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Saturday, April 18, 2009

Political Economy and the Economic Crisis Part II

Political Economy and the Economic Crisis Part II

by Lev Lafayette


What Should We Do?


The very thing that is required is a recognition of the importance of normative economics and political economy in the discussion of contemporary economics. For these essentially moral questions - who owns what, and why - do have highly significant positive effects as well. If ownership of the factors of production favours a class in exchange-value greater than their contribution to the production of use-value then the economy as a whole will inevitably suffer.

The notion of factors of production and economic classes is poorly understood today. It is a field of inquiry largely ignored since the development neoclassical economics in the latter part of the 19th century. Whilst providing important contributions to price, value, scarcity and studies in marginal utility, the conflation of land and capital into a single entity has all the signs of a tragic mistake. The neoclassical economists contributed to the conflation by converting land into capital, essentially an accountant's recording rather than an economist's recording. But also some rather dogmatic and vulgar Marxists could only see the existence of the worker and capitalist classes. Finally, the conflation was partially due to the influence of American functional sociology which investigated relationships and activity on the basis of income, rather than ownership of the means of production.

In contrast all classical economists, including Adam Smith, David Ricardo, Karl Marx, Léon Walras and John Stuart Mill, recognised the distinction between the factors of production (land, labour and capital), the respective sources of income derived from each of these factors (rent, wages and interest) and the respective economic classes (landlord, worker and capitalist); it is noted of course that an individual can be a member of multiple classes simultaneously and proportional to the way their income is derived. In addition to this it is useful to distinguish between public and private ownership of the factors of production, or socialism and capitalism, and between planned or market mechanisms for exchange. Another exogenous dimension refers to a political subsystem that operates in parallel to the economic; by which varieties of dictatorship may be contrasted with varieties of democracy.

Rather than a "mixed economy", where the public and private ownership is appropriately allocated along with planning and market mechanisms is not entirely unfair to suggest that the world system is a "muddled economy", a quasi-political system where productivity and efficiency come a poor second to supporting an increasingly powerful alliance of a section of the capitalist class with the landlord class. Recognising these class relations brings the normative question; on what possible basis is earned income justified? With the assumption of honest provision of labour and the honest acquisition of capital, the moral right of wages and interest can be ascertained; but the same cannot for the income of the landlord class. Their income is acquired entirely from the ownership of a pre-existing resource which is necessary for other economic activity; in effect the landlord derives their income for workers and capitalists whilst providing nothing in return.

The long-recognised solution to this injustice is the public socialisation of income according to site-rental market value, and the use of this income for public expenditure, instead of the range of onerous and inefficient taxes placed on workers and capitalists and all of which come with both a high administrative cost and deadweight loss through the restriction of trade (land value taxation in contrast suffers from neither of these features). Economists are nearly unanimous that as much public income should be derived from land values and use of natural resource as possible; and as little as possible should be derived from labour, capital and transactions. The normative effect should be the abolition of the premodern landlord class as the normative economic priority for advocates of socialism and capitalism alike.

Such a normative claim is not made however without reference to positive effects. With both the incentive to seek rental income from not engaging in productive activity, economic activity is redirected towards the actual production of goods and services. This raises both the appropriate normative and economic models for ownership and distribution in all these cases which, by necessity, must be abstracted. A general principle that can be suggested here is that the closer that a good or service is to being a natural monopoly the greater the requirement for centralised socialisation as a public service, and the close the good or service is to being in accord to perfect competition (including monopolistic competition), the greater the requirement for decentralised private ownership in a variety of forms (including cooperatives etc). Likewise the smaller the number of input and output variables the greater the possibility of accurate planning, whereas the greater number of such variables suggests efficacy of a price mechanism to deal with issues of relative scarcity and opportunity cost. The aforementioned public income should be spend entirely on matters of transparent public goods for the general benefit; the mitigation of negative externalities (e.g., pollution), the enhancement of positive externalities (e.g., networks, education).

Whilst if one wants to understand economics, they should study it. In the study of economics one cannot avoid finding a point where public policy seems totally at odds with the view of nearly all economists. I refer to the way that public income is derived (invariably by taxes on labour and capital), and the way that the private ownership of land (used here in the economic sense of all natural resources) is endorsed. John Locke was the first to suggest that one is the legitimate owner of their labour, and the improvements that they make to nature. Following a stricter class analysis, David Ricardo expressed it rather bluntly. "[T]he interest of the landlord is always opposed to the interest of every other class in the community."

Today, nearly every economist in the world, whether liberal, conservative or radical, agrees that public finances should be largely derived from resource rents. The radical capitalist Milton Friedman argues that "In my opinion the least bad tax is the property tax on the unimproved value of land", whereas the neo-Keynesian Paul Sameulson argues that "pure ground rent is in the nature of a 'surplus,' which can be taxed heavily without distorting production incentives or reducing efficiency". The conservative Robert Solow has claimed "For efficiency, for adequate revenue, and for justice, every user of land should be required to make an annual payment to the local government equal to the current rental value of the land he or she prevents others from using", whereas the radical antifascist Jewish refugee and economist Franco Modigliani stated "It is important that the rent of land be retained as a source of government revenue". Finally, the maverick socialist William Vickery claims "While the governments of developed nations with market economies collect some of the rent of land, they do not collect nearly as much as they could, and they therefore make unnecessarily great use of taxes that impede their economies - taxes on such things as incomes, sales, and the value of capital goods."

Each of the people just quoted are Noble laureates in economics. One can reasonably make the assumption that they have some idea of what they are talking about. If that is insufficient evidence however, consider that in 1991 no less than thirty five of the top economists of the United States - all either Noble prize winners, professors, or deans and across the political spectrum - wrote to to the then President of the Soviet Union Mikhail Gorbachev urging him in the transition to a market economy to retain public ownership of land and to derive a market-based common income from land-rents. Unfortunately, in the replacement of Gorbachev by Boris Yelstin the latter capitulated to demands to a cheap sell off natural resources, the results of which are empirically and readily available; mass impoverishment and even malnutrition in what used to be the second most powerful nation on earth.

Those who labour for wages and those who invest for interest, are indeed productive and beneficial. But the landlord class, increasingly powerful as the revolutionary aspects of capitalism are diluted into a new feudalism mediated by money rather than genetic lineage, produce nothing of value that was not already present in nature And so it is today that the productive worker and the productive capitalist are both fettered by taxes, tariffs, and rents, onerous on their ability to provide goods, services and create wealth. And so it is, more and more aggressive wars are fought for the control of natural resources with horrendous civilian causalities.

What happens when more and more people try to get into the landlord's game, which was called 'Monopoly', for good reason?

What happens when the banks start lending money with cavalier disregard at extremely low rates and lax conditions, with with the assumption that "someone else" will engage in the productive labour and investment that will give a location a good rental price?

What happens when fewer and fewer invest in new business, industry, new goods, and new services? What happens when the expected returns from "somebody else" do not materialise?

'What happens?' indeed. The monopolists find themselves with a debt that they cannot afford to repay. What was once marked as an asset by the banks suddenly becomes written off. Confidence is lost, industry fails, economies shrink, unemployment for masses loom. And like pigs the monopolists come squealing once again before the our governments. They plead for the government, which means us, to prime the printing presses and pay for hundreds of billions of bad assets, under the assumption that "confidence" and "stability" in the credit market will be recovered - and so they can exploit both worker and investor yet again.

That is what happens.

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