Skip to content

Diversion-Profit Identity Demonstrated via Kalecki’s Profit Equation

This is an adjunct to my preceding post on diversion. In it, I argued that oligarchy is a structure by which goods and services fulfilling the core motives of the oligarchic class — luxury consumption and wealth defense — are costlessly obtained from population workers. I call this diversion and it’s rendered costless in our era by the return flow of monetary profit.

That diversion and profit are intimately linked in a diversion-profit loop is easy to see once we accept that the system is one of minority power over the majority. I seek to show in the table below that the identity between diversion and profit flows directly from the logic by which Kalecki derived his profit equation (profit = capitalist consumption + investment).

Key conclusions are: 1) profit is the monetary return of diversion; 2) only investment in goods or services produced for oligarchic consumption are profitable; and 3) investment in goods or services ultimately to be consumed by the population is never profitable over its relevant life. (I assume a closed economy with no state spending in which workers cannot save.)

Kalecki Equation

Profit = Capitalist Consumption + Investment

Diversion Equation

Profit = Diversion

Applicable time period for an investment: Specific accounting period, commonly a year. Applicable time period for an investment: Its applicable life.
Purpose: To understand how profit is generated in an accounting period. Purpose: To highlight the essential class nature of the modern system and to show that the population sector isn’t profitable.
1. GNP can be thought of as the sum of consumption and gross investment:

GNP = Consumption + Investment

1. GNP can be thought of as the sum of consumption and gross investment:

GNP = Consumption + Investment

2. We can expand consumption into 2 components: Capitalist Consumption and Worker Consumption. 2. We can expand consumption into 2 components: Oligarchic Consumption and Population Consumption.
3. We then rewrite equation 1 as:

GNP = Capitalist Consumption + Worker Consumption + Investment

3. We then rewrite equation 1 as:

GNP = Oligarchic Consumption + Population Consumption + Investment

  3a. We can expand investment into 2 components depending on the ultimate beneficiary: Oligarchic Investment + Population Investment
  3b. We rewrite equation 3 as:

GNP = Oligarchic Consumption + Oligarchic Investment + Population Consumption + Population Investment

4. GNP can also be considered the sum of capitalist gross profit plus the worker wage so that:

GNP = Profit + Wage

4. GNP can also be considered the sum of oligarchic gross profit plus the population wage so that:

GNP = Profit + Wage




5. We link 4 and 3 and get:

Profit + Wage = Capitalist Consumption + Worker Consumption + Investment

5. We link 4 and 3b and get:

Profit + Wage = Oligarchic Consumption + Oligarchic Investment + Population Consumption + Population Investment

  5a. Since population investment, by definition, will eventually be consumed by the population, we merge it with population consumption. We restate equation 5 as:

Profit + Wage = Oligarchic Consumption + Oligarchic Investment + Population Consumption

  5b Since diversion is the sum of oligarchic consumption plus oligarchic investment, we restate equation 5a as:

Profit + Wage = Diversion + Population Consumption

6. Since the wage is assumed identical to worker consumption, we eliminate it on both sides and get the Kalecki Profit Equation:


Profit = Capitalist Consumption + Investment

6. Since the wage is assumed identical to population consumption, we eliminate it on both sides and end up with:


Profit = Diversion


Costless Diversion in Modern Oligarchy

I argue in my book Capitalism as Oligarchy that inequality isn’t a side-effect of something we happen to call ‘capitalism’ but is rather the core of what the system is. We gain a great deal of insight approaching it this way for not only does it conform to the historical fact that mankind has been materially ruled by a tiny minority for all of recorded history right down to the present day, it pierces through the confusing complexity of ‘capitalism’ and opens up a wonderful simplicity. I believe it’s crucial to see the modern system as nothing other than the current phase of ancient oligarchy.

All we need is plain common sense and a willingness to critically examine the ideologies of ‘capitalism’. I start by identifying the basic motives, risks, and dynamics that seem integral to any system of unequal power. If the system is oligarchy, then few would deny that the core motives of the empowered minority are to aggressively defend and expand its high position, what I, following political scientist Jeffrey Winters, call wealth defense, and to live luxuriously. Equally obvious are the key risks against which the propertied minority must defend itself—they arise from rival competitors for power and, existentially, from the propertyless majority. And finally, given these motives and risks, we can derive two key operating dynamics, the action processes by which the motives of the minority are achieved and through which wealth gets its meaning. I call them diversion and suppression.

I plan to present over the next several posts a few extracts of the book so as to demonstrate how these dynamics operate in our modern world. I begin with diversion, the dynamic by which the oligarchy forces the population to produce goods and services in fulfilment of its motivational desires of wealth defense and luxury consumption. We’ll discover insights into the nature of profit, the way in which the system structurally guarantees costless diversion to the oligarchic class, and how it is that the population is always a mere break-even and never a source of profit. We’ll rely heavily on the profit equation of mid 20th century economist Michal Kalecki but will interpret it in a somewhat unconventional way.

Let’s start by looking at the essential diversion flow as it has existed throughout all of civilization.

Diversion Command Issued ==> Diversion Produced

We get from this diagram two important pieces of information. The first is that diversion is ludicrously simple. The second is that it isn’t an equal exchange like we’d expect to find in ‘capitalism.’ It’s a command in the full military sense of the word. Generals don’t purchase compliance from privates, they command it; and what that means is that no units of power are lost in the process. If they were, if issuing orders entailed a cost, then power would flow downward and the two ranks would eventually meet somewhere in the middle. It’s the same with the oligarchic class; if it were to lose units of power in the process of commanding diversion, then power would flow downward to the population and oligarchy would quickly collapse. The power of diversion must be structural for oligarchy to exist and it can’t therefore encompass a ‘thing’ that’s spent or exchanged. At the macro level, diversion has to be costless—it can’t be paid for.

This simple power relation, though, is obscured in our modern world by an outer veil of money. We’ll find throughout this section that money is a key source of confusion and the problem here is that it creates an illusion of exchange. Read more…

Oxfam: Wealth of 8 = that of 3.6 billion

According to a recent well publicized report by Oxfam, the combined net worth of just eight men is equal to the collective total of the bottom 50 percent of mankind, 3.6 billion people.

Bill Gates (software), Amanci Ortega (fashion chain), Warren Buffett (stock investor), Carlos Slim Helu (diversified business owner), Jeff Bezos (on-line book seller), Mark Zuckerberg (social media programmer), Larry Ellison (computers), and Michael Bloomberg (financial news) possess, along with half the human species, a collective net worth of $426,000,000,000.

This is so outlandish it’s borderline funny! On one side of a finely-tuned scale we have eight proud men possessing an average wealth of $53.2 billion and on the other is crammed 3.6 billion people having an average portfolio of $118.38.

The well-heeled defenders of the status-quo, of course, aren’t laughing for to them inequality flows innocently and naturally from the workings of ‘liberal democracy’ / ‘market capitalism’. The professions of the eight, they argue, are harmless and certainly not the cause of the misery of others. Besides, even if we were to expropriate their wealth and distribute it to the bottom half, their wealth would rise to a mere $236.76.

Many will sadly accept this kind of argument but just a bit of reflection shows it completely misses the essential point. The real issue isn’t what these men do for a living or by what process they happened to have accumulated their wealth; it’s that they, along with their fellow tycoons, own the socioeconomic structure. A tiny minority controls the system; they are structurally empowered to decide what and how much to produce and do so according to a financial logic they and their forefathers have designed. They control the key levers of the state as well and, through their power, have an immense influence on our principal ideologies. 

The structure of minority power guarantees freedom for the owners, a freedom that can only come at the direct expense of a majority that must always be subservient and unfree. Poverty is its foundational logic.

Because we have a monetized system, we tend to measure inequality in terms of monetary wealth differentials. Money, though, is not in itself important—it’s a mere token having no value at all except to the degree it accurately measures power. That these eight men are enormously wealthy means that they have immense power over us. But they as individuals are irrelevant. Nothing of import changes if the eight become 16 or 32 or a few percent of the global population.

There’s only one fundamental problem on our planet and it’s this: a small minority rules over us and we therefore are not free.

Angus Deaton and the Ideology of Inequality

“It’s hard to think that Mark Zuckerberg is actually impoverishing anyone by getting rich with Facebook” says Nobel Prize winning center-left economist Angus Deaton in a recent Financial Times interview. He goes on to say that it’s a “simple-minded question” to ask whether inequality is bad for economic growth; the problem is when inequality manifests in wealthy people buying control of governments—“That surely is a catastrophe. So I have come to think that it’s the inequality that comes through rent-seeking [the use of wealth to influence politics for selfish gain] that is the crux of the matter.”

While this may sound reasonable to some, I want to argue that Deaton is in fact expressing a shockingly unscientific point of view, one that reveals the iron grip ideology holds over the discipline of economics.

We can all agree that Zuckerberg as an individual billionaire is not directly impoverishing anyone. But this is an enormous misdirection for the issue has nothing to do with the lone individual; it’s systemic—the fundamental structure of our socio-economy enables and perpetuates the ownership by a tiny minority of essentially all material wealth. Since wealth is power, our system at its most basic level is one of concentrated minority power. ‘Zuckerberg’ has nothing to do with it; the question is whether or not a planet owned by a minority is bad for the propertyless majority. It’s anything but a “simple-minded question” and I believe the answer is self-evident. To claim concentrated wealth is harmless or of only secondary concern ignores not only the meaning of power but the entire history of civilization. It’s not remotely science.

But of course Deaton qualifies his view by objecting to minority power when it seeks to influence politics for selfish gain. Zuckerberg should not be able to bribe politicians to advance the interests of Facebook. But again this isn’t the issue nor is it the wider one of, say, wealthy interests limiting their tax bill via assorted nefarious means. The issue isn’t whether or not wealth interferes with government for that isn’t where the crux of its power lies, the issue is whether wealth exists—for if it exists, it rules. Concentrated ownership in and of itself gives the minority the power to divert labor and resources to meet its luxury and wealth maximization desires and to suppress the majority.

Inequality is the core problem of mankind. To claim otherwise is to simply regurgitate an ideology of power that has spanned thousands of years.

The Left’s Most Important Job

The core thesis of my book, Capitalism as Oligarchy, is that the essence of our system is concentrated minority power—inequality (oligarchy)—and that to properly understand it, we need to focus on the straightforward motives and dynamics of power. I think this is a self-evident proposition and many on the left will no doubt agree at least in principle. The problem is that they will then almost universally proceed to define the system with the vacuous term “capitalism” (“money-ism” would be equivalent and just as empty of meaning) and devote their analytic energies on obtuse details like money, finance, modes of production, trade, and so on. We end up losing sight of the extraordinary simplicity of the basic pattern and the great majority is kept mired in hopeless confusion and even open to the vile arguments of the populist right.

We play directly into the ideology of the status-quo when we make what is simple complicated. There is but only one crucial fact and it towers above all else which by comparison is mere detail—it is that a small minority owns essentially everything. It has been this way for over 5,000 years and the driving motives today are exactly the same as they’ve been throughout all of recorded history—keeping a firm lock on power and living luxuriously. The system’s main operating dynamic becomes plain once we ask what the prime risk to such a structure may be. The answer is clear—it is us, the only systemic risk to the rule of a propertied minority is the propertyless majority. We, the “common” people, “the mob”—and make no mistake, that almost assuredly includes you—are the existential risk to minority power. Fear and hatred of the majority is the inescapable dynamic of inequality.

Formal democracy requires some circumspection about this fact today, but we can find anti-majoritarian hostility openly expressed throughout all of recorded history, from Plato to Cicero to the US Founding Fathers to Burke to Nietzsche to von Mises to Ayn Rand. The theme is unvarying but I’ll leave it here to Nietzsche to sum up the heart of inequality in all its skeletal beauty.

The essential characteristic of a good and healthy aristocracy, however, is that it experiences itself not as a function (whether of the monarchy or the commonwealth) but as their meaning and highest justification—that it therefore accepts with a good conscience the sacrifice of untold human beings who, for its sake, must be reduced and lowered to incomplete human beings, to slaves, to instruments. Their fundamental faith simply has to be that society must not exist for society’s sake but only as the foundation and scaffolding on which a choice type of being is able to raise itself to its higher task and to a higher state of being. (Beyond Good and Evil, Part 9, “What is Noble”)

Inequality requires (is) the suppression of the majority. Wealth (minority power) causes (is) poverty (majority living standards far below productive capacity).

This of course is denied by defenders of the status quo and one of their more successful arguments has been down the lines that even if all wealth were confiscated and “the pie” then sliced equally, the material wealth of the average person wouldn’t significantly increase. Wealth, they say, is therefore harmless. This seemingly valid argument, though, completely misses the essence of power. A pie is a false analogy for our modern system given its massive productive capacity. Far better to think in terms of a balloon with widespread prosperity corresponding to the degree it’s inflated. The goal of the minority (structural and not necessarily consciously thought) is to keep the balloon as underinflated as is politically possible since inequality isn’t sustainable alongside a prosperous and secure population.

Except for periods of speculative bubbles and war, underinflation has been the common condition since at least the beginnings of the twentieth century. It’s most certainly the case today. Google “oversupply” and follow it with any term you choose—food, commodities, manufactured goods, steel, cars, or whatever—and you’ll find that it’s all in “oversupply”.  How strange this is when we consider that poverty and insecurity is the common state of humanity in both the ‘developing’ and ‘developed’ world. Just yesterday, in fact, a source as mainstream as CBS News published an article entitled “80 percent of U.S. adults face near poverty, unemployment, survey finds”That such insecurity can exist in even one of the richest countries in the world alongside global “oversupply” testifies to the extraordinary success of suppression.

Our system is structured so that the prosperity of the majority is suppressed. The great oligarchic achievement has been to justify it through the arcane language of money, finance, and financial efficiency. The most important job of the left is to expose the simple hostility lurking behind this ideological façade.

The Normative Value of Equality

Political philosopher Samuel Scheffler offers a magnificent summary of the normative value of equality.

“When the relationship among a society’s members are structured by rigid hierarchical distinctions, . . . the resulting patterns of deference and privilege exert a stifling effect on human freedom and inhibit the possibilities of human exchange. Because of the profound and formative influence of basic political institutions, moreover, patterns of deference and privilege that are politically entrenched spill over into personal relationships of all kinds. They distort people’s attitudes toward themselves, undermining the self-respect of some and encouraging an insidious sense of superiority in others. Furthermore, social hierarchies require stabilizing and sustaining myths, and the necessity of perpetuating and enforcing these myths discourages truthful relations among people and makes genuine self-understanding more difficult to achieve. In all of these ways, inegalitarian societies compromise human flourishing; they limit personal freedom, corrupt human relationships, undermine self-respect, and inhibit truthful living. By contrast, a society of equals supports the mutual respect and the self-respect of its members, encourages the freedom of interpersonal exchange, and places no special obstacles in the way of self-understanding or truthful relations among people. It also makes it possible for people to develop a sense of solidarity and of participation in a shared fate without relying on unsustainable myths or forms of false consciousness.”

Global Wealth Inequality

I’d like to briefly examine in this post the extent of global wealth inequality as presented in the 2015 Credit Suisse Global Wealth Report and offer an interpretation. The authors present four wealth tranches in which the top 0.7 percent owns 45.2 percent of total wealth, the next 7.4 percent 39.4 percent, the next 21 percent 12.5 percent and the bottom 71 percent just 3.0 percent. (Rounding errors.) The top 8.1 percent thereby possesses 84.6 percent of wealth with the bottom 91.9 percent having 15.5 percent.

I think we can get a better grip on these enormous asymmetries if we consider them in terms of the relative wealth of a representative individual within each tranche as illustrated below. (I divide the wealth share by the population percentage and index that to the bottom tranche which I set to one.)


We can see here that the wealth of individuals in the 0.7 percent tranche completely dominates that of the rest of the population and especially the bottom 92 percent. This top tier according to Credit Suisse consists of 33.7 million adults with a total wealth of $112.9 trillion. They detail it as follows:

wealth-brackets(Credit Suisse doesn’t show an over $1b bracket. I’ve incorporated the billionaire data from Forbes and adjusted CS’s top tier accordingly.)

Let’s compare a few of these wealth figures to the global median wealth of $3,210 which I’ll represent as a modest single story ranch home. The median wealth in the United States is $49,800 which in comparison to the ranch home would correspond to a 16 story building. $1 million of wealth, the bottom of the 0.7 percent tranche, would rise to 312 stories or over three times that of the Empire State Building. $10 million would soar 1/3 higher than Mount Everest. $50 million would rise to the top of the stratosphere and $100 million would penetrate the Karman line which demarcates the boundary of outer space. $500 million would be well above the altitude of the international space station, and that station would orbit at only 1/3 the height of the tower representing $1 billion of wealth. Finally, the $75 billion of Bill Gates would soar ¼ the way to the Moon.

Wealth has no meaning outside these kinds of comparisons for by itself it’s a completely circular number. Oligarchy is a civilization spanning system of power whereby the minority attains its motivational desires of luxury consumption and wealth defense without cost. In the modern world it’s achieved via what I call the diversion-profit loop whereby whatever the oligarchy spends is returned via profit. That is the essential source and meaning of profit. (Profit is also generated via state deficit spending but we’ll lay that aside for now.) Wealth in toto can be conceptualized as the present value of anticipated future diversion spending (and deficits), capitalized at a consensus discount rate. If the outlook for future diversion dropped or the discount rate increased, then total measured wealth would decline but this is of no real importance. The existential meaning of wealth lies only in its measure of relative power, both between oligarchs and, crucially for the systemic structure, between the oligarchy as a class and the population.

Capitalism as Oligarchy

Time passes and it’s hard to believe it has been three years since my last post. I hope all former readers and commenters are doing well.

I’ve devoted this hiatus to writing a book centered on some of the basic themes that have been brought out in this blog and I’m happy to announce it has finally been released. Capitalism as Oligarchy seeks to build on the works of Jeffrey Winters (Oligarchy) and Michal Kalecki and offers a somewhat different and I believe important approach to understanding our social world. Since it will provide the grounding perspective for future posts, I’d like to outline the basic idea here.

Throughout the entire 5,000 year history of recorded civilization, and for thousands of years before that, every socioeconomy of any size was a hierarchy in which a tiny minority possessed virtually all material power and thereby ruled over the vast majority. It’s no different today as conservative estimates report that the bottom 90 percent of the global population possesses just 12 percent of wealth. Similar asymmetries exist within all countries.

Despite the deep historical continuity of inequality, our system over the last couple hundred years is almost universally defined and analyzed as ‘capitalism’. This is a significant problem for a number of reasons. It imposes unneeded complexity onto a power structure that’s inherently simple, it presents the system as relatively new and we therefore lose sight of its tight link with the past, and it hides the core hostility that’s the essence of power.

As capitalism, the system is presented as one of ‘private’ ownership in which the primary motive, the “Moses and the Prophets”, is the unending accumulation of monetary profit. Inequality is a mere by-product as is the massive poverty and insecurity that reigns everywhere. But if we think of the system as ancient inequality, i.e. oligarchy, things appear completely different. It’s no longer one of ‘private’ ownership but ‘concentrated minority’ ownership. The systemic logic becomes straightforward. The motives of the propertied minority are self-evidently the aggressive defense of wealth and luxury consumption. Its prime risks arise from others competing for power and, existentially, the propertyless population. And from these, we can deduce two fundamental dynamics that must apply wherever inequality exists—I call them diversion and suppression.

Diversion is the process by which the oligarchic minority costlessly diverts human effort into satisfying its motives. Some ways this has been historically handled is through slavery, serfdom, and indentured servitude. It’s managed today through what I term the diversion-profit loop by which whatever is monetarily expended by the oligarchy is subsequently returned via profit. This is the essential meaning of the Kalecki profit equation (Profit = Capitalist Spending) and from it we can see that profit isn’t the systemic motive but is rather a mere operational detail that permits the oligarchy as a class to costlessly achieve its motives in a monetary based socioeconomy. Through Kalecki, we also discover that the population can never be profitable for, excluding ever-expanding debt, workers can’t spend more than they’re paid in wages.

The other dynamic is suppression, the means by which inequality is enforced over the population. It’s the ongoing imposition of suboptimal living standards, dependence, insecurity, and poverty in service to the vital wealth defense need of sustaining the structural hierarchy. It’s evident in every nook and cranny of the system but is easily overlooked because so many of us accept the ideologies of finance. Examples include corporate pricing power achieved through consolidation, the suppression of unions, the ideology of worker competition, and a host of mythologies on cost, taxation, public debt, international trade, inefficiencies of collective action, individualism, and so on. Suppression is a crucial dynamic of oligarchy as inequality can’t exist without a subservient population. It unambiguously explains why it is that despite our immense productive capacity, the conditions across the planet are what they are. Poverty and insecurity flow directly from the fundamental logic of the system.

I’ll stop here. For those interested, a more detailed summary of my argument can be found under the Capitalism as Oligarchy tab where I’ve posted the book’s Table of Contents, Preface, and Introduction.

More on housing finance – class status

I want to add another aspect to yesterday’s post concerning ways to make housing finance easier and cheaper that goes beyond just interest rates or down payments or unearned rentier income.  It’s the issue of class status.

A high cost of housing is a form of red-lining that very efficiently separates economic classes and allows for clear displays of status.  While segregation is no longer allowed based on race, there’s an obvious link as any visit to an American city will attest.  But even if class today is completely based on “merit”, it’s undeniable that we still live in a hierarchical society.

A meritocracy simply means that jobs are filled based on qualifications; it doesn’t at all speak to what degree, if any, income should vary.  Meritocratic socialist egalitarianism and a vastly unequal hierarchy based on “merit” are both internally consistent forms, although it’s nearly impossible to square the latter with democracy.

So, any significant leveling of inequality, especially in something as status related as housing, represents a direct confrontation with the existing system of meritocratic hierarchy.  Lifestyles and neighborhoods that were once affordable only to a certain “meritocratic” income class would suddenly become available to lower, less “merit-worthy” workers.

I wonder how many liberals there are out there who often speak against inequality in the abstract but would oppose ideas such as discussed yesterday because they would directly confront the usefulness of housing as status.

There can be little doubt that the housing interest rate extraction industry based on Wall Street serves functional purposes beyond the simple channeling of rentier income.  And that the status quo has very deep roots.

A radical housing finance proposal

The world of finance is widely seen as little more than a casino seemingly custom designed to wreak havoc and destruction throughout the world.  As portrayed endlessly in movies and books, though, it seems to have a high degree of panache; it’s exciting, gets a great deal of attention, and our focus is directed on ways to dampen the speculative excess.  But there’s another face of finance that’s not speculative at all and has absolutely no sexiness attached to it.  It’s the steady grueling daily parasitic extraction of rentier finance.  While it gets little attention, though, it’s arguably more damaging over the long term than the casino.  No industry illustrates this better than residential real estate.

A home, of course, isn’t just another consumer commodity; it’s a fundamental requirement to civilized life, ranking right up there with food, clothing, and healthcare.  On the economic front, residential real estate is the critical backbone of the US economy and a collapse in values, as we’ve seen, can easily lead to depression.  A sharp rise in prices, on the other hand, can be equally bad; not only because it could then collapse, but also because it’s a sharp tax on future generations who must buy at the inflated prices.

The United States has developed elaborate institutions to encourage home ownership and prop up housing values, but it turns out every one of them is centered on and directly benefits finance.  Fannie Mae, Freddie Mac, and the FHA provide 100% guarantees against losses to mortgage financiers while the homeowner is essentially unprotected.  What a deal!  Mortgage financiers take absolutely zero risk yet are institutionally enabled to extract high rents from homeowners in the form of interest charges.

The average mortgage rate in the US today for a 30 year mortgage is 3.98%, plus an average additional upfront fee of 0.7% plus many other charges and aggravations.  Financing a home turns out to be a very costly and grueling experience.  For a $300,000 home financed at 90%, for example, the annual interest charge at today’s rate is a whopping $10,746, about 21% of median household income.  This significant transfer of income, we must not forget, is for a loan that’s fully guaranteed by the government and has no risk.

We live in a hierarchical society structured like a great pyramid and the gigantic wealth and power at the top is largely sustained through these kinds of riskless rentier extractions.  The only way to really improve conditions lower down is to put an end to the upward flows.  The relationship between rentier finance and the population is a direct conflict of interest and there’s no way forward without facing up to it.  In that light then, I humbly offer a straightforward proposal.

I propose that the government end its loan insurance program for finance and start financing the homeowner directly.  There’s nothing inherent in the laws of the universe which decrees a home must be expensive, risky, and difficult to acquire.  So, how about  this?  Anyone who wishes to buy a home simply makes a down payment, perhaps 5%, and the remainder is automatically financed by the government at 0% interest.  No principal payment would be required either, so there would be no monthly payment, no underwriting requirements, and no additional hassles.  The effect would be to render home ownership far cheaper, sharply increase disposable income, and virtually eliminate home ownership risk.  Homelessness would be vastly reduced.  Not only would we eliminate the unjust unearned income going to the top, we would also put an end to the vast waste of human effort devoted to producing, servicing, and analyzing mortgage securities, the collection and foreclosure industry, and much else.  We of course need to assure these workers find new sources of income, but that’s a separate story for another day.

Here’s some obvious objections and comments:

1) Where does the government get the money?  Anyone who reads this blog knows the dollar is a fiat currency and can be created at will.  Interest rates are controlled by the Fed and it can and should keep them at zero.  There’s never a just cause for a riskless rate of return for wealth.  Risks of inflation are controllable through assuring that the economy never attempts to spend beyond its real resources, coupled with oversight over the oligopolies to assure they maintain “reasonably” low profit margins.  Existing home sales are now on about a 5,000,000 unit per year pace with the median price being $192,800.  At this level, the program would require annual financing of about $867 billion per year or $72 billion per month.  While this may sound high, it’s lower than current QE purchases which could then be reduced or discontinued.  Also, we must remember that the government need only finance a home once since all future sales would be a net wash given that the new government loan would simply pay off the old one.

2) Should it be available for investment properties and very high priced homes as well?  I think not. I think it should be directed toward the vast majority of the population and centered on owner occupied homes.  Of course the cost of home ownership would sharply decline and rents would certainly decline as well.

3) Wouldn’t it just lead to sharply higher housing prices?  Without some reasonable controls, it probably would.  But the controls wouldn’t be that difficult and would serve important societal purposes.  Housing price increases could be limited by an index tied to inflation or median income.  The controls could even be optional in the sense that a homeowner could decide whether or not to opt into the program.  Once a home is entered into the program though, it’s future value would then be linked to the index.  We may lose some possible benefits dealing with price signals from an unstructured housing market, but they would be greatly offset by the elimination of the risk of future housing collapses or bubbles and the vast advancement in disposable income.

4) This is way too radical and would never be implemented.  Probably true, but no reason to attack it.

This post clearly hasn’t addressed the many issues involved, but they’d all surely be resolvable with a bit of effort.  It isn’t exactly rocket science.  The important thing, I think, is that our views on finance need to be sharply radicalized if we’re to make true progress.  We can’t endlessly send rentier income upward if we seek to live prosperously, and that will clearly involve radical challenges to existing power.  Every day we hear radical proposals emanating from the top demanding ever greater cuts in wages, security, benefits, and living conditions.  We have, it seems, just three possible ways to respond: we can accept the elite theory of the universe as true and, serf-like, humbly accept their endless cuts; OR we can seek to avoid the cuts and maintain the status quo; OR we can throw right back at them our very own democratically based proposals that fully match theirs in the level of radicalism.  Why not go for the third?

Update 6/14: I think the class status aspect of housing is very relevant here and I touch on it in today’s post.