Why Georgists Correctly Predicted the Crisis
Mary Cleveland, Ph.D.
[Reprinted from
GroundSwell, March-April 2009, p.4. Originally presented at
the 27 February 2009 session of the Eastern Economics Association
conference in New York City]
Land bubbles of varying severity and universality recur roughly every
eighteen to twenty years. Like Henry George, modern Georgists
attribute recessions and depressions to collapse of these bubbles. A
huge real estate bubble of the 1920's preceded the Depression of the
1930's. That bubble actually began to burst in 1926, three years
before the stock market crash of 1929. So when "house values"
exploded around the world during the last decade and then began to
decline in 2006, many of us predicted the worst. A few prominent
economists recognized the bubble's threat, notably Karl Case and
Robert Shiller of the Case-Shiller Home Price Index. But most
economists didn't see the crisis coming until it ran them over. Why
couldn't they see what Georgists saw? (Non-economists can skip to the
last paragraph.)
- Like Adam Smith and other classical economists, Georgists
assume a three-factor world: land, labor and capital, earning
economic rent, wages and interest respectively. But starting in
the early 20th century, conventional economics merged land into
capital. Land disappeared so completely that Robert Solow could
joke in 1955 that "if God had meant there to be more than two
factors of production, He would have made it easier for us to draw
three dimensional diagrams."
- Conventional economics airbrushes out economic rent. The
National Income and Product Accounts omit or conceal rent. They
exclude even realized capital gains, let alone unrealized gains.
They lump rent received by business into profits. When I teach
micro I have to explain to students that those cute little
triangles we label "consumer surplus" and "producer
surplus" are really economic rent.
- Conventional microeconomics is static. Textbooks incorporate
discounted present value poorly, or omit it altogether. In
teaching micro, I've had to write a special section on
discounting--after all, someday, students will buy houses and take
out mortgages. Bubbles are just unrealistic projections of rent,
capitalized into the present. Without discounting, how can we
understand them? (Mind you, many Georgists don't understand
discounting either; they explain bubbles as the work of "speculators."
But at least they know bubbles are destructive.)
- Conventional macroeconomics tosses out the good part of micro,
namely, marginal analysis. So in conventional macro, all taxes are
alike, all consumer spending is alike, all saving and investment
is alike. Economists can truly believe that it's good for the
economy now to borrow money (from whom?) and spend it on roads and
bridges. How can they understand that overspending on
infrastructure stimulates bubbles?
- Conventional economics disregards a central Georgist
assumption: distribution of wealth matters. Moreover, the tax and
subsidy system is rigged to drive rent to the top of the heap.
This very rigging of the system also encourages bubbles. So the
Georgist cure is to reverse the rigging, capture the rent and
redistribute it to society either in the form of public goods, or
directly as tax credits or grants. That's a dangerously radical
idea.
One hundred years ago, Georgists allied with Progressives to form a
powerful movement for political and fiscal reform. In
The
Corruption of Economics, Mason Gaffney argues that neoclassical
economics assumed its blinkers precisely to thwart that
movement--leaving modern economists helpless.
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