Excerpts from Chapters 1 to 10, by Professor Mason Gaffney:
FULL text (pdf) HERE
The Corruption of Economics, 1994,
by Mason Gaffney, Fred Harrison, with Kris Feder.

Chapter 6
The Irish Connection

Chapter 7
Pareto's Power

Chapter 8
The Chicago School Poison (excerpt)

[Emphasis and selected links added.]
Note: NCE and NCEist refer to Neo-Classical Economics

Chapter 6, pages 104 to 109
The Irish Connection

Francis Y. Edgeworth anticipated Ely on "ripening costs". He wrote that land taxes would "force the market". He has a strangely repugnant way of putting it: "In fine, the interest of monopolists is not always contrary to that of their customers" (1906: 73). It makes one wonder what else he is trying to rationalize.

Edgeworth correctly observes that taxing land would weaken the credit rating of landowners. He leaves out the counterpart, that untaxing buildings would strengthen the credit rating of builders. Still, we are in his debt for at least introducing the topic of credit rationing. Otherwise, NCE proceeds as though credit markets are pluperfect, and the highest bidder for land is necessarily the highest and best user. I have treated this point in a companion volume in this CIT series (Gaffney, 1994) and elsewhere (Gaffney, 1973, 1993b).

Edgeworth also thought that land taxes would bite into building profits. It is hard to imagine they would do so more than the alternative of taxing buildings themselves, so his point is obscure, and seems like simple carping. Demonstrably, if land or any other taxes did bite into building profits, the effect would be to defer building, which his first argument posits as a desired outcome. The impression is that nothing would please him because he has some unstated reservation.

One can guess what that reservation might be. Edgeworth was from a family of the "Protestant Ascendancy" in Ireland, Irish landlords, a long line of them reaching back 300 years. They owned Edgeworthtown, which he would inherit and own as an Irish absentee landlord. He was also teaching at Oxford, another great absentee landlord. He was not unaware of the faults of his class -his Aunt Maria, author of Castle Rackrent, must have raised his consciousness. That is a far cry from relishing drastic reforms imposed by the state -not even Tia Maria was ready for that.

Henry George had risen from obscurity by attacking absentee landlords generically, and Irish landlords specifically (Douglas, 1976: 15-59; Barker, 1955: 335-72). His 1881 tract on The Irish land Question (later retitled The land Question) is what had sparked initial interest in the more heavyweight Progress and Poverty. He was intimately involved in Irish politics, after travelling as a journalist to Ireland to report for The Irish World of New York, serving a New York clientele of Irish émigrés. These were people who remembered that the Edgeworths and their kind had evicted them from their ancestral land.56 His wife was Irish; his fellow California landreformer and employer, James McClatchy of the Sacramento Bee, was Irish.

These Irish did not take kindly to economists who told them the usurpers had really created The Emerald Isle. In the NCE cant, this land had been produced by landlords, who were just "supplying" their native land to the Irish renters, and sparing them from having to bear the financial burdens of ownership. That was a hard story to sell in Ireland, or the slums of New York City, in the 1880s. As newcomers, outsiders, common laborers, and the poorest voting whites of 19th Century America, the Irish were George's natural ethnic constituency.

They also supported the revolutionary Fenian movement, as it was then called. They sent their contributions back to Ireland to help roust landlords like the Edgeworths, an irritating skill the Irish developed to a high art. In Ireland, George the reporter also made news, supporting the radical activist Michael Davitt against the temporizing Charles Stewart Parnell (Barker, 1955: 341-56). In propertied England then that was something like preaching abolition in ante-bellum Alabama.

Into this powderkeg, George dropped an incendiary note: "It is hard not to feel some contempt for a people so oppressed (as the Irish) who have only occasionally murdered a landlord". It was the harshest, most provocative, impolitic thing he ever wrote. I do not cite it to praise nor blame, but to establish motive. It was only a rhetorical flourish, journalistic hyperbole probably aimed to stir up the passive Parnell. Nevertheless, there it stood on the printed page, seeming to declare open season on Irish landlords like the Edgeworths. It would have been only human for F.Y. Edgeworth to notice, resent, and fear. It gave him all the motive one would need to undercut George.

This line of causation is consistent with Edgeworth's otherwise inexplicably fierce attack on the mathematics of J.E. Cairnes. Cairnes' book, The Slave Power (1862), had played an important role in swinging English opinion against slaveowners, with whom Irish landlords had much in common, during the American Civil War. Cairnes had written of England itself, "The large additions to the wealth of the country have gone neither to profits nor to wages, .. .but to swell ... the rent roll ..."(cit. Miller, 1917: 200). More recently, Cairnes' offense was to have written several articles favoring rent control in Ireland. Cairnes had used his authority as a political economist to assert this was compatible with classical rent theory.

With the best will in the world, it would have been hard for a person with Edgeworth's pedigree not to absorb a trace of class and ethnic bias. That would help explain his title: "Recent schemes for rating land values". "Scheme" is not a friendly term; "plan" or "proposal" would sound less prejudicial. Edgeworth's bias took the form of eugenics. There are individual differences in the capacity for pleasure, he wrote. He seems to suggest, in his cryptic, elusive way, that human creatures higher on the evolutionary scale (the Edgeworths?) have a higher capacity for pleasure than those below them (Irish tenants?), so that social welfare is maximized when wealth is unequally distributed, pretty much the way it already is.57

Quite apart from Irish affairs, ç: 118-19) has suggested that Edgeworth kept J.A. Hobson from teaching at London, and Hobson attributed it to class bias. Hobson was not a Georgist, but a radical who did pen what Barker calls a "famous appreciation" of George (Barker, 1955:414-16,665; Hobson, 1897). This was published after one attack by Edgeworth (1890), and before another (1904). I have no conclusive proof on which to base a firm opinion of the exclusion of Hobson by Edgeworth. Edgeworth's defenders say that either it did not happen, or it was justified because Hobson made an error in calculus (Newman, 1987: 89). Considering that neither Marshall, J.B. Clark, nor Seligman used calculus at all, that would suggest a selective use of technicalities for screening people. Modern academicians are not unschooled in that device.

Back to top

Edgeworth was a "toolmaker" and model-builder. He was a painfully obscure, opaque writer, little understood by his contemporaries. In most substantive matters he followed Marshall who, as we have seen, was more fair to George than other NCE founders, but who couldn't understand Edgeworth either. In the current toolmaking, model-building era, however, painful obscurity and opacity are at a premium and Edgeworth enjoys a great new vogue. Here is his view of things:

Imagine a material Cosmos, a mechanism as composite as possible, and perplexed with all manner of wheels, pistons, parts, connections, and whose mazy complexity might far transcend in its entanglements the webs of thought and wiles of passion; nevertheless, if any given impulses be imparted ... eachpart of the great whole will move off with a velocity such that the energy of the whole may be the greatest possible (1881: 9).

He was, one might say, like a kid with a new toy. Apparently his toy-building technique was excellent. More apposite for us, the subjects that engaged him, and the attitudes he took, are quite congenial to modem "techie" economists. Much of what seems "new" in the last twenty years of grown-up kids playing with toy models is still basic NCE from the 1 880s, expressed in less comprehensible forms.

In Mathematical Psychics (1881) Edgeworth introduced what is now universally called "Pareto Optimality". The idea is that you cannot measure quantities of welfare, or make interpersonal comparisons of welfare. You can only be sure that welfare rises in the course of voluntary exchanges when at least one person is, and usually two persons are better off, and no one is worse off.

The policy implications are immediate, drastic, highly conventional, and very safe for those who stand to inherit land and private incomes. To begin, all existing entitlements to property, whatever their origins, should be firmed up and frozen. The process has to start somewhere, and any change in the existing entitlements would only delay progress in the orderly march of exchanges leading toward higher welfare. This idea remains central to Chicago School thinking: the economy should "maximize utility subject to the constraints of market prices and endowments of wealth" (Reder, 1987: 415). By 1985, "these views and their extensions have become mainstream economics, ..." (Reder, 1985: 417). "The rise in influence of the Coase Theorem at Chicago has more or less paralleled a decline in the marked concern with income distribution that existed in ... the work of Henry Simons" (Reder, 1987: 417).

All property should be clearly defined and fully alienable, with no strings attached.
A series of exchanges, each of them being what is now called a "win-win" solution, must lead always in the direction of greater general welfare. All Robin Hood schemes, based on folk wisdom and Jeffersonian values, like that cited above from Charles Spahr, are without scientific basis, and can only delay progress.

It speaks volumes for modern economists that they have reshaped their discipline around those values. The operational part, of course, is what you do first: firm up and freeze existing entitlements. The rest is mostly moonshine, a promise made to be broken. In practice, "firming up" means wiping out traditional servitudes to the public, so that every "win-win" solution is really a "win-win-lose" solution, with the general public the loser, uncompensated. NCEists often point out how land values are the product of capital in the form of public works. This is all forgotten, however, when land is sold, and this sale is presumed to firm up forever a permanent public obligation to continue servicing and replacing those works. An example is the recent move to convert private contracts to get federally subsidized water in California into perpetual private property, salable to the highest bidder with subsidies permanently attached. NCEists pushing for this overlook that tapping the Treasury, and grabbing water from the public domain, deprive others (Gaffney, 1992, 1 993c, criticizing proposals of Richard Wahi, Zach Willey, Sotirios Angelides, Eugene Bardach, and others).

In 1879, the year George published Progress and Poverty, Edgeworth was thinking thoughts like these.

But Equality is not the whole of distributive justice ...in the minds of many good men among the modems and the wisest of the ancients, there appears a deeper sentiment in favour of aristocratical privilege -the privilege of man above brute, of civilised above savage, of birth, of talent, and of the male sex. The sentiment of right has a ground of utilitarianism in supposed differences of capacity (Edgeworth 1879: 77, cited in Newman, 1987).

Peter Newman, who cites the above, doubts that Edgeworth was wholly given to such dark views. They were, however, an important part of his complex nature.

More, for good measure . . .

Chapter 7, page 110
Pareto's Power
Back to top

We turn to Vilfredo Pareto, whom the dark thoughts of Edgeworth evoke.
The thoughts suggest that Edgeworth's affinities with Pareto were more
than methodological. Pareto's philosophy reads like a tour between Nicolo
Machiavelli and Benito Mussolini, with detours through Fredrich Nietzche.
A wealthy heir who married a Russian Countess, he has been judged by
some as the first fascist, but that label, like most, is too simple. His ideas
sound fascistic in internal affairs, on the model of a Latin American dictator; but they lack the populism that gave European fascism mass support, as well as the imperialism that was its downfall. He was antimilitaristic, consistent with his contempt for government in general. "Pugnacious elitist misanthropic libertarian" might be a better fit: it seems to fit many of his modern followers, the NCEists. Here are some of his words: let the reader judge.58

no social class can for long hold its property or its power if it does not
have the strength and vigor necessary to defend them. In the long run only power determines the social forms; the great error of the 19th century will be to have forgotten this principle (1906: 361).

Society has a dominant class, A, and a subject class, B. Class A divides
into A-alpha and A-beta. The alpha part "still has enough strength and
energy left to defend its share of authority;" the other part, beta, "is made
up of degenerated individuals, with feeble intelligence and will, humanitarians, as is said today" (1927: 91).

The A-alpha try to make people believe that they are working for the
common good, ... [but] it [this effort] also decreases the energy of the A110 beta, who take as true what is only a pure fiction and can only be useful as such (1906 p.92).
The error of the humanitarians ... is not in having a religion, ... but in
having chosen a religion which is appropriate only to weak beings lacking in all energy and courage, ... (p.364).

One wonders, after that, how Pareto would class those who fancy they
have found in "Pareto-optimality" a value-free technique to evaluate issues
of public policy? More relevant today, how should we view them? Pareto
would only appear value-free to those who share his values so thoroughly
that they cannot even see that they are value-judgments. It might be fair to
say that Pareto disclaims all ethical positions and value-judgments save
one: private rent-taking is sacred. In this, of course, he has company; it is
a powerful company with most of the world's discretionary income at its
disposal to impose its message on impressional young students of economics.

Pareto expressed grudging admiration for the B-alphas, or leaders of the
lower classes, so long as they were driven by narrow self seeking, as he
assumed they were. The weak whom "humanitarians" defend are "degenerates". The self-seeking proletarian leaders, or B-alphas, are different. "They are energetic and robust he-men who want to eat when hungry, drink when thirsty, and make love when it suits them ..". "It is self interest which rules the conduct of the B's, not sentimental twaddle" (p.360).

. . . the struggle to appropriate the goods of others may be favorable to (genetic) selection (p.341).
The numerous cases in which the mob wants to lynch. malefactors
demonstrate clearly that the populace still retains the vigor of the race,
vigor which the upper classes have lost (p. 360n).

Pareto does not comment directly on George, but he rejects most of the
value premises that might lead one to Georgism, in the following.

Equality before the law ... is not ... advantageous to society; ... (p.95).

Tories and Whigs "compete for the favor of the common people". ...they
"fight to see which will prostrate itself more humbly at the feet of the
common man" Q. 100).

When the suffrage has been given to all men, including madmen and
criminals, when it has been extended to women, and, if you like, to
children, it will have to stop. One cannot go any lower, unless the suffrage is extended to animals, …(100).
… liberals ... have paved the way for the demagogical oppression which is now dawning". Taxes on the rich are voted on "by those who do not pay them, ... shamelessly ..." (93).
In 1904 in England, "all the parties ...vie with each other in flattering the workers. The Liberal party, which ...has given up its principles, moved to socialism ..." (345).

From 1906-14, under successive Prime Ministers Campbell-Bannerman, Asquith, and Lloyd George, the Radical wing of the English Liberal Party came close to implementing Georgist reforms -in the process drawing the teeth from the House of Lords. This did not come out of nowhere, but out of 25 years of organizing and propagandizing, which was no secret. Among other prominent English statesmen supporting land taxation were Winston Churchill, Philip Snowden, Ramsay MacDonald, Josiah Wedgwood, Clement Attlee, and Stafford Cripps - a conspicuous group. George Bernard Shaw, a highly visible Fabian leader, sustained his support for George (Lawrence, 1957: 85-86,171). Presumably Pareto knew something of the these facts, and was using "Socialist" as a pejorative for "Georgist," as Clark and Ely did.

It was, rather, Bismarck's Germany that adopted socialism. Bismarck had triumphed by swallowing his enemies whole, and announcing their program as his own. As we have seen, this had an enormous influence on American education in economics.

Returning the floor to Pareto, he says Tolstoyism led Russia to lose the
war with Japan (358n). Tolstoy was George's apostle to the Russians
(Geiger, 1933: 459-6 1); we may presume Pareto knew this -his wife was
a Russian countess.59 Pareto goes on, "But among the leaders some enriched
themselves through customs protection and corruptions, others were
besotted by their humanitarian faith" (358n).

"... consumers suffer less harm from (monopolies) perhaps than from
shopkeepers and trade unions". We should deplore "the. contemporary
humanitarian mania to excuse ... all harm caused by workers or by persons of little affluence, ..." (p.338).

Those five quotes leave little doubt that Pareto diametrically opposed
most values associated with Georgism, or "The Single Tax".

Back to top

Next let us look at what economic techniques to associate with Pareto.
He makes no bones about how he sees the purpose of techniques.

Men follow their sentiment and their self-interest, but it pleases them to imagine that they follow reason (p.95)

With that avowal, it would be prudent to be chary, and interpret Pareto's
choice of techniques in the light of what we know about his sentiment and
self-interest. All the techniques to be described have been accepted by
NCEists, and folded into the body of NCE.

(1) "Pareto's Law" of distribution tells us that unequal wealth is
inevitable, and remains the same between times and places, regardless of
human institutions. To Pareto, "leveling" is all sham, it is just the rhetoric
of the outs trying to become the ins. The overtones of this kind of fatalism
are heard in today's "rational expectations" dogma, which says that all
government actions are offset by private investors and other economic
agents who anticipate them. However, Pareto's "Law" is demonstrably
contrary to fact, e.g. among the 50 American states. Detailed data on this
are presented in Gaffney, 1992.

(2) Political economy deals only with how "to compare the sensations of
one man in different situations, and to determine which of these he would
choose". A second class of theories compares the sensations of one person
with another, but these are "most unsatisfactory" (105). This converts
economics from a social science to a study in individual psychology (a bad
one, according to psychologists). It dismisses in one stroke all traditional
American notions and egalitarian ideals, such as expressed by Charles
Spahr, above, who wrote that low incomes are insufficient for healthful and
decent living, while high incomes and properties are "morally perilous to
their possessors" (Spahr, 1896: 159). "...the ability to pay taxes increases
faster than the private fortune" (Spahr, 1896: 160).

Clearly, too, Pareto's view is totally at odds with the case for public education, national defense, social security, universal health care, veterans' benefits, and anything else with any element of social dividend. One could never lead a crew or team, or provision a platoon or a division, or teach a class without comparing the sensation of one person with another. Pareto would seem to have wanted to eliminate both the welfare state and the warfare state, maintaining the military for the prime purpose of putting down domestic insurgencies. The purest applications of his philosophy may be observed today in Guatemala, Honduras, or El Salvador.

(3) Pareto redefines rent as the gain from reallocating a resource -any resource. It is the excess of its current return over its "opportunity cost". He belittles "Ricardian rent" as just a particular case of that (247). This, of course, is calculated to divert attention from land rent as a taxable surplus. This altered definition of rent used often to be called "Paretian rent," or "transfer rent," but modern NCEists have gradually got round to calling it just "rent," as though there were no other meaning.

Logically speaking, that involves the trick of taking a concept appropriate to "partial equilibrium analysis" (theory of exchanges, centered on the firm and the industry) and transplanting it, without advising the reader, to "general equilibrium analysis" (social distribution theory, covering all firms and industries) (Gaffney, 1962: 145-46). It is quite inconsistent for Pareto, who is generally known as a writer on general equilibrium: Frank Knight, as we will see, carried it to the greatest extreme possible.

It has been wrongly imputed to Joan Robinson, who actually saw right through it. Robinson wrote, "From the point of view of society, land ... is provided free, and the whole rent is a surplus and none of it is a social cost" (1933: 107). Another good treatment is by Bronfenbrenner (1971: Ch. 14). Ground rent applies to the whole class of land incomes without reference to allocation among different uses. It would obtain even if all land and labor were homogeneous, and produced but one commodity.

Ground rent is distinguished from wages by the curse of Adam, that labor towards suppertime grows irksome, entails sacrifice of comfort, vacations, desired location, self-direction, often personal safety, and at all times represents a sacrifice of pleasant diversions. Wages are also a return on all the costs of rearing and maintaining the worker, and the future costs of retirement. For increasing numbers of people, work also represents a sacrifice of time spent on lucrative or destructive untaxed activities like stealing, rioting, vandalism, looting, mobbing, arson, smuggling, tax evasion, barter, etc. Idle hands are notjust wasted, they make mischief. For many, work represents a sacrifice of welfare payments, whether from parents or the state (Gaffney, 1962: 146).

The issue is often couched in terms of whether rent is a "cost" to the
individual "firm". That is something of a red herring, land always has a cost
in the sense that use A must preempt land from use B. land never has a cost
of being produced. These are simply two different meanings for one word,
"cost"; no one should be bamboozled by that. Joan Robinson was not fooled. To repeat her wisdom (which warrants repeating), "From the point of view of society, land ... isprovided free, and the whole rent is a surplus and none of it is a social cost" (Robinson, 1933: 107).

The operational question is for tax policy, which the diversion about rent as a cost is designed to obscure. This question is, what will happen to the supply of land if you focus the property tax on land value, exempting capital? How will the tax affect the allocation of land? (The effect is at worst neutral, and will probably improve it because of the pressure of the cashflow effect.) How will the relief of capital from taxation affect the supply of capital, and the allocation of land and capital? (It will raise the supply of capital, and improve the allocation of both land and capital.) It is really not so complicated. Long-winded disputes over the meaning of "rent" are beloved by abstract theorists. They just distract us, as intended, from getting to the nub of the central question of public policy.

(4) Pareto introduces the use of indifference curves, crediting the device to F.Y. Edgeworth (1879: 119). The "indifference curve" technique is a way of recasting the discipline in several ways, too long and tedious to recount in full detail. Perhaps foremost, it makes it technically more difficult to explain and perceive simple points, thus excluding more people from understanding, and facilitating obscure manipulations, insider argot, and unsupportable statements from authority.

The technique helps us shift from "cardinal" to "ordinal" rankings of welfare, avoiding those dangerous interpersonal comparisons (such as that every human body needs about the same daily bread to avoid hunger). It lets us escape from diminishing returns of labor or capital applied to fixed land, and refocus the analysis on the disembodied "firm" as the basic unit. These "firms" pick and choose among "inputs" or "resources," which are treated as perfectly symmetrical, and none of which needs to be called land any more. All can be had in any amount by the firm, and society is just a collection of firms so the society can have any amount of land at any time. Optimal substitution or trade-off is the main emphasis. Technically, the ideas of land rent and taxable surplus can still be expressed by use of the "indifference curve" technique, but only laboriously, obscurely, and indirectly, as intended.

Such is the heritage of the cynical misanthrope, Vilfredo Pareto, who wrote,

Men follow their sentiment and their self-interest, but it pleases them to imagine that they follow reason (p.95).

Chapter 8, 117
The Chicago School Poison
Back to top
EXCERPT
pages 117-118
Frank Knight is another pivotal figure. We have seen that he learned his J.B.
Clark through Alvin Johnson at Cornell. Then he ruled the Chicago School
for many years, bending it to his strong will and commanding personality.
"The close personal relations of the Knight coterie, maintained for over half
a century, has reinforced the strong common elements in their idea systems
..." (Reder, 1987: 415).

How did Knight come to Chicago? John D. Rockefeller funded Chicago
spectacularly in 1892, and started raiding other campuses by raising salaries.
Rockefeller picked the first President, William Rainey Harper. Harper picked the first economist, J. Laurence Laughlin, from Andrew Dickson White's Cornell (he liked Laughlin's rigid conservative and anti-populist views). Harper drove out Veblen in 1906, then died, leaving Laughlin in charge of economics until he retired in 1916. He passed the torch to J.M. Clark, the son and collaborator of J.B. Clark.6° Frank Knight first came to Chicago in 1917 from Laughlin's Cornell. The apostolic succession is fairly clear from Rockefeller to Harper to Laughlin to Clark to Knight.

According to William Barber, the early institutional decisions helped shape the "observable outcome" at Chicago to this day: in plain English, Chicago is still the lengthened shadow of John D. Rockefeller (Barber, 1988d: 242, 248, 263-4, 265). We may assume that the man who hired publicist Ivy Lee to polish his tarnished reputation also picked his own private University President with that in mind. Rockefeller and Harper are long gone, but the problem they exemplify is as perpetual as the maldistribution of wealth and the corruption of politics. "It is not what has been given but what is hoped for that influences most the policy of university authorities" (Ross, 1914: 166).

In terms of numbers, and intensity of feeling generated, Knight probably produced more NCEists and NCEism than anyone in history. He made no secret of his firm opposition to Henry George and ideas that might aid or comfort Georgists. His enduring interest and his viewpoint are clear from the title "Fallacies in the Single Tax" (1953).

In treating rent, Knight totally fuses the individual and the social viewpoints.
A cost to one firm is a cost to society: there is no aggregation problem, no fallacy of composition, and no remote possibilty that "rent" might have more than the one meaning he assigned to it.

Anyway, to Knight all land value is a human product. The single tax, says Knight, is an invention of city men who never knew the soil (recall Alvin Johnson and his "fresh cheeked maidens"). Among the human activities and investments that create land, by Knight, is "killing off previous claimants" (1924, rpt. I 952, pp. 167-69). It reads like a caricature of Chicago, but it is Chicago, from the fountainhead himself. The American Economic Association has laid on its hands, reprinting it as a "classic".

Consistently, Knight also argues that slave-owners had just title to their slaves, because of society's sanction, and - note this well - because there was open competition for the capture of slaves (1953: 810). Competition is the key, it can justify anything. …

Continue to FULL text PDF HERE

Back to top

Go to: Economic Rent Explained
Or, Irish Sovereignty Crisis
Or, The Corruption of Economics, CH. 1