Who are the parasites? The radical implications of classical economics

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Henry George and Karl Marx developed alternative radical theories out of the ideas of Adam Smith and David Ricardo.

The classical economists did not mince their words. As Mason Gaffney puts it:

… classical political economy was a remarkable phenomenon. Its major writers in England were able to portray the dominant class of rent-takers as idlers and superfluous drones. One surmises they got by with this because the idlers were proud of it. In their value-system, labour was not respected; conspicuous leisure was. Saving was regarded contemptuously as stinginess: conspicuous consumption was the mark of a gentleman and aristocrat. (Mason Gaffney, “the Corruption of Economics”. (Gaffney, 1994)

Ricardo and land rent

The Physiocrats, Adam Smith and especially David Ricardo theorised land rents as the ideal source for taxation. Ricardo’s key insight was that economic rent is not a cost of production. No one produced the land, it was a free gift of nature so there was no cost involved in using it for production. Landowners could charge rent for its use because of their ownership alone. Their income was not really a cost, it was a re-distribution of what had been produced but without the landowners doing anything at all, except diverting some of the produced income to themselves “unearned”. The value of a location is not the result of anything that the landowner does – the landowner reaps where they have not sown.

In Ricardo’s definition, rent arises in the difference between the costs of production from different acreages of land. Some acreages are preferable as locations because the soil is better, or these locations are closer to market and to sources of inputs that have to be transported in. At the preferable locations, more money could be made by farmers but landowners could ask more rental, siphoning off the monetary benefits of the advantageous location from the farmers into their own pockets because of competition between farmers.

The classical economists realised that if the landowners had their rental incomes taxed, they could not add the tax charge to the rental charge since renting farmers were already being charged up to the maximum that they were prepared to pay. If more rent was demanded from the farmers in order to pay for the tax that had been imposed on the landowner, it would be in the interests of the farmer to move. The tax would have to be paid out of the rent and could not be added on top of it. That was the theory anyway – if there’s going to be taxation, then it should be on land rents was their message. The trouble was that the landowners were politically powerful and able to block taxes being placed upon rents.

This is a recurring theme in economics. Economists have an idea – but the political power of interest groups is so powerful that the idea remains of purely theoretical interest. What did, however, happen early in the 19th century was a successful campaign against landowning interests organised by the Corn Law League. Tariff protection to prevent cheap grain being imported into the UK had kept grain prices high. This, in turn, had enabled a high rake off by landowners who could charge higher agricultural rents from their tenant farmers who were getting a good price for their grain. The people who paid were workers whose food prices were higher than they might otherwise be, and their employers who had to pay higher wages. Eventually the Corn Laws were swept away – a success for the growing industrial employers and for the economics of free trade – in the UK at least.

Henry George

Apart from their defeat by the Corn Law League in the UK, the landowners in many countries were able to hang onto their power and influence in the 19th century. However, towards the end of that century a campaign by American journalist, turned tax activist, Henry George, used the ideas of Ricardo and the classical economists, and gave landowners in a number of countries a serious scare. He succeeded in popularising the idea that taxes should focus on land rentals. What’s more he popularised a view of social inequality that focused on landownership as the cause. In the view of George, landowners acquired property titles that enabled them to channel the increasing wealth of society into their own pockets even though they made no positive contribution to the development process. Economic development inevitably takes a spatial form. It happens somewhere and if the landowners own that somewhere they can make money without doing anything else.

For instance, consider a railroad that joins a city to a town on the coastline. Now city people can travel to the coastal town with relative ease for holidays and recreation. The smart money will then move to buy land around the coastal town. When people want to build hotels they will have to pay rentals to the landowners. It is the landowners who are able to make the wealth that the railroads bring about by building and running hotels and the other facilities of a seaside resort. They don’t have to lift a finger to earn this rent. They just have to buy up the land – which they can often do cheaply because they have insider information and realise before anyone else what is being planned. Then the work of other people, developing a tourist resort, will make their newly acquired land valuable.

Towards the end of the 19th century, economists were pre-occupied, indeed obsessed, with analysing the sources, determinants and social rationales of interest and other income returns to private property. Apart from theorists and campaigners like Henry George, who focused in landowner rental income, the trade union and socialist movement were emerging and developing their own critical and challenging ideas. Influenced by theorists like Karl Marx, the very legitimacy of property income was in question. Answering Marx was a strong motivation for many economists. (Tobin, 1998)

Karl Marx

Marx’s key idea was that the source of property incomes was “surplus value” produced by labour. What workers and their families needed as wage income, in order to reproduce and maintain their own “labour power”, was less than the full value of what they produced. In effect, workers spent part of the day working for the wages to maintain themselves and their families (the next generation of workers) while the rest of the day they produced exchange value that was paid out to others as property income – distributed as profits, interest and rents.

For Marx, therefore, the division of income was explained in terms of the power asymmetry underlying the social relationships of capitalists and workers. Workers were driven to work for the employing class. They had no choice but to work on terms largely favourable to their employer because they, or their ancestors, had lost access to the means of production though processes like the enclosures. Their only hope was to organise for greater bargaining power and try to enhance their bargaining position by engaging in class struggle. (The working class were obliged to exchange their labour power on a market for wages but this was a market where there were trading under an institutionalised form of duress. Without access to means of production to work for themselves there was a structural power inequality underpinning the labour market).

On the question of land rents, both Marx and George agreed that they should be spent on public purposes. Though George did not agree on the nationalisation of land, it was enough for him to tax away the land rental from the landowners.

The first demand of The Communist Manifesto by Marx and Engels was the nationalisation of land and the devotion of its income to public purposes.

For a time, the ideas of Marx and those of George were competing forms of radical thought that located contemporary problems either in the capitalist class or in the landowning class. Both strands of radicalism had their roots in classical economic theory and conservative economists decided that classical economic ideas needed to be neutered. That is largely why we now have neoclassical economics. The conclusions that were being drawn from classical economics were suddenly very threatening to propertied people. As Gaffney explains in relation to George:

The menace George posed to rent-takers is clear from how he viewed them. To George, the landowner per se is non-functional (unproductive), a layabout drone, a drain on the hive, a transferee, a welfare case. Worse than that, he or she often makes the land itself lay about, too: then he or she is dysfunctional or counterproductive, a double-dipper. Worse yet, landowners become triple-dippers when they use their discretionary income and wealth to dominate politics and drain away yet more treasure through subsidies, public works and services, protections from competition, cheap credit, and so on. Often they are not just passive drones, but active predators. (Gaffney, 1994)

Landowners in the USA funded academic economists in order to put up a counter argument while using their influence in the universities to ensure that academics who supported George were fired. In this way, the others got the message in an era in which there was no such thing as academic tenure. It was a period in which businessmen, landowners and wealthy people were replacing clerics on the boards of colleges. Economics began to change. Classical economics became neoclassical.