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Henry George and Neo-Classical Economics

by ARGeezer Mon Mar 9th, 2009 at 01:40:49 AM EST

I have seen Neo-Classical Economics described as an attempt to side step Karl Marx's labor theory of value.  However, Mason Gaffney shows that it was more properly an attempt to redefine economics in order to confound Henry George, who was an immensely more threatening figure to capitalism in the English speaking world.

Neoclassical economics is the idiom of most economic discourse today. It is the paradigm that bends the twigs of young minds. Then it confines the florescence of older ones, like chicken-wire shaping a topiary. It took form about a hundred years ago, when Henry George and his reform proposals were a clear and present political danger and challenge to the landed and intellectual establishments of the world. Few people realize to what degree the founders of Neo-classical economics changed the discipline for the express purpose of deflecting George and frustrating future students seeking to follow his arguments. The strategem was semantic: to destroy the very words in which he expressed himself. Simon Patten expounded it succinctly. "Nothing pleases a ...single taxer better than ... to use the well-known economic theories ... [therefore] economic doctrine must be recast" (Patten, 1908: 219; Collier, 1979: 270).'

(more below the fold)


Why did Henry George inspire such a significant, coordinated effort?  Gaffney explains:

Henry George came out of a raw, naive new colony, California, as a scrappy marginal journalist. Yet his ideas exploded through the sophisticated metropolitan world as though into a vacuum. His book sales were in the millions. Seven short years after publishing Progress and Poverty in remote California he nearly took over as Mayor of New York City, the financial and intellectual capital of the nation. He thumped also-ran Theodore Roosevelt, and lost to the Tammany candidate (Abram S. Hewitt) only by being counted out (Barker, 1955: 480-81; Myers, 1907: 356-58; Miller, 1917: 11). Three more years and he was a major influence in
sophisticated Britain. In 1889, incredibly, he became "adviser and field general in land reform strategy" to the Radical wing of the Liberal Party in Britain, where he was not even a citizen. "It was inevitable that, when [Joseph] Chamberlain bowed out, George should become the Radical philosopher" (Lawrence, 1957: 105-06). It also happened that when Chamberlain bowed out, the Radical wing became the Liberal Party. It adopted a land-tax plank after 1891 (The "famous Newcastle Programme"), and came to carry George's (muted) policies forward under the successive Liberal Governments of Campbell-Bannerman, Asquith and Lloyd George.

How could a marginal man come out of nowhere and make such an impact? The economic gurus of the day, even as today, were in a scolding mode, blaming unemployment on faulty character traits and genes and demanding austerity. They were not intellectually armed to refute him or befuddle his listeners. He had studied the classical economists and used their tools to dissect the system. Neo-classical economics arose in part to fill the void,to squeeze out such radical notions, and be sure nothing like the Georgist phenomenon could recur.


From the NCE project to the present--a brief synopsis from Gaffney.
Having taken shape in the 1880-l890s, Neo-Classical Economics (henceforth NCE) remained remarkably static. Major texts by Alfred Marshall, E.R.A. Seligman and Richard T. Ely, written in the 1890s, went through many reprints each over a period of 40 years with few if any changes. "It was for the Chautauqua Literary and Scientific Circle (1884) that I wrote the first edition of my Outlines, under the title Introduction to Political Economy. In this first edition of the Outlines there is to be found the general philosophy and principles that have shaped all future editions, including that of 1937" (Ely, 1938: 81).2  

Not until 1936 was there another major "revolution," and that was hived off into a separate compartment, macro-economics, and contained there so that it did not disturb basic tenets ofNCE. Compartmentalization, we will see in several instances, is the common NCE defense against discordant data and reasoning. After that came another 40 years of Paul Samuelson's
"neoclassical synthesis". J.B. Clark's treatment of rent, dating originally from his obvious efforts to refute Henry George (see below), "has been followed by an admiring Paul Samuelson in all of the many editions of his Economics" (Dewey, 1987: 430).

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To most modern readers, probably George seems too minor a figure to have warranted such an extreme reaction. This impression is a measure of the neo-classicals' success: it is what they sought to make of him. It took a generation, but by 1930 (the Neo-Classical Economists) had succeeded in reducing him in the public mind. In the process of succeeding, however, they emasculated the discipline, impoverished economic thought, muddled the minds of countless students, rationalized free-riding by landowners, took dignity from labor, rationalized chronic unemployment, hobbled us with today's counterproductive tax tangle, marginalized the obvious alternative system of public finance, shattered our sense of community, subverted a rising economic democracy for the benefit of rent-takers, and led us into becoming an increasingly nasty and dangerously divided plutocracy.(My bold)

Gaffney shows the "Personal Involvement of George with Early Neo-classicals"

Several major figures in the neo-classical revolution had personal contact with George. Among these were J.B. Clark, Philip Wicksteed, Alfred Marshall, E.R.A. Seligman, and Francis A. Walker. Wicksteed was friendly; the others decidedly not so. There is no doubt George was much on their minds and in their hearts, not with the warmth of friendship but the fire of enmity.

JOHN B. CLARK
No single figure personifies the change from classical political economy to neo-classical economics, but J.B. Clark exemplifies it. His aim was to undercut Henry George's attack on landed property by erasing the classical distinction of land and capital. His method was to endow capital with a Platonic essence, a deathless soul transcending and surviving its material
carcass.

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Clark's capital being deathless it is just like land, and theorists after Clark have made land just another kind of machine. The economic world was thenceforth divided into just two elements, labor and capital. "...that destroys the equality of capital to accumulated savings, and dismisses all Ricardian and Malthusian problems in one fell swoop" (Tobin, 1985). He might have added, it dismisses all Georgist, conservationist, spatial, temporal and environmental questions. It put blinkers on economic theorists
which they wear to this day.

J.B. Clark's bibliography includes at least 24 works directed against George, over a span of 28 years, 1886-1914. These are in the bibliography to the present work. They begin with The Philosophy of Wealth, 1886. In this work Clark refutes "financial heresies and strange teachings concerning the rights of property ... " (1886: 1-2). The only such strange teaching specified waits to p.126, where a "Mr. Henry George" is accused of "ignoring the productive action of capital". That is a strange complaint to raise against one who recommended untaxing capital, but there it is.

Clark's next astounding assertion may have been prompted by the European's dispossession of the Native Americans, but surely it must also apply to the successive waves of invaders into the Roman Empire as well.

Clark points out that wealth is created "from the mere appropriation of limited natural gifts .."and that repelling intruders "is almost the only form of labor which exists in the most primitive social state" (p.10). The atmosphere as a whole, showers or breezes, "minister transiently to whomsoever they will, and, in the long run, with impartiality". Therefore they are not wealth. Those who appropriate them create wealth by so doing. The essential attribute of wealth is "appropriability," to create which "the rights of property must be recognized and enforced Whoever makes, interprets, or enforces law produces wealth". He gives to commodities "the essential wealth-constituting attribute of appropriability". He goes on in that vein: those who seize land and exclude others thereby produce its value; George, who would untax capital, is guilty of ignoring its productive action.

Next came Capital and its Earnings, 1888. Frank A. Fetter, a disciple of Clark, commented as follows in the course of an encomium to Clark: The probable source from which immediate stimulation came to Clark was the contemporary single tax discussion. ... Events were just at that time crowding each other fast in the single tax propaganda. Progress and Poverty ... had a larger sale than any other book ever written by an
American. ... No other economic subject at the time was comparable in importance in the public eye with the doctrine of Progress and Poverty.
Capital and its Earnings "... wears the mien of pure theory ... .but ... one can hardly fail to see on almost every page the reflections of the contemporary
The Stratagem against Henry George's single-tax discussion. In the brief preface is expressed the hope that 'it may be found that these principles settle questions of agrarian socialism.' Repeatedly the discussion turns to 'the capital that vests itself in land,'...(Fetter, 1927: 142-43)  Clark's argument rose from an "original polemical impulse..". (ibid.:144).

Remember, those are not the words of a critic, but a militant disciple of Clark. Fetter was more Clarkian than Clark, criticizing him only for his occasional backing and filling. He was certainly more forthright and importunate. The very candor and extremism of Fetter's exposition, giving a quick take on Clark, makes his chapter a good display of Clark's essential
polemical motivation.

Clark came to reside in the Economics Department at Columbia, one of J.P. Morgan's many interests.  Columbia was, at the time, the most richly endowed university in the USA and Morgan felt the need of the best defense available against the dangerous ideas of George, who resided in and was a public actor in New York City and State politics.  He could readily afford the modest price.

There are those who have thought that Clark was arguing against Marx, but Gaffney refutes that theory at length and points out that, at the time, Marx was an obscure figure in the USA, was an atheist, and had been almost entirely focused on Europe. He never had significant appeal in the USA.  George, on the other hand, grew out of native soil, was embraced by Gompers and other Trade Unionists, and formulated his ideas in ways that resonated with the American ethos.

Gaffney goes on to similarly describe other promanent NCEs such as Edwin R.A. Seligman, Chairman of the Department of Economics at Columbia and recruiter of Clark to his institution and General Francis A. Walker, first President of the American Economic
Association, President of M.I.T., and Director of the US Census who, in 1883 was demolished by George in a public debate but went on to marginalize the importance of land.  He adopted the policy of ridiculing and trivializing the ideas while ignoring the man.

In England George's reception was more cordial.  Philip Henry Wicksteed was much taken by George's Poverty and Progress, as was George Bernard Shaw.  That mutual interest brought Wicksteed and Shaw together and had a significant effect on the Fabian Society.  Alfred Marshall had a famous debate with George at Oxford in 1883.  Despite this event Gaffney characterizes Marshall's relation with George as being "...rather one of caution, compromise, ambivalence, and gradualism."  Gaffney amusingly attributes to Marshall the imprint on neo-classicism of "...his two-handedness, that notorious quality of economists that later disturbed President Harry S. Truman."  (Truman called for one handed economists.)

Gaffney provides a guided tour of late 19th and 20th century US economic and political struggles and casts a highly illuminating light upon the role of private interests and their (ultimately successful) efforts to surplant the public interest with their own very narrow interests and shows how this critically proceeded through the re-casting of the terms of debate for economics and training of  generations of US citizens at universities in a brand of economics highly favorable to the interests of the wealthy few.  Through meticulous documentation and citations he shows how Neo-Classical Economics came to be the standard system taught in all US universities and how it has retained its position.

His paper,  "Neo-classical Economics as a Stratagem Against Henry George," is available on his web site in PDF format and is available commercially in "Neo-classical Economics as a Stratagem Against Henry George," in Fred Harrison, The Corruption of Economics. London: Shepheard-Walwyn Publishing Co. pp. 29-164.  I find it exciting reading.  When I was about 20 years old I changed the focus of my inquiries from "how the world worked" to "how did we get so fucked up?"  Gaffney provides a lot of the answers.

He also provides a sense of the fundamental differences that could have been realized in making our society more humane and egalitarian via the application of George's philosophy, which carefully married "socialist" ideals to a properly functioning capitalism through a more rational tax policy.    

Display:
First rate Diary, ARG.

George's work is based upon the Single Tax - ie the taxation of the privilege of the Commons of Land/Location. He thought - possibly wrongly in my view, although it may have been correct at the time - that such a Single Tax would, as the name implies, render all others unnecessary.

But I think he was correct in principle, if not (maybe) in practice. I believe that Georgism may be extended to cover other privileges, such as use of the Commons of non-renewables eg through a carbon levy, and the Commons of Knowledge, through a levy on Intellectual Property. I would also make a levy on the privilege of Limitation of Liability.

Having said that, George did not, as far as I know, have much to say on the subjects of Credit and Money, which constitutes the other twin of the Twin Peaks of Capitalism.

E C Riegel's Flight to Inflation hit the nail on the head in relation to his analysis of money and credit, but Riegel had profoundly right wing views in relation to Capital, as far as I know, and his work is not to be found in progressive circles.

Finally, re Marx

European Tribune - Comments - Henry George and Neo-Classical Economics

There are those who have thought that Clark was arguing against Marx, but Gaffney refutes that theory at length and points out that, at the time, Marx was an obscure figure in the USA, was an atheist, and had been almost entirely focused on Europe

Marx actually shared the anthropocentric assumption of neo-Classical economics that only Labour is "productive".  This is bollocks, but bollocks convenient for those who own the planet, since it justifies taxes on earned income, rather than on Capital, and on the privileges of private property that give rise to it.

Both Marx and Neo-classicals also share a Newtonian world of Absolute property rights.

Firstly, the absolute Divine Right of Capital - through absolute, permanent ownership (eg freehold land; shareholder equity) by private individuals (neo-Classicals) or the State (Marx);

Secondly, the temporary (for a defined term) use of Capital (eg debt finance, freehold land).

The innovation which I believe will come to replace conventional Capitalism and which I observe emerging is what I call "Open" Capital. This has an indefinite or indeterminate term, but that is to digress to my favourite hobby horse...

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Mar 9th, 2009 at 06:36:21 AM EST
ChrisCook:
Secondly, the temporary (for a defined term) use of Capital (eg debt finance, freehold land).

Oooops ...leasehold land.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Mar 9th, 2009 at 09:43:55 AM EST
[ Parent ]
I would personally abolish freehold. All "freehold" should revert to the community (the scale of which - national, regional, local - I leave open) and the periodic income coming from leaseholds should constitute a basic source of public revenue.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Mar 10th, 2009 at 04:49:44 AM EST
[ Parent ]
How is that different to property tax?
by Colman (colman at eurotrib.com) on Tue Mar 10th, 2009 at 05:14:13 AM EST
[ Parent ]
It isn't.

But we've spent the last few years abolishing property and estate taxes...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Mar 10th, 2009 at 05:29:46 AM EST
[ Parent ]
Not necessary. Freehold in the UK is nominal absolute ownership by the monarchy.

If you abolish freehold, what do you put in its place? Absolute ownership by the State? Not a great track record, the State, as a Custodian, I suggest.

What matters is having freeholds vested in a Custodian: but emphatically not a Trustee. The difference is control: Custodians have only veto rights; Trustees have control, and the law is arcane and complex, which is not surprising since it is "Judge made" ie to all intents and purposes invented by lawyers for lawyers.

As for leaseholds I agree with you that the right of exclusive occupation of a location should give rise to an income to Society - but not to the State - they can't be trusted with the income either, and tend to buy things like Trident with it.

What I am advocating is essentially a new type of lease of indefinite duration. Whether you call it a tax, or a rental, or a levy depends upon the legal and financial structure of government.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Mar 10th, 2009 at 06:46:45 AM EST
[ Parent ]
What's the formal distinction between "Society" and "the State" here?
by Colman (colman at eurotrib.com) on Tue Mar 10th, 2009 at 07:09:20 AM EST
[ Parent ]
There's several Diaries in that, colman.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue Mar 10th, 2009 at 07:16:56 AM EST
[ Parent ]
So?

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Mar 10th, 2009 at 07:23:34 AM EST
[ Parent ]
So I'm not writing them... :-)

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue Mar 10th, 2009 at 02:04:19 PM EST
[ Parent ]
Wimp.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Mar 10th, 2009 at 02:52:22 PM EST
[ Parent ]
Cheeky!

solveig says I've got to write my book instead...

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Mar 10th, 2009 at 03:21:44 PM EST
[ Parent ]
ChrisCook:
Freehold in the UK is nominal absolute ownership by the monarchy.
The Monarchy is not the only freeholder in the UK. Lots of properties are for sale by freehold.

I would much rather the Local Council held the freehold than the Duke of Westminster, to be honest.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Mar 10th, 2009 at 07:27:11 AM EST
[ Parent ]
Migeru:
The Monarchy is not the only freeholder in the UK.

If we are getting technical....

Fee simple - Wikipedia, the free encyclopedia

In English common law theory, the Crown has radical title or the allodium of all land in England, meaning that it is the ultimate "owner" of all land. However, the Crown can grant an abstract entity--called an estate in land--which is what is owned. The fee simple estate is also called "estate in fee simple" or "fee-simple title" and sometimes simply freehold in England and Wales.

The "estate in land" is a relationship. The innovation I am observing emerging is that this "estate in land" may be packaged within an "Open" Corporate legal entity, such as a UK LLP, and the rights and obligations shared in a non-adversarial way. This is very much distinct from the way in which the conventional alternative rights of a freeholder and the rights of a leaseholder diverge.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Mar 10th, 2009 at 01:52:16 PM EST
[ Parent ]
Jeebus.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Mar 10th, 2009 at 01:58:52 PM EST
[ Parent ]
Oh, those quaint Brits and their quaint vestiges of feudal monarchy. As opposed to ...

... oops, never mind.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Mar 10th, 2009 at 06:04:30 PM EST
[ Parent ]
George's work is based upon the Single Tax - ie the taxation of the privilege of the Commons of Land/Location. He thought - possibly wrongly in my view, although it may have been correct at the time - that such a Single Tax would, as the name implies, render all others unnecessary.

I read somewhere that, with the "multiplier" Fractional Reserve monetary system and cozily practiced banking-governing partnerships (of unbounded borrowing) governments do not need any taxes at all to provide their services. The taxes mostly end up in government creditors' hands anyway.

I found the following critique of George. Is it resonating to what we know?

Yet by 1900 or thereabouts, George's name was all but forgotten and his works were little read. The causes of this sudden demise of a once towering reputation are not hard to find: George's argument was expressed in the language of an outmoded Ricardian vision of economic growth as an inherently land-using process; furthermore, the Georgist assertion that the yield of a single tax on land rentals would suffice to defray all the expenses of government, which was absolutely true for its day and age, was no longer even half-true by 1920. By then even the most zealous Georgists had retreated from the platform of a single tax on ground rent to the more modest proposal of site-value taxation; meaning taxation of land at a much higher rate than the distinguishable improvements that are made on the land plus full or partial exemption of improvements, a high levy on windfalls derived from the sale of land, and a surtax on absentee landowners. A perfectly good case can be made for such fiscal reforms even today because the fact remains that a property tax on the improved value of land is the nearest we shall ever get to a tax that has no dead-weight loss whatsoever.
by das monde on Mon Mar 9th, 2009 at 11:45:24 PM EST
[ Parent ]
By then (1920) even the most zealous Georgists had retreated from the platform of a single tax on ground rent to the more modest proposal of site-value taxation...
 Gaffney speaks of "modified Georgeism" with respect to most 20th century applications.  In rural and undeveloped areas George's original ideas still substantially apply.  Gaffney's focus for much of his career has been on land and resource development.  He also explicitly notes the 19th century usage of "land" that included natural features such as, for instance, geography suitable to hydro power.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 10th, 2009 at 10:34:14 AM EST
[ Parent ]
Wow.  Standards are getting very high around here.  When I started to study Economic and Social Studies many years ago I instinctive steered away from Economics and towards Politics/Sociology because I felt you had to make certain (for me) untenable assumptions about rationality and property rights for the whole edifice of economics (as it was then taught) to be sustainable.  It was a bit like observing that 99% of law students were only in it for the money and so law couldn't be for me.

It has taken a long time for those chickens to home to roost but the triumph of neo-classical economics is now long gone.  What I don't see is a new Marx or George or Keynes who is articulating an alternative vision (with the exception of Chris here) and which depends upon fundamentally different assumptions about humanity, ownership, natural resources and sustainability/progress.

Obama seems to be pursuing a significantly different direction without ever having articulated a fundamentally different philosophy, and still seems to be relying on many of the same "intellectuals" who got us into the mess in the first place. And yet when he fails, the reaction is likely to be back towards the even bigger failures of the Reagan era.

We need a post globalisation economic and political philosophy which takes the limited nature of the earth's resources into account, limited resources which can be allocated to any individual/community/society, and the processes which are required to ensure we aren't condemned to a Malthusian apocalypse as thsoe diminishing resources are fought over ever more viciously by growing populations.

Something tells me we aren't even beginning to grapple with those issues within mainstream discourse and even the intellectual freedoms enabled by the internet have not yet spawned a sufficiently radical analysis capable of inspiring the world population as a whole to overthrow the stale elite ideologies which have gotten us to this point.

Maybe when the banking bailouts have finally impoverished us all we will realise than plan A isn't working...

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 9th, 2009 at 09:20:33 AM EST
The diary is long as it stands.  Left out are a summary of the accomplishments made possible by and the benefits of George's positions and the massive influence he has had, albeit in diluted form, on 20th Century politics in the USA.  Later in the day I will try to post a couple of comments to amplify.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 9th, 2009 at 10:21:11 AM EST
It is staggering testimony to the effectiveness of the NCE that we hear so little about Henry George.  Progress and Poverty was the #1 bestseller in the English language (bible excepted) for more than 50 years.  He was one of the most known names in America in the late 1800's.  It is unlikely that 1 in 1000 Americans know of him today.  

When George wrote of taxing "land" he was careful to define land in the 19th century notion of all natural resources.  In his later writing he tended to talk more about taxing (or abolishing) privileges, of which land is one form.  But when considering the question of whether enough revenue could be obtained consider all the forms of modern untaxed (or under-taxed) resources:  Broadcast spectrum, pollution permits, surface land, highway land, internet rights-of-way, fishing rights, oil severance, atmospheric carbon, and mining.  Also consider that the cost of government would likely come down if we tax natural resources because urban sprawl would stop, pollution would be reduced, and employment would likely generally increase.

But if any political party actually gets around to taxing rents directly there will be a few challenges yet to be addresses (to my knowledge).  We need credible rent models.  For example, if we tax surface land the "value-scape" would change quickly and dramatically.  Land at the periphery of cities would drop in value (enabling local farming) and would likely increase at the center.  We would also have great tension between the forms of rent.  If we tax the monopolization of highway space then land at the periphery would also probably drop in value, as would the price (demand) for oil.  

Once you understand how big of an influence George was in America your understanding of America in the early 20th century will change dramatically.  The National Parks Service mission statement reads like a Georgist pamphlet (written by a Georgist who was the first parks director).  Almost every property-taxing jurisdiction in American maintains separate values for land and buildings (usually done poorly).  It was George's influence that pushed them to do so and it was not the case earlier.  The California Water Projects of the early 20th century (paid for by land taxes) shared the water, broke up the large estates, created the most productive agricultural area on earth, and created a robust middle class of farmers.  (Mostly reversed since the huge reduction in land taxes over the last 50 years.)  California had a ballot initiative in the 1920's that called for a complete state tax shift to land only.  The initiative lost but it tells you that the subject was very much in the political culture.  Practically everywhere that land was taxed more heavily prosperity followed (upper mid-west, CA, parts of the NE).  Places with low property taxes were the laggards (the SE states in particular).  

George's theory of money was not well developed but does receive considerable attention in his last (less known) book "The Science of Political Economy".  But if we tax rents heavily our understanding of money will have to change too.  In effect, we would create a "complete circuit" for money because rents would be payable in currency only.  If the tax structure were based on rent we would see a sharp distinction between real money and liquid debt (treasury securities, etc.)  Also, most of the "asset inflation" related debt is based on natural resource values and such debt bubbles simply wouldn't form if we taxed privileges for their full value.  

I believe that a successful replacement to the NCE madness we are all suffering from will be based in some way on the ideas George proposed. I don't mean that dogmatically, as there could likely be variations in how we collect rent.  Another important idea George developed late in his life was a labor theory of value that was distinct from Marx but is probably necessary to a new economics.   George's view was that value was related to "labor avoided" not the Marxist notion of "labor contained".  But that would require a whole new diary to explore.

by Geonomist on Mon Mar 9th, 2009 at 01:40:52 PM EST
Welcome back, Geonomist. I had a feeling this Diary would attract one of your thoughtful contributions.

Geonomist:

 But if we tax rents heavily our understanding of money will have to change too.  In effect, we would create a "complete circuit" for money because rents would be payable in currency only.  If the tax structure were based on rent we would see a sharp distinction between real money and liquid debt (treasury securities, etc.)

Agreed. But in my view the opportunity now exists to  directly invest in land rental value through the simple expedient of the creation of Units redeemable in rental value which would be widely acceptable in exchange and therefore result in the monetisation of land rental value.

John Law conceived - some 300 years ago in Scotland - of a land-backed currency

Money & Trade Consider'd"

Unfortunately he did rather cock up implementation of the idea in France, giving rise to the first recognisable Central Bank on the one hand (Banque Royale) and the Mississippi Bubble on the other.

I believe that it is possible to rapidly evolve a land-based currency through "unitising" rentals as an alternative to mortgage debt. Indeed, this was the subject of my lecture in Ireland last November

Equity Shares: a solution to the Credit Crunch

The adoption of such a unitisation solution would lead, de facto, to land-based currencies with domestic application. A levy charged in relation to the exclusive use of the location - rather than the capital invested in the location - would essentially be the tax you advocate, but within a consensual legal framework.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Mar 9th, 2009 at 02:37:03 PM EST
[ Parent ]
Once you understand how big of an influence George was in America your understanding of America in the early 20th century will change dramatically.
I will attest to that.  While American History was not one of my areas, I have subsequently read a good bit in the area.  It would have been an exception had George's impact been widely and favorably discussed in a university history course in the early 60s.  Gaffney and Upton Sinclair explain why George would not have received sympathetic treatment in college test books.  While the proportion of historians in academia sympathetic to the causes championed by George may be greater than that of similar minded economists, the role of George seems to have slipped from consciousness.

Greg Mitchell's The Campaign of the Century Upton Sinclair's Race for Governor of California and the Birth of Media Politics 1993 does not reference Henry George either in the index or the bibliography, though developments rooted in George's ideas were central to Sinclair's campaign.  I agree with you that, while Georgian economic and tax policies must be updated and elaborated, they offer a way out of the current problems.  This would be an excellent time for PBS to present a series on Henry George and Progress and Poverty and for Bill Moyers to interview Mason Gaffney on his Journal.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 9th, 2009 at 06:12:58 PM EST
[ Parent ]
Another important idea George developed late in his life was a labor theory of value that was distinct from Marx but is probably necessary to a new economics.   George's view was that value was related to "labor avoided" not the Marxist notion of "labor contained".  But that would require a whole new diary to explore.

I would find such a diary EXTREMELY interesting.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Mar 10th, 2009 at 12:33:14 AM EST
[ Parent ]
Geonomist
I see from your original ET post that you might be the source of my own discovery of Mason Gaffney.  Had I known I would have referenced you.  It was from well before I discovered ET.  My post consists mostly of quotes and summaries of Gaffney and is well complimented by your elaborated and well developed views.  I recommend that post to all those to whom it is not already familiar.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 10th, 2009 at 10:53:34 AM EST
[ Parent ]
The Neo-Classical stratgem and style compared to George's approach.  NCE is dismal by design and by choice.  Hard dilemmas are presented for public policies.  However, the dilemmas are less hard for the wealthy, who are well positioned to survive and even to profit from crashes.  NCE is a perversion of economics in which rhetoric that protects the rich is incorporated into the "theory," regardless of the stultifying and vitiating effect on the discipline.
Neo-classical economics makes an ideal of "choice". That sounds good, and liberating, and positive. In practice, however, it has become a new dismal science, a science of choice where most of the choices are bad. "TANSTAAFL" (There Ain't No Such Thing As A Free Lunch) is the slogan and shibboleth. Whatever you want, you must give up something good. As an overtone there is even a hint that what one person gains he must take from another. The theory of gains from trade has it otherwise, but that is a heritage from the older classical economists.

Henry George, in contrast, had a genius for reconciling-by-synthesizing.  Reconciling is far better than merely compromising. He had a way of taking two problems and composing them into one solution, as we lay out in detail below. He took two polar philosophies, collectivism and individualism, and synthesized a plan to combine the better features, and discard the worse features, of each. He was a problem-solver who did not suffer incapacitating dilemmas and standoffs.

As policy-makers, neo-classical economists present us with "choices" that are too often hard dilemmas. They are in the tradition of Parson Maithus, who preached to the poor that they must choose between sex or food. That was getting right down to grim basics, and is the origin of the well-earned "the dismal science" epithet. Most modern neo-classicals are more subtle... Here are some dismal dilemmas that neo-classicals pose for us today. For efficiency we must sacrifice equity; to attract business we must lower taxes so much as to shut the libraries and starve the schools; to prevent inflation we must keep an army of unfortunates
unemployed; to make jobs we must chew up land and pollute the world; to motivate workers we must have unequal wealth; to raise productivity we must fire people; and so on.

The neo-classical approach is the "trade-off'. A trade -off is a compromise.  That has a ring of reasonableness to it, but it presumes a zero-sum condition.  At the level of public policy, such "trade-offs" turn into paralyzing stand-offs in which no one gets nearly what he wants, or what he could get. It overlooks the possibility of a reconciliation, or synthesis.  In such a resolution, we are not limited by trade-offs between fixed A and B: we get more of both.

This approach has dramatic effects on popular politics.  The basis for a true resolution of public policy dilemmas has been defined out of the common discourse.  While a generation of  economic policy makers embraced Keynes from 1936 through the Vietnam era, when political and economic developments required an update to Keynesian political economy Walter Heller was able to oblige under JFK, but, after JFK, Heller retired from the field and other  events dominated the discourse--Vietnam and Civil Rights.  The vast majority of economists from which a replacement could be chosen, along with the vast preponderance of commentary in the public discourse was found among the Neo-Classical Economists.  Milton Friedman's time was coming.  Nixon's famous statement "We are all Keynesians now"  probably served to damn Keynes with faint praise and hang the economic failures derived from LBJ's "guns and butter" approach to political economy around the neck of John Maynard Keynes.  

Popular responsiveness to problem-solvers

Voters faced with two candidates, each coached by a neo-classical economist, also face a hard choice. They often appear apathetic and take a third choice, staying home. However, history denies that voters are intrinsically apathetic. They have been excited by candidates who try to lead up and away from dismal trade-offs.

In 1980 it was Ronald Reagan. Instead of the dismal Phillips Curve ("choose inflation or unemployment"), he offered the happy Laffer Curve: lower tax rates would lead to higher supplies, higher revenues and lower deficits, he promised. Lowering taxes, said Laffer, would eliminate the "wedge effect". He often cited Henry George in support of his position. Thus he would unleash supply, and collect more taxes while applying lower tax rates. The voters were sick of second-generation Keynesians who had been reduced to preaching austerity, so they were game (if not wise) to buy into Reaganomics as advertised.

Unfortunately, the Laffer Curve turned out to be wildly overoptimistic, and Reaganomics partly fraudulent and hypocritical in application. The voters again tuned out and seemed apathetic. They are not saying, however, that they don't care. They are saying "come back when you have something better, mean what you say, and deliver what you promise".

From 1936-70 it was John Maynard Keynes and his apostles who had a long run with the voters, in spite of virulent critics. Keynes' winning political formula was that consumption and capital formation are not alternatives to be traded off, but complements that reinforce one another. Raise wages, he said, raise private and public consumer spending, and get more capital formation as a happy by-product. "We can have it all," he said.  Who would not prefer that to long-faced moralizers preaching that we must suffer for the prodigalities of the past, or for the sake of a remote and uncertain future? Even puritans learned better as children from Longfellow's "Psalm of Life".

When the theory of the propensity to consume, and the multiplier, lost their charm, and some strong trade unions (like Hoffa' s Teamsters) showed their nastier side, the American voters tuned in to John F. Kennedy and "business Keynesianism" in which the emphasis turned to fostering new investment. Keynes had been shrewd enough to cast his theories to accommodate either emphasis. Here the formula was to raise the "marginal efficiency of capital" (today we say the marginal rate of return) after taxes by giving preferential tax treatment to new investment, keeping tax rates high on income from old assets like land. It was a species of Georgism, applied via the Federal income tax. The key devices were fast write off for new capital, and the investment tax credit. There was no talk or thought, however, of enriching capitalists by impoverishing workers. The promise was to enrich capitalists and workers together, as higher investment raised aggregate demand for labor and its products through the "multiplier" effect.

In time that happy glow of mutuality turned to ashes. After JFK, with his influential economist Walter Heller, the flame burned low; later leaders stumbled in the dark. They relied too simple-mindedly on demand management through fiscal and monetary policy, carrying them well beyond their power to stimulate supply. Thus they lurched into Stagflation: double- digit inflation and recession conjoined. They blamed the war, then the Arabs. They scolded the public, and they called for sacrifices, as leaders always do when they lack ideas. "You must mature and face the facts of life," they lectured. "There is no way to stop inflation except unemployment.  Whichever evil you choose, don't blame us, we told you so.  Faced with that, the voters exercised a third choice: they retired the patrons of those new dismal scientists.

There are a number of economists among the "heterodox," a group to which our own Frank McF claims membership.  They include Michael Hudson, the late James Tobin and his students, including Paul Krugman, and Mason Gaffney.  They constitute a decided minority among academic economists, where they serve as evidence of "balance" in various departments.  This is hardly surprising, as one of the effects of the dominance of NCE in the academy is to cause those who are naturally inclined to a progressive agenda to gag and turn away from economics in revulsion.  Some who have remained have re-branded their field as "Non-Autistic Economics."   I was unaware of Mason Gaffney until I followed a link provided by Chris Cook.  We should treasure those who enable us to see through the deliberately set smoke screen that is Neo-Classical Economics  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 9th, 2009 at 02:25:08 PM EST
I got this comment at Daily Kos:
In 1924,  Secretary of Treasury Andrew Mellon wrote,

It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower rates." ..
{snip}
...he pushed for the reduction of the top income tax bracket from 73% to an eventual 24%.

Four years later came the crash of 1929 and the economy did not recover until after the onset of WWII - 12+ years later.

So, Laffer's fallacy is not that new.
by das monde on Mon Mar 9th, 2009 at 11:27:10 PM EST
[ Parent ]
Very little that the Right is spewing is new.  Some of it goes back to the fifteen hundreds

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Mar 10th, 2009 at 12:36:12 AM EST
[ Parent ]
ATinNM
A very interesting diary that needed much more attention.  As it was in the beginning....

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 10th, 2009 at 10:59:23 AM EST
[ Parent ]
ARGeezer:
our own Frank BruceMcF


Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Mar 10th, 2009 at 04:44:37 AM EST
[ Parent ]
ARGhhhhhhh!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 10th, 2009 at 11:00:03 AM EST
[ Parent ]
That's OK, my youngest kid is Frank.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Mar 10th, 2009 at 11:29:07 AM EST
[ Parent ]
ARGeezer:
There are a number of economists among the "heterodox," a group to which our own Frank McF claims membership.  They include Michael Hudson, the late James Tobin and his students, including Paul Krugman, and Mason Gaffney.
And James "Jamie" Galbraith, don't forgate Jamie Galbraith.

Among ETers there's also TGeraghty.

"Our" rdf is a big fan (IMHO deservedly) of Hermann Daly and his Ecological Economics.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Mar 10th, 2009 at 04:46:42 AM EST
[ Parent ]
Michael Hudson interview:

http://kpfa.org/archive/id/48892

Quite a "dystopic" view of our future he presents here.

by kjr63 on Mon Mar 9th, 2009 at 07:27:14 PM EST
The free markets today are supposed to refer to what Adam Smith and the classical economists wrote about free markets. When they talked about free markets, the meant a market free of unearned income. A free market is was where people   would earn what they produce. That meant... the number one aim of classical economics was to tax the free lunch, to tax land rent and interest. And the idea was to have an economy that had minimum property rental interest, that wasn't that taxed. The idea was to shift the tax base off labour on to the landlord class and on to the financial class. That's what Adams Smith wrote, it's what John Stewart Miller wrote, that was the ideal. In order to make an economy more competitive you had to bring market prices in line with the actual cost of production that ultimately could be reduced to the cost of hiring labour, including the labour that made the machinery, the labour that made the raw materials. The cost basically of most products was reducible to labour. And the idea was to minimize the cost of the FIRE sector. Today the free market means free to the FIRE sector, for the banks and for the real estate sector, and the insurance companies like AIG to essentially loot the economy, to impose toll booths everywhere that it can: toll booths for credit, toll booths for rent, toll booths for public utilities, and to maximize the ratio of interest and economic rent and monopoly pricing relative to overall pricing, leaving less and less for actual cost of production, so that instead of having an economy whose costs reflect what technologically necessary for production you have an economy where as much as possible goes to the parasite - for the finance, insurance and the real estate sector.
That supports my diary... But ok, I was already influenced by Hudson.
by das monde on Tue Mar 10th, 2009 at 01:25:33 AM EST
[ Parent ]
You could say that our economy has been consumed by FIRE.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 10th, 2009 at 01:54:49 AM EST
[ Parent ]
Rampant FIRE.
by das monde on Tue Mar 10th, 2009 at 02:13:43 AM EST
[ Parent ]
das monde:
That's what Adams Smith wrote, it's what John StewartStuart Miller wrote, that was the ideal.


Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Mar 10th, 2009 at 04:52:04 AM EST
[ Parent ]
From Google's first-liner, I thought this fellow fit the bill.
by das monde on Tue Mar 10th, 2009 at 05:14:15 AM EST
[ Parent ]
LOL

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Mar 10th, 2009 at 05:30:15 AM EST
[ Parent ]
As a means of illustrating the manner in which Neo-Classical Economics came to have such a strangle hold over academic economics in the U.S.A. I will provide a quote from Upton Sinclair's The Goose Step. Early in that work Sinclair states: "Our educational system is not a public service, but an instrument of special privilege; its purpose is not to further the welfare of mankind, but merely to keep America capitalist."  To demonstrate that thesis he describes the role of Columbia University in New York City.

Men die, but the plutocracy is immortal; and it is necessary that fresh generations should be trained to its service.  Therefore the interlocking directorate has need of an educational system, and has provided it complete.  There is a great university, of which Mr. Morgan was all his active life a trustee, also his son-in-law and one or two of his attorneys and several of his bankers.  The president of this university is a director in one of Mr. Morgan's life insurance companies, and is interlocked  with Mr. Morgan's Bishop, and Mr. Morgans physician, and Mr. Morgans newspaper.  If the president of the university writes a book, telling the American people to be good and humble servants of the plutocracy, this book may be published by a concern in which Mr. Morgan (or a partner) is a director, and the paper maybe bought from the International Paper Company, in which Mr. Morgan has a director through the Guaranty Trust Company.  If you visit the town where the paper is made, you will find that the president of the school board is a director in the local bank, which deposits its funds with the Guaranty Trust Company at a low rate of interest,  to be reloaned by Mr. Morgan at a high rate of interest.  The superintendent of the schools will be a graduate of Mr. Morgan's university, and will have been recommended to the school board president by Mr. Morgan's dean of education.  Both the board and  president and the school superintendent will insure their lives in the company of which Mr. Morgan's university president is a director; and the school books selected in that town will be published by a concern in which Mr. Morgan (or a partner) is a director, and they will be written by Mr. Morgan's university's dean of education, and they will be praised by Mr. Morgan's newspaper and magazine editors.  The superintendent of schools will give promotion to teachers who take the university's summer courses, and will cause the high school pupils to aspire to that university.  Once a year he will attend the convention of the National Educational Association, and will elect as president a man who is a graduate of Mr. Morgan's university, and also a member of Mr. Morgan's church, and a reader of Mr. Morgan's newspaper, and of Mr. Morgan's university president's educational journal....And when the Republican Party, of which Mr. Morgan (or a partner) is a director, nominates the president of Mr. Morgan's university for Vice President of the United States, Mr. Morgan's Bishop will bless the proceedings, and Mr. Morgan's newspapers will report them, and Mr. Morgan's school superintendent will invite the children to a picnic to hear Mr. Morgan's candidates' campaign speeches on a phonograph, and to drink lemonade paid for by Mr. Morgan's campaign committee, out of the funds of the life insurance company of which Mr. Morgan's university president is a director.

Such is the system of interlocking directorates:  such is, in skeleton form, that department of the plutocratic empire which calls itself American Education.  And if you don't believe me, just come along and let me show you--not merely the skeleton of this beast, but the nerves and the brains, the blood and the meat, the hair and the hide, the teeth and the claws of it.

                           CHAPTER VI

                    THE UNIVERSITY OF THE HOUSE OF MORGAN

The headquarters of the American plutocracy is, of course, New York City.  Here are the three central banks, and here the hundred and twelve corporations have their offices, and the interlocking directors roll about in their padded limousines and collect their gold eagles and half-eagles with the minimum of trouble and delay.

-Skip-

It is inevitable that this headquarters of our plutocratic empire should also be the headquarters of our plutocratic education.  The interlocking directors could not discommode themselves by taking long journeys; therefore they selected themselves a spacious site on Morningside Heights, and there stands the palatial University of the House of Morgan, which sets the standard for the higher education of America.  Other universities, we shall find, vary from the ideal;  there are some which have old traditions, there are others which permit modern eccentricities; but in Columbia you have plutocracy, perfect, complete and final, and as I shall presently show, the rest of America's educational system comes more and more to be modeled upon it.  Columbia's educational experts take charge of the school and college systems of the country, and the production of plutocratic ideas becomes an industry as thoroughly established and standardized as the production of automobiles or sausages.



"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 9th, 2009 at 10:06:22 PM EST
Our educational system is not a public service, but an instrument of special privilege...
Although this is seldom remarked publicly, the effectual attitude towards education changed remarkably during a generation. Now everyone is obsessed with giving "the best" education to his/her child, up to the point of entering much higher mortgages (in a district with a better school) and bothering almost daily with schools' program. Back in the 1960s, probably only the elites cared somewhat about these things. Most parents were not interested in attending meetings for them; the most they would do would be bringing they kids by car to school's gate. It shows how dramatically the neo-liberal propaganda changed attitudes and concerns. Although rarely admitted loudly, education became widely accepted as a "desired" differentiator.
by das monde on Mon Mar 9th, 2009 at 11:23:56 PM EST
[ Parent ]
Would that more would read Veblen's The Higher Learning In America or Sinclair's The Goose Step before they attend or send their children to an institute of higher learning.  While I do think that the degree of critical self understanding among academics has significantly increased since Upton Sinclair's time, there is still far too much that remains true.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 10th, 2009 at 01:07:54 AM EST
[ Parent ]
... economics in the US after WWII was that it was originally convenient to argue against George's economics, and remained convenient after WWII to argue against Commune-ism.

And, of course, lots of American Institutions went to work for the Government during the New Deal and WWII, while the neoclassical economists were of no use for getting actual economic management accomplished, so they stayed in the Universities and reproduced themselves, ready to start using the new fangled computers and do lots of meaningless statistical regressions to make purely ideological models look more scientific.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Mar 10th, 2009 at 06:11:07 PM EST
... recovering from the flu, so no guarantee against there being a think-o or two in there.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Mar 10th, 2009 at 06:12:18 PM EST
[ Parent ]
FT Alphaville » Blog Archive » A suspension of space for airlines

For a bit of background -- under current rules airlines hold so-called "grandfather" rights to their takeoff and landing slots, or space at the airport. That means as long as they use them 80 per cent of the time they keep the rights to the space. This often leads to funny things like airlines operating empty flights in off-seasons to keep hold of their slots, much to environmentalists' consternation. BMED's 2007 'ghost flights' were a prime example of this.

Slots are valuable things, particularly at crowded airports like London Heathrow,

Classic case of enclosure of a Commons. In this case the right for a plane to be 2000 feet up over Hounslow or Windsor at (say) 0930 hrs.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Mar 11th, 2009 at 06:26:05 AM EST


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