Unsound economics theory the root of our problems

Sunday, 11 January 2009 08:14
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Nearly two years after the bank crisis which initiated the present phase of the economic crisis, it is evident that the experts, including the people who advise governments, have a very incomplete grasp of what is happening. Current economic theory ignores land and its role in the economy...

If it do not, we should not be finding people like Lord Turner, head of Britain's Financial Services Authority, advocating the so-called Tobin Tax on financial transactions. That the failure in understanding runs deep is proven when organisations like the Tax Justice Campaign devote their energy to promoting a crack-down on tax havens, thereby demonstrating a refusal to contemplate the underlying principles, the neglect of which is the cause of the problem.

The gap in understanding is filled by economist Brian Hodgkinson, whose book, "A New Model of the Economy", makes it possible to understand what is really happening. Most of what is wrong, he shows, is due to the private appropriation of the rent of land. He points out that as this is a value created by the actions and presence of the community, it is society's natural source of public revenue. But when this income stream is appropriated by land owners, governments are forced to levy taxes on wages and production. A host of problems ensue.

Most obviously, it means that land titles become a commodity to be traded in. And once the banking system is involved in this trade, damaging cyclic booms and slumps occur, such as the present one.

It also becomes impossible to carry out economic activity on marginal locations. Populations therefore concentrate in those places most favoured by the advantages of geography. Wages come to be regarded and treated as a cost instead of the natural share of production. Marginal labour is unable to produce enough to cover those costs and so there is a permanent pool of unemployed men and women, imposing a burden on government to alleviate the resulting poverty, as costly systems of welfare are then needed. But the connection between cause and effect is not appreciated because both micro- and macro-economic theory ignores land, mistakenly regarding it as "capital." The chronic misuse of this term serves to compound the confusion, since it is usually considered to include finance for credit, money, shares and bonds as well as physical capital. It is this confusion that has left governments world-wide unable to achieve a state of stable and universal prosperity in their jurisdictions. They don't understand what they are dealing with.

Although the book is written using technical terms perhaps unfamiliar to those who have not studied economics in an academic context, the general reader can skip them yet still gain a useful overview of Hodgkinson's narrative. He concludes by putting the case for the use of public revenue in terms familiar to mainstream economists.

It is timely. For over a century, advocacy of land value taxation has depended virtually on a single text: 'Progress and Poverty' by Henry George, and subsequent editions and abridgements. The arguments presented by Henry George, who was writing in the 1870s, cut no ice with people who have been taught to the contemporary economic paradigm. In the light of this new book, however, which is published by Shepherd-Walwyn and costs £20 (£30 from Amazon), advocates of LVT might ponder the need to think of a new name for themselves.

Summary of 'A New Model of the Economy'

 

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