Why Georgists Correctly Predicted the Crisis

For more on the Georgists, Henry George, and the idea of a land tax, see this excellent sidebar D&S co-editor Amy Gluckman wrote to Mason Gaffney’s excellent article about how a land tax helped rebuild San Francisco in 1906, and could be used to rebuild New Orleans after Katrina.

Why Georgists Correctly Predicted the Crisis, and Why Conventional Economists Couldn’t

Land bubbles of varying severity and universality recur roughly every eighteen to twenty years. Like Henry George, modern Georgists attribute recessions and depressions to 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. I even convinced my husband it was time to sell our property–but alas, too late.

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, Mason Gaffney argues that neoclassical economics assumed its blinkers precisely to thwart that movement–leaving modern economists helpless.

0 thoughts on “Why Georgists Correctly Predicted the Crisis”

  1. I’m not an economist, yet I could read the paragraphs between the third and the last.I understood it, what I couldn’t understand was what georgists are?(I’m not united stater, so perhaps what I’m asking is too obvious for you)

  2. Dear Anonymous,Very good question. I should have added < HREF="http://www.dollarsandsense.org/archives/2006/0306gluckman.html" REL="nofollow">this link<> to Polly’s post. I will do so now. I hope this helps. Also check out < HREF="http://www.dollarsandsense.org/archives/2006/0306gaffney.html" REL="nofollow">the article<> that this was a sidebar to–it’s about how the land tax (promoted by 19th-century economist Henry George, and today by the Georgists) helped rebuild San Francisco in 1906, and could be used to rebuild New Orleans.

  3. (No Account…but I will go by “Broke and Jobless”)That was an excellent article! Short and sweet. Going to start reading up on Henry George/Georgists now. This is my new favorite site. Getting an MBA in Finance right now (read – worthless) and I can’t stand most of the economic theory (let alone portfolio theory). It just seems rife with aggrandized assumptions. And you are dead right – none of these economists discount anything.New favorite site for sure.

  4. “Broke and Jobless”Trying to repost:Fantastic article. Short and sweet. This is my new favorite site.I’m getting an MBA in Finance right now (worthless) and I can’t stand most of the economics (or portfolio theory). Most of it seems based on aggrandized assumptions. Are most of these assumptions dead now? Like theories of moral hazard and such? I’ve always felt like you can’t preach moral hazard post haste–the crooks are already gone with the money and leave wreckage behind.Also, you are totally right most of these economists don’t discount anything. Just seems ridiculous.Definitely a new favorite site.

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