Forward to the Book:
The Marginalists and the Special Status of Land
as a Factor of Production
Mason Gaffney
[Forward to the book written by Fernando
Scornik-Gerstein and Fred E. Foldvary, published by the International
Union, London, England, 2010]
Foreword to Fernando Scornik-Gerstein and Fred E. Foldvary, The
Marginalists and the Special Status of Land as a Factor of Production,
in press as of May 13 2010, London: The International Union Mason
Gaffney, March 2010 This is a fascinating and insightful study of how
the radical egalitarian views of three beautiful minds were
bowdlerlzed by homelier minds and passed forward to modern students as
complacent rationalizations of the status quo. These three were the
continental Europeans Hermann-Heinrich Gossen, Friedrich von Wieser,
and Léon Walras. To them the authors add the fascistic mind of
Vilfredo Pareto, and how this last is what shaped the modern economic
canon. The Anglophonic clerisy, beholden to geocratic patrons,
beatified Pareto and overlooked his fascism because his ideas helped
them merge land with capital goods and thus stymie the most dangerous
challenge to the ruling classes. This challenge was not Marxism, not
in America or Britain, but the one posed by Henry George and
like-minded activists in the Populist-Progressive Era in America.
Under other names this movement had counterparts in most advanced and
developing nations in the same period.
Desk-bound scholars will also value new translations of fragments, at
least, from Spanish, French, German, Italian and even Russian sources:
a pan-continental smorgasbord of economic thought.
Hermann-Heinrich Gossen was, like the better known Ernst Engel (of "Engel's
Law"), a Prussian bureaucrat. Writing in 1854 Gossen developed
the equimarginal principle. Others neglected his ideas almost entirely
until Jevons unearthed them in 1879 - but only to praise his
mathematics and his conceptual insights, not the controversial part of
his work that caused it to be so neglected. This was his proposal to
nationalize land.
Gossen's proposal did not cause him to be imprisoned or shot because
its implementation was to be less drastic than it sounds. The state
was not to administer enterprises on its lands, but make them
available to private enterprise by leasing them out -- much as the
U.S.A. leases out parts of its vast remaining public domain today,
only better and more efficiently. He would compensate present owners.
His thinking was that the state could do this and profit because of
its better credit rating and longer time-horizon. Later writers Walras
and Alfred Russel Wallace advanced the same idea -- and met the same
oblivion. What we know of prodigal states today makes one doubt the
realism of the postulate, but it was a tribute to the Prussian
administration of his day that he could entertain such a thought. To
demonstrate the point Gossen worked out the mathematics of discounting
cash flows under conditions of rising rents. His mathematical skill
was also a tribute to the numeracy of German education, for German
forest economists, notably Martin Faustmann, were at the same time
pioneering the use of mathematics in forest valuation and management.
Friedrich von Wieser was a pioneer of the "Austrian" school
of thought. Unlike Menger and B?hm-Bawerk, Wieser harbored egalitarian
thoughts based on the idea of diminishing marginal utility. He wrote
specifically about taxing urban land rents. Scornik-Gerstein and
Foldvary note that modern leaders and exemplars of the Austrian school
neglect Wieser relative to its other pioneers. This writer notes with
regret -- and without knowing if the authors of this work will agree
-- that the moderns make "Austrian" almost synonymous with "libertarian".
Presumably the recent debacle led by Greenspan and other libertarians
in Washington will force some rethinking of this policy, but like
other intellectual changes it will take time while the world will move
on ahead of it.
Walras found himself unemployable in his native France because of his
ideas on nationalizing land. He found refuge at Lausanne, in
Switzerland, over heavy opposition, so he and his ideas are identified
with Lausanne, although his acceptance there was marginal and his
successor, Pareto, was in important ways his opposite. After retiring
he expressed his ideas on nationalizing land with unmistakable
conviction and élan in his Études d'Économie
Sociale, a compilation of previous writings. He pictures himself
there as a faithful successor to Quesnay and other Physiocrats who had
sought in vain to save and reform l'ancien régime at
Versailles by substituting l'impôt unique on land for
the inherited tangle of taxes on business and labor that were choking
French enterprise and weakening the state. He singles out for special
censure J.B. Say, whom he calls a sell-out.
At Lausanne, Walras turned to pure theory and mathematics.
Unsatisfied with the equilibrium of individual markets equating supply
and demand through price flexibility, Walras asked how the whole
system works, when everything depends on everything else. Our authors
compare this with Zen; one might also mention Alexander von Humboldt's
pioneering work on what he called Kosmos, a predecessor of
modern ecology. Walras, at any rate, put his case mathematically,
satisfying a compulsion of economists to have a model they can call a
proof, and satisfy physicists on interdisciplinary committees that
economics is really a "hard science". He asked if he could
compose an equation for supply meeting demand in each individual
market, then solve them all simultaneously to prove that the whole
system creates the best of all possible worlds. Then it is just a
matter of having as many equations as unknowns. This became known as "general
equilibrium" in contrast with the previous "partial
equilibrium" of one market at a time.
Essentially general equilibrium is merely formalizing what is
inherent in Adam Smith, and intuitively so evident one hardly needs to
formalize it, but perhaps that was tit for tat. Smith had merely
popularized what the Frenchman, Quesnay, had earlier essayed to state
more formally, so Walras was merely reclaiming what was originally
French anyway - except that Quesnay, aka "The French Confucius",
owed a good deal to the philosophy of Lao-tze. Ideas are indeed
transnational and intertemporal.
Anglophones got to know Walras mainly through the translations of
William Jaffe of Northwestern University, who made a career of
translating Walras. Jaffe replicated for Walras the experience of
Gossen, that is, he translated the mathematics and ignored the works
on land reform. In 1975 Jaffe did publish in The Economic Journal a
short piece, "Leon Walras: Economic Adviser Manqué",
wherein he refers to Walras' ideas on land reform, but only in a
demeaning, mocking manner, and with no reference to Walras' major
works like Études d'Économie Sociale. No one has
translated the latter into English (it is likely that Routledge will
publish Jan van Daal's translation in 2010, and there is an extract in
Hillel Steiner and Peter Vallentyne (eds.), 2000, The Origins of
Left Libertarianism ). Generations of students have thus come and
gone thinking of Walras as another incomprehensible apologist for the
ruling class instead of the radical land reformer he was. The idea
that we can have land reform and free markets at the same time has
been erased from the minds of economic thinkers and policy makers - it
no longer even can occur to them, so successful has this kind of
brainwashing been.
Some unfortunate lacunae in Walras' system are time and information.
Simultaneous equations are, well, simultaneous, while markets and
their adjustments are not. Capital is formed and depreciates over
time, so any model based on simultaneity is acapitalistic. DCF
valuation of land calls for forecasting both rents and interest rates
over infinite future time, which would entail not just perfect
knowledge but Divine omniscience, a tall order even in "pure"
theory. Thus Walras' general equilibrium, at least as passed down by
others, deletes both capital and land values from the economy,
contradicting Walras' other work on land values - but making his work
all too acceptable as the plaything of later model-builders and
taste-dictators of the clerisy beholden to the ruling class of
rentiers.
Scornik and Foldvary emphasize that Walras in his Études
d'Économie Sociale showed that land rents and values,
rather than wages and interest, capture the major gains of social and
technological progress. At the present (2010) conjuncture of the giant
swings of the land cycle one might note that land values fall as well
as rise, and their instability, and their use as loan collateral, are
problems, too. Henry George opened his major work on Progress and
Poverty by calling it "an inquiry into the cause of
industrial depressions", but did not develop that thoroughly
enough to be remembered as a cycle theorist. Many of those who quote
George today - and there are still a good many - are libertarians like
Arthur Laffer, Jr., who use George selectively as though he were, like
them, an enemy of all taxes, indiscriminately. It is to be hoped that
the present generation of analysts will see and fill the need to use
George to find the cause of depressions - and a cure.
Scornik and Foldvary conclude from the ill-treatment of Gossen,
Wieser, Walras, and George that the geocratic establishment will
reject, and induce intellectuals to reject, any variation on the theme
of land nationalization. Suppression of Walras' radical works
demonstrates, for them, how "the power of landownership drives
publication and education" - i.e. how the geocracy controls the
clerisy. There will always be some of us, including I think Scornick
and Foldvary, who won't take that fate supinely. Indeed, Adam Smith
himself scolded the landowners of England for their "indolence".
He was not referring to their slack usage of their superabundant
inherited lands, but their failure to grasp the Physiocratic principle
of tax incidence, that all taxes of whatever kind are passed through
to landowners in lower rents. Along with the taxes themselves, their
Excess Burdens are also passed through, so the way to maximize rents
is to adopt a tax without excess burden, namely a tax on rents. Thus,
by Smith, the most rational landowner will favor taxes that fall
directly on land and thus are free of excess burdens.
Vilfredo Pareto is the fourth economist whom Scornik and Foldvary
treat. It is not crystal clear why they picked him for this study,
unless for contrast. He was, as they tell us, a "total
reactionary" who supported Mussolini, and whom Mussolini
patronized: i.e., he was a Fascist. That a person of such views should
dominate economic theory today speaks volumes about the persons who
weave the screens that filter admission to leadership in the
profession - and the ovine majority who take their cues from such
leaders.
Pareto advanced a claim that distributions of wealth and income are
equally skewed in all times and places and under whatever tax regimes
or other institutions. The claim is conspicuously untrue - one need
only contrast Wisconsin and Florida, for example, as this writer has
in "Rising Inequality and Falling Property Tax Rates" (in
Wunderlich, Gene (ed.), Ownership, Tenure, and Taxation of
Agricultural Land. Boulder: Westview Press, 1992). Scornik and
Foldvary cite the case of Taiwan in the last half of the 20th Century.
Yet learned professors soberly present "Pareto's Law" to
graduate students along with its inference that any effort to abate
the concentration of wealth and income must fail. Classical economics
dealt with the production AND DISTRIBUTION of wealth. Neo-classical
economists have slowly eased Distribution out of the curriculum,
replacing it with Growth. Pareto taught that only "growth",
overall growth, can ever ease the lot of the poor. In politics, this
became "A rising tide lifts all boats".
Pareto threw out all interpersonal comparisons, thus undercutting the
traditional case for progressivity in taxation. The traditional case
was based on the intuitive idea of diminishing marginal utility: the
more you have, the less you need more. It was based on proverbial
wisdom dating back ages, as in Virgil's deploring auri sacra fames,
the accursed lust for gold; or as in the story of King Midas. It was
based on Hebrew prophets like Isaiah and Amos cursing those who "lay
field to field until there be no place". It was based on military
traditions of equal rations for each soldier. It was based on dozens
of observers like Bentham who anticipated what is now called Maslow's
"Hierarchy of Needs". It was based on Tolstoy's popular
short story, 'How much land does a man need?". It was based on
everyone's personal experience with life. It was so obvious, so
intuitive, it seemed to need no philosophical or mathematical "proof".
Pareto, like a clever lawyer, put the burden of proof on the other
side, and the clerisy has followed. How can you prove, he asks, that
taking an ounce of the miser's gold to save the lives of a hundred
starving widows or trapped quake victims will raise the sum of human
welfare? It seems never to have occurred to any leading economist to
raise the obvious reply: how can you prove that the inherited
distribution of land, based on bloody history and sinful chicane, is
better than any alternative distribution? Without interpersonal
comparisons one can't prove anything, so it's back to diminishing
marginal utility. This involves feelings of empathy, common humanity,
and brotherhood.
Scornik and Foldvary go on with Pareto at some length, justified more
by his reputation and influence within the profession than by his
merits. They are able by diligent searching to extract a few
concessions from Pareto on the unique characteristics of land, but
then find many reservations, leaving "an ocean of confusion and
contradictions".
In summary, the authors show us how the filters of mediocrity and
timidity have screened out the bold causes that three talented
economists tried in vain to pass along to our generation. They also
show how these same filters let pass the ideas of one Fascist
economist to remold the discipline in his image and name. They show
how this Pareto's thoughts on the special status of land left only "an
ocean of confusions and contradictions". The last is a fair
characterization of mainstream economics today, helping explain its
shame and uselessness in forecasting the present depression, and
piloting us to recovery.
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