In From the Cold:
The Mindless Kinematics of a Mainstream Economist
Roy Martin
[Reprinted from Land & Liberty, Summer
2001]
FOR MANY YEARS. I have pondered the adamant refusal of academic
economists to discuss the land question. Latterly, I became acquainted
with a well-known professor of economics. He had a number of books lo
his credit and was a collaborator of Keynes and friend of von Hayek. I
occasionally raised the matter of the "economic rent" of
land but he was always dismissive. Finally. I told him that as I
wished "to come in out of the cold", would he write me a
short note showing why the iheories so well illuminated by Henry
George were wrong. Under the title. RENT et al, in 1987, he
wrote the following.
"English economies began with Davenant's studies of the causes
affecting the size of the National Income in the C17th and so a
tendency to think in macro terms was set up which persisted under the
name of Political Economy -- a melange of moral and political
philosophy and sociology and riddled with ethical and aesthetic
judgements which are no more relevant to modem economic analysis than
they arc to the differential calculus. Freed from irrelevancies
economic science has become a system of analysis for the examination
of the problems of the mechanism by which a society gets its living.
It does not issue directions of mandatory character 'You should do
this'. Rather it says 'If you want to do this you can achieve it by
this, that and the other method and the side affects will be such and
such in each case'. Take what you will says God and pay for it -- as
they say in Spain.
"The original approach and the dominance of agriculture and the
problem of feeding the population led to analysis being in terms of a
fixed quantity of land and an expanding labour force -- not the whole
labour force but 'productive labour' only -- the labour engaged in the
extraction industries agriculture and mining. All the rest of the
working population merely 'distributed' the balance from total output
after the productive labour had been paid a subsistence wage. Therein
was one of the roots of the Georgite fallacies about Rent. Adam Smith
scotched the fallacy of 'non-productive labour" but it was a long
time dying if indeed it is even now now entirely defunct in popular
thought.
"The adherents of this scheme of analysis were too self
satisfied to bother about its failure to deal with most of the
problems of economic society. The state of the subject was parallel to
that of physics and chemistry before atomic theory or even before
Priestly. Ricardo had qualms but the breakthrough came with Jevrons in
England and Counot and Walras (pere et fils) in France and
Switzerland. The economic problem became that of showing how the
resources of land, labour and equipment are divided up to cater for
the multitude of human choices. First the attempt was made to examine
the individual circumstances of industries -- an industry made only
one product itself an unrealistic assumption -- then the move was made
lo individual single product firms and then to multi-product firms. So
far it was feasible to proceed with the assumption that quantity of
each resource was fixed -- equilibrium theory -- then quantity of
resources became variable and the subheads of resources proliferated.
Since usable land for any purpose is not the gift of God but the
product of human effort the total quantity of land and the quantity
used for any specific purpose are both variables. To talk as the
Georgites do of any monopoly of land is a nonsense. Beauty lies in the
eyes of the beholder. Monopoly lies in the choice of the consumer. The
"Perfect Competition' of the C19th economics is a myth. If a
number of people buy 'Players Weights' from No. 10 High Street rather
than from No. 21, No. 10 has that degree of monopoly. The people who
buy Chivers jam in jars labelled Chivers instead of identically the
same jam in jars labelled with other names confer that element of
monopoly and there are gradations of monopoly from that level up to
the statutory monopoly of postal services enjoyed by the GPO. Given
the obstacles, human choices determine how resources are productively
deployed.
"This is the first time I have ever written a word on the
Georgites nor indeed have I ever read a discussion by a professional
economist. An eminent American economist years ago once commented to
me -- the only cranks you have to deal with are the Douglasites - (the
1930's) we have the Georgites as well. That I think is a fair
assessment of the impact of Henry George on European economists.
"There is the problem of the 'unearned increment" -- the
increase in the value of a holding due to development on surrounding
land. The cost and effort of the initial survey and valuation and the
creation of litigious field have inhibited every attempt to deal with
it."
HE THEN DERIVED from a short mathematical statement, that: "Price
(of resources) = value of marginal product (differential of production
function)" and continued: "This applies to all resources
used in variable quantities in a given production unit, and given time
all quantities are variable. In short time quantity of a resource may
he fixed -- payment determined as surplus after variable resources
(which will not work unless they are paid) have been paid as much as
they can earn elsewhere. Such a payment was termed a rent by Marshall."
First, it is important to note that he tries the same dodge as most
modem economists by virtually dismissing land as an economic factor
once the economy passes primarily from an agricultural lo an
industrial one. This illustrates their theoretical bias that land
value arises solely from its use. Usability of, or the efforts of man
to use, land is not the turning point for economic value. Wheat in
Westminster and Harrods in the Highlands serve that notion. But such
use will never occur unless the site value of Westminster falls to a
point where wheat-growing would provide the highest profitabiliy, or
the site value of the Highlands rises because a sufficient populaiton
moves there and demands a Harrods. It is the site value, and the
return of economic rent that it so provides which detemrines the use:
and, any increase in it indicates the ripeness of the site for a
change in use, which the developer/entrepreneur recognises. No
increased effort by himself will increase the usability and vaue of
his site.
Second, he removes from economics most of the qualities of man's
nature which controlhis perception and actions. Thus, he limits
economics to mindless kinematics bereft of it sdynamic or genetic
origin. Unfortunately, he does not sustain this position when he
refers to the wages of productive workers as being only of a "subsistence"
level, which is a social assessment and irrelevant to detached
economics. Later, he regards land as the effort of man, thus making
the effort of man, and therefore his will (inevitably riddled with
non-economic judgements), essential to economic analysis. There is a
further contradiction when he refers to the "problems of economic
society" in paragraph four.
Third, there seems to be a confusion over the use of the word "distribution".
Usually, in its economic context "distribution" is taken to
mean the return of wealth to the factors of production after its
creation. Clearly, it is not to be confused with the "distribution",
or trading, of goods, which is part of the process of the creation of
wealth, not its distribution. In fact, one wonders why any of mankind,
in any economic context, would indulge in "non-productive labour".
As such a concept has no place in the Georgist economic argument, it
can not be a root cause of its supposed fallacies.
Fourth, he says the notion of a land monopoly is nonsense, that "Monopoly
lies in the choice of the consumer." and that "usable land
for any purpose is ... the product of human effort... "This is
such an apparent abuse of the English language and reality that one
must assume that in his economic context they mean something quite
different to normal. He says the "degree of monopoly" (sic)
gained by a particular shop is due to people preferring it rather than
another from which to buy their "Players Weights". He does
not distinguish them by the difference in their size, shape, colour,
service satisfaction and other attractions, but by their position in
the High Street. No. 10 and No. 21. Thus, that site No. 10, presumably
meant to indicate nearer the centre of the town, has been made more
valuable not by the owner but by the people. This is an intriguing, if
unwitting, way of confirming the Georgist argument, monopoly and all.
Fifth, on the problem of the "unearned increment" in land,
he accepts that it is due to the development on surrounding land,
which, again, is pure Georgist. He dismisses it. however, by claiming
that it is difficult to measure. Thus an agreed economic factor is
calmly removed from consideration without knowing its significance.
This shows the falsity of his position. It constitutes no economic
argument even if it is true, which it is not. Go any day to your local
estate agent or valuator and you will receive, immediately or in short
time, a valuation of the capital price and annual rental of your land.
In effect, this is done every time you take out fire insurance on your
house you do not insure the land on which it is built.
Sixth, his mathematically derived statement that after the variable
resources, let us presume they are labour and capital, have been paid,
the surplus is paid to the resource which is fixed in the short term,
which, in this context, must be land. Put thus, it confirms the notion
of rent as defined by Marshall and his classical predecessors. Turn
this round to make capital the fixed factor, and it becomes the rent
or surplus. Likewise, labour has it turn according to this expression
of the relationship between the factors. But land, palpably, is the
only factor fixed in place or quantity, whether the term considered is
long or short. Again, the idea that this is not so arises from the
perception that change in use of land constitutes variability in its
supply.
Seventh, in paragraph four, he discredits himself and his arguments
by attempting to throw professional weight instead of argument into
the discussion. Henry George was more widely known in his day than
Karl Marx. Lloyd George and Churchill vigorously sought land reform
and Harold Wilson, himself an economist, "sang the Land Song at
his father's knee". Land value taxation was introduced in the
1910 Liberal budget and again in Snowden's 1931 Labour budget. I am
suspicious that the professor's rejection of George, like so many
other economists, arose from a socialist-oriented belief with the
concomitant use of economists in government. Laissez-faire,
George's object, was an anathema to him.
Lastly, he makes only one reference lo value and none to wealth --
the central purpose of economics. Apparently, even John Maynard Keynes
had doubts about his highly influential theories in the absence of a
theory of value. He said he could not find one which was acceptable --
acceptable to who? Not fellow scientists, because they know that the
definition, even if they disagree with it, of key words and concepts
is essential to building a theory and holding orderly discussion on
it: otherwise any thing goes. And, as the professor once told me,
Keynes did not, as many presume, influence the government but was used
by it to convince fellow economists and the general public of the need
to abandon the gold standard so as to use inflation -- historically,
the oldest economic trick in the book to control the economy.
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