Our Unconscious Economic Theories
|January 9, 2007||Posted by Staff under Progress Report, The Progress Report|
Unconscious Economic Prejudices
Economic Biases Against Georgism
Why have the economic views commonly known as Georgism or geoism not become more popular? Perhaps, says author Ian Lambert, people in our civilization hold unconscious assumptions about economics that preclude, or make it difficult to understand, the Georgist viewpoint.
We are reprinting Lambert’s important presentation on this subject in weekly installments.
by Ian Lambert
7. Selfishness as the Primary Axiom
There is much in George’s work that can be traced back to The Physiocrats, Adam Smith and David Ricardo. Arguably, his greatest original contribution to the field of economic ideas was his criticism of selfishness as the primary axiom from which the whole of political economy can be derived. Ever since Smith’s famous reference in “The Wealth Of Nations” to our not relying on the benevolence of the butcher, the brewer or the baker but on their own self-interest, people on the Left and on the Right have assumed (without any real argument) that selfishness is the mainspring of “capitalism”. As Gordon Gekko in the film “Wall Street” puts it: “Greed is good”.
George maintained that there was a fundamental misapprehension here. Political economy was the study of the production and distribution of wealth, of how men move to satisfy their desires, not why they have those desires; his was a “value free” science. So, said George, why I want to own a Picasso or a Van Gogh is not part of the province of political economy. My desire to own it may be foolish; it may be the result of pure greed, avarice or vanity. So far as political economy is concerned it is irrelevant; it is concerned with how I go about acquiring it.
This led George to formulate the primary axiom on which the whole of political economy rests as follows: men move to satisfy their desires with the least exertion or detriment possible. This is the great grundnorm of political economy, a fact so obvious that it is likely to be dismissed as “a mere truism”. Yet, its significance is profound. (In fact, it is from this axiom and man’s ability to reason that man’s propensity to truck, barter and exchange – what Smith saw as primary and irrefutable – can be derived.)
George’s axiom in no way conflicts with the altruistic actions of men from time to time. If I wish to bestow a benefit upon someone, I will not give up all rational processes merely because I am not acting in my own selfish interests; on the contrary I will seek to maximize the benefit to the donee while minimizing the detriment to myself.
Thus, it becomes quite unnecessary to determine when altruism becomes enlightened self-interest which then becomes self-centeredness. We all do what we “want” or intend to do; that is inevitable. We will not act in a charitable manner until we want to. What my wants are, and what they should be, may be (and Smith and George both considered them to be) of supreme importance, but they are not part of the province of political economy.
8. Distribution and the Interfering Taxman
Another misapprehension concerns the nature of “distribution”. Ever since John Stuart Mill (and even before) it has been presumed that, while there may be scientific laws of production, distribution is a matter solely of human law:-
“The laws and conditions of the production of wealth partake of the character of physical truths. There is nothing optioned or arbitrary in them …..
But it is not so with the distribution of wealth. That is a matter of human institution solely. The things once there, mankind, individually or collectively can do with them as they like. They can place them at the disposal of whomsoever they please, and on whatever terms.” – John Stuart Mill (Principles of Political Economy).
George considered this argument to contain a logical fallacy:-
“The question that Mill is arguing is whether what is called in political economy the distribution of wealth is a matter of natural law or a matter of human law, and what he does is to cite the fact that in what is called human law the distribution of wealth, mankind can do as they like, and assume from that that the distribution of wealth in the economic sense of the term is a matter of human law – “a matter of human institution solely.”” – (SPE).
Production and Distribution were two sides of the same coin. Distribution was the process whereby production (or its proceeds of sale) was divided among those (the providers of the factors of production) who had produced it. People produced wealth in order that it might be distributed. Long before “supply side Reaganomics” and Laffer with his famous tax curve, George demonstrated that interference with the natural laws of distribution only resulted in a diminution in production:
… production in political economy is not to be conceived of as something which goes on for a while then stops, when its product wealth has been brought into being; nor is it to be conceived of as something related only to a production that is finished and done. Both production and distribution are properly conceived of as continuous, resembling not the drawing of water in a bucket but the drawing of water through a pipe – or better still, in the conveyance of water over an elevation by means of a bent pipe or siphon, of which the shorter arm may stand for production and the longer for distribution. It is in our power to tap this longer arm of the pipe at any point below the highest, and take what water is already there. But the moment we do so, the continuity of the stream is at an end, and the water will cease to flow.
Production and distribution are in fact not separate things, but two mentally distinguishable parts of one thing – the exertion of human labor in the satisfaction of human desire. Though materially distinguishable, they are as closely related as the two arms of the siphon. And as it is the outflow of water at the longer end of the siphon that is the cause of the inflow of water at the shorter end, so it is that distribution is really the cause of production, not production the cause of distribution. In the ordinary course, things are not distributed because they have been produced, but are produced in order that they may be distributed. Thus interference with the distribution of wealth is interference with the production of wealth, and shows its effect in lessened production.” – Henry George (SPE).
Taxation on production means an alteration in distribution. What was otherwise apportioned among the providers of the three factors land, labor and capital has now to be apportioned among those persons and, in addition, the sovereign. Those of us who have trained and practiced as tax practitioners in the U.K. will be well aware of the interfering effect of the Taxman. As George points out, distribution is the cause of production. Until people know what is going to be distributed to them they are not prepared to produce. Thus, the returns to the factors of production and the government have to be determined with sufficient certainty at the outset for production to take place at all. This is why there is always virtue in taxation which is fixed and simple; (this is one of the few virtues of the Community Charge, or “Poll Tax”, in Britain).
Now, the Taxman always poses a problem for the simple reason that, whereas you can always negotiate terms with the providers of the factors of production, you cannot negotiate with the Taxman. He is under a legal duty to recover taxation from the taxpayer, impartially and in accordance with the law. He has no discretion to barter, negotiate or waive in relation to the tax chargeable. Moreover, there is no scope for him being given (by parliament) any such discretion, because of the overriding principle that tax must be levied impartially and on an “equal” basis. (Even if he were given such a discretion, it is difficult to see how fruitful such negotiations could be, given that the Taxman has no service to offer; all he can offer by way of barter or exchange is some sort of waiver or concession.) Negotiations therefore proceed in the absence of the Taxman.
This might not cause a problem if it were not for the fact that tax legislation is notoriously complex and its application in particular cases far from clear. Doubts surrounding the applicability of certain statutory provisions will usually want to be resolved by the parties before proceeding, but all too often inquiries made of the Inland Revenue are met with the response that they cannot comment on hypothetical cases; they will only express a view after the transaction has been done (when it is too late for the taxpayer). In fairness to the Inland Revenue, providing a full blown question and answer service would cost a huge amount perhaps better spent on pursuing tax evaders. But pity the poor taxpayer; it is not his fault that the legislation does not make the position clear.
Moreover, even if the legislation is sufficiently clear to determine the tax for this year, there is no knowing what it may be next year, since tax rates and allowances are changed annually. This makes it incredibly difficult for the transacting parties to plan ahead. (Is there any wonder that businessmen view the Chancellor’s criticism of “short termism” in the markets as the pot calling the kettle black, when the government leads a truly hand to mouth existence and is quite unable to fix its tax rates and allowances more than a year in advance?!)
In addition to the disincentive effect of any taxation on production, and the literal demoralization caused by the government’s inability to control its own finances, there are massive costs in levying modern taxation. The amounts dissipated in the economy every year by the general costs of administering the British tax system must be staggering, particularly if you add in to the costs of administration and collection the taxpayer’s own costs, in terms of the tax managers, advisers and administrators he has to engage. The British government has succeeded in the 1980s in shifting an increasing amount of responsibility for administering the tax system on to the taxpayer himself (the best example is VAT). This succeeds in reducing the government’s costs but it does nothing to make the tax system any more “efficient” in terms of what is dissipated in the economy and the benefit of which accrues neither to the taxpayer nor to the government but to those in between (from Revenue employees to eminent tax counsel, among the most highly remunerated lawyers in Britain).
Since Lambert’s presentation was made, an important book The Losses of Nations has explored and quantified this problem of the ‘deadweight losses’ due to inefficient taxation. See this review of the book.
All taxes on production are taxes on distribution and interfere with production as a result. We need to impress upon governments (sovereign, state and local) both the efficiency and justice of a tax which is not levied on what is actually produced but on a quite different basis: a tax on the economic rent of land, which (as Milton Friedman and other economists freely admit) cannot be shifted to the other factors of production and does not act as a disincentive to produce, because it is levied on the rent that a site commands regardless of what that site is actually used to produce. Thus, unlike the old rates system, which penalized people who improved their property and rewarded those who let their properties go to waste, a tax on economic rent would actually promote production by forcing the landholder to put his land to productive use, rather than merely hold it (or more likely withhold it) in the speculative hope of an increase in value. We must get rid of the interfering Taxman.
END OF PART FOUR
Ian Lambert is a globetrotting man of many talents. This presentation was originally made at the 10th Annual Conference Of The Council Of Georgist Organizations, Santa Fe, New Mexico, July, 1990.
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