|Wealth and Want
|... because democracy alone is not enough to produce widely shared prosperity.
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, 1997]
I was happy to be invited here and talk about a topic which has come to be known as Geo-Economics. (See Feder, 1994).
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 citizens).
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 and efficient."
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 Geoist
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 this view.
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 externality."
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 essays.
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 productive investments).
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 known.
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 was chosen).
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" setting.
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 Memoir".
Arnott, R. J. and Stiglitz, J. E. "Aggregate Land Rents, Expenditure on Public Goods, and Optimal City Size", Quarterly Journal of Economics 93: 471-500
Bailey, M. J. (1997) "Towards A Constitution for a New Country" (1996a), "The Thompson Insurance Mechanism" (1996) in Public Choice (cite)
Bailey, M. J. and Tideman,T. N. A Constitution for A Future Country (Macmillan, forthcoming)
Brough, W. (1995) "Superfund Unplugged", Citizens for A Sound Economy Washington, D. C.
Brough, W., Clarke E. and Tideman, T. N. (1995) "Airport Congestion and Noise: Interplay of Allocation and Distribution, Transportation Research Record
Clarke, E. (1971) "Multipart Pricing of Public Goods" Public Choice 11; 17-33
Clarke, E. (1980) Demand Revelation and the Provision of Public Goods, Ballinger Pub. Co.
Clarke, E. and Tozzi, J. J. (1983) On Information and the Regulation of Public Utilities, in A. Danielsen and D. Kamershen, Eds., Current Issues in Public Utility Economics, 133-147: Lexington: Lexington Books
Clarke, E. (1996) "Incentive Compatible Resource Allocation: An Application to "Distributive" Federal Programs". Paper presented at the Annual meeting of the Southern Economics Association. Unpublished.
Cole G. D. S. History of Socialism (Volume II) 1954
Cord, S. Henry George: Dreamer of Realist? (1964)
Dwyer, T. (1982) "Henry George's Thought in Relation to Modern Economics". American Journal of Economics and Sociology. October:362
Feder, K. (1994) "Geo-Economics" in Foldvary, F. Beyond Neoclassical Economics: ( ) Elgar Pub. Co.
Foldvary, F. (1995) Public Goods and Private Communities (Elgar)
Gwartney, T. and Tideman, T. N. "The Morality of Taxation: The Local Case" AJES (July)
Holcombe, R. (1992) "Revolving Fund Finance" Public Budgeting and Finance
Mueller, D. (1979) Public Choice (Cambridge U. Press)
Mueller, D. (1996) Constitutional Democracy (Cambridge U. Press)
Petrella, F. (1985)"Henry George and the Classical Scientific Research Program: The Economics of Republican Millennium" AJES: April:239-56.
Tideman, T. N. and Tullock, G. (1977) "A New and Superior Process for Making Social Choices" JPE: 84: 1145-1160
Tideman, T. N. (1979) "Liability Rules, Compulsory Excahnge and Compensated Incentive Compatibility: Towards Improved Management of Urban Externalities". In COUPE Papers on Public Economics, Vol 3, pp. 105-34
Tideman, T. N. (1993) "Integrating Rent and Demand Revelation in the Evaluation and Financing of Public Services" Im Ohta and Thieese (eds.) Does Economic Space Matter? MacMillan.
Vickrey, W. (1961) "Counterspeculation, Auctions, and Competitively Sealed Tenders", Journal of Finance
to email this page to a friend: right click, choose "send"
Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper