Michael Hudson’s Critique of Neoclassical Economics

Michael Hudson’s Critique of Neoclassical Economics and Marginalism: A Deep Dive and Heterodox Comparison

Michael Hudson, a maverick economist, takes a sledgehammer to neoclassical economics, calling it a rigged system that props up wealth hoarders while ignoring the real-world mess of debt, rent, and power. His sharpest blade is aimed at marginalism—the neoclassical idea that prices, wages, and profits reflect the “marginal” value of goods or labor. Hudson says this is mathematical nonsense, a smokescreen for rentier capitalism. But how does his critique stack up against other heterodox thinkers like Steve Keen, Thomas Piketty, and Yanis Varoufakis? This note unpacks Hudson’s views, digs into his attack on marginalism’s math, compares him to his peers, and draws conclusions about his place in the fight against mainstream economics. Buckle up—it’s a wild ride through economic rebellion.

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Part 1: Hudson’s Critique of Neoclassical Economics

Hudson sees neoclassical economics as a fairy tale told by elites to justify inequality. Here’s how he tears it apart:

1. Equilibrium? More Like a Pipe Dream

Neoclassical theory claims markets magically balance supply and demand, with prices reflecting true value. Hudson calls this a fantasy. Real markets are warped by monopolies, banks, and speculators. Think housing: prices skyrocket not because of “equilibrium” but because of debt-fueled land grabs.
Quote: “Neoclassical economics assumes markets are self-correcting… but in reality, markets are rigged by monopolies and rentiers.” (J is for Junk Economics, p. 148)

2. Rent: The Elephant in the Room

Classical economists like Adam Smith railed against “rentiers”—landlords and monopolists who rake in cash without lifting a finger. Neoclassical economics buries this idea, treating all income as earned. Hudson says this lets landlords and bankers fleece society while dodging taxes.
Quote: “The neoclassical failure to distinguish between wealth-creating labor and rentier income sanitizes the economic rent classical economists urged to be taxed.” (Killing the Host, p. 57)

3. History? What History?

Neoclassical models are abstract, ignoring the messy history of colonialism, labor struggles, or debt crises. Hudson argues this makes them clueless about real-world inequality. The 2008 crash? Neoclassical economists didn’t see it coming because their math skips power and debt.
Quote: “Neoclassical economics is ahistorical, pretending today’s polarized economy is a natural result of individual choices.” (J is for Junk Economics, p. 12)

4. Debt: The Silent Killer

Neoclassical theory treats debt as a neutral deal between equals. Hudson says it’s a trap, piling up faster than the economy grows, enslaving borrowers to banks. Most debt (mortgages, student loans) fuels rentier assets, not factories.
Quote: “Neoclassical economics treats debt as a voluntary exchange, ignoring how it compounds to impoverish debtors.” (Killing the Host, p. 112)

5. Ideology in Disguise

Hudson calls neoclassical economics a cheerleader for the rich. Its “free market” mantra pushes austerity, deregulation, and privatization—policies that gut workers and pad elite wallets. It’s not science; it’s class warfare.
Quote: “Neoclassical economics is a public relations exercise for rentiers, dressed up as science.” (J is for Junk Economics, p. 204)

6. Burying Classical Wisdom

Neoclassical economics erased the classical split between land, labor, and capital, lumping land with capital to hide rentier profits. Hudson wants to revive ideas like land-value taxes to stop speculators.
Quote: “By conflating land with capital, neoclassical economics erased the classical goal of taxing rent.” (The Bubble and Beyond, p. 89)

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Part 2: Hudson’s Attack on Marginalism’s Mathematical Flaws

Marginalism—the idea that prices and wages come from the “marginal” utility or productivity of goods, labor, or capital—is the heart of neoclassical economics. Hudson says its math is a house of cards. Here’s why:

1. Circular Logic

Marginalism claims prices reflect utility (how much you want something) or productivity. But Hudson says it’s a loop: prices are used to measure utility, then utility explains prices. It’s like saying, “It’s expensive because it’s valuable, and it’s valuable because it’s expensive.”
Quote: “Marginalism’s mathematics is circular: it assumes prices reflect utility or productivity, then uses prices to measure utility.” (J is for Junk Economics, p. 156)
Example: Neoclassical models say high CEO pay reflects their “marginal productivity.” Hudson counters it’s set by corporate cronyism, not math.

2. Fantasy Assumptions

Marginalist equations assume perfect competition, rational people, and diminishing returns. Hudson laughs this off—real markets are dominated by monopolies like Big Tech, and people make desperate choices under debt or ads. Land values, unlike factories, don’t diminish; they soar with speculation.
Quote: “The mathematics of marginalism depends on assumptions of perfect competition… like building a skyscraper on quicksand.” (The Bubble and Beyond, p. 92)

3. Ignoring Rent

Marginalism treats all income as productive, ignoring rent—unearned cash from land or monopolies. Hudson says rent grows without effort, breaking marginalist rules like diminishing returns. Think Manhattan real estate: prices aren’t about “utility” but speculative debt.
Quote: “Marginalist math can’t handle economic rent, which grows exponentially without productive input.” (Killing the Host, p. 59)

4. Static Models, Dynamic Chaos

Marginalist math freezes time, assuming markets settle into equilibrium. Hudson says economies are dynamic—debt snowballs, bubbles burst. Static models missed the 2008 crash because they ignored compounding debt.
Quote: “Marginalism’s static equations freeze time, ignoring how debt and rent destabilize economies.” (J is for Junk Economics, p. 204)

5. Empirical Failure

Marginalist predictions—like wages matching productivity—flop in reality. Wages stagnated since the 1970s despite soaring productivity. Hudson says the math is unfalsifiable, hiding behind vague concepts like “utility.”
Quote: “Marginalism’s math is unfalsifiable, hiding behind unmeasurable concepts like utility.” (Killing the Host, p. 113)

Policy Fix: Hudson’s answer? Ditch marginalism’s math for classical metrics like rent-to-GDP. Tax land, cancel crushing debts, and regulate banks to stop rentier games.

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Part 3: Synopsis of J is for Junk Economics

Hudson’s J is for Junk Economics: A Guide to Reality in an Age of Deception (2017) is a witty, glossary-style takedown of neoclassical buzzwords. Each entry—“Free Market,” “Debt,” “Value”—exposes how these terms hide rentier power.

• Core Idea: Neoclassical language is propaganda, making exploitation sound natural. “Free markets” mean freedom for monopolists, not workers.
• Key Focus: Rentier income (land, finance) is the real driver of inequality, ignored by neoclassical models.
• Policy Push: Tax rent, forgive debts, regulate finance to rebuild a fair economy.
• Style: Sharp, accessible, blending history (e.g., ancient debt jubilees) with modern critique.
  Quote: “Junk economics is the anti-classical patter talk… rationalizing a financialized order that is impoverishing most economies.” (J is for Junk Economics, p. 1)
  Impact: A go-to for heterodox thinkers, it’s a call to rethink economics as a tool for justice, not elite defense.

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Part 4: Comparing Hudson to Heterodox Peers

Hudson’s not alone in bashing neoclassical economics. Let’s see how he compares to three heterodox heavyweights: Steve Keen, Thomas Piketty, and Yanis Varoufakis.

1. Steve Keen: The Debt Dynamo

Keen’s View: A post-Keynesian, Keen rips into neoclassical math in Debunking Economics, showing models like Cobb-Douglas are logically broken. He focuses on debt and banking, using dynamic models to reveal economic instability.
Similarities:

• Both trash marginalism’s math as circular and unrealistic.
• Both blame static models for missing crises like 2008.
• Both push debt jubilees to fix runaway debt.
  Differences:
• Keen’s all about macro—banks and credit—while Hudson zooms in on micro—rent and land.
• Keen loves complex math (chaos theory); Hudson sticks to history and simple metrics.
• Keen’s policies target banking; Hudson’s hit rentiers harder (e.g., land taxes).
  Keen Quote: “Neoclassical economics pretends its aggregates like ‘capital’ are mathematically coherent, but they violate basic logic.” (Debunking Economics, p. 149)
  Hudson Quote: “Marginalism’s math is a tautology that masks how rentiers gouge society.” (J is for Junk Economics, p. 156)

2. Thomas Piketty: The Inequality Chronicler

Piketty’s View: In Capital in the 21st Century, Piketty uses data to show wealth grows faster than economies (r > g), debunking marginalism’s claim that returns reflect productivity. He critiques inequality but stays closer to neoclassical tools.
Similarities:

• Both reject marginal productivity as explaining wealth.
• Both use history to expose neoclassical blind spots.
• Both see rentier-like wealth (capital for Piketty) driving inequality.
  Differences:
• Piketty lumps land with capital; Hudson separates them to spotlight rent.
• Piketty uses neoclassical math with tweaks; Hudson calls it junk.
• Piketty’s wealth tax is tame compared to Hudson’s debt jubilees and land taxes.
  Piketty Quote: “The marginal productivity theory ignores the historical forces that shape capital’s returns.” (Capital in the 21st Century, p. 274)
  Hudson Quote: “Marginalist math can’t handle economic rent.” (Killing the Host, p. 59)

3. Yanis Varoufakis: The Global Rebel

Varoufakis’s View: A post-Keynesian and Marxist, Varoufakis (The Global Minotaur) sees neoclassical economics as a prop for austerity and financial power. He critiques its math but uses game theory to model global conflicts.
Similarities:

• Both call neoclassical economics an elite scam.
• Both slam marginalism for ignoring power and debt.
• Both highlight financialization’s damage.
  Differences:
• Varoufakis focuses on global power (e.g., U.S. dollar); Hudson on domestic rentiers.
• Varoufakis uses some math (game theory); Hudson avoids it.
• Varoufakis’s Green New Deal is pragmatic; Hudson’s debt jubilees are radical.
  Varoufakis Quote: “Neoclassical economics is a theology that sanctifies market outcomes as just.” (Talking to My Daughter About the Economy, p. 89)
  Hudson Quote: “Neoclassical economics is a priesthood defending rentier power.” (Killing the Host, p. 113)

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Part 5: Conclusions

Hudson’s critique of neoclassical economics and marginalism is a fiery call to arms, rooted in classical economics’ fight against rentiers. His attack on marginalism’s math—circular, unrealistic, and blind to rent—exposes it as a tool to hide exploitation. Compared to Keen, Piketty, and Varoufakis, Hudson stands out for his laser focus on rent and land, his outright rejection of mathematical modeling, and his radical solutions like debt jubilees and land taxes.

Key Takeaways:

1. Shared Rebellion: All four economists agree neoclassical economics is a flawed, elite-serving dogma. They reject marginalism’s math for ignoring power, debt, and inequality, favoring real-world dynamics.
2. Hudson’s Niche: Hudson’s classical lens—separating rent from production—gives him a unique edge. While Keen models debt, Piketty tracks wealth, and Varoufakis fights global power, Hudson’s rentier obsession ties modern capitalism to feudal roots.
3. Policy Divide: Hudson’s radicalism (debt forgiveness, public banking) contrasts with Piketty’s and Varoufakis’s reformism, aligning closest to Keen’s debt focus but with a broader anti-rentier agenda.
4. Impact: Hudson’s work, especially J is for Junk Economics, is a rallying cry for heterodox thinkers, though his rejection of math limits his academic reach compared to Piketty or Keen.

Broader Implications: Hudson’s critique suggests mainstream economics needs a overhaul, not a tweak. By reviving classical ideas, he offers a blueprint for an economy that serves workers, not landlords or bankers. His peers amplify this fight, but Hudson’s voice—blunt, historical, and unapologetic—cuts through the noise, demanding we face the rentier elephant in the room.

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References

1. Hudson, M. (2017). J is for Junk Economics: A Guide to Reality in an Age of Deception. ISLET.
2. Hudson, M. (2015). Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy. ISLET.
3. Hudson, M. (2012). The Bubble and Beyond: Fictitious Capital, Debt Deflation and Global Crisis. ISLET.
4. Keen, S. (2011). Debunking Economics: The Naked Emperor Dethroned? (2nd ed.). Zed Books.
5. Piketty, T. (2014). Capital in the 21st Century. Harvard University Press.
6. Varoufakis, Y. (2017). Talking to My Daughter About the Economy: A Brief History of Capitalism. Bodley Head.
7. Varoufakis, Y. (2011). The Global Minotaur: America, Europe and the Future of the Global Economy. Zed Books.
8. Hudson, M. (n.d.). Interviews and articles on michael-hudson.com.

Each of the points from Michael Hudson's discussion in the above video: 1. Manipulation of Economic Terms: Hudson argues that many fundamental economic terms have been redefined or twisted to serve the interests of the financial and rentier classes (landlords, monopolists, financiers). He suggests that this manipulation isn't accidental but a deliberate effort to obscure the exploitative nature of certain economic activities. His book, "J is for Junk Economics," likely unpacks numerous such terms, revealing their original meaning versus their current, often misleading, usage in mainstream economics and political discourse. He contends that this linguistic shift shapes how we understand and discuss economic issues, often normalizing or even valorizing practices that extract wealth rather than create it. 2. The Perversion of "Free Markets": According to Hudson, the contemporary understanding of "free markets" has been distorted to primarily mean the absence of regulations that might limit the ability of landlords to raise rents, monopolies to inflate prices, and the financial sector to charge exorbitant interest and fees. He contrasts this with a more classical understanding of free markets, which often involved measures to prevent the accumulation of undue economic power and the extraction of unearned income (economic rent). He posits that the current "free market" ideology disproportionately benefits those who derive income from property ownership and market dominance, often at the expense of labor and productive investment. 3. Mainstream Economics as "Junk Economics": Hudson uses the term "junk economics" to describe the prevailing economic theories and models taught in universities and promoted by financial institutions. He believes this mainstream approach deliberately downplays or ignores the significance of economic rent – unearned income derived from control over scarce resources or assets. He argues that this "junk economics" promotes the false idea that rent is a natural and unavoidable part of the economy, thereby legitimizing the extraction of wealth by landlords and monopolists. Furthermore, he suggests it elevates the role of Wall Street in economic planning, advocating for financial interests to dictate economic policy rather than focusing on productive growth and social well-being. 4. Refuting the "Job Creator" Narrative: Hudson challenges the widely held belief that wealthy individuals and corporations, such as those often associated with figures like Donald Trump, are inherently "job creators." He argues that their business practices, which may include financial engineering, speculation, and the pursuit of monopolies, can often lead to job losses through outsourcing, automation driven by cost-cutting rather than genuine innovation, and the destabilization of industries. He suggests that the focus should be on policies that directly promote employment and fair wages rather than relying on the trickle-down effect from the wealthy. 5. Questioning the Benefits of GDP Growth: Hudson disputes the common metric of GDP growth as an accurate indicator of overall societal well-being. He points out that while GDP may increase, the benefits of this growth are often unevenly distributed, with a disproportionate share going to the top 5% of the income earners. He likely argues that focusing solely on GDP growth can mask increasing inequality and the stagnation or decline in living standards for the majority of the population. He suggests that other indicators, such as income distribution, real wage growth, and social welfare, are more crucial for assessing the true health of an economy. 6. Criticism of the Obama Administration's Response to the 2008 Crisis: Hudson criticizes the Obama administration's handling of the 2008 financial crisis. He likely argues that instead of using the crisis as an opportunity to fundamentally reform the financial system and curb the power of Wall Street, the administration opted for bailouts and policies that ultimately preserved the existing financial order. He suggests that this failure to challenge Wall Street's influence allowed the underlying problems that led to the crisis to persist, setting the stage for future economic instability and continued dominance of the financial sector.

 

"Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy" is a 2015 book by Michael Hudson that expands on his critique of modern financial capitalism. The title itself is a metaphor, comparing the financial sector to a parasite that ultimately harms and can even kill its host, which is the real, productive economy. Here are the key themes and arguments of the book: The Rise of the FIRE Sector: Hudson argues that Finance, Insurance, and Real Estate (the FIRE sector) has gained dominance over industrial capitalism and governments. He contends that this sector increasingly extracts wealth from the productive economy rather than contributing to it. Debt Deflation and Austerity: The book explains how the accumulation of debt leads to debt deflation, where the burden of debt grows faster than the economy. This necessitates austerity measures that impoverish the middle class and benefit the financial sector by siphoning off income to pay debts. Economic Rent: A central concept in the book is "economic rent," which Hudson defines as unearned income derived from control over scarce resources, land, or financial assets, without contributing to production. He argues that the FIRE sector thrives on extracting this rent. The Illusion of Productivity: Hudson criticizes mainstream economics for portraying the earnings of the FIRE sector (interest, rent, capital gains) as productive income, thereby obscuring their parasitic nature. He believes this "junk economics" prevents a clear understanding of how wealth is actually created and extracted. Historical Context: The book draws on historical analysis, referencing classical economists who understood the dangers of unchecked financial power and the importance of taxing land and unearned income. Hudson argues that modern economics has abandoned these crucial insights. Critique of Financialization: "Killing the Host" details how financialization has reshaped economies, prioritizing asset speculation and debt creation over investment in productive industries and job creation. The 2008 Crisis: The book analyzes the 2008 financial crisis as a prime example of how the FIRE sector's unchecked growth led to economic collapse, and how the subsequent bailouts protected the "parasites" rather than addressing the underlying issues. Call for Reform: While critical, the book also implicitly calls for radical reforms to reorient the economy towards productive investment, regulate the financial sector, and address the issue of unearned income. In essence, "Killing the Host" is a powerful critique of how modern financial systems, driven by rent-seeking behavior and excessive debt, are undermining the real economy and leading to increasing inequality and economic instability. Hudson urges a return to classical economic principles that distinguish between productive and unproductive wealth and advocate for policies that serve the broader economy rather than the interests of the financial elite.