Political Economy 13: Capital – Part II – Distortion

1. As mentioned on previous posts, Political Economy saw a distortion of its teaching by the academics that taught it: they dubbed land as capital! This post will examine this further.

In 1879 in New York, Progress and Povertywas published by the journalist/economist Henry George. It became a best seller in a short amount of time, despite pertaining on economic issues and suggesting Land Value Taxation as the only necessary tax. Following this publication various movements supporting LVT sprang in the US, Britain, Germany and elsewhere, pushing for tax reform and the institution of LVT in place of other taxes.

As was to be expected, all the landowners were against it. In what follows we will focus on the US, where the distortion of Political Economy took place.

The American historian F. Shannon (author of The Farmer’s Last Frontier, New York, 1961), wrote that before 1870, men like Win Scully were commanding vast swathes of land, reaching up to 250,000 acres. Chapman owned 650,000 and later went beyond a million. In 1886 there were 29 syndicates and a few people that were the owners of a combined 20,747,000 acres, while 11 logging companies owned over 12 million acres.

These factions, together with the railroad companies (each of the latter owning over 500,000 acres or above) were funding newly established Universities. For example, the Economics department of Wharton School in the University of Pennsylvania was funded by the businessman J. Wharton, who was the owner of 100,000 acres of land. Cornell University was funded by E. Cornell who held the monopoly on the railroads under Western Union, and who at the time commanded 1 million acres! Standford University was funded by the railroad company Southern Pacific and so on and so forth.

2. In 1908, professor S. N. Patten of Wharton School in the University of Pennsylvania wrote that “nothing is more pleasing to a socialist or supporter of the Single Tax (=LVT) as much as quoting experts… Economic theory must be restated so that it is founded solely on new facts… It cannot accept socialism and must… become more fully detached from history, sociology and other fields of study”.

We will not delve into further detail here, otherwise this post would end up being several pages long. But the “experts” that Patten refers to here are the classical  economists (Smith, Ricardo, Mill etc). “Socialism” has nothing to do here with Proudhon or Marx, but it is implying the supporters of LVT. Marx did not comment on this movement having died in 1883, but he did mention in a few of his books that economic rent should be returned to the state in the form of a tax. But Engels, who did not fully grasp Marx’s inquisitive thoughts and even misunderstood some of his ideas, was very critical of the Single Tax.

 

3. Patten was not the first nor the only one to express such views. Earlier, in 1899, J.B. Clark (seat of Economics at Columbia) published his main work The Distribution of Wealth, a compendium of past works of his since 1886. Let it be noted that Dean of Columbia at the time was S. Lowe, another landowner who personally hired Clark. The purpose of this assignment was to alter the original principles of Political Economy, as they had been stated by the classical writes up to Alfred Marshall (Cambridge, UK, 1900) and, together with other professors in other universities, to re-state those principles so that they conformed with the demands of the landowners that reaped the economic rent.

In 1886, Clark, in his work The Philosophy of Wealthhad, rather openly and blindly, attacked “various teachings on the rights of property” (p.1-2) and against Henry George personally writing that he and others who share his views “ignore the productive action of capital”. This was a totally morose criticism, since George was repeatedly suggesting detaching capital from taxation! (let it also be noted that Clark, prior to 1886 was flirting with socialism, but when it came down to his appointment as a lecturer and his later career as an assistant professor, he renounced his former heretical views, espousing views that conformed with the landowning powers-that-be at the Universities.

 

4. In his Distribution of Wealth, Clark redefines the nature and function of capital so that it also includes land (p. 9-11 and 116-20) and suggests a neo-classical economic model where all the contributing factors are in limited supply (p.338). This is groundless since land (which is not capital according to the classical writers) is in limited supply while all other factors (tools, machines, vehicles etc) can be reproduced endlessly. But Clark succeeded in equating land with capital. And this distortion was here to stay!

Many others toed this new line. The academics who did not support it faced being rejected from universities and many were fired – such as S. Nearing from Penn State, E. Andrews from Brown, A. Eaton from Oregon and others.

 

5.Marshall, who taught the famous Keynes at Cambridge, wrote around the same time: (Principles of Economics, Appendix G §8: )

 

… from an economic and an  ethical point of view, land must everywhere and always be classed as a thing by itself. If from the first the State had retained  true rents in its own hands, the vigour of industry and accumulation need not have been impaired…

 

A few years later, in 1937, J. Schumpeter, a Harvard Professor also wrote (History of Economic Analysis, 1954): “…we shall notice a tendency to harness the concept of rent into the service of entirely different purposes… we shall observe a struggle between old and new ideas that was an important cause, if not the only one, of waverings, hazinesses, and spurious issues.” Despite several eminent economists’ attempts to extend the definition of rent to other uses, “this only served to expose its emptiness” (pp.900-3).

By the first half of the 20thcentury, the distortion had taken root as a mainstream, unquestionable dogma in economic theory; Frank Knight, of the Chicago school writes with absolute certainty (On the History and Method of Economics, 1956) that “the notion that natural resources [=land] are not produced [from human labour] is wrong… Land is pure capital” (p.53-4). Let it be noted that the same person also claimed that the slave owners in the 19thcentury had “fair titles of possession”.

 

The reader will forgive me for the length and frequency of references in this post, but it is necessary to understand that the distortion was made purposely by academics in the interest of unwarranted gains.

This distortion still rules over todays teaching of Economics in all Universities and therefore in politics and journalism as well. Yet another component is the grave ignorance which afflicts the masses.

-Nikodemos

 

Click here to read other posts on the Political Economy series.

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