A Georgist Eye for the Neoclassical Guy

Fred E. Foldvary

[Reprinted from Progress, November-December 2004]

Fred received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He has taught economics at the Latvian University of Agriculture, Virginia Tech, John F. Kennedy University, California State University at Hayward, the University of California at Berkeley Extension, and Santa Clara University.

Fred is also a researcher and author on public finance, governance, ethical philosophy, and land economics. foldvary@pobox.com

For the past hundred years, economics has been dominated by the neoclassical school of thought. Neoclassical guys have constructed a big mansion of economic theory, and some of the rooms look very elegant, but there are some parts of the house of neo-econ which are shoddy, badly constructed, incomplete, and designed from faulty blueprints. It needs a make-over.

Henry George, the late-19th-century economist and social philosopher, was good at juicing up and fixing drab, dull, clumsy economic doctrines. His followers, Georgists or geoists, can take a worn out economic theory and spruce it up into a shining object of utility and beauty. So let's apply a Georgist eye to the broken doctrines of the neoclassical guy for an economic make-over.

Neoclassical guys like to talk about trade-offs. Resources are scarce while human desires are unlimited, so if you want more of one thing, you have to give up getting something else. This is true for goods, but the neos apply this also to the two outcomes we want from an economy, efficiency and equity. An efficient economy maximizes the output we can get from input resources. Equity means economic justice, how fair and equitable is the distribution of wealth.

The neoclassical guy says that if we want more equity, the cost is less efficiency, and if we want more efficiency, we have to sacrifice equity. That's because in neo thought, a more equal distribution of income requires redistribution from the rich to the poor, and higher taxes on the rich reduce investment and production.

The problem here is that neoclassical guys suffer from economic amnesia. They know about land and rent, but they forget this when they think about anything else. One big reason for the inequality of wealth is the highly unequal income from land rent. If society shares this rent equally, there is no reduction in efficiency, and indeed there is greater efficiency.

Neoclassicals also forget to factor in the capitalization of public services into land rent. Public works pump up land rent, and if the landowners don't pay for the works from that rent, their land value jumps up and this creates incentives for speculators to buy land to get that rent, driving land prices up even higher. Speculatively high land values then stop folks from getting land for current use. Tapping that rent eliminates the subsidy, and so land gets used more productively.

The Georgist eye can see that a shift from today's punitive taxes towards public revenue from land rent would increase both efficiency and equity.

The neoclassical guy knows that land has a fixed supply, so tapping the rent creates no excess burden or deadweight loss for the economy. But this knowledge gets boxed in, compartmentalized. It's stuck in the attic of the economic mansion and forgotten about in the other rooms. In contrast, the Georgist eye always keeps the whole mansion in mind. The neoclassical guy needs a theory make-over to tear down the walls he has constructed and get an economic blueprint that is whole and integrated. The Georgist will also take land theory from the attic and place it prominently in the living room.

Another faulty area of neoclassical thought is the producer surplus, the difference between the price of a good and the cost of production. The neoclassical guy draws a supply curve sloping up as some producers have higher costs and so need a higher price to be profitable. But the neoclassical guy also says that in a competitive industry, in the long-run, the firms only make normal profits, the usual returns to labor and assets. If profits are higher than that, firms will enter the industry to get those extra profits, driving the price down and squeezing out the profit.

But there is a contradiction here. If there is a producer surplus, a gain above costs and normal returns, how can there also be no economic profits? Neos don't think about this, or else they get bewildered and end up relaxing the assumption of no economic profit. The Georgist eye can clear this up. In competitive markets, the owners don't get the producer surplus; it goes to the input providers, but not to labor or capital goods. It goes to the factor which cannot move or expand, land. The producer surplus is land rent!

Neoclassical guys like to point out that price controls, such as minimum wages and rent controls, create problems such as more unemployment and a housing shortage. But they are perplexed about poverty. They say some controls and welfare programs may be required because in the market, some folks just end up poor. Again, the Georgist eye sees more clearly. Henry George explained why poverty persists in the midst of progress. The free market will eliminate poverty, but only if it is truly free of all trade barriers, including all taxes on production and exchange, and only if the rent is shared or tapped for public revenue.

The neoclassical guy is puzzled because he sees a grin but no body, while the Georgist eye can see it is the Cheshire cat. The fat cat is grinning, because he reaps what others sow, and the public can't see the cat because their neoclassical economists don't even know it's there.

To do a complete make-over on the neoclassical guy, the Georgist needs to teach him the law of rent and the law of wages. This was in classical theory, but the neoclassicals threw it out when they tucked land in the attic. It's simply a model with grades of land of decreasing productivity.

The least productive land in use is called the 'margin of production,' which is where the general wage level is set. After paying for wages and capital goods, the rest is a surplus that goes to rent.

If Georgists and geoists could do a make-over on all the neoclassical guys, what a difference it would make. Economists would put land rent at the center of economic policy, and soon the public would understand it, and policy makers could no longer ignore it. Poverty would be extirpated, the welfare state eliminated, and conflicts over land would diminish.

But to do this, the Georgist eye must see 20-20. The geoist eye needs a clear vision, not clouded by the astigmatism of statist monetary doctrines and the myopia of blaming corporations. The clear eye needs the ethical understanding that the only evil is coercive harm to others. The Georgist eye needs to understand the problem of mass democracy and its remedy, small-group voting. Only with this complete understanding, going a bit beyond classical thought, will the Georgist eye be able to turn the bumbling, stumbling neoclassical guy into a cool economics dude who is hip to the cause and cure of our economic woes.