Neo-Classical Economics

Mason Gaffney: Henry George 100 Years Later: The Great Reconciler

Having taken shape in the 1880-1890s, Neo-Classical Economics (henceforth NCE) remained remarkably static. Major texts by Marshall, Seligman, and Richard T. Ely, written in the 1890s, went through many reprintings each over a period of 40 years with few if any changes. "It was for the Chautauqua Literary and Scientific Circle (1884) that I wrote the first edition of my Outlines, under the title Introduction to Political Economy. In this first edition of the Outlines there is to be found the general philosophy and principles that have shaped all future editions, including that of 1937" (Ely, 1938, p.81).2

Neo-classical economics makes an ideal of "choice." That sounds good, and liberating, and positive. In practice, however, it has become a new dismal science, a science of choice where most of the choices are bad. "TANSTAAFL" (There Ain't No Such Thing As A Free Lunch) is the slogan and shibboleth. Whatever you want, you must give up something good. As an overtone there is even a hint that what one person gains he must take from another. The theory of gains from trade has it otherwise, but that is a heritage from the older classical economists.  

Henry George, in contrast, had a genius for reconciling-by-synthesizing. Reconciling is far better than merely compromising. He had a way of taking two problems and composing them into one solution, as we lay out in detail infra. He took two polar philosophies, collectivism and individualism, and synthesized a plan to combine the better features, and discard the worse features, of each. He was a problem-solver, who did not suffer incapacitating dilemmas and standoffs.

The neo-classical approach is the "trade-off." A trade-off is a compromise. That has a ring of reasonableness to it, but it presumes a zero-sum condition. At the level of public policy, such "trade-offs" turn into paralyzing stand-offs, where no one gets nearly what he wants, or could get. It overlooks the possibility of a reconciliation, or synthesis, instead. In such a resolution, we are not limited by trade-offs between fixed A and B: we get more of both.  ... read the whole essay

Mason Gaffney: California's Governor-Elect

His choice of advisors, however, tells us A.S. will repeat Pete Wilson's performance from the early 1990s. Chief of Staff Patricia Clarey is a good soldier from Wilson's old staff; Auditor Donna Arduin is from Jeb Bush's Florida. The gurus who set the doctrinal tone give the clearest hints: they are neo-classical economists of deepest dye. These are advisors George Shultz and Michael Boskin from the Hoover Institution. Economics, to them, is a set of dismal choices. California's choice is to cut public services, or lose business and jobs. That is what they told Wilson in 1994. All taxes are the same, always "burdens," always driving away "business."

Joseph Stiglitz: October, 2002, interview

Q: A former Director of Robert Schalkenbach Foundation was given a grant recently to research the adequacy of land as a tax base. He's a professor at the University of California, Riverside, named Mason Gaffney, and he wrote a book titled, "The Corruption of Economics." Are you familiar with his work?

JES: No.

Q: I'll send you a copy of the book. Basically, he argues that the founders of neo-classical economics, which, as you know, is the paradigm taught in schools such as the University of Chicago, distorted the science of economics to protect vested interests. For example, Rockefeller money was spent to hire professors of economics with a view to their discrediting the ideas of Henry George. Did that happen?

JES: My general impression is that most donors that give money to universities don't take a very strong view of [who should be on] the faculty. Sometimes it ends up on one side, sometimes on the other. It would have been unusual [at Chicago], but it could have happened there. What is striking about Chicago as a school of economic theory is that it's very conservative. One would have thought that Henry George was someone who would have been liked by "Conservatives."

Q: In that George wanted to reduce tax on the fruits of one's own labor?

JES: Exactly. And you want non-distortionary taxes, so I would have thought that every "Conservative" would be in Henry George's camp. Now, as far as I know, I'm one of the few people who keeps emphasizing that you ought to view Henry George in a broader way, to include natural resources. I didn't think that people thought about that a hundred years ago. But if they had, and maybe Rockefeller was smart — he realized that he obviously didn't want a tax on natural resources.

Q: He wouldn't have wanted rents flowing from natural resources to go to the people rather than to him.

JES: Yes, he obviously wouldn't like that perspective. But I don't know if that view was at that time recognized, and I just don't know whether he actively intervened at Chicago. ... read the entire interview

Frank Stilwell and Kirrily Jordan: The Political Economy of Land: Putting Henry George in His Place

Land is the most basic of all economic resources, fundamental to the form that economic development takes. Its use for agricultural purposes is integral to the production of the means of our subsistence. Its use in an urban context is crucial in shaping how effectively cities function and who gets the principal benefits from urban economic growth. Its ownership is a major determinant of the degree of economic inequality: surges of land prices, such as have occurred in Australian cities during the last decade, cause major redistributions of wealth. In both an urban and rural context the use of land – and nature more generally – is central to the possibility of ecological sustainability. Contemporary social concerns about problems of housing affordability and environmental quality necessarily focus our attention on ‘the land question.’

These considerations indicate the need for a coherent political economic analysis of land in capitalist society. Indeed, the analysis of land was central in an earlier era of political economic analysis. The role of land in relation to economic production, income distribution and economic growth was a major concern for classical political economists, such as Smith, Ricardo and Malthus. But the intervening years have seen land slide into a more peripheral status within economic analysis. Political economists working in the Marxian tradition have tended to focus primarily on the capital-labour relation as the key to understanding the capitalist economy.1 Neo-classical economists typically treat land, if they acknowledge it at all, as a ‘factor of production’ equivalent to labour or capital, thereby obscuring its distinctive features and differences. Keynesian and post-Keynesian economists have also given little attention to land because typically their analyses focus more on consumption, saving, investment and other economic aggregates. ... read the whole article

Mason Gaffney: Land as a Distinctive Factor of Production

• England's North Sea oil (where it is called "performance bidding");
• water in the 17 western States of the USA, and four western provinces of Canada; the radio spectrum; licenses to pollute air ("offset rights," in EPA-speak);
• US farmland under Squatters' Rights (1841) and the Homestead Act (1862);
• US and Canadian railroad land grants;
• fishing quotas;
• farm production and acreage quotas;
• cartel shares;
• utility franchises with duty-to-serve; etc.

How did economics get so twisted? Don't blame Adam Smith, or David Ricardo, or John Stuart Mill, or John E. Cairnes, or Knut Wicksell, or Philip Wicksteed, sterling 19th Century writers. Rather, blame J.B. Clark, Karl Marx, Richard T. Ely, Alvin Johnson, Frank Fetter, Frank Knight, George Stigler, and a host of lesser figures who gradually warped economics into its present form. How did they do it? ...

Private property: from means to end

In a proper view of things, I submit, private property is a means to an end. It is not an end in itself; it needs a functional rationale. The end is to get land put to the best use. All the private land in the world was originally granted by some sovereign public person or body, mainly for that purpose, not as a welfare entitlement. Landowners and their lawyers have slyly, over time, turned the means into an end, a fetish they endow with "sanctity." This is a term they borrowed from absolutist medieval theology. "Sanctity" means the quality or state of being holy or sacred, hence inviolable. It means property may not be challenged, or even questioned. It has become an end in itself, its own voucher. You're not even supposed to think about it, it is above thought. Taboo!

Neoclassical economics, historically, marked the final, total surrender of the profession to this fetish. The modern economist's view runs something like this: "I pledge allegiance to the 14th Amendment, and to the overinterpretation of private landowner supremacy for which it has come to stand." It is ironic to recall that Radical Republicans passed that Amendment, at a time when a "Radical Republican" was one who favored freeing the slaves. The 14th Amendment was designed to protect the rights of freedmen. As interpreted now, the 14th Amendment means that The Emancipation Proclamation itself was unconstitutional! Fortunately, no one has brought that case - yet.

The Neo-classical economists' view of their proper role is rather like that in The Realtor's Oath, which includes a vow "To protect the individual right of real estate ownership." The word "individual" is construed broadly to include corporations, estates, trusts, anonymous offshore funds, schools, government agencies, institutions, partnerships, cooperatives, the Duke of Westminster, the Sultan of Brunei, the Medellin Cartel, Saddam Hussein, congregations, Archbishops, families (including criminal families) and so on, but "individual" sounds more all-American and subsumes them all. This is a potent chant that stirs people to extremes of self-righteousness and siege mentality when challenged.

The resemblance between Neo-classical economics and the Realtor's Oath is easier to understand when you learn that Professor Richard T. Ely, founder of the modern discipline of Land Economics, was heavily subsidized by the National Association of Real Estate Boards, the utilities, the major landowning railroads, and others of like mind and property interests.

When it comes to violating property rights, air pollution today is perhaps the greatest invader and confiscator of property. Where do economists stand? Once a few of them tried to say, following A.C. Pigou, "let the polluter pay," and in parts of Europe they still do. In our modern backward thinking here at home, however, it's not the polluter who is invading the property of others, nor the human rights of those not owning property. Rather, when you tell them to stop, the government is invading their rights. The wage-earning taxpayers must pay them to stop, else you are violating both the 14th Amendment and the "Coase Theorem," a rationalization for polluting now dearly beloved by Neo-classical economists.  ... read the whole article

• one the continuing tradition of Adam Smith through J.S. Mill,
• a second being the aggressive and emerging school of Marxism, and
• the third a proposal for two-factor economics being pressed largely by interests in America.

Professor Gaffney has for the first time shown how powerful economic interests in American society essentially bought the leading figures of the newly- established American Economics Association with all the blandishments that can be used to influence academicians. Leading scholars were induced to change definitions of terms so that special interests would be advantaged. What were those interests? Primarily the railroad industry, which at the time was probably the most powerful political force in America. By changing definitions and conflating the land factor into capital, it was no longer essential for land rent to be paid in taxes, and the railroads, holders of some of the most valuable land in the nation, were thereby able to escape their full duty. This is an astonishing story, one never fully spelled out until now, and it explains both how the academic community was beholden to powerful interests and how many of the social problems we see today could have been avoided.

The classical tradition of economic thought was ably synthesized and represented by one dominant figure of the age: Henry George. All but forgotten today, perhaps in good part due to the assiduous disparagement of his economic foes, one should note that he was more widely known in his time in America than anyone except Thomas Edison. His 1879 book, Progress and Poverty, sold more copies throughout the world than any book till that time except the Bible. Born in Philadelphia the son of a publisher of religious books, he traveled to California as a young man to make his fortune as a journalist. But what he saw in land speculation and the exploitation of labor soon led him to study the classical economists and to write his ideas down. Upon publication of his book he shortly became known throughout the world, and traveled and lectured widely as a social reformer for the rest of his life. By the time he died he had become so famous that he almost won the mayoralty of the city of New York. He ran twice, losing to Tammany Hall the first time in what was probably a corrupt election (but beating the third-place finisher, Theodore Roosevelt) in 1886, and died four days before a second election he might have won in 1897. As a spellbinding orator and lucid writer, he captivated the world with his vision of societies made more just by a proper understanding of economics. Gaffney shows that it was George, not Marx, that was the primary threat to dominant interests in end-of-century United States. He had to be stopped, and he was.

In classical economics, the definition of capital grew out of labor mixed with earlier capital. Land, by conventional definition, was not capital, nor was it a component of wealth. Rather land was its own category. Conflating land into capital allowed land rent to be hidden and diluted in ways so that the unearned increment arising from social improvements fell to speculators rather than being returned to society in rent. The failure of society to recapture the appropriate level of land rent from titleholders led also to depression of labor wages at the margin, creating poverty and artificial scarcity of labor where otherwise it could be relieved. Hence the title of George's book, Progress and Poverty. George recognized that the value of any land parcel arose out of its social activity, not from anything which a titleholder might have done to it. He recognized that many, perhaps most, titleholders in land were speculators, reaping the benefit of others' investments, and selling out at last when their price was met. Hence it made sense that society had a right to a return on what it had brought about, as well as from the fact that those titles could never be other than leaseholds. That land rent, shortly confused by use of the words "single tax," was, to George, the rightful return to society.

The railroad barons of the 19th century were not just coincidentally the land barons. They also had strong holds on the founding and growth of the major American universities of the period, some of which carry their names. Johns Hopkins, Andrew Dickson White, Daniel Gilman, John D. Rockefeller, George Leland Stanford, Nicholas Murray Butler were all as attached to various universities in the country as they were to powerful railroad interests. They were able, through their control of universities either as actual presidents or as benefactors, to influence the dominant figures responsible for establishing the American Economic Association in 1885. The actual intrigue is too complex to be recounted here: who got appointed and promoted, who was funded in research, which were given endowed chairs, who got stock options, and so on. The preoccupation with defeating Henry George, Gaffney shows, was a paramount preoccupation of all of these figures. The central figures were:

• Francis Walker, first president of the AEA, then President of MIT and Director of the Census Bureau.
• Richard Ely, also founder of the AEA, and professor of economics at University of Wisconsin and later Northwestern, there granted his own Institute with railroad money.
• John Bates Clark, Professor of Economics at Columbia University, and whose patron was Julius Seelye, President of Amherst College and then Smith College.
• E.R.A. Seligman, Chairman of the Economics Department at Columbia University and scion of a wealthy banking family.

These figures are even today the honored founders of an esteemed profession. So great was their victory over rival schools of thought that they are a century later seen as paragons of clear thinking and virtue. The intrigue and the inside deals are long forgotten. The lineage to contemporary scholarship continues in a "chain unbroken from Seelye to Clark to Johnson to Knight to Stigler, Friedman, Harberger and now thousands of Chicago-oriented economists." Indeed, when Henry George ran for mayor of New York in 1897, it was against the wealthy patrician Seth Low, President of Columbia University, who had recently recruited Clark to come to Columbia. To really understand the academic tension of the period, one must look at the published papers, the speeches and debates, the newspaper articles, and the citations at the end of those articles. These, even more than the interlocking directorates of faculty appointments, explain how much George was opposed, perhaps more feared. Was it for the falsity of his views? Clearly not, as few critics then or since then have managed to strike a knock-out blow against his theories. Rather, it was the threat George represented to powerful interests that required him to be defeated, and in doing so they succeeded but only in the short run, as they were within decades victims of their very successes. Today we see that the railroads have failed in this country for lack of traffic. It will soon be evident why.

There were many arguments to be made for the classical tradition, the result of which would be to rely upon payment of rent of land according to its value to society. George recognized that land value is largely a function of how society has elected to invest in any general neighborhood; there is no argument for any one titleholder to reap the reward of what others have invested. Gaffney points out that, from the standpoint of economic theory, the framework had the following virtues:

• It reconciled common land rights with private tenure, free markets and modern capitalism, a growing and persistent problem as the industrial society took hold.
• It enabled the lowering of taxes on labor without raising taxes on capital.
• It reconciled equity and efficiency. It constituted a progressive tax because land is concentrated so much among the wealthy and because the tax cannot be shifted. It was efficient because it is neutral among different land-use options.
• It constituted no disincentive to business location or population settlement. In this way it encouraged the most efficient land use and discouraged sprawl.
• It created jobs without inflation, and raised government revenue without any penalty upon its base.
• It strengthened public revenues and at the same time promotes economy in government.

Those economists who today still persistently hold to the view that there is something special about land that make it unwise to treat as a form of capital are known as Georgists. They represent a small minority of the economics profession, but, little known as they are, they are among its most esteemed members.

Two-factor economics, however, had advantages to influential individuals and special interests. Land speculators who were positioned to profit from knowing where locational values would increase, or were in a position to cause those increases, could quickly and easily reap a private gain. Simply by holding title to parcels of real property, without doing anything at all to increase their value, one could quickly turn a profit. This is because the increment of unearned increases resulting from social investments were left for owners to reap rather than recovered by society. In three-factor economics, land rent reverted to society in an automatic and efficient manner. When a railroad magnate like George Leland Stanford extended the Southern Pacific track to the east of Los Angeles on land that he was granted by the government, all he then needed to do was to sit back and wait for the land sales to give him a return on that which was made more valuable by his investment in the line. All across America, land speculators learned that capturing monopoly titles to tracts of land allowed them to quickly and easily turn a "profit" on their investment yet hardly raising a finger.... read the whole article

TPR - For an economics professor, you're said to be quite an expert on the environment, what's the connection?

MG - Economic analysis, properly used, can serve the cause of environmentalism. The neo-classical economists abused both economics and the environment badly, as a byproduct of their drive to discredit classical political economy, and Henry George. John Bates Clark wrote that land is not scarce, that mankind can convert capital into land without limit, and create as much as we please. He wrote that natural resources have no value to mankind until and unless they are privatized; that privatization itself is what creates value. Our universities churn out thousands of new economists yearly, imbued with such attitudes. When Rachel Carson kicked off the new environmentalism in 1962 with her "Silent Spring," most economists trashed or disdained her: they 'd been trained that way.

Faced with the obvious growth of environmental sentiment, economists dealt with it as they have with other problems: they absorbed it in the discipline, then marginalized it. Now they can say it is part of economics, while they proceed to ignore or trivialize it in their major policy pronouncements, wherein endless territorial expansion continues to be not just a goal, but a necessity to make the system work.

The legitimate goals of environmentalists, they coopt and distort. Here are two examples.

• They'll tell you that it's not OK to promote oil conservation by taxing withdrawals, but it is OK to do so by monopolizing the industry - monopolists are our best friends.
• They'll tell you it's not OK to check polluters by taxing their effluents, but it is OK to give them property rights to pollute, based on past emissions, and then buy those rights back from them at their price. You think I'm just making that up? I wish I were! The EPA is actually applying that idea around the country.

Thank you, John B. Clark; thank you, neo-classical economics. It all follows from Clark's efforts to avoid any recognition that natural resources are common property: in this case, the air itself is turned into private property. Your very right to breathe, you have to buy from major owners of the air. And how did they establish that ownership? By their track records of dumping their crud in the air in the past. It beggars belief, but there it is: it shows what the war against Henry George has made of the discipline of economics.... read the whole article

George believed economists were recasting the discipline to refute him. He states so, as though in the third person, in his last book, The Science of Political Economy (George, 1898, pp.200-209). George's self-importance was immodest, it is true. However, immodesty may be objectivity, as many great talents from Frank Lloyd Wright to Muhammed Ali and Frank Sinatra have displayed. George had good reasons, which we are to demonstrate. George's view may even strike some as paranoid. That was this writer's first impression, many years ago. I have changed my view, however, after learning more about the period, the literature, and later events.

Not until 1936 was there another major "revolution," and that was hived off into a separate compartment, macro-economics, and contained there so as not to disturb basic tenets of NCE. Compartmentalization, we will see in several instances, is the common NCE defense against discordant data and reasoning. After that came another 40 years of Samuelson's "neoclassical synthesis." J.B. Clark's treatment of rent, dating originally from his obvious efforts to refute Henry George (see below), "has been followed by an admiring Paul Samuelson in all of the many editions of his Economics" (Dewey, p.430).

Clark's capital theory "... gives the appearance of being specially tailored to lead to arguments for use against George" (Collier, 1979, p.270). "The probable source from which immediate stimulation came to Clark was the contemporary single tax discussion" (Fetter, 1927, p.142). "To date, capital theory in the Clark tradition has provided the basis for virtually all empirical work on wealth and income" (Dewey, 1987, p.429; cf. Tobin, 1985). Later writers have added fretworks, curlicues and arabesques beyond counting, and achieved more isolation from history, and from the ground under their feet, than in Patten's dreams, but all without disturbing the basic strategy arrived at by 1899, tailored to lead to arguments against Henry George.

To most modern readers, probably George seems too minor a figure to have warranted such an extreme reaction. This impression is a measure of the neo-classicals' success: it is what they sought to make of him. It took a generation, but by 1930 they had succeeded in reducing him in the public mind. In the process of succeeding, however, they emasculated the discipline, impoverished economic thought, muddled the minds of countless students, rationalized free-riding by landowners, took dignity from labor, rationalized chronic unemployment, hobbled us with today's counterproductive tax tangle, marginalized the obvious alternative system of public finance, shattered our sense of community, subverted a rising economic democracy for the benefit of rent-takers, and led us into becoming an increasingly nasty and dangerously divided plutocracy.

The present paper purports to identify the elements of Neo-Classical Economics (NCE) that were planted there to sap and confound George, and show how they continue to warp, debase and vitiate much of the discipline called economics. Once a paradigm is well-ensconced it becomes a power in itself, a set of reflexes to sort the true and false. Any exception spoils the web of interpretation through which art seeks to make human experience intelligible. Only the young, the brave, the energetic, the sincere and the skeptical can break off such fetters. This work is addressed and dedicated to them. ...

Thus, to the rent-taker, the typical college trustee or regent, George's ideas remained a real and present danger over several decades: the very decades when neo-classical economics was spreading through the academic clerisy.16 With the development of direct democracy, open primaries, the secret ballot, direct election of U.S. Senators, the Initiative, Referendum, and Recall, and the like, crude vote-buying such as prevailed in the late 19th Century would no longer dominate the electorate. Mind-control became the urgent need; NCE was the tool. ...   Read the whole article

Bill Batt: Comment on Parts of the NYS Legislative Tax Study Commission's 1985 study “Who Pays New York Taxes?”

My choice was to explore a tradition of economics and tax policy that I had discovered toward the end of my Commission service: the philosophy of Henry George. In the summer of 1993, I flew to Los Angeles to attend the annual conference of the Council of Georgist Organizations; I had become fascinated with these, to me, totally new ideas. I have counted myself a Georgist ever since. Never in the course of ten years reading and discussion of New York's tax policy options did anything even close to this perspective cross the horizon. And it is fair to assume that the staffers on the Commission today – it still exists – have no inkling of what narrow perspective they work from. Even with ample evidence that the framework of neoclassical economics on which most of the contemporary American tax system rests is collapsing, tax professionals have carried on with little awareness of its pitfalls. Alternate schools of economics are quickly growing in many quarters – very frequently outside of conventional university economics departments. There is even ample evidence now that the still prevailing neoclassical economic paradigm can be shown to violate the laws of physics!4 Professional tax literature, however, shows little evidence of being aware of any of this.

... read the whole commentary