if they were so inclined, they could run their economies for full employment with as much state intervention as necessary with as big a role for the government and the economy as necessary. And this could be done because of capital controls.
And this also brings me to my second point. It has been very fashionable, in our neoliberal era, to talk about the so-called trilemma of policy, which is that there are three goals which are considered by neoliberalism to be desirable, namely, having a stable exchange rate, having an autonomous monetary policy, and free capital flows.
They say you can only achieve two of these at any given time. But my point is, actually it is not a trilemma at all. It is an absolute no-brainer.
If you have capital controls, then you can have both an autonomous monetary policy and a stable exchange rate. There is no need to worry about it.
It is only by adding free capital flows as a desirable end to this mix that you create this artificial trilemma. It’s a completely artificial trilemma.
And my final point. If currencies were really valued realistically rather than this strange overvaluation of the dollar that we have all suffered from for so long, then in fact there would be even less need, even among the rich people of any country, would not feel such a big pressure to hold their money in dollars as they do today, because they only wish that because their own currencies are so subject to the vagaries of the dollar system.
The Fed decides to jack up interest rates, then all the money that has hitherto been flowing into these non-Western economies flows right out, creating currency crises, debt crises, trade crises, and all of these sorts of things.
The currencies of the rest of the world, of the countries of the world majority, would also be more stable and that would actually decrease the attractiveness of dollars to even the elites of these societies.
MICHAEL HUDSON: Well I think you’re quite right about capital controls.
When I went to work in international finance in the 1960s, there were dual exchange rates. The IMF every month would publish the exchange rate for normal trade in goods and services, and a different exchange rate for capital transactions, for debt and investments.
So you had two exchange rates. And that’s because there were capital controls.
The United States, via the IMF, got rid of capital controls so that other countries could not protect themselves. Only the United States could protect itself. That’s the double standard.
Also, as we discussed before, Keynes wanted to solve this by something that is very interesting that the US fought like anything not to accept.
Keynes said, — How do you make an international financial system that is not going to be dominated by the strongest currency, by one currency swamping the others? In other words, how do we avoid the disaster and world depression that the United States has brought on?
He said, — If one country continues to run a balance of payment surplus and has enormous claims on other countries, and other countries accumulate a deficit, we can’t let them just be painted into a corner or we’re going to be back to the position of Germany and France in the 1920s.
— The country that has the major currency has it because it’s refusing to import from other countries. It’s refusing to help create an international, equitable world order, and so the dominant currency’s claims will be written down.
Well of course the United States knew that Keynes was talking about the dollar that was going to grow.
But just imagine today if China could say, — We thought about the discussions that took place at the end of World War II shaping how the world financial system developed and, yes, I know that the US and NATO say, — Well China’s going to dominate the whole area and end up being another America.
Well, China can say, — We’re in agreement with Keynes’s principle. If we really get so many export surpluses and so many claims on the rest of the country that they can’t pay, of course we’re going to write it down in order to maintain stability.
Imagine if the United States had done this in 1945 and accepted what Keynes did. Imagine how the whole world’s development would have been different for the last 75 years.
That, I think, would be a great ploy by China.
RADHIKA DESAI: Absolutely. Remember that at the 1944 Bretton Woods conference, Keynes had gone there with these proposals for bancor, for International Clearing Union, and they were nixed by the United States because the United States wanted to impose the dollar on the rest of the world.
By contrast, by the way, you should know that in China there is quite a lot of interest in Keynes’s proposals for bancor and so on, for a couple of different reasons.
One thing I remember very vividly is I was precisely writing an article about Keynes and bancor and so on around the time of the 2008 financial crisis.
So I wrote it in the fall of 2008, and it was published in early 2009, and just before it went to press, the governor of the People’s Bank of China issued a short paper in which he recalled that Keynes had proposed a bancor and we need to return to those principles, and so on.
And thankfully I just managed to stick a reference to that into the article just before it went to press which was really lucky.
So the Chinese have a lot of interest. And that’s one thing.
I think you have to understand that the Chinese know the price that the Western economies, the American economy in particular, has paid for making the dollar the world’s money, which is an undermining of its own productive capacity, the financialization of its financial system in such a way that it is geared towards predatory and speculative activity rather than being geared towards financing productive investment.
So in all of these ways, actually all of the Americans have paid a huge price for making the dollar the world’s currency, which is only a good thing for the cream of the American elite and not for anyone else.
The second thing I wanted to say is, this idea that the national currency of any country can easily, stably, reliably, in a good way, be the currency of the world has become naturalized in our time, but it is a completely false idea.
And you see, Keynes’s career is very interesting from this perspective. I’ve written about this as well.
When Keyenes started his career in the teens, he was fresh out of college, he went to work for the India Office, and there he learned how the British financial system worked, because as we’ve talked about before, it was so reliant on British India.
So his first book, published in 1913, was called “Indian Currency and Finance”, and it is widely regarded as the primer. If you want to understand how the gold standard worked, read “Indian Currency and Finance”.
And of course, why would a book like “Indian Currency and Finance” be the primer on the gold standard? Because British India was critical to its functioning.
Anyway, if you read this book, it’s full of praise for how wonderfully the system works. Keynes was completely uncritical.
And then over the course of the rest of his life which, if you think about it, Keynes’s career spanned the First World War, the thirty years’ crisis. The First World War began it, and the Second World War more or less ended it. He died in 1946.
So over this period, Keynes was witness to the steepest fall in the international standing and economy of any country he’d seen. Britain went from being the head of the empire on which the sun never set, to essentially being on the cusp of losing that empire and being turned into a weak, industrially declining, medium-sized economy.
So Keyes designed bancor. Keynes, over the course of his life, became a critic of the gold standard, its deflationary character, the costs it exacts on other countries. He absorbed all this.
And of course towards the end of his life he proposed a replacement for what used to be this gold-sterling exchange standard, which was a complete contrast. Which would not impose austerity. Which would not create financialization. Which would allow countries to run their economies for development, for prosperity, for full employment.
MICHAEL HUDSON: Well, you can say that Eurasia today is picking up the strain of world history where the world left off in 1913 and 1914.
World War I changed the whole direction of the world. It stopped the evolution of industrial capitalism into socialism, with the Russian Revolution and the great fight against the Soviet Union. And it replaced industrial capitalism with finance capitalism.
And today, over a century later, now finally Eurasia is taking the lead in rejecting this retrogression into neo-feudal finance capitalism and picking up where the world was evolving from industrial capitalism into socialism, which seemed to be the wave of the future for everybody who was writing until World War I was such a shock that it traumatized history.
We’re only right now getting over it with Europe and America fighting against it.
They don’t want the world to continue the way it was going in 1914. That’s why they sent all the troops into Russia to try to overthrow the revolution. They’re doing everything they can to prevent it and the rest of the world’s task is to fight for civilization against the forces of reaction.
RADHIKA DESAI: That’s so interesting. And I would say, Michael, that even Europe is probably going to get off this crazy pro-American track that it’s been on since early last year since the military operations began in Ukraine.
I mean, Europe’s position is definitely suicidal, I think increasingly there are voices emerging that are counseling against that. It is not a surprise that Macron, on his visit to China said, his words, not ours, — Europe should stop being a vassal of the United States.
I think that it’s very possible, although certainly the bloody-mindedness and crazy policies of European leaders are not giving us much hope, but nevertheless statements like Macron’s point to the fact that Europe is not in a very comfortable place and it’s going to have to, if only for its own economic survival, break these crazy attachments to US policy.
So that’s one thing. But I’ll say a couple of other things as we should probably wind down soon.
One thing is that, I completely agree with you. I’ve even written stuff about this, for example in this article about Keyes and bancor.
The last section, which looks at the US role in all of this, for example in nixing Keynes’s proposals and trying to exert its dominance over the rest of the world, which I have argued was never successful. I argued this in my “Geopolitical Economy”.
Anyway, the point is the section was entitled “The Strange Afterlife of Imperialism”, in the sense that the United States, in its desire to recreate the kind of dominance that Britain had enjoyed in the 19th century, the 20th century, that the US would enjoy the same sort of dominance.
This attempt managed to, of course, influence world history, but even still it was not successful.
But now the story of that attempt is also at an end. It can no longer realistically even try to create this sort of dominance.
And that means that the anti-imperialist tide that had begun with the outbreak of the First World War and in the thirty years’ crisis of 1914 to 1945, that anti-imperialist trend is now resuming in a bigger way after being sort of held back a bit by American attempts.
But you have to understand that even though the United States wanted to exert its power over the world, in the post-Second World War period it was never entirely successful for the simple reason that the communist world existed.
The communist world stretched from Prague to Pyongyang. It was huge. The United States was not the master of this world. Its existence put serious limits on what the United States could do.
In that sense,what you have seen is that only after the end of the Soviet Union you saw this hubristic attempt on the part of the United States to try to now finally exert its dominance over the world, but that has as we know ended really badly.
There is no unipolarity. Instead there is multipolarity, and the United States has reacted to this very badly and has therefore been engaged in nonstop wars since then.
MICHAEL HUDSON: Well, you’re right to point out Macron’s statement that Europe is caught in the middle. He’s sort of France’s Donald Trump. He’ll say whatever he thinks is going to a be popular, and then he’ll just turn around and say to another side the exact opposite.
But Europe was in the middle after World War I. It agreed to pay the inter-ally debts, and that’s what forced it to impose the reparations on Germany that wrecked all of its development.
It was so rigid in holding to the old financial system in which a debt has to be paid, that it could not break.
But right now Europe is in the middle again, America’s war against Russia being fought in Ukraine.
I think that when Macron made his statement, that maybe Europe should go its own way, he’s trying to take the voting power away from the right wing of France.
The irony is it’s the right wing in almost every European country, the nationalistic wing, that is breaking away from the US, leaving the left way behind.
So the irony is that the left is not playing a role in creating an alternative to neoliberalism. The left has embraced neoliberalism ever since Tony Blair and Bill Clinton.
So it’s very unique that we’re seeing civilization, a new path of civilization, being developed without any reference to the past discussions at all.
I think it would be nice to have a discussion of classical economics, of the political economy of Adam Smith and John Stewart Mill and Marx about value and price. I think they were on to the important things in the 19th century.
It’s as if there’s a kind of technocratic class that is trying to reanalyze the world without really any reference to history at all, and I think that’s what you and I are trying to do in our lectures here.
We’re trying to provide a basis in history to say, — All this has happened before. What can we learn from the experience of what to do and what to avoid?
RADHIKA DESAI: Absolutely. And Michael, maybe we should bring this to an end, but I totally agree with you.
And indeed this is much of the argument of my book “Capitalism, Coronavirus, and War”. It tries to explain why it is that the left has essentially failed to understand imperialism, and this failure today accounts for the fact that it has uniformly become a cheerleader for the West’s disastrous policies against Russia, against China.
Whereas what I find really interesting, particularly in recent foreign policy statements, major statements that have come out of China and come out of Russia, is that they have put imperialism, and the understanding of imperialism, at the center of their understanding.
Every time I read these I’ve been like, this is astonishing. This is what we have been arguing for such a long time. And now the leaders of these major countries, the governments of these major countries, are essentially behind this, which is really so important.
I think that if the West finally wakes up and realizes what it needs to do, I think this can only be a very good thing for us here, because otherwise we are going to be in some sort of spiral of political dysfunction for a very long time.
MICHAEL HUDSON: Well the West may wake up, but the Western leadership of politicians won’t wake up.
America’s had its own color revolution by Wall Street here, and you can say that Europe had its color revolution.
RADHIKA DESAI: I like that. That was a very good way of putting what’s happening in Europe right now. Europe has been subject to a color revolution by the United States.
We’ve come up to nearly an hour. This has been a great discussion Michael.
Next time we are going to decide what exactly to talk about, but we have a couple of pending topics.
One of them is of course to examine in greater detail the political and geopolitical economy of the conflict in Ukraine, its effects on the various parts of the world, including Russia and Ukraine and the United States and Europe.
And of course we still have to finish our dedollarization final program.
If you have any other suggestions for topics, please let us know. Thanks for your attention, and see you in a couple of weeks.
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