Real free marketers should be calling for an economy that favors workers, not rent seekers and creditors.

What would Adam Smith have said about the Bowles-Simpson economic report?

What a pity the great free marketer was not around to serve on the deficit reduction commission. He not only would have rolled over in his grave, he would have risen up wielding an ax to the fiscal proposals that are diametrically opposite to the fiscal principles that he and his original free market contemporaries urged.

Writing in the wake of the French Physiocrats with their Impôt Unique to collect the revenues that France's landed aristocracy drained from the countryside and towns, Smith endorsed the idea that the least burdensome tax was one that fell on land rent:

A more equal land-tax, a more equal tax upon the rent of houses, and such alterations in the present system of customs and excise as those which have been mentioned in the foregoing chapter might, perhaps, without increasing the burden of the greater part of the people, but only distributing the weight of it more equally upon the whole, produce a considerable augmentation of revenue. (Wealth of Nations, Book V.3.68)

If Britain were to become a dominant economic power, Smith argued, its industrial capitalism would have to shed the vestiges of feudalism. Ground rent charged by its landed aristocracy should be taxed away on the logic that it was the prototypical "free lunch" revenue with no counterpart cost of production. He noted at the outset (Book I, ch. xi) that there were "some parts of the produce of land for which the demand must always be such as to afford a greater price than what is sufficient to bring them to market." In 1814, David Buchanan published an edition of The Wealth of Nations with a volume of his own notes and commentary, attributing rent to monopoly (III:272n), and concluding that it represented a mere transfer payment, not actually reimbursing the production of value. High rents enriched landlords at the expense of food consumers -- what economists call a zero-sum game at another's expense.

The 19th century elaborated on the concept of economic rent as that element of price which found no counterpart in actual cost of production and hence was "unearned." It was a form of economic overhead that added unnecessarily to prices. In 1817, David Ricardo's Principles of Political Economy and Taxation elaborated on the concept of economic rent. Under conditions of diminishing soil fertility in the face of growing demand, value was set at the high-cost margin of production. Low-cost producers benefited from the rising price level. Ricardo helped clarify the concept of differential rent by applying it to mining and subsoil wealth as well as to land. Heinrich von Thünen soon added the more helpful concept of rent-of-location (site value).

The important classical point was that economic rent was produced either by nature or by special privilege ("monopoly"), not labor effort. Hence, it was that element of price that could not be explained by the labor theory of value, except by marginal costs on what Ricardo hypothesized to be "rentless land" as recourse was made to poorer soils. Ricardo's follower John Stuart Mill explained that being income without labor or other costs, such rent formed the natural basis for taxation.

The Progressive Era developed the view that public utilities and other natural monopolies rightly belonged in the public sector, where governments would provide their basic services at a subsidized price, or even freely, as in the case of roads. The idea was to keep user fees no higher than the actual cost of production, so as to avoid "rent seeking". This pejorative term means extracting income by placing tollbooths on the economy's key infrastructure. To leave roads and railroads, electric and power utilities in private hands ran the risk of private owners "rack-renting" the population, adding to the cost of living and doing business.

U.S. policy is just the opposite. Commercial real estate has been regressively "freed" from debt -- leaving the rental value to be pledged to banks as interest. This un-taxing of land rent has been a major factor in inflating the real estate bubble on credit, much as deregulating monopolies has helped inflate their stocks and bonds on credit.

This is the policy that the Bowles-Simpson deficit reduction commission endorses. Its regressive tax proposals would shrink the economy, pushing it further into debt. This transfer of revenue from labor and business to property owners -- and from them to their bankers and bondholders -- threatens to force up the government's fiscal deficit (as states and municipalities are seeing today) and turn the United States into a Third World-type neofeudal economy.

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Smith: Wars should be financed on a pay-as-you-go basis, not by borrowing

If the shade of Adam Smith were to reappear today, he would be equally disturbed by the failure of the Bowles-Simpson commission to address the issue of war debts. Smith's argument against waging foreign wars was basically an argument that they were not worth the debt burden and the associated taxes to pay interest on it. These payments transferred income from taxpayers to creditors -- largely foreign creditors, the Dutch in Smith's day, Asians today.

Neither Bowles-Simpson nor President Obama acknowledge the extent to which the federal debt -- and indeed, most of America's rise in foreign debt for decades on end -- has stemmed from overseas military spending. During the Vietnam War years of the 1960s and ‘70s, the military deficit accounted for the entire rise in U.S. foreign debt, as private sector trade and investment was exactly in balance.

Smith wrote that even a land tax could not finance governments or "compensate the further accumulation of the public debt in the next war." His argument was that to free the economy from taxes, nations should avoid wars. And the best way to do this was to wage them on a pay-as-you-go basis. Borrowing rather than taxing meant the population did not feel the real cost of war -- and thus deterred it from making an economically informed choice.

So the Bush-Obama administration has taken a fiscal stance diametrically opposed to that of the patron saint of free enterprise. While escalating war in Afghanistan and maintaining over 850 military bases around the world, the administration has run up the national debt that Smith decried. By shifting the tax burden off property and off rent-seeking monopolies -- above all, off the financial sector -- this policy has raised America's cost of living and doing business, thereby undercutting its competitive power and running up larger and larger foreign debt.

The Wealth of Nations traced the growth of Britain's national debt, listing how all new war borrowing was secured by a new excise tax. Writing in the wake of the Seven Years War with France, fought largely over their respective possessions in the New World, Smith urged Britain to free its American colonies. In a similar vein, after France's Revolution, its Minister of the Navy, Bertrand de Molleville, wrote that Louis XVI in 1792 had blamed the overthrow of his monarchy on the burdensome taxes levied to finance the war with Britain in America.

This did not prevent a new wave of Franco-British war under Napoleon, and by the time this new wave of warfare ended in 1815, interest charges absorbed some three-quarters of British government revenues and devastated French finances. Led by Henri de Saint-Simon, French free marketers focused as much on freeing economies from interest-bearing debt as the Physiocrats had sought to tax the landed nobility.

The balance of the 19th century saw a move throughout Europe to endorse progressive taxation. The aim was not class warfare that takes from the rich to give to the poor. Led by the industrial middle class and its leaders, the aim was to make national economies more competitive by freeing them from economic rent and private bank credit. Landlords and bankers were the two rentier classes bequeathed by Europe's feudal epoch: a hereditary aristocracy receiving land rent simply by virtue of birth and ownership, and banking based increasingly on securing the monopoly of credit creation as a means of extracting interest. Pressure grew to socialize the land's rental value and financial systems so that the economic surplus created by monopoly privilege and the rise in national prosperity would form the natural tax base, not excise taxes on consumer goods and incomes that increased the cost of living (and hence the break-even costs of labor) and of capital.

None of this classical free market theory is to be found in the Bowles-Simpson commission. It advocates a continued shift of the tax burden off property and the wealthiest layer of the population onto labor, as well as a fiscal giveaway to the vested interests. This is not what the classical economists meant by a free market. Their idea was to free markets from rent and interest, not to dismantle the government's power to tax and regulate prices to keep them in line with socially necessary costs of production.

So where are the "real" conservatives and free marketers today? They have been dropped from the academic curriculum. This virtual censorship is what enables the media to avoid calling the Bowles-Simpson commission what it is: a travesty of free market theory.

The way that Adam Smith would have addressed the deficit would have been to say, "Mr. Obama, pull out of Afghanistan -- and perhaps 850 of our foreign bases." And the century of free market economists who followed Smith would have said, "Tax away unearned rentier income. And do not pay creditors by selling off the private domain to rent-seeking privatizers erecting tollbooths on the economy." That was precisely the legacy of feudalism that free market theory was designed to reject, after all.

In view of the conspicuous absence of true free market conservatives, it is clear that President Obama selected members of the Bowles-Simpson commission to provide a rationale -- or at least a rhetorical cover story -- for turning the U.S. economy into a neofeudal one. It will be increasingly indebted to creditors, enjoying their revenue and "capital" gains (mainly land-price gains that John Stuart Mill's generation called the "unearned increment") at the top of the economic pyramid.

It won't work. It will drive the economy further into debt, shrink the fiscal base and further polarize the economy between rentiers (for whom John Maynard Keynes proposed euthanasia) and wage earners.

Prof. Michael Hudson is Chief Economic Advisor to the Reform Task Force Latvia (RTFL). His website is michael-hudson.com. **A shorter version of this post appeared on Counterpunch.

"America's First Citizen" knew a recession is no excuse to ignore the rights of working Americans.

The latest blow to the Roosevelt legacy was reported in this weekend's NYTimes: "Even at manufacturing companies that are profitable, union workers are reluctantly agreeing to tiered contracts that create two levels of pay." Tactics like these have been used before, but almost always at financially troubled companies and with the assurance that the changes were temporary. This time, however, companies like Harley-Davidson -- usually an emblem of the working men it employs -- are making the two-tier system permanent, against the threat of pulling out of communities and taking jobs with them.

No better time than now to pick up a copy of Brigid O'Farrell's new book, "She Was One Of Us: Eleanor Roosevelt and the American Worker". O'Farrell goes back before ER ever set foot in the White House and takes us all the way to her death in 1962, pointing out along the way the passion she brought to the fight for workers' rights and the expansion of unions' influence. Throughout her life, ER was an ambassador between unions and minorities, the president, and the world at large. She was a card-carrying member until her death and never stopped fighting for labor rights.

But ER didn't grow up in a working-class environment. She was raised as a New York debutante in one of the city's oldest families, attending a finishing school and fancy balls. But at the age of 18 she became involved in the settlement house movement, volunteering to provide necessities to the less well off. It was through this work that she introduced FDR to the squalid life in New York City's tenements and both became involved in social justice. That passion never faltered. She then got involved in union work when her friend Rose Schneiderman introduced her to the Women's Trade Union League. And in 1936, in celebration of the first anniversary of her "My Day" column, she joined the American Newspaper Guild, a union for journalists. She stayed active in that organization until the end.

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As O'Farrell explains: "She practiced what she preached." She surprised the country by going into a coal mine in 1935 to see the conditions for herself and to talk to the miners about their needs. As Heywood Broun, a prominent labor leader, put it, "It seems to me, at the moment Eleanor Roosevelt has a deeper and closer understanding of the needs and aspirations of millions of Americans than any other person in public life." In a pamphlet for a memorial fund set up in her honor by the AFL-CIO in 1963, the unions declared, "she was one of us." That sentiment wasn't just felt by the unions, however. A woman that Glenn Beck would be quick to call an "elite" today, she was beloved by average Americans of all groups, racial minorities and women included, for her work on their behalf. Martin Luther King, Jr. called her "America's First Citizen." Her whole life she worked to make sure that African Americans and women were included in union organizing efforts.

And while today the recession is used as an excuse to damage unions' influence and workers' rights, both ER and her husband ensured that an economic recovery from the Great Depression included improved living standards for the poorest citizens. While she wasn't shy about acknowledging some of the corruption, internal strife and power grabbing that would go on in the unions, she always felt that they held the key to improving the lives of working Americans and thus were vital to protect. She constantly questioned attacks on labor, even after her husband's death. In response to the passage of the anti-labor Taft-Hartley Act, she wrote, "Perhaps [Congress] hope[s] to establish an economy which will keep up large incomes for certain great business corporations but cut down on small business, gradually reducing the living standard for the average individual while keeping it high for the few favored people. This is not a democratic theory." And no matter what other challenges the country faced, she never felt that workers' rights should be ignored. O'Farrell says it well: "In the face of difficulties both domestic and foreign, from the Great Depression through World War II and the cold war to the economic challenges posed by automation and globalization, Eleanor Roosevelt allied herself with workers who sought to advance economic and social justice."

ER also knew that workers' rights didn't just matter at home, but had echoes in the global arena. While she watched squabbles over alleged communism in unions' ranks and attacks on their power, she lamented, "Sometimes, when I see how inadequate we are at settling these disputes among ourselves reasonably, I despair about a peaceful world... If we can't do this in labor disputes at home, how on earth do we expect to do it when the people concerned belong to different nations?" She strived for the US to set an example of democracy and freedom for all of its citizens on the global stage. As we fight two wars and try to make economic deals with other countries, those might be good words to remember.

Her work is far from over; in fact, the torch is in need of relighting. Walter Reuther, a labor leader and dear friend, once said that ER had "the rare combination of courage, integrity, intelligence and charm blended into human kindness and understanding that entitles her to a place in history as the greatest woman in modern times." We can all find a little of her in ourselves and in our fight for social justice.

Bryce Covert is Assistant Editor at New Deal 2.0.

ER fought the very weaknesses we see today in America's failing labor relations system. ND20 ALERT: O'Farrell's new book She Was One of Us will be released this week, October 14. With wages stagnant for decades, unemployment shockingly high, and union membership at levels not seen since the Great Depression, this book about Eleanor Roosevelt's championing of working people reminds us of the struggles necessary to achieve the successes of the New Deal.

Today marks Eleanor Roosevelt's 126th birthday. How fitting that we are now honoring the 75th anniversary of the National Labor Relations Act legislation vital to building our labor relations system. In 1936, just a year after President Roosevelt signed the NLRA, his wife celebrated the first anniversary of her syndicated My Day newspaper column by joining the newly formed American Newspaper Guild, CIO.

For many, however, the battles were bloody. Workers organizing under the new law, better known as the Wagner Act, were intimidated, brutally beaten, and some were killed. Companies stockpiled weapons and hired paramilitary forces and workers fought back. As strikes spread and violence escalated, ER, as she often signed her name, told her readers that "Many people do not believe in unions. Unquestionably unions and their leaders are not always wise and fair any more than any other human beings. There are only two ways to bring about protection of the workers, however, legislation and unionization."

The Wagner Act embodied her combined strategies. The legislation was necessary to unionization: guaranteeing workers the right to take individual responsibility and then act collectively, to join a union and bargain for their wages, working conditions, and benefits. She gave her full support, starting with her own very public union membership, which she maintained until her death in 1962. Union membership grew from 3 million to 8 million during the decade and by 1955 over one-third of all workers belonged to a union, creating the core of a growing middle class.

Eleanor Roosevelt fought amendments to weaken the Wagner Act, especially Taft-Hartley, and under her guidance workers' rights became part of the Universal Declaration of Human Rights. The decades that followed her death, however, witnessed a dramatic decline in union membership. In the early 21st century, 12 million union members represent only 12% of the workforce. Just over 7% of workers in the private sector belong to a union, a level not seen since the Great Depression.

The current labor relations system is in need of repair. Work has changed a great deal since ER's day but the problems are familiar: low wages, employer hostility, plant closings, outdated laws, racial and gender discrimination. There are multiple reasons for union decline, but management resistance to union organizing and the failure of labor laws to effectively protect workers' rights contribute to the problem. Several of the core weakness in the system today are areas that Eleanor Roosevelt vociferously opposed.

Excluded Workers: The Wagner Act covers a limited number of workers in the private sector. Agricultural laborers, domestic employees, first level supervisors, immigrants, and public sector workers are among those excluded. Eleanor Roosevelt opposed such exclusions, telling striking IBEW workers in 1941 that she had "always felt that it was important that everyone who was a worker join a labor organization." She testified before Congress on behalf of migrant farm workers, for example, and encouraged domestic workers to form unions.

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Employer Resistance: Workers protected by the Wagner Act still meet intimidation, harassment, and job loss when organizing. In labor expert Kate Bronfenbrenner's most recent study workers were discharged in 34% of the campaigns leading up to elections and employers threatened to close plants in 57% of these elections. ER deplored the use of intimidation and threats arguing, "I do believe the right to explain the principles lying back of labor unions should be safeguarded, that every workman should be free to listen to the pleas of organization without fear of hindrance or of evil circumstances."

Collective Bargaining: When workers win an election for union representation, they often fail to negotiate a contract. According to Bronfenbrenner, in 37% of elections where unions win workers are still without a contract two years later. ER tirelessly reminded the country of the dirty and dangerous conditions in which many people worked and the meager wages for which they toiled. She declared that "A business has no right to exist which cannot pay every employee a living wage." Workers had a right to bargain and she supported mediation when bargaining failed.

Strikes and Mediation: Under the current system companies can hire replacement workers when a strike over economic issues is in process. Rarely used at first, permanent replacement workers have become a frequent way to weaken the effectiveness of strikes. Eleanor Roosevelt staunchly supported the right to strike and refused to cross a picket line. She reminded her readers that imposing a ban on strikes seemed to her "an abrogation of fundamental rights which eventually would do harm to every citizen." At the same time, however, she saw the strike as a last resort and she joined her friend Walter Reuther of the UAW in admiring the Swedish system of tripartite cooperation between government, employers, and unions.

Union Security: Today, so called "right-to-work" laws have been enacted in 22 states under section 14b of the Taft-Hartley Act. This means that an employee can refuse to join a union or pay dues, but the union still has to represent the worker in negotiations and workplace grievances. For ER, these laws weakened the labor relations system and diminished human rights. At the age of 74, an ailing ER co-chaired the National Council for Industrial Peace to defeat the extension of the right-to-work laws to six more states, declaring that it was time "for all right-thinking citizens, from all walks of life, to join in protecting the nation's economy and the working man's union security from the predatory and misleading campaigns now being waged by the US Chamber of Commerce and the National Association of Manufacturers." In 2009, new right-to-work legislation was introduced in Pennsylvania.

Eleanor Roosevelt would support labor law reform today, beginning with the Employee Free Choice Act (EFCA). This proposal would make it easier for people to join a union by signing cards, increase employer penalties for breaking the laws, and provide for mediation when collective bargaining broke down. A recent public opinion survey found strong support for EFCA across party and state lines, but there is also strong opposition. Senators threaten a filibuster and the cofounder of Home Depot called it "the demise of a civilization."

EFCA would not affect many barriers to union organizing, but it could help improve the success rate for organizing drives and first contracts. With more members unions would have stronger bargaining power and political influence. As a practical politician Eleanor Roosevelt might well support such a strategy. Employer arguments echo those she criticized in the fight against the right-to-work laws as "predatory and misleading." For ER, legislation that facilitated union organizing was a necessary step to give workers a democratic voice in securing their human rights, but then she would move on to expanding protection to all workers, stopping the permanent replacement of strikers, strengthening mediation systems, and ending right-to-work laws. These are important issues to think about on Eleanor Roosevelt's birthday.

For O'Farrell's full article on this topic see "Restoring Workplace Democracy: Eleanor Roosevelt and Labor Law Reform," Journal of Workplace Rights, Volume 14, Issue 3, 2010 (Click here: Baywood - Article).

Brigid O’Farrell is an independent scholar whose research and writing focuses on employment equity, especially for women in nontraditional jobs, and labor history. She is the author, most recently of, She Was One of Us.

Without serious structural changes, Wall Street will continue to look like a country club.

Three women filed a sex discrimination suit against Goldman seeking class action status. It has gotten some attention in the press and on the Web for not the best reasons, namely, the complaint recounts in some detail how one of the plaintiffs, Christina Chen-Oster, a convertible bonds sales rep, had had a colleague force himself on her after a business-related group outing to a strip club. When she reported it some time after the fact (the perp had asked her to keep it secret), she was increasingly ostracized and marginalized.

While the salacious allegations are a vivid reminder of the sort of indignities that women can experience even in ostensibly well-run firms, they are the most obnoxious and disheartening example of the second-class status that women typically occupy in male-dominated fields. The fact is that Goldman has had long-standing problems with women, and the lawsuit's charges are far more damaging and potentially costly than the commentary indicates.

I joined Goldman in its corporate finance department nearly 30 years ago. Goldman had just been sued for sex discrimination, and the firm seemed eager to counter its reputation as the worst place for women on Wall Street. But it wasn't clear to me that things had changed so much as the worst extremes were addressed. For instance, a highly respected Vice President had propositioned every woman in the department. He was finally hauled before the Management Committee and told to cut it out. I arrived at the firm to learn that there was a betting pool on whether he would revert to his old form with me. While he didn't, a partner in the firm did make advances. When he eventually backed off, the fallback was to give me a checklist of the sort of woman he wanted to date and ask me to set him up with suitable candidates.

Fast forward, and while the firm now has policies on dating, the area where the rubber really hits the road, pay and promotion, appears to be as retrograde as ever. Some of this may result from the shift at Goldman from having a substantial investment banking business to one where traders, the most macho and individualistic players, are now dominant.

Make no mistake: the charges in the suit are serious. It seeks class action status, and gender discrimination suits with similar allegations have won class certification (the process is that the plaintiffs do limited discovery to prove they meet the four criteria for class certification). That means that should the plaintiffs prevail, every woman at the firm in a to-be-determined target time period would be considered in arriving at damages.

The central charge is a classic pay act claim, that women are paid less for doing the same work as the boys. There are multiple mechanisms by which this occurs, in addition to allegations of simply lower compensation for comparable performance. Women are also set up to do less well: the best assignments and territories go to men (the suit gives examples of plum territories and clients being stripped from women and assigned to male colleagues); are asked to do clerical work and training far more than men; and receive less informal mentoring.

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The suit describes how business unit managers have unlimited discretion on pay and promotion of their subordinates. This may not seem unusual, but according to the plaintiffs, a lot of "human capital management" procedures are easily and often gamed. For instance, the firm has "360 degree" reviews, but the boss picks who gets to review a particular subordinate, which can be used to stack the deck, and when he gets back the ratings, he can still rank his troops as he sees fit. Perhaps most important, pay is compounded. If one person is paid 10% less than other people in their unit, their next year pay is set as a percent increase over prior year pay. So a one-year setback, whether justified or not, will lead to widening differentials over time.

There is every reason to believe this suit will be costly to Goldman, yet have perilously little long-term impact. One of the two firms representing the plaintiffs, Lieff Cabraser, is a class action heavyweight. Goldman is likely to be advised to settle the suit quickly. It does not want Lieff Cabraster doing a lot of discovery. Lieff Cabraster will probably go to the class certification stage (that's when the numbers will start to get large) and see if Goldman initiates settlement talks.

Assuming this plays out according to the normal script, all affected women will get checks. Those who remain, even if the firm agrees to modify some of its pay and promotion practices to manager discretion, are unlikely to see much change. Big dealer firms delegate substantial authority to producers; a Wal-Mart, with its highly codified managerial processes, is in a far better position to curb abuses than a firm where managers operate what amount to franchises in a larger corporate umbrella.

There's nevertheless a tendency to see people like the plaintiffs in this suit as sore losers, when the reality is far more complex. Unfortunately, legal remedies can reinforce the idea that minorities and women can’t succeed on their own and need quotas or other measures to assure they are represented in sufficient numbers. By implication, diversity is in conflict with merit-based policies. As transgendered scientist Ben Barres has pointed out, citing research, “When it comes to bias, it seems that the desire to believe in a meritocracy is so powerful that until a person has experienced sufficient career-harming bias themselves, they simply do not believe it exists.” And examples are widespread in other fields. For example, a 1997 Nature paper by Christine Wenneras and Agnes Wold, “Nepotism and Gender Bias in Peer-Review,” determined that women seeking research grants need to be 2.5 times more productive than men to receive the same competence score. In 1999, MIT published the results of a five-year, data-driven study that found that female faculty members in its School of Science experienced pervasive discrimination, which operated through “a pattern of powerful but unrecognized assumptions and attitudes that work systematically against female faculty even in the light of obvious good will.”

It isn't widely recognized outside the human resources field, but performance appraisal systems have been criticized for over 100 years as being unable to live up to their objectives. Thus, the typical defense against the failure to achieve diversity, that the company was in fact hiring and promoting based on achievement, is hollow. These systems not only are subjective (inherent to most ratings) but also often lead to capricious, even unfair results.

The idea that Goldman, and Wall Street generally, which for decades have had their pick of top business and law school graduates, can't find women of the same caliber as men simply doesn't pass the common sense test. But “diversity” has the effect of shifting attention away from the fact that companies may be inbred. Conservatism and a common preference to hire in your own image leads many firms to stick with their tried-and true profile, which in most cases is Caucasian and male. Sadly, the C level and boards at most large companies still look more like country clubs than the US as a whole, and that's still not likely to change soon.

Yves Smith is the founding editor of Naked Capitalism. She is a former employee of Goldman Sachs.