Re the Mongiovi-Lee-Colander dialogue, I love Colander's quote from
Robinson, "Neoclassicals change the emphasis from big questions to
price-of-eggs questions". Pithy and on target!

 

In this connection, I suggest another look at Charles Ramsey's work, guided
by A.C. Pigou, on supply, demand, and taxation.

 

A.C. Pigou (orig. 1928) A Study in Public Finance. [3rd Ed., 1947, rpt.
1949. London: Macmillan & Co. Ltd.], writes as follows:

 

pp.105-09 on the Ramsey rule. "by analogous reasoning it can be shown that,
when one source of production yields an absolutely inelastic supply, ... a
given revenue can be raised with less sacrifice by concentrating taxation
upon this use than by imposing uniform rates of tax on all uses." - p105

 

p.108, "if there is any commodity for which either the demand or the supply
is absolutely inelastic, the formula implies that the rate of tax imposed on
every other commodity must be nil, i.e. that the whole of the revenue wanted
must be raised on that commodity."

 

That looks a lot like Henry George, cautiously laid between the lines
timidly and obliquely.

 

Several texts I have consulted explain the Ramsey Rule solely in terms of
demand, not mentioning supply. However, Pigou is the most authoritative
source on Ramsey, other than Ramsey himself. Ramsey was his protege; they
worked closely together, and Pigou's book was published just a year
following Ramsey's article.

 

So, in this case it looks as though Neoclassical economics consisted of
reshaping a classically inspired text to "change the emphasis from big
questions to price-of-eggs questions", as that wonderful Mrs. Robinson said.

 

Allyn Young, 1929, got Pigou's and Ramsey's point all right [Review of A.C.
Pigou: a Study in Public Finance, 1928. EJ XXXIX, March. Rpt in Musgrave &
Peacock, Readings in the Economics of Taxation, 1959 (Irwin) pp.13-18]

 

P.15, Young quotes Pigou, rates should "become progressively higher as we
pass from uses of very elastic demand OR SUPPLY (emphasis mine) to uses
where demand OR SUPPLY (emphasis mine) are progressively less elastic." 

 

More recently, I find only one source that is true to Ramsey and Pigou:
Joseph Stiglitz, 1986, Economics of the Public Sector, (NY & London: W.W.
Norton):

 

P.404, "Ramsey taxes are proportional to the sum of the reciprocal of the
elasticity of demand AND SUPPLY: (emphasis mine)"

 

He puts this in the form of a simple equation (also found in Pigou, p.108,
evidently taken directly from Ramsey).

 

NOTE THAT IF THE ELASTICITY OF SUPPLY (OR DEMAND) IS ZERO, TAX RATES MAY BE
AS HIGH AS YOU PLEASE.

 

In practical terms, what does this mean? There is no commodity for which the
demand is inelastic for all possible prices. For most items, this is obvious
at all prices. Suppose, though, there is something so essential, and buyers
so obsessive (like serious drug addicts), that they are frantic to get the
item "at any price." Is this then a source of infinite tax revenues? No,
because if you raise the tax-price high enough, buyers will run out of
money. Think compensated demand curves.

 

With supply, it is another story. The supply of land is absolutely
inelastic, at any price. The Ramsey Rule, therefore, tells us plainly that,
to repeat Pigou:

 

"When one source of production yields an absolutely inelastic supply, ... A
given revenue can be raised with less sacrifice by concentrating taxation
upon this use than by imposing uniform rates of tax on all uses."

 

"... if there is any commodity for which ... the supply is absolutely
inelastic, the formula implies that the rate of tax imposed on every other
commodity must be nil, i.e. that the whole of the revenue wanted must be
raised on that commodity." -pp.105, 108.

 

And yet, most modern texts on public finance explain the Ramsey Rule solely
in terms of demand, not even mentioning supply. How can we explain such a
curious flight from the source, and from reality? Some, alas, are just
copying from each other, but it had to start someplace. Are these writers
simply not ready to face the Georgist implications of the Ramsey Rule? Is
that attitude a component of Neo-classical economics? It was assuredly
central to the thinking of J.B. Clark, who focused the first half or more of
his career on attacking Henry George, as documented in Gaffney,
"Neo-classical Economics as a Stratagem". 

 

Mason Gaffney