Georgism and Normative Economics

by Lindy Davies

The question of positive vs. normative economics — in other words, of whether moral questions have any place in economic analysis — used to be a laugh line in my Fundamental Economics classes. These neoclassical guys… they say economists should never use the word “should”! It seemed ridiculous — and we could easily move from there to Henry George’s stirring words

[T]he natural laws of production are physical laws and the natural laws of distribution are moral laws. And it is this that enables us to see in political economy more clearly than in any other science, that the government of the universe is a moral government, having its foundation in justice. Or, to put this idea in terms that fit it for the simplest comprehension, that the Lord our God is a just God. (The Science of Political Economy, abridged edition, Part IV, Chp. 3)

This is not, of course, a position that enjoys universal approval; although Georgists cleave to it with an abiding faith, many others see it as quaint and naïve. John Stuart Mill was one. Henry George argued stridently against Mill’s position that the Laws of Distribution were not natural laws, because they arose inevitably out of legal arrangements which sovereign governments could change whenever they wished. George’s answer was, well, sure, human laws can violate the natural laws of distribution — but whenever they do, inevitably, predictable consequences ensue. (The two lads debate this subject on page 26.)

By the 21st century, it’s tempting to think that Mill has been proved right: human laws regarding the distribution of wealth seem to be cast in unbreakable stone. Economic rent is inheritable, transferable, and hardly taxed at all. There used to be two inevitable things in society; now, I guess, there are three: death, taxes and the Non-Accelerating Inflation Rate of Unemployment. The field of economics, for the most part, has no energy for challenging underlying assumptions — as demonstrated by the awarding of the Nobel Prize, at a time of profound, multi-dimensional economic crisis, to two American economists for their work in “the theory of stable allocations and the practice of market design.”

Academic economics, lodged in its self-consistent box, has utterly failed at either solving real-world problems or predicting economic calamities, so much so that a growing movement has labeled it “autistic.” Seeing that the field was gravely sick, many have endeavored to inject economics with the vital medicine of social and environmental values. Conventional models of “economic growth” have tended to assume endless supplies of cheap energy and endless room in which to dump civilization’s junk. It seemed that we could gauge our overall levels of well-being simply by the amount of material and energy our society used up. Economic growth, in other words, was seen as “throughput” — the more energy we used, the better, and (outside of one’s own Back Yard, of course) pollution didn’t matter.

This point of view is very convenient, not just in terms of environmental policy, but also as an answer to concerns over economic development and justice. Granting those assumptions, the most efficient economic arrangement is obviously the “ownership society” approach — less-developed countries can enjoy prosperity by simply embracing privatization and market incentives, and growing their way out of poverty. However, if it becomes clear (and it has) that the strategy of creating economic growth by maximizing our matter/energy throughput is unsustainable — that it is doing irreversible harm to our planet — then we need another plan. Bangladesh can hardly grow itself out of poverty, while simultaneously dealing with inexorably rising sea levels and ever-more extreme weather. The effects of China reaching US levels of per-capita fossil-fuel use would be unthinkable. If that’s what unfettered markets give us, then we’d better get some normative input.

gpichartBecause these negative results of “growth” have been outside our standard ways of measuring economic progress, the call has gone out for a better yardstick. Thus we have the movement for “true cost accounting,” an effort to quantify the negative externalities of economic behavior, and subtract that from the number that represents our aggregate well-being. A number of such indices have been devised. Our own Clifford Cobb played a major role in creating the best-known and most-used measurement of sustainable prosperity, the Genuine Progress Indicator. The GPI identifies an extensive list of things that really do either benefit or cost us, but do not show up in Gross Domestic Product figures. As the graph shows, the US economy, seen in terms of GPI, has been on a very different trajectory since the 1970s than we thought. In sustainability terms, it is getting harder and harder to make ends meet.

From the start, the GPI’s creators at the California think tank Redefining Progress have had to fend off methodological attacks on the subjectivity of their criteria for assigning values. Obviously, it’s tough to price things that are outside the price system. The Genuine Progress Indicator’s list of externalities and their aggregate worth seems very much open to question; different people, no doubt, would object to their valuations for different reasons. And this is not to suggest that the GPI’s methodology is glib or slipshod; all of its assumptions are fully declared and explained. I don’t doubt that Redefining Progress does about as good a job of this as can be done. There’s just an inherent fuzziness to estimating society-wide externalities. Redefining Progress accepts this criticism, and responds, sensibly, that the GPI could be off by quite a lot and still be a far better measure of economic well-being than the GDP. For example, the observed economic impacts of global climate change are highly quantifiable (and virtually everyone expects them to get worse before they get better). Redefining Progress estimates the damage caused by CO2 emissions to be over $1 trillion per year. Not only does GDP not acccount for that cost — it even considers increased fuel-burning to be part of growth!

It’s pretty easy for me to sympathize with the GPI’s goals. I would want more of the things it calls benefits, and less of the things it designates as costs. But would everyone? And if we’re talking about a guide to national — or international — economic policy, who gets to choose? A couple of examples from the GPI’s list of methodological categories will show that these questions aren’t trivial.

The GPI computes the value of household work and parenting. This idea is so widely approved that it’s nearly part of the mainstream. But it terms of quantification, it’s problematic. Redefining Progress begins by saying that household work “is more essential than much of the work done in offices, factories and stores.” It’s hard to get a bead on this. Child-rearing is essential; shelf-dusting, less so. Stores that sell life-saving medicines rank high on the scale of essentialness; stores that sell pet rocks, less so. Also, the method used to value household work is open to question: essentially it counts up the market value of such services as if people had been hired to do them. An assessment in terms of opportunity cost might be just as valid, but it would return a much higher figure; a college-educated, professionally-trained adult who opts to stay home to raise the kids foregoes a heck of a lot more than $8 an hour. Or, suppose a spouse is childless, and stays home just to keep house — should that be valued equally? What if a single person works only part time, and spend the rest of the time building and caring for his own home? (The cost of underemployment is one of GPI’s subtractors to overall wellbeing.)

Many of the GPI categories can be similarly “reduced to absurdity” in this way. Their authors would, I think, defend them as representing generally-held values, the explicit costing-out of which could reasonably be expected to measure an overall social benefit (or detriment). Yet many of them still seem iffy. The GPI tallies the cost of crime, including things like injuries and property loss of crime victims, which is hard to argue with — but also the cost of locks, burglar alarms, security devices and security services. It seems clear that the use of such things isn’t equally distributed; the areas that have more crime are precisely those in which fewer people can afford burglar alarms and security services. One would guess, therefore, that if unemployment dropped, wages rose and people had more money to spend on personal security, the GPI would nevertheless deduct this negative cost from its index of well-being. A similar point can be made about the cost of automobile accidents. People with higher incomes tend to drive better-maintained, safer cars (and to live in areas in which vehicle-inspection standards are more strictly enforced). If more is spent on repairing cars after accidents, does it mean that there are more accidents, or that people are taking better care of their cars?

On the other hand, many of the GPI’s categories are less ambiguous, counting things that (I imagine) any sane person would want to count, such as water pollution, soil depletion and erosion, farmland loss, loss of primary forests and greenhouse-gas emissions. Now, the Genuine Progress Indicator is a measuring device. It doesn’t endeavor to explain why we have so much of these harmful things. However, it does, by inserting these normative elements into economic measurement, take a pretty clear editorial stance: measuring the bad things will help people to understand that we have too many of them, and to take appropriate steps. It is just this editorial stance, it seems, that renders the GPI less effective as a progressive public-policy instrument. If it is so demonstrably fuzzy in some of its assessments, might not the whole enterprise be too subjectively unclear for scientists to take seriously?

In some ways, the effort to infuse economic analysis with green or feminist “normative” values seems to revive the thinking behind the old labor theory of value. For neoclassical economics, certainly, if the market doesn’t value something, it doesn’t have value, no matter how important it might be to you and your friends. Ecological or Feminist economists are saying we can’t trust that — that the market is a political construct that leaves out important, meaningful things that should be valued. Value is, undeniably, a quantity — yet the normative folks cannot avoid unquantifiable questions: Who says these things are valuable? Why are they worth that much?

Perhaps that is simply be the best we can do. It may be more important that economics take a political stand against bad things, even at the cost of scientific verifiability. Or, it could be that, at the end of the day, the Genuine Progress Indicator is really a political talking point, not a scientific exercise.

It seems to me now that when I joked about how dumb it was to say “there shouldn’t be any shoulds,” I was avoiding a more serious (or at least more interesting) question. I seemed to be joining the normative team — but, as we’ve seen, that has all sort of implications, and I don’t think Henry George would approve of my placing him on that team. Henry George’s ideas on economic value, and on the nature of political economy as a science, were clear. He held that value is arrived at through “the higgling of the market” and that political economy has no business trying to determine what things should or shouldn’t have value. For Henry George, political economy is a positive science.

Of course, just because George held that view doesn’t mean it’s right, or that it needn’t be modified to account for economic realities that have emerged since George’s day. We might have to do that — but before we do, we should recall the rest of George’s theory of value: that value can come from two sources: production or obligation. That is not a normative judgment; it is based on an objective characteristic of the valuable thing: whether it was or was not produced by human labor. George’s theory holds that things behave observably, predictably differently in markets due to this distinction, and his theory is supported by rich lodes of evidence — evidence that neoclassical economics, and, I’m sorry to say, the Genuine Progress Indicator, tend not to consider.

We mentioned a few of the things that the GPI very sensibly (in my judgment) subtracts from its tally of overall wellbeing: water pollution, soil depletion and erosion, farmland loss, loss of primary forests and greenhouse-gas emissions. It is easy to show that all of these conditions are exacerbated by the incentives created by our land-tenure and public-revenue systems. Encouraging land speculation, and penalizing production, creates sprawl, which vastly increases fuel use, traffic jams, vehicle-miles and acres of pavement. It puts increasing pressure on farmland near cities, and on small farms everywhere, encouraging large, capital-intensive farms that bring great increases in erosion and runoff pollution. It encourages willy-nilly clearcutting of timber lands, maximizing soil damage and habitat loss. Applying the Georgist remedy — collecting the unimproved value of land for public revenue and eliminating other taxes — would reverse all of these trends, regardless of how, or whether, they were counted.

This scenario has been explored, in depth, in the tale of Alodia. You can order a copy — and hear the speech of Gen. Samuel Akuopha to the people of Alodia, performed by George Collins — at www.alodiascrapbook.com

This scenario has been explored, in depth, in the tale of Alodia. You can order a copy — and hear the speech of Gen. Samuel Akuopha to the people of Alodia, performed by George Collins — at www.alodiascrapbook.com

It has been well-established that the Gross Domestic Product is inadequate as a measure of economic progress in modern societies. Many basic econ texts discuss the point, and mention alternatives; the GPI has done a good job of getting its message out. It doesn’t follow, however, that economic science needs, or benefits from, culture-bound normative assumptions. Let’s consider a hypothetical scenario. A developing nation takes the brave step of defaulting on its foreign debts, and collecting land rent for public revenue. Suddenly its export markets dry up, due to punitive tariffs in retaliation to the debt default. It quickly shifts from a large trade surplus (most of the income from which had been used to service old debts) to a small trade deficit, and this substantially decreases its GDP. Meanwhile, large ranches and plantations, that had been held tax-free, are now charged a substantial tax. The land barons seek better deals in other banana republics. Lots of land is now available for subsistence farming and small markets. Also, the newly-untaxed coastal tourist industry starts to boom, creating new demand for construction and service workers. Much of this work (and the ensuing rise in consumer spending) is informal; off the books, it adds to neither GDP nor GPI — but, lots of people have more money, and less free time. Thus there is new demand for day care and precooked food — things the GPI already counted when they were done in the home, so they bring no net improvement. All this new economic activity, happening in old infrastructure, also brings more commuting, more traffic jams and more car accidents — which are counted against the GPI. It is conceivable, at least, that our little nation’s bold reforms would have lowered both its GDP and its GPI. Yet, as we drive through its streets and provinces, everybody sure seems to be better off!

This leaves with an intriguing possibility for macroeconomic measurement. Georgist Journal readers would agree, I think, that a society’s levels of association and equality — Henry George’s two essential attributes of human progress — would be a strong indicator of its overall well-being. Could this be quantified in some way? There’s robust theoretical and empirical support for the notion that the surest path toward optimum levels of A and E is to collect the rental value of natural opportunities for public revenue, and eliminate taxes on production. This, by itself, wouldn’t get society all the way to optimal GPI, because society would still need to curb harmful expernalities through regulations. Of course, society does some of this even today, and appropriate regulations would be much easier to adopt and maintain in a just, prosperous single-tax society. Also, the single-tax society, by taking the profit out of owning natural opportunities, would correct the most important incentives that lead to unsustainable sprawl and pollution. This leads me to think that the Gross Domestic Product could serve as a meta-indicator. Perhaps the GDP is an accurate measure of overall wellbeing to the extent that the society being measured exhibits a high degree of association and equality. That, it seems to me, is a hypothesis worth testing.

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