Ethical Economics

Anthony Werner

[An article posted to the internet 21 September, 2011. Anthony Werner, a graduate of Cape Town and Oxford Universities, is managing director of Shepheard-Walwyn (Publishers) Ltd in London, where he has built up a list of titles under the heading Ethical Economics]

Economists pronounce with great confidence in the media and blind us with maths and jargon so that most of us switch off and leave it to the 'experts'-but are we wise to do so when the evidence of the last four years suggests they do not know what they are doing? The voter who votes in ignorance forges the chains that bind him.

There have been, however, some brave voices calling into question the fitness of economists to guide policy-making.

As long ago as 1994, Paul Ormerod, in the preface to his book, The Death of Economics, wrote: "Good economists know … that the foundations of their subject are virtually non-existent" and explained that "the obstacles facing academic economists [seeking an alternative, scientific approach] are formidable, for tenure and professional advancement still depend to a large extent on a willingness to comply with and to work within the tenets of orthodox theory."

In August 1997, The Economist's lead article, "The Puzzling Failure of Economics," posed the question: "If the world were run by economists, would it be a better place?"

After suggesting some benefits, the article went on: "Don't praise the dismal scientists too much. Who designed those earlier policies, which failed so disastrously?"

With the world economy in such poor shape today, we might ask the same question. The Economist's answer was unequivocal: "Economists. Where were those theories … that did such harm … so persuasively set out? In economics textbooks."

Anyone who has seen the film Inside Job will know the close link between economists, bankers, and politicians so that policy-making is blinkered by the parameters of orthodox economics.

Paul Samuelson, a Nobel laureate and author of one of the most widely used economics textbooks, stated, "I don't care who writes a nation's laws … if I can write its economics textbooks."

Who is entitled to profit from land?

A major flaw in modern economics is the treatment of land-you only have to look at the index of a major economics textbook to see that little, if any, reference is made to land. The classical economists, however, regarded land as one of three factors necessary for producing wealth, the other two being labor and capital. By land they meant not just the earth's surface, but all the powers of nature available to man which today would include the radio spectrum.

Modern economists treat land as an aspect of capital, but this ignores a fundamental distinction between land and capital that one does not have to be an economist to recognize. Land is the free provision of nature, and man cannot live without it-he is a land animal. Capital, on the other hand, is a manmade product. It too could not exist without land-and the labor necessary to produce it. To treat land as capital distorts our understanding of how the economy works and obscures a remedy to our economic ills.

The financial return to land owners is not uniform. This means that, given the same application of labor and capital to each site-shown by the darker area below the horizontal line in the diagram below - the result will differ from site to site (the paler area above the line).

We need not be an economist to establish this for ourselves. The wheat sown in fertile soil will produce a bigger crop than in less fertile soil; a retail store on Fifth Avenue in Manhattan will take in more than one on a street in some small town. This fact is indicated by the differing height of the columns above the horizontal line. So, the lower portion of the diagram represents the earnings of labor and capital, and the upper portion the rent of land. The diagram as a whole represents the wealth produced in a community or nation.

What this shows is that those working on the left hand site would get a much bigger return without any extra effort or capital outlay than those on the right hand site. This difference in return is attributable solely to some quality of the land.

Who is entitled to that return? Under our present system of land tenure, this unearned income goes to the owner of the land as economic rent or ground rent. Here lies the cause of the widening gap between rich and poor. As John Kay wrote in the Financial Times (27 Dec 2009), "You can become wealthy by creating wealth or by appropriating the wealth created by other people. When the appropriation of the wealth is illegal it is called theft or fraud. When it is legal economists call it rent-seeking."

Is rent-seeking ethical?

In Social Statics, Herbert Spencer sought a fixed principle to serve as the basis of political ethics and afford us a surer guide than the shifting sands of expediency or the vague formula of the greatest good of the greatest number. He found it in the principle that "every person has freedom to do all he wills, provided he infringes not the equal freedom of any other person." The 'law of equal freedom' he called it.

The first deduction Spencer made from this 'first principle' was the equal right to life and personal liberty, and second, the equal right to the use of the earth.

How can the equal right to the use of the earth be established? Spencer came up with a simple answer - change the landlord:

Instead of leasing his acres from an isolated proprietor, the farmer would lease them from the nation … A state of things so ordered would be in perfect harmony with the moral law … on such a system, the earth might be enclosed, occupied and cultivated in entire subordination to the law of equal freedom.

If the government, on behalf of the nation, receives the ground rent, there is no need for taxation. This was the idea behind the 'single tax' argument made by Henry George in Progress and Poverty. Government would have its own, legitimate source of revenue that is created communally, and the individual could keep his entire earnings untaxed.

Here is the recipe for small government funded by a fair and efficient tax system to which everyone contributes according to the benefits enjoyed and which no one can avoid as land cannot be moved offshore.

It can be reduced to a simple slogan: 'Let's abolish taxes and collect rent'. This would be both an equitable and efficient solution to our economic woes.