Economics: broken then and still broken now

The Science of Political Economy was Henry George’s final book and it was unfinished at the time of his death in 1897. In Part II Chapter 6 titled “The Breakdown of Scholastic Political Economy” George set out his views on the changing nature of economic teaching at the university institutions of his day. He was in fact observing the rapid descent of the subject of economics into a dysfunctional and malignant pseudo-science that has stood in the way of progress towards a just economic system ever since. The passage in question is worth revisiting so is set out here in full:


“Progress and Poverty [1879] has been the most successful economic work ever published. Its reasoning has never been successfully assailed, and on three continents it is given birth to movements whose practical success is only a question of time. Yet though the scholastic political economy has been broken, it has not been, as I at the time anticipated, by some of its professors taking up what I had pointed out; but by a new and utterly incoherent political economy which has taken its place in the schools.


Among the adherents of the scholastic political economy, who had been claiming it as a science, there had been from the time of Smith no attempt to determine what wealth was; no attempt to say what constituted property, and no attempt to make the laws of production or distribution correlate and agree, until there thus burst on them from a fresh man, without either the education or the sanction of the schools, on the remotest verge of civilization, a reconstruction of the science, that began to make its way and command attention. What were their training and laborious study worth if it could be thus ignored, and if one who had never seen the inside of a college should be admitted to prove the inconsistency of what they had been teaching as a science? It was not to be thought of. And so while a few of these professional economists, driven to say something about Progress and Poverty, resorted to misrepresentation, the majority preferred to rely upon their official positions in which they were secured by the interests of the dominant class, and to treat as beneath contempt a book circulating by thousands in the three great English-speaking countries and translated into all the important modern languages. Thus the professors of political economy seemingly rejected the simple teachings of Progress and Poverty, refrained from meeting with disproof or argument what it had laid down, and treated it with contemptuous silence.

Thus the professors of political economy, having the sanction and support of the schools, preferred to unite their differences, by giving up what had been insisted on as essential, and to teach an incomprehensible jargon, an occult science, which required a great study of what had been written by numerous learned professors all over the world, and a knowledge of foreign languages. So the scholastic political economy, as it had been taught, utterly broke down, and, as taught in the schools, tended to protectionism and the Germans, and to the assumption that it was the recondite science on which no one not having the endorsement of the colleges was competent to speak.

The new science speaks of the “science of economics” and not of “political economy.” It teaches that there are no eternally valid natural laws; and, asked if free trade or protection be beneficial or if the trusts be good or bad, declines to give a categorical answer, but replies that this can be decided only as to the particular time and place, and by a historical investigation of all that has been written about it. As such inquiry must, of course, be left to professors and learned men, it leaves the professors of “economics,” who have almost universally taken the places founded for professors of “political economy,” to dictate as they please, without any semblance of embarrassing axioms or rules.

Such inquiry as I have been able to make of the recently published works and writings of the authoritative professors of the science has convinced me that this change has been general, in all the colleges, both of England and the United States. So general is this scholastic utterance that it may now be said that the science of political economy, as founded by Adam Smith and taught authoritatively in 1880, has now been utterly abandoned, its teachings being referred to as the teachings of “the classical school” of political economy, now obsolete.

What has succeeded is usually denominated the Austrian school, for no other reason that I can discover than that “far kine have long horns.” If it has any principles, I have been utterly unable to find them. The inquirer is usually referred to the incomprehensible works of Professor Alfred Marshall of Cambridge in England, whose first 764-page volume of his Principles of Economics, out in 1891, has not yet given place to a second, and to the ponderous works of Eugen V. Böhm-Bawerk, Professor of Political Economy, first at Innsbruck and then at Vienna.

This pseudo-science is admirably calculated to serve the purpose of those powerful interests dominant in the colleges under our organization, that must fear a simple and understandable political economy, and who vaguely wish to have the poor boys who are subjected to it by their professors rendered incapable of thought on economic subjects. There is nothing that suggests so much what Schopenhauer (Parerga and Paralipomena) said of the works of the German philosopher Hegel than what the professors have written, and the volumes for mutual admiration which they publish as serials:

If one should wish to make a bright young man so stupid as to become incapable of all real thinking, the best way would be to command to him a diligent study of these works. For these monstrous piecings together of words which really destroy and contradict one another so causes the mind to vainly torment itself in the effort to discover their meaning that at last it collapses exhausted, with its capacity for thinking so completely destroyed that from that time on meaningless phrases count with it for thoughts.

It is to this state that political economy in the teachings of the schools, which profess to know all about it, has now come.”

The abridged version of The Science of Political Economy can be accessed for free online here.


Georgist breakthrough at Totnes TED X

Last month a very special TED Talk took place in Totnes. Laurie  Macfarlane, co-author of the book “Rethinking the Economics if Housing and Land”, presented the core Georgist message to a packed Civic Hall. This is the first time the Georgist paradigm has been presented in a TED Talk so its a great honour for Totnes and an absolute coup for the Henry George Society of Devon.  This truly is an idea worth sharing!

Technology and the cost of access to land

A letter to the editor of the London Review of Books by Julian Pratt 18/05/17

Adrian Bowyer is to be congratulated on his invention of the self-replicating 3D printer RepRap, and also for the generosity of its open-source licensing, which tackles one of the chief blocks to universal access to production: the monopoly over intellectual property rights.RepRap

He is, though, too sanguine about the capacity of this technology to bring about a situation in which all a producer will have to pay is ‘the cost of access to an allotment’. As the current housing crisis shows, if all the land is owned by just some of the people, they will be in a position to charge as much rent as its users can pay. Ownership of land in perpetuity, without concomitant responsibilities and duties, is a state-created right. If inequality is to be reduced, this property-right must be transformed into a use-right, for which the steward of the land would pay rent to the community. Unless landowners were suddenly to start behaving with the same generosity as the open source movement, this would require political action not technological change.

Rethinking the Economics of Land and Housing

Why are house prices in many adRethinkingvanced economies rising faster than incomes? Why isn’t land and location taught or seen as important in modern economics? What is the relationship between the financial system and land? These are the questions addressed in an excellent and highly accessible new book by Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane. Rethinking the Economics of Land and Housing explains clearly that the key challenges facing modern economies – including housing crises, financial instability and growing inequalities – are intimately tied to the land economy.

These ideas are at the heart of the Georgist paradigm. Watch an excellent discussion about the book between Ross Ashcroft, Josh Ryan-Collins and Laurie Macfarlane on RT here:

Why Robots Will Never Take Our Jobs (unless we want them to)

A guest post by Edward Miller: 

Many people are understandably concerned about the future role for labor in our increasingly automated economy. Considering the precarious position of laborers, these concerns should not be taken lightly. Nevertheless, this fear is rooted in simplistic reasoning. The deductive truths of classical political economy and the empirical truths of our world both reveal that capital will not permanently replace labor through any sort of unintentional economic process. It could only happen through conscious public policy.


Could robots one day become sentient, and kill all humans? Maybe. That might even count as technological unemployment, by an expansive definition, but that is not the type of scenario I’m talking about. Automation can and will replace all sorts of jobs, and cause temporary displacement. Yet, in a market economy, there’s a number of strong reasons to doubt that automation will ever unintentionally replace labor in general. I’ve numbered them for convenience:

 1) There is a trend that is documented in the literature for Supply Chain Management (SCM) known as “de-automation.”

De-automation is the process of shutting down capital-intensive factories staffed by highly skilled laborers, and replacing them with unskilled Third World labor. Any look at the statistics of how manufacturing has actually occurred over the past century would validate this fact. It is amusing to note the cognitive dissonance that as people are worrying about robots, the obvious reality is that manufacturing has been constantly moving away from technologically sophisticated regions, and towards unskilled emerging markets. This is a predictable thing, when we note that capital and labor are “fungible” and can replace one another as necessary.

2) Nobody is questioning whether robots can be more efficient at producing any particular product. Indeed, there’s all kinds of jobs that we’ve figured out how to automrobots2ate decades ago that still aren’t automated. The question is whether these jobs *will* be automated, not whether they can be.

There is a finite supply of inventors, engineers, and so on. Each of them is generally going to apply their skills only to the areas in which they can achieve the highest return. Doing anything else would incur an opportunity cost. So why don’t we have robot arms like in the Jetsons that wipe our faces for us, and so on? Well, if you are a roboticist, are you going to work on a robot that wipes your face, or a robot that builds cars? Which is more likely to make you rich?

 3) The Law of Comparative Advantage shows that if there are two parties, and one is more efficient at every type of production than another, it is still in each party’s best interest to trade with one another as long as they each focus on their comparative advantage.

This is a simple deductive truth that can be figured out with basic arithmetic. Thus, even if we make the ridiculous assumption that humans can’t beat robots in any respect, in terms of quality or efficiency, in any industry at all, then it would still be in the best interests of everyone for robots to focus on their comparative advantage, and for humans to focus on ours.

4) The Law of Rent shows that rents are set based on the differential between the productivity available at that location compared to the productivity achievable on the best available rent-free land.
Thus, as productivity per laborer increases, nominal wages may go up, but real wages will stay the same because rents will rise. Wages are set primarily by the standard of living that can be achieved without paying rent. Even the wages of high-skilled labor, because everyone’s wages are set based on their next best alternative. When people can live well off the land, and by their own wits, then for employers to get unskilled workers they need to entice them with a better offer. And for them to get highly skilled workers, they can’t simply pay them the same wage… they need to offer something even better. And real wages are what matter, not some number on your check. Real wages are the standard of living that you can acquire after you’ve paid off all your rent, taxes, and other mandatory payments.

Basically, landlords are given a government license to sell access to the location, not just the improvements that they are responsible for. Even vacant land has a price, and clearly that can’t be attributable to the efforts of the landlord. Most of the rental price in urban locations is merely locational value. They don’t ask what their costs were when determining what to charge, they ask what their tenants can afford. Thus, as productivity rises, so do rents. But the reverse is also true. If workers aren’t in as much demand, then rents will begin to decline. This will assist workers in their race to the bottom. This process of land rents taking a larger and larger share of production, as economic progress occurs, is a key cause of wealth inequality.

5) If we suppose that there’s an inevitable race to the bottom in wages, we must remember that neither side is static in this race. Both capital and labor can become more expensive or less. The changes within the race are not unidirectional.


Sure, robots can make amazing gains in efficiency. What is the result of that? The price of goods decreases. If the prices of goods decrease, that means humans can achieve the same standard of living, while accepting a lower nominal wage, and underbid robots. And as artificial intelligence grows, this can enhance the productivity of human beings. Computers make humans more efficient, not just robots. We can become more like cyborgs ourselves, and some would say we already are. If efficiency rises, demand can shoot up to such a degree that resource usage rises higher than before. This is counter-intuitive because one generally associates efficiency with reduced resource consumption, but it is a well-documented fact, and high resource usage in turn raises prices. Right now there’s a scramble to mine enough lithium for all the batteries being produced for phones, electric cars, solar, etc. Rare earth elements, helium, and all sorts of scarce resources are in high demand for similar reasons. Shortages in any of these can quickly cause prices to spike, and for capital to be replaced with labor. Feeding humans with renewable resources can be cheaper than feeding robots with non-renewable resources.

6) The assumption that this race to the bottom is inevitable in a market economy is incorrect. Even though living standards are still rising, I don’t dispute that we are currently in a race to the bottom in much of the world.

However, certain insights from political economy show us how to make reforms that get us out of this race to the bottom. Most notably, a land value tax. …want a vision of the future? Imagine a child working in a sweatshop, forever. Unless we consciously choose another path. Automation is good. It is more or less synonymous with economic progress. Trying to halt automation would be like shooting ourselves in the foot, and would solve nothing. We just need to figure out how to achieve a fairer distribution of wealth, by understanding the fundamental power relationships that were revealed by classical political economists, such as Adam Smith and David Ricardo. Prime locations are one thing robots can never create more of.

We all need land, and to live where jobs are. If we share the rents that accrue from access rights to that which everyone needs, but nobody creates, then real wages can finally rise. At that point it could be financially viable for robots to actually start replacing labor. Using our higher wages and Citizen’s Dividend, laborers could stop working so hard, but only if we want to.

How would Land Value Based Fiscal Reform contribute towards good, secure, affordable housing?

In the face of a deep and ever worsening housing crisis there is widespread frustration at the failure to increase the rate of house building to address the imbalance of supply and demand. A large part of the problem is that the profits of the development industry are intrinsically linked to inflated land values which are boosted by artificial scarcity. It is not in the interests of developers to flood the market with new builds as this would have a price supressing effect and hit their bottom line.plymouth-houses

At present it is all too common for land owners to sit on development sites and demand an unrealistically high price from others who want to bring them forward, or otherwise demand that local authorities lift the obligation to build sub-market affordable homes in order to make schemes more profitable. The viability discussion, a circular argument over the relationship between site value and planning obligations, can be typified as a stand-off between the developer and the planning authority with the latter commonly lowering its affordable housing requirement in the hope that this will result in stalled sites being taken forward.

Land value based fiscal reform would strike at the root of the problem by fundamentally shifting the balance in favour of productive land use, rewarding the industrious and penalising the speculator. It would do this by introducing a modest annual cost on the land owner regardless of whether land is used productively or not. In return, one-off costs that developers currently face such as Community Infrastructure Levy and Stamp Duty Land Tax on development land could be eliminated in a revenue neutral way. These existing taxes are not paid by those holding land idle but are only levied once the decision is made to sell or develop the site. The revenue neutral fiscal shift could be extended further to the elimination of other taxes on house building companies and construction workers including VAT, corporation tax, income tax and national insurance. Reducing these harmful taxes would lower the cost of development.

The net result would be a saving for those who proceed quickly with development and mounting costs for those that do not. The reform would prove to be an effective antidote to unproductive land banking and speculative behaviour which drives up the cost of land. Stalled sites, previously developed, underused and derelict land in both the public and private sectors would be unlocked and the build-out of development schemes would be accelerated. The surge of available land would have the effect of lowering its price, enabling new developers, including smaller house builders, self-builders and housing associations to join established volume house builders in providing a plentiful supply of affordable housing as well as creating additional jobs in the construction industry.

The fiscal shift would also result in a more efficient use of the existing housing stock. Bringing empty homes back into use would be rewarded and an incentive would be created for existing households to downsize where possible. Not only would this mean a greater number of larger homes coming onto the market but it would also reduce the requirement for greenfield land to facilitate urban expansion.

huge-tracts-of-landThousands of hectares of land would be freed up and millions of new homes would be delivered across the country. Housing supply would increase to meet demand causing a fall in house prices as well as lower rents. At the same time the fiscal shift would mean higher after tax incomes and greater spending power for the majority of people which would make homes more affordable to the population at large. Furthermore, the end to scarcity that increased supply would bring would result in better quality housing and a more equal relationship between landlords and tenants, reducing the insecurity of tenure and poor conditions currently experienced by many in the private rented sector. In essence, a land value based fiscal reform would tackle the monopolisation of land which lies at the heart of our current housing crisis.

Google’s tax avoidance – the wrong culprit

By Julian Pratt

After a six year inquiry, Google has agreed with HMRC that it will pay £130 million in tax to cover the 10 years from 2005 – an amount that critics have rightly described as derisory. HMRC’s says that it has collected ‘the full tax due in law’. Both the critics and HMRC are completely right, as there is a problem but it does not lie with tax avoidance measures. These are entirely within the law and, for example, used by anybody with an ISA. Rather the problem is a badly designed tax system.

Lord Lawson has responded by attacking Corporation Tax, which invites large businesses to shift profits between tax jurisdictions to avoid paying tax in the UK – a privilege that, as he points out, is not available to small business. Lord Lawson proposes replacing this tax on profits, in whole or in part, with a tax on sales. This might be a bit more difficult to avoid, but it would surely not take long for the accountants to find ways of doing so – particularly as the location where a sale takes place is increasingly difficult to identify as more and more sales move to the internet. And like any conventional tax it would discourage whatever is being taxed – why would we want to discourage sales (or indeed profits)?

The solution to tax avoidance is to move towards a tax system in which whatever is being taxed is impossible to hide or to move abroad. After two hundred years of dysfunctional tax policy the answer is clear. Orthodox economists now agree that the source of revenue for a government should be the rent of the land that it defends, protects and services – which they describe as a Land Value Tax (Economist 29/6/13 Levying the land). A Land Value Tax even has the advantage that not only does it not discourage profit-making or sales but it does discourage holding land out of productive use – derelict or underused. If this land were brought back into productive use it would provide space for business and for decent housing that people can afford.

Bedroom Tax – David Cameron’s poor grasp of the facts

By Julian Pratt

The government has lost its Court of Appeal cases relating to two families that have a clear need for a spare bedroom and whose Housing Benefit has been cut, though the cases will now go to the Supreme Court. This ‘bedroom tax’ attacks those who are most in need of decent housing and is rightly described as ‘vile’ by Danny Dorling (2014:147) in his excellent book All that is solid: the great housing disaster.

David Cameron’s response is seductive but outrageous – that it is ‘unfair to subsidise spare rooms in the social sector if we don’t subsidise them in the private sector’. Housing Benefit is of course a subsidy to private landlords as well as to social landlords, but the substantial point is that we do subsidise – on a massive scale – spare rooms in the private sector. The most obvious way is by exempting owner-occupiers from Capital Gains Tax on their home. It’s not unusual to hear people say that they have ‘earned’ more by watching the value of their home rise over the years than they have by working full-time. This means that buying the most expensive home you can afford is one of the best investment decisions any family can make. Location is of course a major factor in this expense, but so is the size of the house. The exemption to Capital Gains Tax is therefore encouraging people to buy larger homes than they might without such an exemption – contributing to the large number of unoccupied bedrooms in the private sector. Housing in the private sector is used far less efficiently than in the social sector.

That’s just the capital gain. We also now fail to tax as income the ‘imputed rent’ that an owner-occupier can be considered to receive as income from themselves in rent (as the result of the exclusion of owner-occupied properties from Schedule A in 1963). This has provided a further subsidy to owner-occupiers that distorts housing tenure by incentivising investment in unnecessarily large homes in the private sector.

There are plenty of other subsidies for private housing that may subsidise overprovision of bedrooms, like Help to Buy and other schemes for first-time buyers and Right to Buy for residents in council and housing association properties. And the inequity of subsidies to owner-occupiers goes far wider than this. The government has shown that it will do whatever it takes to prop up house prices, whether this be by demolishing housing in northern cities or by increasing the money supply.

David Cameron is right though – we need a society that treats renters and owner-occupiers fairly and even-handedly. Subsidies to owner-occupiers currently make it inevitable that their wealth will grow in the long term, principally as the result of rising house prices and rent-free accommodation once the mortgage is paid off. How can we ensure that renters are fairly treated?

A large part of the cost of any house, and almost all of any increase in its value, is attributable to the value of the land rather than the building. What we need is a cap on ever increasing land values. The value of land is fundamentally determined by the discounted stream of expected future rents, though expectations of future price rises add a speculative element. The most effective way to cap land prices is to collect the full market rent, or even just any future increase in the market rent, as a location fee or Land Value Tax.

Land Value Taxation

Here is a comprehensive presentation on the merits of Land Value Taxation pitched at the Labour Party  by the Labour Land Campaign:

Why Keynes was wrong

Guest post by Akhil Patel of Ascendant Strategy

In 1930, as the world toiled through the Great Depression, John Maynard Keynes wrote an essay, Economic Possibilities for our Grandchildren, to allay people’s fears about their economic future and, as he so eloquently put it:

Keynes… to take wings into the future” in order to ask: “What can we reasonably expect the level of our economic life to be a hundred years hence?”

In other words, he was peering into a crystal ball to imagine what things would be like in 2030. As an aside, reading this essay is a little like going back and watching Back to the Future II, in which Marty McFly is transported to the future….to our very own 2015. It’s interesting to see all of the technological progress they envisaged for October 2015. Some of it was way off (hydrating pizza?) but in other ways it was quite accurate (3D movies at the cinema; video chatting with several people via computer).BackToTheFuture

In his essay, Keynes made two famous predictions:

  • that the world in economic terms would be eight times better off (projecting into the future the growth rates from the early part of the 20th century).
  • And that this would mean that his grandchildren would only have to work 15 hours per week.

I mention this now because a famous UK economist, Tim Harford, author of The Undercover Economist, revisited Keynes’ famous speculations in the Financial Times. Here is what he had to say:

Keynes was half right. Barring some catastrophe in the next 15 years, his rosy-seeming forecasts of global growth will be an underestimate. The three-hour workday, however, remains elusive.

Harford then goes on to explain why this might be the case. He puts it down to two main reasons:

  1. We like to work hard.
  2. We like to earn more than our neighbours so we can spend more than them.

There may be something in this. But please note – he misses the main point. (As an aside, I’ve given up expecting such figures to “get it”).

The main point is this: The fruits of economic development always increases the price of land, which far outstrips the growth in wages. This is called The Law of Economic Rent.

This is an invariable, immutable and permanent law of economics. Write it down. Commit it to memory. This is what drives the cycle. Increased rents attract capital; and then invite speculation as people chase something for nothing. In economies (such as ours) where the rent is privately captured, those who own the rent can work less and less – because as the economy grows the value of the rent increases. But those who earn wages will see much less growth – while the rent (or mortgage payments) they will have to pay for a place to live or work will go up by much more.

It used to be possible for a family on a single income to own a proper house in London and not to be mortgaged more than a decade. Now, it’s unlikely to happen for a two-income professional couple both working 40 plus hours a week and repaying the loan over three decades. A small flat is probably all they will be able to afford – after several years saving up for a deposit. This is because there is an abundant supply of people wanting jobs which puts pressure on wages and what people are prepared to do to earn them.

And note another thing: Tim Harford is a very widely-read economist, especially here in the UK. But he doesn’t talk about or understand the land dimension. This is one of the reasons why there will never be any widespread understanding of the 18 year cycle. Find out more about it here.

Akhil Patel

Director, Ascendant Strategy

tw: @AkhilGPatel @AscendantStrat