Geoism and the Practice
of Public Economics
Edward H. Clarke
[A paper delivered at the Annual Conference of the
Council of Georgist Organizations, Plainfield, New Jersey, August,
I was happy to be invited here and talk about
a topic which has come to be known as Geo-Economics. (See Feder,
I have long been sympathetic to the Geoist
position, and to the extent that you will let me characterize my
views as Geoclassical rather than Neoclassical,
Geoism represents a position that many in the public economics
profession can gradually be attracted to, as I was over the course
of thirty years.
The geoist position, at least as developed by
people like Feder and Tideman, is simply to advance principles of
public economics known as benefit taxation, to structure incentives
that will constrain rent-seeking behavior, and share rents from use
of natural resources and the exercise of government privileges more
equitably among citizens (present and future, ours and the world's
In this talk, I pick up on some themes in
Gwartney and Tideman (1996), which references attempts to better
measure rents from land, natural resources and government sponsored
privileges and a good statement by Tideman ("The Morality of
Taxation: The Local Case") about putting limits on the extent
to which citizens can treat their fellows as targets of plunder
(ie., through political exploitation).
I would also like to elaborate on ideas of
what might be done as we move from the local case to higher levels
of government, picking up on a theme Tideman has expressed in other
writing as follows:
"For local political decisions, privilege
and political exploitation of fellow citizens have little salience,
because dissatisfied citizens can go elsewhere. Land value taxation,
free trade, Wicksellian approval procedures and user fees
corresponding to marginal costs may be attractive components of a
local political order, but they cannot be described as compulsory as
long as no one is deprived or exploited. As the scale of the
political order grows, the possibility of depriving or exploiting
one's fellow citizens increases, and it becomes more and more
essential to use the forms of organization that are objectively fair
My development of this theme is as follows:
(1.) recounting some of my experiences over the last 30 years,
traveling through these higher orders of government (2.) some
history and political philosophy or observations about converting
the impossible to the possible (a purpose, I suppose, of political
philosophy) and (3.) some suggestions about concrete steps that
could be conceivably undertaken, by real political actors in the
foreseeable future, to better implement the geoist vision as set
forth by Tideman, Feder, and others. In some respects, I propose to
present geoism as social art -- in part science, in part politics
(the art of the possible) and part political philosophy (converting
the impossible to the possible).
(1.) Waiting for Turgot: Confessions of A
I certainly wasn't educated to be a Georgist.
I encountered Henry George first in the unfavorable (underground)
light that Heilbroner portrayed him in the Worldly Philosophers.
My initial bout with "Chicago economics" did not change
Geoism came fast to me, however, in the
mid-1960's in working for a land economics consulting firm,
curiously named the Real Estate Research Corporation. I worked on
real world projects involving transportation projects in the Chicago
Metropolitan area (including a new international airport in the
Lake, and the planning and financing of new towns (at the height of
the "new town" movement). It was a time of
near-revolutionary activity (the period from 1964 through the
Chicago riots of 1968), and as part of a national attempt to
understand (or perhaps contain) the revolution, we also contributed
to the study of urban problems (as instanced by the contribution of
the son of the founder, Anthony Downs, to the work of the National
Commission on Urban Problems, known as the Douglas Commission).
I was always curious about really what went on
with that Commission in its deliberations, and I may finally satisfy
my curiosity. The source of this curiosity was the somewhat
passionate (a vote of 8 to 4, I believe) dissent to the majority of
the Commission recommending a "Treasury study" of LVT. It
was led further into my study of how people like Paul Douglas (a
Chicago economics professor) were led to carry these ideas beyond
simply having them further studied. I was led into a study of how
historians and political economists dealt with the Georgist
phenonomen (Steven Cord's 1964 book on Henry George) and led me then
into studying particularly the lives of people like Frederic Howe,
particularly in two books: Confessions of A Monopolist (
(1905) and Confessions of A Reformer (1925). Howe had shared
many of the same frustrations as Douglas -- each dealing with the
public utilities in Cleveland and Chicago respectively.
Geoism -- Chicago style
What I was learning in the world of public
policy was reinforcing and conflicting with what I was learning in a
more theoretical realm.
While working on projects such as building an
airport in the Lake (which happily died), I was starting a
dissertation on the "economics of water quality regulation",
sitting for hours trying to figure out how costs of cleaning up Lake
Michigan ought to be allocated in a way that might also lead to a
process of revelation of preferences for improved water quality, and
even the location of an airport in the Lake.
Some 30 years later, the process (called
demand revelation) I came up with is finding its way into books on
the economics of environmental management (cite Oates and Mueller
article on use of preference revelation among communities
surrounding the Chesapeake Bay). I describe the process later in a
discussion of incentive compatible approaches to fiscal and
regulatory coordination and in a related paper recently presented at
the annual meetings of the Sothern Economics Association.
In essentially working towards some better
solution to the public goods (preference revelation) problem in the
context of environmental management, I came to the view that land
was a public good.
As Petrela (1985) has noted in the same
context, "Henry George's resolution of the social implications
of land as a public good is consistent with modern economic theory's
resolution of the negative externalities created by the use or abuse
of nature's gifts, for example air and water... George's treatment
of land as a public good was alien to early classical economic
analysis and as Terence Dwyer (1982) has noted surprisingly modern "...
rent reflects net externalities, so establishing private tenure but
at the same time collecting the competitively determined economic
rent for the public benefit will establish an optimal level of
My initial experiences with treating land as a
public good were not fruitful (I. e. it was most alien to NCE
thought at the U. of Chicago). I was working as an Asst. Dean of
Students in the Chicago Business School and that school had one
professor in an urban economics program, but he had no students. I
was his first formal student. There were students in the economics
department like Tideman who were investigating something like what
was later to come to be called the HG Theorem (in an article I refer
to later), which I gradually became aware of. Nonetheless, when it
became obvious to "middle of the road" academic advisers
that my Geoist pursuasions were perhaps in sharp conflict with "properterian"
(and overt anti-Georgist opinion -- two of my advisers were
republishing George's 1887 debate with Marshall in the Journal
of Law and Economics -- 1969), I was gradually encouraged to
shift my focus to some promising ideas on "preference, or
demand revealing" (DR) approaches to helping to solve the
public goods problem.
I got to introduce some of my Georgist
thinking at the Smithsonian Institution in what became the lead
chapter of my 1980 book --- calling it "The New Incentive
Mechanisms: Capitalism, Socialism, and Henry George". During
this period there was also a real awakening among economists to the
merits of what has been named the "Henry George Theorem"
(HGT), in the work of Smolensky and Tideman (1970), Vickrey (1977)
and Arnott and Stiglitz (1979). There has also been work linking
these ideas -- HGT and DR -- Tideman (1985, 1993), the spirit of
which is contained in Gwartney and Tideman's article on the morality
of taxation mentioned above.
Remarks on Bailey and Tideman's "Constitution".
I would like now to turn to my main purpose --
how you design "financial laws" that act as a complement
to LVT and, more importantly, force, or strongly encourage, the
adoption of LVT as a source of financing public services.
The ideas are contained in several recent
articles by Martin Bailey, one of Chicago's most famous public
finance professors, who recently died. Nic Tideman has taken on the
task of publishing his posthumous work on A Constitution for A
Future Country. In his articles (Public Choice, 1996, 1997),
Bailey structures a set of incentive compatible decision mechanisms
and agenda setting/referendum arrangements that essentially mimic
the operation of the private market in the public sphere.
These markets largely eliminate the incentive
to rent-seeking and politically exploitative behavior and to the
extent that community-created values are appropriately reflected in
land rents (ie., the building of a dam or flood control project) as
opposed to some good that has non-material or symbolic value
(Bailey, 1996, uses the example of public support of a monarchy),
then there is a strong motivation to adopt what amounts to LVT
and/or the appropriate (supplementary) marginal cost (user) charges.
I have been trying in recent work to show how
Bailey's method would work in a subset of current expenditure
activities -- for example transportation or environmental trust fund
expenditures (Clarke, 1996) which has been integrated into a
collection of essays, entitled "Waiting for Turgot". I
have also described the method in the revision of a paper presented
at the November, 1996 meetings of the Southern Economics Association
(SEA), entitled "Incentive Compatible Resource Allocation: An
Application to 'Distributive' Federal Programs".
2. Turgot Unplugged: The Practice of Social
Art (and of Everyday Life).
I'll briefly introduce the concept here, which
Robert Conlan (presently at the University of Hawaii) and I have
called a "General Progress Program". I explain this
concept as follows in a treatment of "intergovernmental
coordination" in a section extracted from the aforementioned
On Intergovernmental Coordination
The Nation has long needed more effective
decision-making mechanisms for intergovernmental coordination of
expenditures and regulations. Efficient coordination can be achieved
in an incentive-compatible way where the effects of spending by any
one subunit on another subunit can be more effectively taken into
account as compared with current decision-making procedures.
Effective coordination also relates to an
important national economic policy concern which is efficient and
equitable spending and deficit management. The need for better
coordination is evidenced by fractious Congressional debate (ie.,.
the Congressional debate over welfare reform) over how to implement
acceptable reductions in intergovernmental transfers, accompanied by
reductions in Federally mandated spending requirements.
Given the existence of decision-making
mechanisms (ie., demand revealing) that would motivate
decision-makers to accurately reveal the positive and negative
effects of spending and regulatory decisions on one another, why not
use these mechanisms to achieve more effective coordination? The
Federal Government can establish an initial level of entitlements
(called a distributional status quo) and then, with appropriate
provisions for agenda-control, let the political subunits decide
what levels of actual spending, including Federally mandated
spending, is required. In effect, Congress determines the initial
distribution but allows more implementation flexibility to the
subunits, adjusting the financial flows to reflect external effects.
To illustrate, I will assume we are applying
the process to a subset of Federal discretionary programs (about
$500 billion annually, and including National defense expenditures).
Consider a subset of these programs consisting of about $55 billion
in programs (transportation, communications and the environment)
financed by Federal excise taxes. Assume first that, we take the
President's budget and allow a "citizen's advisory committee"
to propose substitutes or eliminations designed to "maximize
the likelihood of minimizing harm" (a criterion elaborated by
Bailey, 1997). Subject to oversight by a "Commission", it
will allocate cost shares among political subunits (in this case
Congressional districts) so as to try to equalize per capita (or
household) net benefits among the jurisdictions (for example, by
trying to make the cost shares proportional to estimated benefits --
see Clarke, 1980, Chapter V).
Suppose that the allocation of beneficiary
tax-shares resulted in pressures for spending changes that were
nonuniform among the districts. For example, spending may be cut
about 10% (from $550 per household on average to $500. Lower
spending districts with lower cost shares might end up with an
average of $450 while higher spending districts remained close to
the original $550 average. Under the system, compensating transfers
in the form of interest on expenditures of $50 plus a credit on the
$50 principal would be made in the form of an accounting transfer
from the higher to the lower spending districts. If the advisory
committee recommended prudent changes that also generated large net
benefits and the compensating transfers were designed to achieve
equal or proportional per capita net benefit increases for each
district (that, say also averaged $500 per household), then the
proposed package of changes would be accepted unanimously. (The
result is that, relative to the original status quo, the lower
spending districts would be loaning $50 per household to the higher
spending districts and sharing in the social surplus created by more
Perhaps such transfers may seem fairly
insignificant in each household's budget. But what of the potential
benefits to residents in any district if they carefully scrutinize
the entire $500 or so in entitlements spent in or outside the
district and can begin to effect self sustaining projects that are,
say, financed through land rent increments and the appropriate
marginal cost (user) charges? A resident that in no way benefits may
be saving $500 per year with accumulating interest balances,
accompanied by a significant incentive to make his/her preferences
In the SEA paper referred to above, I explore
the potential for various "federalist" arrangements to
govern district and National spending decisions. They range between
close approximations of Bailey's "constitution" or "financial
laws" to very simple, if less effective means of constraining
rent seeking, means of determining interest rates to reflect
disproportionate uses of Trust funds relative to initial
entitlements (see appendix). The strongest incentive system, based
on Bailey's work, is a use of the pivotal mechanism for agenda
setting and combined use of the pivotal mechanism and the Thompson "preference
revealing" approach in making final budget and regulatory
decisions in a manner that will achieve efficiency while minimizing
redistributive harm. (To illustrate the power of the Thompson
incentive if budgetary conflicts reached a referendum stage, the
citizen would have a strong incentive to reveal the $500 he is
paying for a project with no benefit to him and would receive up to
one half that amount in compensation if his less preferred option
Less strong incentive arrangements are
explored in my SEA paper which are basically the integration of
Bailey's approach with the Limited Fund Mechanism (LFM) which, like
Thompson's approach, uses information generated by
incentive-compatible means to compensate losers and minimize
redistributive harm, through a process I which has been called "compensated
incentive compatibility", or CIC (see Brough, Clarke and
Tideman, 1995 and Tideman, 1979).
A second feature of my SEA paper is the
combining of the agenda setting process with incentive compatible
Congressional voting, at least initially, at the referendum stage.
Rather than voting by individuals through direct democracy (as in
Bailey's approach), I rely on representative voting in Congress or
by Congressional committees representing regions or states in the
process of agenda setting. In my SEA paper, I describe first an
agenda setting stage where the system is operating under the aegis
of one (monopoly) advisory committee which establishes one set of
options for departures from the status quo. The committee works with
executive officers (EOs) which essentially represent the interests
of constituent regions (ie.,. the executive officers substitute for
competitive regional committees). I then turn to cases where there
are competitive alternatives (e. g. a national committee's preferred
alternatives competing with those of the executive officers or
regional committees), where the decisions are made by Bailey's
process in the context of Congressional voting via the VCG-Thompson
mechanism. While the idea of such a method used in present
legislatures may seem initially farfetched, one is usefully led into
investigations of how it could be implemented in a "second best"
In terms of what aspects of this approach may
be immediately practicable, I suggest that they could be used in the
context of infrastructure banking, through revolving funds or the
rapidly evolving State Infrastructure Banks (SIBs) in the
transportation area. The National government could, for example,
come up with procedures for determining "incentive-compatible"
procedures for lending among the ten administrative regions and the
regions could "on-lend" in a similar way. I describe this
mechanism in Section IIA of the SEA paper (The Limited Fund
Mechanism: A Practical Approach?).
How does all this relate to Turgot and the
problems of today. In a chapter of my Turgot essays, entitled "The
Practice of Social Art", I speak of the various kinds of public
finance and regulatory reforms (education finance, environmental and
"network" management reforms as well as other efforts to
structure financial laws to encourage benefit taxation) as analogous
to Turgot's "Memoire sur les Municipalities" (September
1775). A good treatment of the "Memoire" in the
enlightenment conception of "social art" is contained in
Keith Baker's Condercet (1975). My interest in this area is
how all this is traced from Turgot, through Condercet and the
Idealoges through two "Belgian socialists" -- Colins and
DePaepe. Colins (who died in 1859) is still referred to in the Grand
Larousse as a "disciplino of Henry George". In his work
during the mid-1830's, he built a grand "federalist"
superstructure, almost a metaphysical one, to try to create the
conditions in a "cosmopolitan" federalist superstructure
that would lead through the appropriate taxation of land (and public
utility) rent. His work included detailed discussion of auction
techniques for awarding franchises in the rapidly emerging public
utility enterprises of the time. His follower, DePaepe, tried to
carry his ideas forward and to demonstrate to both Marx and Proudhon
that such techniques would minimize the potential for political
exploitation, either of the capitalist or socialist variety. (See
G.D.S. Cole's History of Socialism, Chapter 4 of Volume II, for a
brief treatment). I think both these individuals deserve some
attention in future anthologies of geoist thought.
I'll conclude this brief treatment of Waiting
for Turgot with some of the related writings of Turgot's co-author
(Dupont) and follower (Condercet).
The actual Memoire was a very "bare-bones"
and straightforward outline of proposed reforms at the local level
that did not involve economic matters beyond notes on various
economies to be achieved in particular administrative
reorganizations. Selective material to be introduced here to the
effect that Dupont had written the "Memoire" as part of
what he foresaw as an overall reform of government that would make
possible a country-wide administration of the physiocratic tax. "In
a letter to the Grand Duke of Baden, Dupont described the way in
which the planned system of municipal courts would determine levels
of tax on the net produce according to the needs both of the
national and their own local levels of government". (The
Economic Writings of Dupont).
Later, Condercet who picked up many of these
themes in His "Vie de Turgot" (1785) was developing these
them further in his "Letter From A Citizen of New Haven to A
Citizen of Virginia".(1787).
As we (the emerging United States) were
deliberating very general provisions involving the levy of direct
taxes, excises and so forth (on a uniform basis) and authorizing
expenditures on postal services and roads (U. S. Constitution),
Condercet was advising as follows:<
Let us now discuss financial laws: They are
concerned principally with (3 things)...
"First, the way in which taxes are
levied. it is very important both for the freedom and prosperity of
the State that we decide once and for all that the only tax which is
just and involves no violation of natural law is a tax levied
directly on land, in proportion to its direct product."
Condercet then goes on to describe what must
be done if this principle is not adopted (in terms of voting rules
and the pluralities among the voting districts to decide about a
direct territorial tax.
Later, he says:
"The second concern of financial laws is
to fix the amount of the tax. I have to say I can find no good way
of doing this unless we accept the principle, which is very simple
and well proven -- even if rarely adopted-- that a land tax is the
only just form of taxation."
Condercet then goes on with a detailed
discussion of expenditure controls. What I'm suggesting in this
brief paper that having decided to levy uniform excises, we can
design a set of incentive compatible expenditure arrangements that
motivate the districts to return, to the extent appropriate, to the
land tax (or rent) as a final source of revenue.
I'm also suggesting a very simple moral to the
story. No one is going to seriously move forward on LVT when people
think they can get what they want largely for free. We need to live
with that realization. However, we often have episodic periods of
reform when broad, if discrete, administrative measures might be
undertaken in conjunction with an eye towards instituting what
amounts to benefit taxation. Imagine an alternative to a "Truth
in Budgeting" bill that can take Trust Funds off budget (which
failed by one vote in the last Congress) passing with the
appropriate incentive-compatible allocation features). One might
find those with a strong bent towards benefit taxation (like Dupont)
working in tandem with those who have no strong ideological bent
towards the benefit tax idea (like Turgot).
One can always imagine the results of one's
conversations with an overly agitated Finance Minister (who despite
their calm exteriors are often extremely agitated). Whether I've
worked with one or more in a functioning democracy here at home, in
an autocracy (Morocco) or in anarchy (Haiti), I often feel like a
player in Waiting for Godot. The mood is captured late in Act I when
Estrogen (the assistant) turns to Vladimir (the Finance Minister)
and says: "Be Happy". Later (after considerable
reflection), Vladimir replies: Now That We Are Happy, What Shall We
Do? Later, Estrogen then says (not in the play): Let's Write That
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