Review of the Book:
The Marginalists and the Special Status of Land
as a Factor of Production
by Fernando Scornik-Gerstein and Fred E. Foldvary
GroundSwell, March-April 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 Bohm-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 this 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 "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 - that Quesnay, aka "The French
Confucius", owed a good deal to the philosophy of Lao-tze.
Ideas are indeed international.
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. 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 the cure.
Scornik and Foldvary conclude from the ill-treatment of Gossen,
Wieser, Walras, and George that the geocratic establishment will
reject, and induce others 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
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
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 so obvious, so intuitive, it seemed to need no
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 wealth 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". The last is a fair characterization of
mainstream economics today, helping explain its utter shame and
uselessness in forecasting the present great recession, and
prescribing measures for recovery.