Review of the Book

The Corruption of Economics
by Mason Gaffney and Fred Harrison

[Reviews by Herbert Gintis (June 2010) and Todd Altman (October 2002), with comments by Edward J. Dodson, Director, School of Cooperative Individualism, H. William Batt and Bruno Moser -- June 2010]]

HERBERT GINTIS

Henry George was a late-nineteenth century politician and economic theory who believed, with John Locke, that people own what they produce or create, as well as what they acquire in exchange, but that "natural" contributions to production, especially land, belong equally to all members of society. He argued in Progress and Poverty (1987) that the only just tax is on land, and that a single land value tax would be extremely egalitarian. There are not many Georgians around these days, but I suppose they would extend the land tax to gas, oil, and other natural resources. With this extension, there are some contemporary "oil economies" that come close to the Georgist ideal, but the idea is rarely suggested in the advanced industrial societies.

If one could separate the primordial value of natural resources from their value after people have invested in their improvement, the single land tax would have the attractive feature of being non-distortionary. However, this separation cannot easily be made, any more than an individual worker's productivity can be divided between innate ability and the results of human capital investment. Moreover, there are strong ethical grounds for taxing individuals at least proportional to their income or wealth, independently of the source of the income or wealth. For these and other reasons, the single land tax is of marginal relevance in contemporary economic policy.

This is not judgment of the authors, who claim that Henry George was right, and powerful landed interests paid a generation of scholars to confuse the masses by inventing neoclassical economics, which makes the elementary mistake of conflating land with capital. "Those who opposed Henry George's vision of The Good Society" we are informed (p. 8), "paid money to by scholars to bend the truth - to prevent people from insisting on their democratic rights." Gaffney faults professional economists for spurning their duty as scientists in order to reap the profits of toadying to the landed interests. "Systematic, universal brainwashing is the crime," he asserts, "tendentious mental conditioning calculated to mislead students, to impoverish their mental ability, to bend their minds to the service of a system that funnels power and wealth to a parasitic minority." (p. 15) Most of the rest of the book is a description of a series of encounters of late-nineteenth century economists with Henry George and his proposals.

I did not find the book's arguments very plausible. A century of neoclassical economics has passed since Henry George was active, the neoclassical doctrine is the standard theory taught around the world, and most modern economists have no idea who Henry George is or what he stood for. It is not plausible that the neoclassical dog is wagged by the Georgian stump of a tail. Moreover, neoclassical economics does not conflate land with capital, and at any rate is value-neutral on issues of the proper distribution of income and taxes. According to the Fundamental Theorem of Welfare Economics, any distribution of welfare society deems just can be achieved through the appropriate system of lump-sum taxes. If anything, this theorem is simply Henry George writ large, and has all the defects of the Georgian land value tax. Once and for all lump sum taxes are non-distortionary but are completely infeasible in practice and do not meet the cannons of justice, either.

The explanation of the demise of George's political economy ideas is that rich men paid smart men to confuse the masses, and this hoodwinking of the public continues today. The idea is really quite ludicrous, and reminiscent of the religious fundamentalist Creationists who believe all evolutionary biologists are atheists in the pay of the devil.

I feel in reading and reporting on this book that I have done a public service. It was painful every step of the way and has led to a very bad taste in my mouth. Of course, when the landed interests in my town read this review, they will probably send me bundles of money and make me head of the economics department at Harvard University or Amherst College. I can't wait.

COMMENTS BY EDWARD J. DODSON / JUNE 2010

Herbert Gintis wrote:

"He [meaning Henry George] argued in Progress and Poverty (1987) [probably a typo; the actual date was 1879] that the only just tax is on land, and that a single land value tax would be extremely egalitarian.

Ed Dodson here:

Actually, Henry George argued that the annual rental value of land (in all its forms, e.g., locations in cities and towns, natural resource-laden lands, the seas, and a long list of what Mason Gaffney refer to as "natural monopolies") is and ought to be treated as societal property. Thus, the collection of this rent fund is not taxation but appropriate compensation for the privilege granted by society to individuals to exclusive (if conditional) access to land. George would have preferred that all such access be allocated under leasehold arrangements, awarded by competitive bidding. However, because in the U.S. and most other countries control over land was already deeded, he came to the practical conclusion that the rent fund could be collected via the tax system on landed property.

Herbert Gintis wrote:

There are not many Georgians around these days, but I suppose they would extend the land tax to gas, oil, and other natural resources. With this extension, there are some contemporary "oil economies" that come close to the Georgist ideal, but the idea is rarely suggested in the advanced industrial societies.

Ed Dodson here:

Sadly, there are too few activists and policy analysts who appreciate the wisdom offered by Henry George. The Gaffney/Harrison book provides a good deal of insight into why the political momentum deteriorated with the death of Henry George. Still, there have been thousands of people who embraced Henry George's analysis and worked throughout the 20th century to keep his work from being totally ignored.

Herbert Gintis wrote:

If one could separate the primordial value of natural resources from their value after people have invested in their improvement, the single land tax would have the attractive feature of being non-distortionary. However, this separation cannot easily be made, any more than an individual worker's productivity can be divided between innate ability and the results of human capital investment.

Ed Dodson here:

Real estate appraisers separate the value of property improvements from the value of land parcels on every appraisal they prepare. Determining the rental value of a land parcel is somewhat more difficult because the selling price of land in cities and towns is based on a speculative rate of capitalization. This is why proponents of a land-only property tax base urge implementation over a period of time. First, squeeze out the speculative incentives for buying and selling land, then the true market-determined rental values will emerge. Moreover, there is a vibrant leasehold market for land all across the United States (and, most prominently internationally, in Hong Kong, but certainly in many cities around the world). This market data needs to be made public to facilitate the move to a "rent as revenue" basis for funding public goods and services.

Herbert Gintis wrote:

Moreover, there are strong ethical grounds for taxing individuals at least proportional to their income or wealth, independently of the source of the income or wealth. For these and other reasons, the single land tax is of marginal relevance in contemporary economic policy.

Ed Dodson here:

Henry George argued that once the full rent fund was being collected there would be fewer and fewer opportunities for individuals to gain income from nonproductive (i.e., monopolistic and speculative) activities. In the interim, I concur that the fairest as well as economically efficient way to pay for public goods and services is a highly progressive form of income tax. Back in first Bush administration, I proposed to the commission he appointed on reform of the federal tax system that all individual incomes up to the national median be exempted from taxation. Then, above this level, higher ranges of income be subjected (without further exemptions for deductions) to increasing rates of taxation -- sufficient to achieve a balanced budget. The rates might begin at 5% and rise to 85% on incomes above some level, say, $10 million.

Herbert Gintis wrote:

I did not find the book's arguments very plausible. A century of neoclassical economics has passed since Henry George was active, the neoclassical doctrine is the standard theory taught around the world, and most modern economists have no idea who Henry George is or what he stood for. It is not plausible that the neoclassical dog is wagged by the Georgian stump of a tail.

Ed Dodson here:

If what Gaffney writes does not convince, I recommend two other writers who know a good deal about how economics developed as a discipline. One was an economics professor named Harry Gunnison Brown. The first chapter of his own textbook described what he believed (in the 1940s and 1950s) as an abandonment of objective scientific investigation by economics professors. The second is a critique of economists' writings and forecasts written in 1994 by Alfred Malabre, Jr., who had recently retired as economics editor of the Wall Street Journal.

Herbert Gintis wrote:

Moreover, neoclassical economics does not conflate land with capital, and at any rate is value-neutral on issues of the proper distribution of income and taxes.

Ed Dodson here:

In fact, general equilibrum theory rests on the assertion that price clears all markets. A simple analysis of how land markets operate shows that absent the full (or nearly full) public collection of ground rent results in a supply curve for land that leans to the left. Why? Because as the price of land climbs speculation increases. Owners of land not pressed for cash withhold land from the market in anticipation of higher and higher prices. And, investors acquire land not for development but purely for speculative holding. Thus, rising prices tend to reduce the supply of land brought to the market for economic use.

Herbert Gintis wrote:

The explanation of the demise of George's political economy ideas is that rich men paid smart men to confuse the masses, and this hoodwinking of the public continues today. The idea is really quite ludicrous, and reminiscent of the religious fundamentalist Creationists who believe all evolutionary biologists are atheists in the pay of the devil.

Ed Dodson here:

Many historians have covered the same ground in a similar manner. Whether there was an actual conspiracy, as Mason Gaffney has tried to document, may be subject to debate. The fact is that the science of political economy as developed by Adam Smith and the Physiocrats, which Henry George attempted to rid of its contradictions with reality, was displaced by the social sciences beginning at the end of the 19th century. Economists, as a narrowly-charged discipline, were trained in the German universities to gather and report on the resources available to modern military-industrial states. They returned to the U.S. and Britain with these skills, and the issues of concern to political economists such as Henry George (or before him, John Stuart Mill, or David Ricardo) were shifted to reform-minded politicians and other activists.

ANOTHER PERSON'S REACTIONS TO THE REVIEW BY MR. GINTIS

Gintis and his neoclassical economic ilk, leaves LAND and land values out of their conceptual framework. A house, mad-made, so CAPITAL, depreciates in value over time, while LAND, which the house sits on, which is not a product of labor and exists without human investment, generally becomes more valuable over time.

The neoclassical mob, lump a house (which is CAPITAL) and the LAND all into one. Significantly increasing the annual tax rate on land values will powerfully stimulate investment in CAPITAL, raise wages and reduce unemployment.

Heavy taxation of land values will reduce land prices in the long term and make housing truly affordable for all. Land speculation, which was the major, fundamental cause of the housing boom, and then massive crash, would be massively reduced.

The only way to keep the neoclassical economic system stable is by touch control of interest rates, money supply, etc, making trade-off here and there. Taxing land values is near self regulating, promoting economic growth.

Eliminating or reducing taxation on house improvements, production, commerce and non-privilege-based incomes would increase the economy.

All this common sense, which was in was in use before the Industrial Revolution and proven in Denmark for three years at a national level, goes over the heads of Gintis and his flawed neoclassical followers. They follow a flawed system that will periodically crash in a catastrophic manner and constantly cycle up and down causing mini housing/land bubbles. History over the past 100 years proves their system is a total failure.

REVIEW BY TODD ALTMAN / October 2002

In the late 19th century, economist and social philosopher Henry George achieved international fame by calling for the abolition of all taxation save that upon land values -- a tax reform that would reconcile the conflict between economic liberty and social justice. So persuasive were George's arguments that landed elites, desperate to protect their vested interests in unearned wealth, set out to undermine George's immense popularity.

In "The Corruption of Economics," the precise manner in which Henry George was neutralized is uncovered by professor Mason Gaffney. That manner -- which later became known as neo-classical economics -- was to corrupt economic science. How? By blurring the traditional distinction between capital and land (and hence between earned and unearned income), by glossing this blurred distinction with jargon and abstract models, and by recasting economics generally to make free-riding by landowners seem just and moral.

Unable or unwilling to address Gaffney's arguments head-on, some economists are fond of dismissing this book out of hand as nothing more than a "conspiracy theory." In reality, it's a scholarly analysis of the anti-Georgist origins of the neo-classical school of economics, and how this school made an art form out of justifying landed privilege. Every single one of its claims in that regard are supported by credible references.

"The Corruption of Economics" is a must-read for anyone who suspects there is something inherently flawed with "mainstream" economic theory -- particularly when it comes to reconciling the seeming conflict between economic liberty and social justice -- but is unsure as to what that flaw is.

ANONYMOUS (from London)

The basics of Classical economics is:

. LAND - the result is confusingly called "economic rent".
CAPITAL - man made things, the result is "profit or interest".
LABOR - the result is "wages".

Neoclassical economics, formed 100 years ago, has moved LAND into CAPITAL. This distorts, and since we have had two world-wide economic crashes, which were both fueled by rising LAND prices as debt and after debt was poured into non-taxed LAND. In between the major crashes there has been minor boom and busts in many countries.

I buy a new car and the value drops. I buy an old house and it rises in value - well the LAND rises in value. Why?

The value of the land was created by community activity, such as spending on infrastructure like, metro rail networks, roads, schools, hospitals, etc, with their tax money. This creates economic growth. The economic growth of Community activity soaks into the land crystallizing as LAND VALUES. This is why house/land values rise - LAND is immovable. In short, the value of the land belongs to the Community as their activity and money created it, not the occupier of the LAND, who did nothing to increase that value. The value of the bricks on the land, the building, belongs to the occupier of the land.

Currently there is no mechanism to feed the LAND VALUES back into the economic cycle to maintain, improve and extend vital infrastructure. The LAND VALUES are creamed off as windfalls by landowners. The Land/house market is a giant sluice to the communities money. The land/house market is easy money for doing little more than nothing - merely occupying LAND. Amongst the riches people in most countries, own LAND.

The mechanism to complete the economic cycle reclaiming the Communities values soaked into the LAND is called Land Value Tax (LVT) - a tax on all land and its "values" only, not the bricks on the land, the building. However, a great plus point of LVT is that there is no Income Tax. This stabilizing of the LAND market creates a level, stable, free-market playing field. Not taxing people's energies and enterprise by taking their wages in Income Tax, creates a more enterprise environment playing on the stable free-market playing field.

These were the teachings of Adman Smith and Henry George. Mason Gaffney puts this across very well in the modern sense. He highlights where the economic system was hijacked by self-interest to remove land from economics 100 years ago, which as we all know gives us a highly unstable economic system, leading to misery for millions. Using LVT and removing Income Tax gives a largely self regulating economic system, eliminating boom and busts. LVT also keep house prices to acceptable levels with no housing/land bubbles.

This is a very good book from a very bright and down to earth man. This book proves that LVT is now of age as the Credit Crunch has nastily demonstrated to us all.

H. WILLIAM BATT (Albany, NY)

Mr. Gintis is schooled in contemporary neoclassical economics that trivializes and sometimes even denies the existence of Ricardian rent, and naturally has difficulty separating and identifying natural resource rents from other components of the economy. This is most disappointing, as substantial strides have been made in showing the amount and significance of rents since the advent of computer power and data can be tapped. Australian economist Terry Dwyer, himself Harvard educated, shows that just the ground rent from earthly locations is about a third of GDP. And Professor Gaffney's most recent article in the International Journal of Social Economics shows the numerous ways in which rent has been under-estimated.

Professor Gintis gets a number of his facts wrong in this review: Henry George's Progress and Poverty was first published in 1879 and not 1987, and by 1906 had been translated into fourteen languages and sold more copies than any book published except the Bible. Contemporaries of the era were intellectual luminaries and statesmen, among them Bernard Shaw, Winston Churchill, Sun Yat Sen, Leo Tolstoi, and Alfred Russell Wallace. More recently, Illinois economics professor and later Paul Douglas was a strong supporter of these ideas, as was Albert Einstein. John Dewey wrote an introduction to one edition of Progress and Poverty, saying "It would require less than the fingers of the two hands to enumerate those who, from Plato down, rank with Henry George among the world's social philosophers. No man, no graduate of a higher institution, has a right to regard himself as an educated man in social thought unless he has some first-hand acquaintance with the theoretical contribution of this great American thinker." Later, at the depth of the depression, Dewey gave a radio broadcast in homage to George. More recently still some eight Nobel laureates in economics have endorsed taxing economic rents, and Columbia University Professor Bill Vickrey was on his way to a Georgist convention when he died.

Professor Gaffney's collected work spans seven decades, and he continues to be active -- his most recent book, After the Crash, is printed by Wiley Blackwell. As evidence mounts in recognition of the importance of economic rent in our contemporary economy, only those who wear blinders will continue to deny its significance. He continues to inspire many young scholars. It is fortunate that we have the benefit of Mason Gaffney's enormous corpus of articles, www.masongaffney.org, for it is now, as neoclassical economics is collapsing of its own contradictions, that the tradition of classical economics is being looked to once more. One could do far worse than to start by exploring the many Georgist websites that continue to explore and amplify this venerable tradition. Links can be found readily on Professor Gaffney's site.

BRUNO MOSER (Swaziland)

Anyone who has ever spent a half a day in a university getting lectured on economics should read this book. To academics it is a must. To ordinary folks it reads like a crime. Best insight book on the market as why economics is such a muddled science and why lawyers, historians, politicians and journalists have no clue about today's whereabouts. Or did you ever wonder why you work like a slave and get stripped down to nearly nothing by the state and its "social" agencies. Ever wondered why we face so much sprawl, poverty, blight? This book explains neatly what happened to the once grand science of political economy and the real effects on today's world.