Dear all:
I welcome Warren's effort to summarize and especially
to make his points clearly. I disagree, however, that
others and I have been talking past each other. With
all due respect, I believe that I fully understand the
non-ideological points he is making and that I have
understood them from the start. The same is true of
Roger's points. The question is whether they
understand my points. I guess not.
(I should add parenthetically that I think that I
fully understand the difficulty of dealing with
arguments that are so different from one's own that
one is at wits end to explain them. I am not in the
least offended by Warren's comments and I hope that he
and others will not be offended by mine.)
My major point is simple. Whether, in a market
economy, a thing is a good or resource and how much it
is worth must be determined through interactive
entrepreneurship. Without entrepreneurship there can
be no demand curve or supply curve of land and no
increments in price. It follows that an economist who
tries to logically justify a land tax policy based on
changes in the price of land has a duty to defend the
policy by showing how it will affect entrepreneurship.
The policy recommended by Georgists requires someone
to determine (within limits that are tolerable given
the circumstances) not only the change in market value
of each parcel of land but also the extent to which
that change reflects an unearned increment. Warren and
others believe that they (or some government official)
can do this. In my view, this is an error and I think
that there are two reasons why they make it. The first
is that because they fail to comprehend the complexity
of (entrepreneur-based) market interaction, they
misjudge the ability to achieve the intended
consequences by means of an (efficiently administered)
economic policy. My way of expressing this is to say
that they do not appreciate the entrepreneurship
entailed in causing wants to be satisfied under market
economy conditions. The second is that they have been
victims of indoctrination by means of Marshallian
microeconomics. I discuss each in turn. Then I state
some conclusions and discuss some peripheral matters.
Tax Assessment, Complexity, and Entrepreneurship
We can start with the tax assessor's problem. The
Georgist tax assessor's goal is to determine whether
and to what extent a change in the price of a parcel
of land reflects an UNEARNED INCREMENT. It is not
merely to determine the magnitude of a change in the
market price of a parcel of land, which is difficult
enough. Perhaps the best way for me to describe the
tax assessor's problem is to give an example.
When the Disney corporation transformed the cheap land
of sand and swamp outside of Orlando Florida into a
giant theme park, people came to visit and to take
jobs. Both the land owned by Disney and that not owned
by them increased in price. The price increase in
Disney-owned land presumably was earned; that of non
Disney-owned land was partly unearned. But not
totally. Other non-Disney entrepreneurs anticipated
the higher land prices and the demand for other
services that Disney had not provided. They bought
land and either employed it in a way that enabled them
to take earn profit by serving the expected visitors
and new residents or sold it to those who employed it
in this way. This buying, selling and development has
been in continuous flux since the process began, as
entrepreneurs have continually identified uses of the
land parcels that were not known before.
Land prices near Orlando increased. But could a tax
assessor determine the sizes of the earned and
unearned increments? To explain the earned increment,
he would have to be willing and able to explain how
the increment was earned. I cannot imagine how he
would be able. (For willingness, one must turn to
Public Choice.) The tax assessor is likely to have
access to the record of the prices of past
transactions. But without further detailed historical
investigation, which requires knowledge of the
entrepreneurial judgments that led to each price
change, there is no way to know whether an increment
in price was earned or unearned. The Georgist, so far
as I can tell, shows no appreciation for the problem
of further investigation. Yet without such
investigation, a tax assessor could never find the
elusive unearned increment.
The essence of urban development over a long time is
similar to the change that occur ed more quickly in
the case of Disney. In a large city, such changes are
continuous, diverse, and as complex as the sum of the
entrepreneurial judgments that cause them. The tax
assessor must know these judgments to determine the
elusive unearned increment.
Indoctrination Through Marshallian Microeconomics
Marshallian economics, as it is taught in the
textbooks, begins with the assumption that demand and
supply conditions already exist without having to be
discovered and communicated and without
entrepreneurial judgments having to be made. This lack
of realism is OK as a beginning point -- a part of a
didactic program (which, unfortunately, is never
completed in modern curricula). But it is not suited
as a basis for recommending policy because the
assumptions are not realistic. Policies based on such
assumptions disregard the need for an incentive to
make the discoveries, to carry out the communications,
and to make the entrepreneurial judgments.
Marshallian indoctrination seems to be the reason that
members of the list are confused about a number of
issues. An example is the price inelasticity of
supply. Price inelasticity of supply refers to
identical units of an homogeneous item that are owned
or could be supplied by different individuals. Is it
not obvious that, in reality, parcels of land that
have identical physical size do not possess this
homogeneous characteristic in the eyes of those whose
knowledge causes them to be resources and to have
prices? Carl Menger (Principles) seems to have been
the first to point out that a resource cannot exist
independently of the knowledge needed to know how it
can be used to satisfy a want. But Marshallian
microeconomics makes no mention of this lesson. The
major hurdle faced by one who wants to base a policy
on the assumption of the price inelasticity of supply
of land is to show how to homogenize the parcels of
the real world, which are distinctly different in the
eyes of entrepreneurs. The knowledge needed to do this
is similar to that needed by the tax assessor. One
would have to conduct a special historical
investigation -- one that would reveal the
entrepreneurial reasoning behind each increment in
price of each parcel of land.
The proper response to someone to claims that real
land in real economic interaction has the
characteristics of supply inelasticity is to demand
proof. Davenport mockingly called himself "a single
taxer of the looser observance." He meant that he
approved wholeheartedly of taxing the unearned
increment. But he did not have a clue about how
somebody could find it and did not believe that anyone
else had. The ASSUMPTION that land is price inelastic
in supply is not a means of finding it. It is a means
of evading the issue.
Talking Past
I agree with Warren that we have been talking past
each other. But I am persuaded that the reason is a
combination of intellectual intransigence on the part
of others and Marshallian indoctrination. Warren
writes about having believed in the Georgian idea from
his days as an undergraduate. I cannot say that, as an
undergraduate, I ever bought into this idea. But I was
certainly susceptible to it. Most of us were subject
to the same indoctrination. We were taught wrongly to
believe (1) that conditions that determine demand and
supply, as well as the prices themselves, can be known
without entrepreneurship and (2) that real world
applications of economic theory based on assumptions
about such conditions can be made without accounting
for entrepreneurship.
This kind of brainwashing need not be permanent. We
can learn why we talk past others who seem to have
similar beliefs in some respects. We can do this by
first identifying ours and their fundamental economic
beliefs -- the ones that we had to memorize and
internalize to pass those first examinations -- and
then subjecting them to critical examination. We learn
about alternatives and compare them.
Addenda
I would like to assure Warren that I do not believe
that one can measure consumer surplus or to tax it in
any meaningful way. My answer to an earlier question
in this regard was a rhetorical answer to a question
about what tax I would suggest in lieu of the land
tax. George's noteworthy arguments for the land tax
are not related to the ease with which land prices can
be taxed. They are based on the assumption that an
unearned increment exists and can be identified. My
answer was an effort to show the irrelevance of the
question to the issue at hand.
Warren claims that "the owner per se of oil land does
nothing and yet reaps where he has not sown." Which
oil land is he writing about? The focus on oil land
gains seems to me to be a rhetorical ploy that is
especially appealing in these days when many people
resent gains by terrorist-sponsoring middle eastern
oil-land owners. In any case it is a good example of
disregarded entrepreneurship. Oil has existed for a
longer time that human beings, yet it was not regarded
as a resource in the modern sense until about 150
years ago. Since that time great effort and expense
have gone into discovering it and transforming it into
a usable substance. Has Warren read the history of the
oil magnates? Does it not read somewhat like the
history of Microsoft and Disney? Does Warren think
that it is possible to separate the earned from the
unearned increment in the prices of different kinds of
'oil land' located at different places, some of which
entrepreneurs regard as valuable only if oil prices
are high? How would he go about assessing oil land?
Some readers may not recall that I started this
discussion by criticizing Laurent's review of George.
I did this in order to show how Herbert Davenport used
the entrepreneur view to drive the nail into the
coffin of the single tax idea. I published a paper on
this about 10 years ago that nobody seems to have
read. I have come with some sadness to form the
opinion that some members appear to lack the tools
necessary to comprehend my demonstration. I understand
more as a result of this discussion why Davenport's
revolutionary work has been neglected.
Pat Gunning
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