Comments on "Echoes of Henry George in Modern Analysis"

American Journal of Economics and Sociology, The,  Nov, 2004  by Fred E. Foldvary

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These three papers demonstrate how Henry George's late 19th-century economic thoughts not only echo but indeed resonate in modern economic analysis. George's influence is not confined to land issues but permeates into welfare economics, macroeconomics, urban economics, public economics, economic development, and environmental economics. However, too often in textbooks as well as in scholarly literature, George's thought is compartmentalized, acknowledged in discussing a topic such as how the elasticity of supply affects the welfare loss of taxation, but then ignored in the chapter on tax policy. So it is an excellent contribution to show how George's thought still resonates in the topics analyzed in these papers.

In an echo, a person calls out to a vista, and the voice bounces from walls and mountains back to the caller. An echo is more haunting than a mirror, because the returning voice is not a replicated reverse image. In an echo, it seems like the mountains and walls are returning the call. So, too, in modern echoes of George's thought, the modern analyst does not merely replicate but rather invokes George, harking back to him for inspiration, analysis, and expression.

To change metaphors, the citation and replication of writing are but the visible tip of the iceberg, the submerged part being Georgian influence and theoretical structure that is tacit, unacknowledged, perhaps unknown and even unknowable. Much of one's influence leaves no trace; it can be a student who gets an idea and much later expands it into creative new thought, the original seed long forgotten. It can be lines of analysis and structures of thought that subtly

alter one's view of the world, without being some specific text or proposition that can be explicitly cited. So the echoes in these papers represent only the visible, explicit echo of Henry George, while the more implicit and subtle influence perhaps has become such a part of the theoretical infrastructure that it is no longer seen as Georgian. Such may be the case, for example, in George's marginal analysis.

Land Speculation

THE PAPER BY NICOLAUS TIDEMAN, "George on Land Speculation and the Winner's Curse," touches on auctions and land speculation. Land speculation is at the heart of Georgian macroeconomics, including George's theory of the business cycle and his explanation for poverty and wealth inequality, and yet this is the most neglected and misunderstood aspect of his thought. Free-market analysts (those who believe unimpeded markets work well) typically believe that since markets are necessarily and ubiquitously efficient, land speculation is rational, productive, and just. Those not so enamored of unhampered markets typically do not differentiate between the current intervention-skewed markets and the pure market and so, seeing "markets" as flawed, they seek immediate governmental remedies for effects; the concept that other interventions could have caused the dysfunctions lies outside their scope of vision.

The Austrian School of economic thought has given us the insight that all human action is speculative, seeking means toward ends in the face of an uncertain future. Therefore, speculation per se, as the imagining of future outcomes, and action based on this speculation of the future, cannot be a dysfunction. In Georgian analysis, the reason land speculation becomes a problem is that it takes place not in a pure market but in a market already skewed by intervention. But this is a type of intervention that lies outside the imagination of conventional free-market thought, because it is an intervention not of governmental malfeasance but of societal nonfeasance. It is the nonfeasant failure to harness site rentals.

Tideman invokes George's proposition that the taxation of site rentals is better than neutral, since not only has it no excess burden, it can have an excess benefit in enhancing the productivity of land use by eliminating market-hampering land speculation. George's proposition is that people take title to more land than they productively use or let others use.

Consider a vacant lot in the city center, next to a tall building. There is much foregone rent in the vacant lot, perhaps generating a bit of rent as a parking lot, but only a small fraction of the potential rent, let alone the return on the potential building. But the holder expects that in a decade the growth of population, commerce, and infrastructure will warrant an even taller, bigger building. A building constructed today would have to be torn down then in order to make the best use of the land in the future. The building is a long-lasting capital good that takes much time to return the cost plus a profit. So construction is held off. And if in fact the expectations are realized, this withholding of use is rational and productive, as the gain from the rentals would be less than the cost of destroying the capital goods.

But in historical fact, such expectations are often not realized. Ten years into the future, the demand has not risen so much, but the holder now expects this to happen in the next decade, so he holds on. Yet once again, in the following decade, again the expectations were wrong, but the holder still expects the gains to come and holds on. And so the parking lot continues year after year, the holder constantly optimistic, even though the hopes turn out to be in vain. Ex post, the land is seen as underused and causing construction and production to be located elsewhere, namely, at the urban fringe, contributing to sprawl.