Compute and Poverty

Land Is Not Like Everything Else: The Corruption of Economics

7 min read

Land is not like everything else. Nobody made it, nobody can make more of it, and it does not move when it is taxed. Classical economics treated it as a separate factor of production, alongside labor and capital. I suspect most economics students today never hear why.

In 2024 I wrote: “Land is not capital. How can economists say straight-faced that land is just a form of capital? … There is a fixed supply of land, and we can’t create any more of it.” This page tells the story behind that complaint, as argued in The Corruption of Economics by Mason Gaffney and Fred Harrison (Shepheard-Walwyn, 1994).

Why it matters today

If land is just another kind of capital, then taxing land is just another tax on investment, and the case Henry George made falls apart before it starts. If land is different, then the rent it earns is a payment for something no owner produced, and collecting it publicly is, as George argued, about the least harmful way to raise revenue. Which way the textbook leans decides which question gets asked. When housing outruns wages, I suspect much of the answer is land, and an economics that cannot see land will miss it.

George’s moment

George published Progress and Poverty in 1879. It sold several million copies, and Frank Fetter, a disciple of John Bates Clark, wrote that it “had a larger sale than any other book ever written by an American.”1 George built his argument on the classical frame: “Land, labor, and capital are the three factors of production,” and “nothing that is freely supplied by nature can be properly classed as capital” (Book I, Chapter II).

In 1886 he ran for mayor of New York. The official count gave Abram Hewitt 90,552 votes, George 68,110, and a 28-year-old Theodore Roosevelt 60,435.2 George lost, but he beat Roosevelt, and his followers believed for years that he had been counted out. A reformer who could nearly win the country’s financial capital was not a curiosity. He was a threat to people who held a great deal of land, and the economists of the day took notice.

The redefinition

John Bates Clark was the economist most closely tied to the change. He helped found the American Economic Association, moved to Columbia in 1895, and published The Distribution of Wealth in 1899, the book that made marginal productivity theory famous.3 The theory says each factor of production tends to earn what its last unit adds to output. That is a real insight, and economists still use it.

Clark said plainly that George set him on this path. In his preface he wrote that “the claim advanced by Mr. Henry George, that wages are fixed by the product which a man can create by tilling rentless land,” was what “first led me” to the search that produced the theory.4

The trouble lies in where he put land. In Chapter XIII he grouped all productive goods, “including land,” under one name, “capital-goods,” and wrote: “Ground rent we shall study as the earnings of one kind of capital-goods,” which he called “merely a part of interest.” With that move the world has two factors, labor and capital, and land’s rent becomes ordinary interest. To be fair to Clark, a footnote insists “this is not calling land capital,” only treating land as part of one fund of productive wealth.5 In practice the distinction did not survive. By 1952 the economist Tibor Scitovsky could write that “land may be regarded as a capital good.”6

Gaffney reads this as aimed squarely at George. He puts it bluntly: “The strategem was semantic: to destroy the very words in which he expressed himself.” His best evidence comes from the economists themselves. Simon Patten wrote in 1908 that “economic doctrine must be recast” because single taxers made such good use of the standard theories. Fetter wrote that “the probable source from which immediate stimulation came to Clark was the contemporary single tax discussion.”7

The institutions

Ideas need homes, and homes need money. Gaffney traces Clark’s move to Columbia to its president, Seth Low, a wealthy man who was preparing to run for mayor against George, and describes rival bids for Clark from universities founded on railroad and oil fortunes.7 I treat those details as his argument.

The record on Richard T. Ely is firmer. Ely was another founder of the American Economic Association, in 1885. In 1920 he started the Institute for Research in Land Economics and Public Utilities at Wisconsin, moved it to Northwestern in 1925, and that year launched the journal now called Land Economics.8 The Institute was privately funded. In a 1923 address to railway men, quoted by Gaffney, Ely explained that a railroad vice-president had “induced the Burlington Railroad to make subscription to our funds,” because land and railways “are in no position to escape taxation by flight.” He then named ten railroads that had sent endorsements and subscriptions. Gaffney adds that the National Association of Real Estate Boards was a major contributor, and that it printed and distributed the Institute’s first report, an attack on a federal bill to tax land values.9 Historian Marc Weiss, in a study of housing policy, documents the Institute’s close working ties to that association and notes that Ely became its economic adviser in 1924.10

None of this needs a villain. Ely had to raise his own money, and the people with money and an interest in land taxation owned land. Clark was a sincere theorist working in a city where George’s movement was a live political force. Blame the game. When the people who fund a field have a large stake in one answer, that answer tends to get the most careful attention.

What was lost

Once land is folded into capital, several things become hard to say. Rent stops looking like a payment for something nobody produced. A tax on land looks as harmful as a tax on factories, even though land cannot flee or shrink. Gains from rising land values get counted as returns to saving. George’s whole remedy (Book VIII) loses the vocabulary it needs. As I wrote in 2024, concealing land’s uniqueness “provided the theoretical justification for landlords and capitalists to profit from the gifts of Nature unfairly.” Today one of the most prestigious prizes in the profession, given by the American Economic Association to economists under forty since 1947, bears Clark’s name.11

The counterview

Gaffney himself admitted that George’s belief in a plot “may even strike some as paranoid. That was this writer’s first impression, many years ago.”7 Others read the same evidence more skeptically. Marginalism did not start in America or with George in mind. Jevons and Menger published their theories in 1871, and Walras in 1874, well before Clark’s major work.12 Reviewing the book in the Journal of Economic Literature in 1996, Murray Milgate called Gaffney’s essay “interesting, provocative, and witty.” He also faulted the genre for “the casting of all opponents (however different their backgrounds and arguments) as co-conspirators,” and he found the chapter tying the Chicago School to the campaign “strained and unconvincing; resting as it does on guilt by association.”13

So here is the line between record and reading. Documented: George’s fame, the 1886 vote, Clark’s own credit to George, Clark’s grouping of land with capital-goods, and Ely’s funding from railroads and real estate interests. Interpretation: that these choices were coordinated, and that they were made in order to bury George. I find the pattern persuasive, but it is a pattern, not a confession.

What’s left

Land never fully left economics. Ely’s field survives as land and resource economics. In 1977 Joseph Stiglitz showed that, under certain conditions, spending on local public goods raises total land rents by at least its cost, and in 1979 he and Richard Arnott showed that when a city’s population is at its optimal size, total land rents equal spending on the pure public good. They noted that this result “has been dubbed the Henry George Theorem,” because a full tax on land rent would then be efficient and also enough to pay for that good.14 The idea that land is different was never refuted. It was set aside.

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Notes

  1. Sales: “Progress and Poverty,” Wikipedia, https://en.wikipedia.org/wiki/Progress_and_Poverty. Fetter (1927: 142-43), quoted in Gaffney, The Corruption of Economics, pp. 48-49. ↩︎

  2. “1886 New York City mayoral election,” Wikipedia, https://en.wikipedia.org/wiki/1886_New_York_City_mayoral_election. On the “counted out” belief, and the Republican swing to Hewitt that City Journal calls the larger factor: “1886: The Men Who Would Be Mayor,” City Journal, https://www.city-journal.org/article/1886-the-men-who-would-be-mayor ↩︎

  3. David R. Henderson, “John Bates Clark,” Concise Encyclopedia of Economics, Econlib, https://www.econlib.org/library/enc/bios/clark.html. Columbia, 1895: Gaffney, p. 49. ↩︎

  4. J. B. Clark, The Distribution of Wealth (1899), Preface, https://www.econlib.org/library/Clark/clkDW.html ↩︎

  5. Clark, The Distribution of Wealth, Chapter XIII and note 18, https://www.econlib.org/library/Clark/clkDW13.html ↩︎

  6. Tibor Scitovsky (1952: 227-28), quoted in Gaffney, p. 59. ↩︎

  7. Mason Gaffney, “Neo-classical Economics as a Stratagem against Henry George,” in Gaffney and Harrison, The Corruption of Economics (1994), pp. 29-164, https://www.masongaffney.org/publications/K1Neo-classical_Stratagem.CV.pdf. Contents of the book: https://cooperative-individualism.org/gaffney-mason_corruption-of-economics-1994.htm ↩︎a↩︎b↩︎c

  8. “Richard T. Ely,” Wikipedia, https://en.wikipedia.org/wiki/Richard_T._Ely (AEA founder, 1885); “A Century of Land Economics,” University of Wisconsin Press, https://le.uwpress.org/page/history; Marc A. Weiss (note 10). ↩︎

  9. Gaffney, pp. 88-91, citing Ely’s 1923 address as printed in Jorgensen (1925). ↩︎

  10. Marc A. Weiss, “Richard T. Ely and the Contribution of Economic Research to National Housing Policy, 1920-1940,” Urban Studies 26 (1989): 115-126, https://www.globalurban.org/Economic_Research_and_Housing_Policy.pdf ↩︎

  11. American Economic Association, “John Bates Clark Medal,” https://www.aeaweb.org/about-aea/honors-awards/bates-clark ↩︎

  12. “Marginalism,” Wikipedia, https://en.wikipedia.org/wiki/Marginalism; Econlib’s Clark entry (note 3) names Jevons, Menger and Walras as the founders and says Clark discovered the idea independently. ↩︎

  13. Murray Milgate, review of The Corruption of Economics, Journal of Economic Literature 34 (June 1996): 775-777, https://cooperative-individualism.org/milgate-murray_review-of-mason-gaffney-and-fred-harrison-the-corruption-of-economics-1996-jun.pdf ↩︎

  14. J. E. Stiglitz, “The Theory of Local Public Goods,” in Feldstein and Inman, eds., The Economics of Public Services (1977), https://link.springer.com/chapter/10.1007/978-1-349-02917-4_12; R. Arnott and J. E. Stiglitz, “Aggregate Land Rents, Expenditure on Public Goods, and Optimal City Size,” Quarterly Journal of Economics 93 (1979): 471-500, quoted from the paper’s introduction, https://cooperative-individualism.org/arnott-richard-and-joseph-stiglitz_aggregate-land-rents-1979-nov.pdf and https://ideas.repec.org/a/oup/qjecon/v93y1979i4p471-500..html; summary at “Henry George theorem,” Wikipedia, https://en.wikipedia.org/wiki/Henry_George_theorem ↩︎