Edgeworth correctly observes that taxing land would weaken the credit rating of landowners. He leaves out the counterpart, that untaxing buildings would strengthen the credit rating of builders. Still, we are in his debt for at least introducing the topic of credit rationing. Otherwise, NCE proceeds as though credit markets are pluperfect, and the highest bidder for land is necessarily the highest and best user. The writer has treated this point in a companion volume in this CIT series (Gaffney, 1994) and elsewhere (Gaffney, 1973, 1993b).
Edgeworth also thought that land taxes would bite into building profits. It is hard to imagine they would do so more than the alternative of taxing buildings themselves, so his point is obscure, and seems like simple carping. Demonstrably, if land or any other taxes did bite into building profits, the effect would be to defer building, which his first argument posits as a desired outcome. The impression is that nothing would please him because he has some unstated reservation.
One can guess what that reservation might be. Edgeworth was from a family of the "Protestant Ascendancy" in Ireland, Irish landlords, a long line of them reaching back 300 years. They owned Edgeworthtown, which he would inherit and own as an Irish absentee landlord. He was also teaching at Oxford, another great absentee landlord. He was not unaware of the faults of his class - his Aunt Maria, author of Castle Rackrent, must have raised his consciousness. That is a far cry from relishing drastic reforms imposed by the state - not even Tia Maria was ready for that.
Henry George had risen from obscurity by attacking absentee landlords generically, and Irish landlords specifically (Douglas, 1976, pp.15-59; Barker, pp.335-72). His 1881 tract on The Irish Land Question (later retitled The Land Question) is what had sparked initial interest in the more heavyweight Progress and Poverty. He was intimately involved in Irish politics, after travelling as a journalist to Ireland to report for The Irish World of New York, serving a New York clientele of Irish emigres. These were people who remembered that the Edgeworths and their kind had evicted them from their ancestral land. His wife was Irish; his fellow California land-reformer and employer, James McClatchy of the Sacramento Bee, was Irish.
These Irish did not take kindly to economists who told them the usurpers had really created The Emerald Isle. In the NCE cant, this land had been produced by landlords, who were just "supplying" their native land to the Irish renters, and sparing them from having to bear the financial burdens of ownership. That was a hard story to sell in Ireland, or the slums of New York City, in the 1880s. As newcomers, outsiders, common labourers, and the poorest voting whites of 19th Century America, the Irish were George's natural ethnic constituency.
They also supported the revolutionary Fenian movement, as it was then called. They sent their contributions back to Ireland to help roust landlords like the Edgeworths, an irritating skill the Irish developed to a high art. In Ireland, George the reporter also made news, supporting the radical activist Michael Davitt against the temporizing Charles Stewart Parnell (Barker, pp.341-56). In propertied England then that was something like preaching abolition in ante-bellum Alabama.
Into this powderkeg, George dropped an incendiary note: "It is hard not to feel some contempt for a people so oppressed (as the Irish) who have only occasionally murdered a landlord." It was the harshest, most provocative, impolitic thing he ever wrote. I do not cite it to praise nor blame, but to establish motive. It was only a rhetorical flourish, journalistic hyperbole probably aimed to stir up the passive Parnell. Neverthess, there it stood on the printed page, seeming to declare open season on Irish landlords like the Edgeworths. It would have been only human for F.Y. Edgeworth to notice, resent, and fear. It gave him all the motive one would need to undercut George.
This line of causation is consistent with Edgeworth's otherwise inexplicably fierce attack on the mathematics of J.E. Cairnes. Cairnes book, The Slave Power (1862), had played an important role in swinging English opinion against slaveowners, with whom Irish landlords had much in common, during the American Civil War. Cairnes had written of England itself, "The large additions to the wealth of the country have gone neither to profits nor to wages, ...but to swell ... the rent roll ... " (cit. Miller p.200). More recently, Cairnes offense was to have written several articles favoring rent control in Ireland. Cairnes had used his authority as a political economist to assert this was compatible with classical rent theory.
With the best will in the world, it would have been hard for a person with Edgeworth's pedigree not to absorb a trace of class and ethnic bias. That would help explain his title: "Recent schemes for rating land values." "Scheme" is not a friendly term; "plan" or "proposal" would sound less prejudicial. Edgeworth's bias took the form of eugenics. There are individual differences in the capacity for pleasure, he wrote. He seems to suggest, in his cryptic, elusive way, that human creatures higher on the evolutionary scale (the Edgeworths?) have a higher capacity for pleasure than those below them (Irish tenants?), so that social welfare is maximized when wealth is unequally distributed, pretty much the way it already is.
Quite apart from Irish affairs, T.W. Hutchison (1953, pp.118-19) has suggested that Edgeworth kept J.A. Hobson from teaching at London, and Hobson attributed it to class bias. Hobson was a not a Georgist, but a radical who did pen what Barker calls a "famous appreciation" of George (Barker, pp.414-16, 665; Hobson, 1897). This was published after one attack by Edgeworth (1890), and before another (1904). This writer has no conclusive proof on which to base a firm opinion of the exclusion of Hobson by Edgeworth. Edgeworth's defenders say that either it didn't happen, or it was justified because Hobson made an error in calculus (Newman, p.89). Considering that neither Marshall, J.B. Clark, nor Seligman used calculus at all, that would suggest a selective use of technicalities for screening people. Modern academicians are not unschooled in that device.
Edgeworth was a "toolmaker" and model-builder. He was a painfully obscure, opaque writer, little understood by his contemporaries. In most substantive matters he followed Marshall who, as we have seen, was more fair to George than other NCE founders, but who couldn't understand Edgeworth either. In the current toolmaking, model-building era, however, painful obscurity and opacity are at a premium and Edgeworth enjoys a great new vogue. Here is his view of things:
He was, one might say, like a kid with a new toy. Apparently his toy-building technique was excellent. More apposite for us, the subjects that engaged him, and the attitudes he took, are quite congenial to modern "techie" economists. Much of what seems "new" in the last twenty years of grown-up kids playing with toy models is still basic NCE from the 1880s, expressed in less comprehensible forms.
In Mathematical Psychics (1881) Edgeworth introduced what is now universally called "Pareto Optimality." The idea is that you cannot measure quantities of welfare, or make interpersonal comparisons of welfare. You can only be sure that welfare rises in the course of voluntary exchanges when at least one person is, and usually two persons are better off, and no one is worse off.
The policy implications are immediate, drastic, highly conventional, and very safe for those who stand to inherit land and private incomes. To begin, all existing entitlements to property, whatever their origins, should be firmed up and frozen. The process has to start somewhere, and any change in the existing entitlements would only delay progress in the orderly march of exchanges leading toward higher welfare. This idea remains central to Chicago School thinking: the economy should "maximize utility subject to the constraints of market prices and endowments of wealth" (Reder, 1987, p.415). By 1985, "these views and their extensions have become mainstream economics, ... " (Reder, 1985, p.417). "The rise in influence of the Coase Theorem at Chicago has more or less paralleled a decline in the marked concern with income distribution that existed in ... the work of Henry Simons" (Reder, 1987, p.417).
All property should be clearly defined and fully alienable, with no strings attached. A series of exchanges, each of them being what is now called a "win-win" solution, must lead always in the direction of greater general welfare. All Robin Hood schemes, based on folk wisdom and Jeffersonian values, like that cited above from Charles Spahr, are without scientific basis, and can only delay progress.
It speaks volumes for modern economists that they have reshaped their discipline around those values. The operational part, of course, is what you do first: firm up and freeze existing entitlements. The rest is mostly moonshine, a promise made to be broken. In practice, "firming up" means wiping out traditional servitudes to the public, so that every "win-win" solution is really a "win-win-lose" solution, with the general public the loser, uncompensated. NCEists often point out how land values are the product of capital in the form of public works. This is all forgotten, however, when land is sold, and this sale is presumed to firm up forever a permanent public obligation to continue servicing and replacing those works. An example is the recent move to convert private contracts to get federally subsidized water in California into perpetual private property, salable to the highest bidder with subsidies permanently attached. NCEists pushing for this overlook that tapping the Treasury, and grabbing water from the public domain, deprive others (Gaffney, 1992, 1993c, criticizing proposals of Richard Wahl, Zach Willey, Sotirios Angelides, Eugene Bardach, and others).
In 1879, the year George published Progress and Poverty, Edgeworth was thinking thoughts like these.
Peter Newman, who cites the above, doubts that Edgeworth was wholly given to such dark views. They were, however, an important part of his complex nature.
Society has a dominant class, A, and a subject class, B. Class A divides into A-alpha and A-beta. The alpha part "still has enough strength and energy left to defend its share of authority;" the other part, beta, "is made up of degenerated individuals, with feeble intelligence and will, humanitarians, as is said today" (1927, p.91).
"The A-alpha try to make people believe that they are working for the
common good, ... (but) it (this effort) also decreases the energy of the
A-beta, who take as true what is only a pure fiction and can only be
useful as such" (1927 p.92).
"The error of the humanitarians ... is not in having a religion, ... but in having chosen a religion which is appropriate only to weak beings lacking in all energy and courage, ... " (p.364).
One wonders, after that, how Pareto would class those who fancy they have found in "Pareto-optimality" a value-free technique to evaluate issues of public policy? More relevant today, how should we view them? Pareto would only appear value-free to those who share his values so thoroughly they cannot even see that they are value-judgments. It might be fair to say that Pareto disclaims all ethical positions and value-judgments save one: private rent-taking is sacred. In this, of course, he has company; it is a powerful company with most of the world's discretionary income at its disposal to impose its message on impressional young students of economics.
Pareto expressed grudging admiration for the B-alphas, or leaders of the lower classes, so long as they were driven by narrow self seeking, as he assumed they were. The weak whom "humanitarians" defend are "degenerates." The self-seeking proletarian leaders, or B-alphas, are different. "They are energetic and robust he-men who want to eat when hungry, drink when thirsty, and make love when it suits them ..." "It is self-interest which rules the conduct of the B's, not sentimental twaddle" (p.360).
Pareto does not comment directly on George, but he rejects most of the value premises that might lead one to Georgism, in the following.
Tories and Whigs "compete for the favor of the common people." ... they "fight to see which will prostrate itself more humbly at the feet of the common man."
I will intercede here for historical accuracy. Actually, the English Liberal Party did not move to socialism., it moved towards Georgism (Douglas, 1976; Lawrence, pp.37,63,73,105-06,111,126). The "famous Newcastle Programme" of the Party, first adopted in 1891, put both rating (local) and taxing (national) of land values into the Liberal Platform (J.D. Miller, p.102; Douglas, pp.114-15; Lawrence, p.171), where it stood for thirty years. That is why people like Pareto's friend Edgeworth (1906) were writing articles against "Recent Schemes for Rating Urban Land Values," and Cannan (1907) was writing against "The Proposed Relief of Buildings from Local Rates." Georgists and Socialists had long since fallen out (Lawrence, p.37,63,73), and it was the Georgists who were accepted into the Liberal Party. Gladstone was not keen on them, but lost out and retired to Hawarden in 1894.
From 1906-14, under successive Prime Ministers Campbell-Bannerman, Asquith, and Lloyd George, the Radical wing of the English Liberal Party came close to implementing Georgist reforms - in the process drawing the teeth from the House of Lords. This did not come out of nowhere, but out of 25 years of organizing and propagandizing, which was no secret. Among other prominent English statesmen supporting land taxation were Winston Churchill, Philip Snowden, Ramsay MacDonald, Josiah Wedgwood, Clement Attlee, and Stafford Cripps - a conspicuous group. George Bernard Shaw, a highly visible Fabian leader, sustained his support for George (Lawrence, pp.85-86,171). Presumably Pareto knew something of the these facts, and was using "Socialist" as a pejorative for "Georgist," as Clark and Ely did.
It was, rather, Bismarck's Germany that adopted socialism. Bismarck had triumphed by swallowing his enemies whole, and announcing their program as his own. As we have seen, this had an enormous influence on American education in economics.
Returning the floor to Pareto, he says Tolstoyism led Russia to lose the war with Japan (p.358n). Tolstoy was George's apostle to the Russians (Geiger, 1933, pp.459-61); we may presume Pareto knew this - his wife was a Russian countess. Pareto goes on, "But among the leaders some enriched themselves through customs protection and corruptions, others were besotted by their humanitarian faith" (p.358n).
"... consumers suffer less harm from (monopolies) perhaps than from shopkeepers and trade unions." We should deplore "the contemporary humanitarian mania to excuse ... all harm caused by workers or by persons of little affluence, ... " (p.338).
Those five quotes leave little doubt that Pareto diametrically opposed most values associated with Georgism, or "The Single Tax."
Next let us look at what economic techniques to associate with Pareto. He makes no bones about how he sees the purpose of techniques.
With that avowal, it would be prudent to be chary, and interpret Pareto's choice of techniques in light of what we know about his sentiment and self-interest. All the techniques to be described have been accepted by NCEists, and folded into the body of NCE.
(1) "Pareto's Law" of distribution tells us that unequal wealth is inevitable, and remains the same between times and places, regardless of human institutions. To Pareto, "leveling" is all sham, it is just the rhetoric of the outs trying to become the ins. The overtones of this kind of fatalism are heard in today's "rational expectations" dogma, which says all government actions are offset by private investors and other economic agents who anticipate them. However, Pareto's "Law" is demonstrably contrary to fact, e.g. among the 50 American states. Detailed data on this are presented in Gaffney, 1992.
(2) Political economy deals only with how "to compare the sensations of one man in different situations, and to determine which of these he would choose." A second class of theories compares the sensations of one person with another, but these are "most unsatisfactory" (p.105). This converts economics from a social science to a study in individual psychology (a bad one, according to psychologists). It dismisses in one stroke all traditional American notions and egalitarian ideals, such as expressed by Charles Spahr, above, who wrote that low incomes are insufficient for healthful and decent living, while high incomes and properties are "morally perilous to their possessors" (Spahr, 1896, p.159). "... the ability to pay taxes increases faster than the private fortune" (Spahr, 1896, p.160).
Clearly, too, Pareto's view is totally at odds with the case for public education, national defense, social security, universal health care, veterans' benefits, and anything else with any element of social dividend. One could never lead a crew or team, or provision a platoon or a division, or teach a class without comparing the sensation of one person with another. Pareto would seem to have wanted to eliminate both the welfare state and the warfare state, maintaining the military for the prime purpose of putting down domestic insurgencies. The purest applications of his philosophy may be observed today in Guatemala, Honduras, or El Salvador.
(3) Pareto redefines rent as the gain from reallocating a resource - any resource. It is the excess of its current return over its "opportunity cost." He belittles "Ricardian rent" as just a particular case of that (p.247). This, of course, is calculated to divert attention from land rent as a taxable surplus. This altered definition of rent used often to be called "Paretian rent," or "transfer rent," but modern NCEists have gradually gotten to calling it just "rent," as though there were no other meaning.
Logically speaking, that involves the trick of taking a concept appropriate to "partial equilibrium analysis" (theory of exchanges, centered on the firm and the industry) and transplanting it, without advising the reader, to "general equilibrium analysis" (social distribution theory, covering all firms and industries) (Gaffney, 1962, pp.145-46). It is quite inconsistent for Pareto, who is generally known as a writer on general equilibrium. Frank Knight, as we will see, carried it to the greatest extreme possible.
It has been wrongly imputed to Joan Robinson, who actually saw right through it. Robinson wrote, "From the point of view of society, land ... is provided free, and the whole rent is a surplus and none of it is a social cost" (1933, p.107). Ground rent applies to the whole class of land incomes without reference to allocation among different uses. It would obtain even if all land and labour were homogeneous, and produced but one commodity.
Ground rent is distinguished from wages by the curse of Adam, that labour towards suppertime grows irksome, entails sacrifice of comfort, vacations, desired location, self-direction, often personal safety, and at all times represents a sacrifice of pleasant diversions. Wages are also a return on all the costs of rearing and maintaining the worker, and the future costs of retirement. For increasing numbers of people, work also represents a sacrifice of time spent on lucrative or destructive untaxed activities like stealing, rioting, vandalism, looting, mobbing, car-racing, arson, smuggling, tax evasion, barter, etc. Idle hands are not just wasted, they make mischief. For many, work represents a sacrifice of welfare payments, whether from parents or the state (Gaffney, 1962, p.146).
The issue is often couched in terms of whether rent is a "cost" to the individual "firm." That is something of a red herring. Land always has a cost in the sense that use A must preempt land from use B. Land never has a cost of being produced. These are simply two different meanings for one word, "cost"; no one should be bamboozled by that. Joan Robinson was not fooled. To repeat her wisdom (which warrants repeating), "From the point of view of society, land ... is provided free, and the whole rent is a surplus and none of it is a social cost" (Robinson, 1933, p.107).
The operational question is for tax policy, which the diversion about rent as a cost is designed to obscure. This question is, what will happen to the supply of land if you focus the property tax on land value, exempting capital? How will the tax affect the allocation of land? (The effect is at worst neutral, and will probably improve it because of the pressure of the cashflow effect.) How will the relief of capital from taxation affect the supply of capital, and the allocation of land and capital? (It will raise the supply of capital, and improve the allocation of both land and capital.) It's really not so complicated. Long-winded disputes over the meaning of "rent" are beloved by abstract theorists. They just distract us, as intended, from getting to the nub of the central question of public policy.
(4) Pareto introduces the use of indifference curves, crediting the device to F.Y. Edgeworth (1879, p.119). The "indifference curve" technique is a way of recasting the discipline in several ways, too long and tedious to recount in full detail. Perhaps foremost, it makes it technically more difficult to explain and perceive simple points, thus excluding more people from understanding, and facilitating obscure manipulations, insider argot, and unsupportable statements from authority.
The technique helps us shift from "cardinal" to "ordinal" rankings of welfare, avoiding those dangerous interpersonal comparisons (such as that every human body needs about the same daily bread to avoid hunger). It lets us escape from diminishing returns of labour or capital applied to fixed land, and refocus the analysis on the disembodied "firm" as the basic unit. These "firms" pick and choose among "inputs" or "resources," which are treated as perfectly symmetrical, and none of which needs to be called land any more. All can be had in any amount by the firm, and society is just a collection of firms so the society can have any amount of land at any time. Optimal substitution or trade-off is the main emphasis. Technically, the ideas of land rent and taxable surplus can still be expressed by use of the "indifference curve" technique, but only labouriously, obscurely, and indirectly, as intended.
Such is the heritage of the cynical misanthrope, Vilfredo Pareto, who wrote,