The year 2014 is the 100th anniversary of an economics article that was the final nail in the coffin of classical economics, as it marked the victory of the neoclassical economics war against land. This was a victory so great that economists today do not even realize that there had been such an academic war.
Alvin Saunders Johnson (1874-1971) was an American economist at several universities, including Columbia, the University of Chicago, and Cornell. He was a co-founder of the New School at New York City. In 1902 he wrote “Rent in Modern Economic Theory: An Essay in Distribution.” Johnson, along with other economists who were turning the classical theories of the 1800s into the neoclassical doctrines of the 1900s, generalized “rent,” from the yield of land, into any surplus above opportunity cost, i.e. above the cost needed to put a resource to its most productive use. For example, a movie star paid $1 million to act in a movie, whose next best opportunity is being a salesman earning $100,000, has an economic rent of $900,000.
In 1914, Johnson published “The Case against the Single Tax” in The Atlantic Monthly. As has been well explained by Prof. Mason Gaffney in The Corruption of Economics, Johnson played a major role in suppressing, by falsification, the land-tax ideas of Henry George. Land is now visible everywhere except in academic economics. For example, the generation of land value by public goods is not even mentioned in the general textbooks.
Johnson correctly stated that a tax on the entire rent of land would bring the purchase price down to zero, but he expressed it as: “the value kernel of landed property will have been seized by the state.” In policy analysis, we need to examine inflammatory vocabulary. The moral case for land-value taxation rests in the proposition that the benefits of nature belong to all humanity equally, that the creation of local land values by population and commerce belongs in equal shares to the members of those communities, and that the rentals generated by public works may be used to pay the providers, whether this be private-sector or government providers. None of this is confiscation or seizing by the state.
In Georgist ethics, the people own the rent, not the chiefs of state. A government may justly act as the agent of the people to protect their property, such as the atmosphere, from damage, and a government may, as the agent of the people, collect the rent to distribute it among them, or to use to pay for public goods. The premise that the rent belongs to the people implies that the rent is not being seized from the landowners as though these title holders are the morally legitimate owners, but rather that the state is facilitating the collection of the rent to the proper owners, the people. Hence the terminology used by Johnson taints his analysis and begs the question of the proper ownership of land rent.
Johnson continues his attack by calling the single tax on land value “propaganda for the universal confiscation of land.” Henry George had unfortunately stated in Progress and Poverty that “It is not necessary to confiscate land; it is only necessary to confiscate rent.” The Latin origin of “confiscate” is “confiscare,” from “fiscus” meaning the government’s treasury. Fiscal policy is about governmental revenue and spending. Thus in linguistic origin, to confiscate means simply to tax, to transfer assets to the public treasury. But in modern popular usage, to “confiscate” means to take by force, with the implication that the state is seizing property that was legitimately owned. And despite George’s statement that it is only the rent, not the land itself, that is being “confiscated,” Johnson attacks the single tax as confiscating the land.
Moreover, by dismissing the theory behind the single tax as “propaganda,” Johnson denigrated the logic and evidence for land-value taxation in an anti-scholarly manner, and thus he himself indulged in propaganda.
Johnson’s mixing up the ownership of land and of its rent is also shown by his statement that if all the value of land is taxed, the revenue would cover the costs of government, “provided, of course, that the public can manage the lands as efficiently as they are now managed by their private owners.” This despite the statement of George that “I do not propose either to purchase or to confiscate private property in land.” Land-value taxation would not disturb private titles; it would not alter private control and possession. The government would not “manage the lands.”
Johnson states that much of the financial wealth of the middle class is in land value, and that the full taxation of land value would take more value from them than they would regain in the removal of other taxes. Of course in 1914, the 16th Amendment had just been enacted in 1913, and the middle class did not yet suffer from the income tax.
Nevertheless, Johnson’s statement is illogical. Suppose the total land rent is $1 trillion, and the cost of government is half of that; then the rent does not disappear, but is distributed back to the people in cash. So the effect of land value taxation would be to equalize the ownership of the rent, and a person who owned an average amount of rent would get half back in cash, and half back, ideally, in valued public goods. If government is squandering some of the rent, then the remedy is to give it all back to the people. Then the average land owner is in a neutral position.
Johnson falsely declared that “The Single Tax is, then, essentially a device for the spoilation of the middle class.” One could justly say that Johnson’s malicious attack was a device for the spoilation of the remedy for poverty, depressions, and land conflicts. What has spoiled the middle class is high taxes on their wages and on the goods they buy. Johnson’s falsifications were the spoilation of a policy that could have promoted sustainable prosperity and prevented needless economic inequality. Johnson’s propaganda succeeded in helping squash land-value taxation, but to the ruin of economies worldwide.
With the neoclassical victory against land, most economists today suffer from cognitive dissonance. Even if economists reject an egalitarian view of natural resources, they know that the supply of land is inelastic, so public revenue from land rent avoids the excess burden that other taxes have. But they do not extend this knowledge to the rest of theory and to policy. Mason Gaffney calls this the “corruption of economics.” I call it “academic brain freeze.” At any rate, it is worth marking the 100th anniversary of Johnson’s attack.