(March-April 2009 GroundSwell)
WHY GEORGISTS CORRECTLY PREDICTED THE CRISIS
by Dr. Mary (Polly) Cleveland, New York, NY
(This essay of the Feb. 27, 2009 session at the Eastern Economic
Association meetings in New York City was originally posted in an email March
23, 2009 by Dr. Cleveland to
econamici08@georgiststudies.org.
Dr. Cleveland, Association for Georgist Studies and Columbia SIPA,
organized the session, "Why Georgists Correctly Predicted the Crisis and Why
(Almost) No One Took Them Seriously. What Conventional Economics Can Learn from
Them--and Vice Versa." Panelists included Wellesley College Professor of
Economics Karl E. (Chip) Case, Univ. of Calif.-Riverside Economics Professor
Mason Gaffney, Knowledge and the Wealth of Nations author David Warsh, Brendan
(Dan) O?Flaherty of Columbia University, and Prof. Fred Foldvary of Santa Clara
University.)
Land bubbles of varying severity and universality
recur roughly every eighteen to twenty years. Like Henry George, modern
Georgists attribute recessions and depressions to collapse of these
bubbles. A huge real estate bubble of the 1920's preceded the
Depression of the 1930's. That bubble actually began to burst in 1926,
three years before the stock market crash of 1929. So when "house
values" exploded around the world during the last decade and then began to
decline in 2006, many of us predicted the worst.
A few prominent
economists recognized the bubble's threat, notably Karl Case and Robert
Shiller of the Case-Shiller Home Price Index. But most economists didn't
see the crisis coming until it ran them over. Why couldn't they see what
Georgists saw? (Non-economists can skip to the last paragraph.)
1. Like Adam Smith and other classical
economists, Georgists assume a three-factor world: land, labor and
capital, earning economic rent, wages and interest respectively. But
starting in the early 20th century, conventional economics merged land
into capital. Land disappeared so completely that Robert Solow could joke
in 1955 that "if God had meant there to be more than two factors of
production, He would have made it easier for us to draw three dimensional
diagrams."
2. Conventional economics airbrushes out
economic rent. The National Income and Product Accounts omit or conceal
rent. They exclude even realized capital gains, let alone unrealized
gains. They lump rent received by business into profits. When I teach
micro I have to explain to students that those cute little triangles we
label "consumer surplus" and "producer surplus" are really economic
rent.
3. Conventional microeconomics is static.
Textbooks incorporate discounted present value poorly, or omit it
altogether. In teaching micro, I've had to write a special section on
discounting--after all, someday, students will buy houses and take out
mortgages. Bubbles are just unrealistic projections of rent,
capitalized into the present. Without discounting, how can we understand
them? (Mind you, many
Georgists don't understand discounting either;
they explain bubbles as the work of "speculators." But at least they
know bubbles are destructive.)
4. Conventional macroeconomics tosses out the
good part of micro, namely, marginal analysis. So in conventional
macro, all taxes are alike, all consumer spending is alike, all saving and
investment is alike. Economists can truly believe that it's good for the
economy now to borrow money (from whom?) and spend it on roads and
bridges. How can they understand that overspending on infrastructure
stimulates
bubbles?
5. Conventional economics disregards a
central Georgist assumption: distribution of wealth matters. Moreover, the
tax and subsidy system is rigged to drive rent to the top of the
heap. This very rigging of the system also encourages
bubbles. So the Georgist cure is to reverse
the rigging, capture
the rent and redistribute it to society either in the form of public
goods, or directly as tax credits or grants. That's a dangerously
radical idea.
One hundred years ago, Georgists allied with
Progressives to form a powerful movement for political and fiscal
reform. In The Corruption of Economics,
(
http://www.masongaffney.org/publications/K1Neo-classical_Stratagem.CV.pdf)
Mason Gaffney argues that neoclassical economics assumed its blinkers
precisely to thwart that movement--leaving modern economists helpless.