18 Clark: apostle of two-factor economics - Part III: nineteenth-century Americas critics

American Journal of Economics and Sociology, The,  Nov, 2003  by Kris Feder

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The problem, of course, is that to achieve this theoretical result, we abstracted from the very features of the real economy that account for the problems that the single tax was meant to solve. In a real dynamic economy, capitalized values reflect subjective estimates regarding an uncertain future. When expectations are revised in response to changing conditions, the "rent" of a particular capital good diverges from what would yield normal interest on sunk cost, that is, the actual amount initially invested by production or purchase of the asset. A capital gain or loss is required to reestablish asset equilibrium.

Ironically, Clark's methodology undercuts his own argument that the single tax would unfairly burden landowners. According to Clark's stow, all future taxes on rent or land value would be fully capitalized in present prices. If the discounted present value of taxes attaching to a particular parcel is $100, then the purchase price of that parcel is exactly $100 less than it would be in the absence of the tax. No burden whatsoever is imposed on landowners.

Whatever its merits as an analytical device, Clark's static model does not carry far against Henry George, whose theory concentrated on the dynamics of a real economy. The passing of time is of little significance in a world where the future is fully known and accounted for in advance. Even Clark admitted that actual economies are normally moving between shifting equilibria at any moment, but he ignored most of George's arguments about speculation, strategic behavior, risk, error, transaction costs, capital market imperfections, collusion, hoarding, externalities, monopoly, location value, monetary disturbances, macroeconomic cycles, the political process, and the effects of public spending on land values. By focusing on competitive static equilibrium in a model with perfect foresight, Clark provides no framework with which to challenge George's theory of economic systems. Such a model can neither substantiate nor refute George's case for the single tax.

Clark's primary defense against George's dynamic analysis was to say that economics had not yet evolved to the point where it was prepared undertake a study of dynamics. "If present plans shall be realized," he wrote in 1899, "this work will in due time be followed by another, which will deal with the distinctly dynamic laws." (45) Clark was professionally active for another quarter century, but never produced the promised volume.

Value from Production and Value from Obligation

In a chapter in Progress and Poverty on "The Meaning of the Terms," George critically reviewed the definitions of "land," "labor," and "capital" given by political economists. He could find no writer who had provided a satisfactory taxonomy of factors and applied his definitions consistently in his reasoning. John Bates Clark was hardly the first to subsume land under capital:

   Henry C. Carey, the American apostle of protectionism, defines
   capital as "the instrument by which man obtains mastery over
   nature, including in it the physical and mental powers of man
   himself." ... An English economic writer of high standing, Mr.
   Wm. Thornton, begins an elaborate examination of the relations
   of labor and capital by stating that he will include land with
   capital, which is very much as if one who proposed to
   teach algebra should begin with the declaration that he would
   consider the signs plus and minus as meaning the same thing and
   having the same value. An American writer, also of high standing,
   Professor Francis A. Walker, makes the same declaration.... Another
   English writer, N. A. Nicholson ... seems to cap the climax of
   absurdity by declaring in one paragraph ... that "capital must
   of course be accumulated by saving," and in the very next
   paragraph stating that "the land which produces a crop,
   the plow which turns the soil, the labor which secures the produce,
   and the produce itself, if a material profit is to be derived from
   its employment, are all alike capital." But how land and labor
   are to be accumulated by saving them he nowhere condescends to
   explain. (46)