Keith,
I'll respond below. Harry ******************************** Henry George School of Los Angeles Box 655 Tujunga CA 9104 818 352-4141 ******************************** From: Keith Hudson [mailto:[email protected]] Sent: Saturday, October 09, 2010 1:09 AM To: RE-DESIGNING WORK, INCOME DISTRIBUTION, , EDUCATION; Harry Pollard Subject: [Futurework] Not a very positive picture Harry, At 20:57 08/10/2010 -0700, you wrote: Keith, Profit simply means that income is greater than outgo in the books. But in reality it's a slippery thing and not as simple as that. It's only a snapshot phenomenon and soon disappears when a more efficient process is used by someone else. Sometimes, in the case of a successful producer, profit never appears as such because it is sucked into concurrent improvements in efficiency. ////////////// Perhaps "slippery" things should be kept out of science! Profit is an excess of income over outgo, something important to accountants as they maneuver "profits" to gain the best tax benefit, or to gain some other benefit for their clients. You'll recall the old story of the accountant with one set of figures that showed a large profit for the shareholders, another that showed a loss for the tax people and a third that shows how the firm really stands. "Profit" is not something a science should be interested in, except perhaps mildly. /////////////// It has nothing to do with Political Economy. Political Economy is old-fashioned. Economics as a subject has, in the case of most practitioners, separated itself from politics, just as physics had done from philosophy a century or two previously. There are, of course, public economists, such as Paul Krugman, who seek to persuade politicians to do this or that in order to elicit certain results (such as relieving the poor) but usually there are other public economists who give opposite advice to achieve the same ends. The economists who have given the best insights (that is, those who have kept their reputations longer) are those who seek to describe what has happened in the past and, hopefully, give an accurate idea of what is going on in the present. At best, they can only advise politicians that a proposed remedy, or a similar one, has been used in the past and has been successful or not. No-one can forecast the ultimate effects of any innovation. (Collateralized Debt Obligations [CDOs], for example!) ///////////////////////// Political Economy has nothing to do with politics, whereas modern economics is completely enmeshed in them. There are tens of thousands of theoretical economic papers, but many of the practitioners of the science, and the economists who write about it like Krugman, are tied to politics. Krugman is a left wing Keynesian who wants increased stimulus money to be poured into the economy. This, I would say, because he hasn't a clue as to what is wrong, so he is part of the "try this" school of economists. I don't think that you can applaud the present crop of economists for their ability to provide us with an "accurate idea of what is going on in the present". /////////////////////////// The boss might just add the profit to his wages whereupon the firm will be profitless but the boss will do all right. Or, he might put into contingency until January 1st because income taxes are being reduced next year, or . . . . ? It's accountancy, not economics. Modern economics hasn't a clue about how to deal with poverty, or unemployment, or Great Recessions, but it can come up with several profits. They hardly advance the discipline, but do help to fill the semester. Economists are not obliged to show how politicians deal with poverty or unemployment any more than physicists are obliged to show how to run a railway. Both are trying to clarify the basic principles of their subject and it's for others to use the results. ///////////////////////// They are obliged to explain why there is poverty or unemployment, whether or not politicians listen to them, for these subjects are part of the economy. Railroad engineers rely on physicists to provide the knowledge that will keep the railway safe. Similarly, the politicians rely on economists to provide a basis for correct economic policies. Poverty and unemployment are economic situations. Politicians may, or may not, make use of economists' insights. Trouble is they have no credible insights. They don't know why there is hunger in modern society. They have failed completely to see why in a modern economy with enormous and increasing productive power, poverty and deprivation are normal. The welfare state perfectly shows this failure. They don't know why people are poor, unemployed, hungry, so they give them money, find token jobs, provide food stamps. George asked at the beginning of his classic Progress and Poverty 'Why in spite of the increase in productive power is it so hard to make a living?' It still is. Economists tell us over the years how much productivity has increased, yet seem unimpressed by the fact that those at the bottom of the heap are somehow left out of this "progress". As Ed showed in a recent post, it is normal in the US to have 43 million people living in poverty - this in the richest nation in the world, with amazing natural resources. If this isn't in the purview of economics, where? /////////////////////////// Your extra Factors of Production are unnecessary. Innovation is part of Labor -- what else? Why not add invention, skills, knowledge, to the bundle. You fail to see that energy is an absolute necessity in all production. It is so important that it deserves a place of its own in any formula. It is the energy aspect of Labour which is the supremely important factor in your Land + Labour + Capital scheme of things. As soon as a routinized task can be replaced by a machine, the human aspect of Labour disappears. Labour as a necessity -- past, present and future -- belongs to the Consumption part of the economics equation. ////////////////////////// How does energy exist without Capital? Energy is part of Capital. You don't need a separate Factor. This is a major problem in thinking about things. If you are not clear in your concepts, you cannot be clear in reasoning. A factory power generator is capital. Do you not agree? The job of this machine is to keep other machines running by providing electricity - energy. It is capital. //////////////////////// Will innovation happen without Labor? Yes, a useful inn innovation frequently occurs in the mind of a person who is quite outside a particular production process and even, sometimes, ignorant of it. Thus, Land + Energy + Capital + Innovation is a more adequate description. ("Innovation" is not the best term perhaps because enterprise and organization are also involved in the application of a new idea, and modern text-book economists usually use one of these as a fourth term, or even use five or more terms. "Land" itself really needs to be divided between land-as-space and (occasional patches of) land-as-resources. Both sorts of land are necessary for a productive process. ///////////////////////////// Doesn't matter where the "mind of the person" is. If he is part of the production process, he is labor. If he, or someone else, doesn't use the innovation then it's outside our study anyway. We know nothing about it. One of the problems of economic textbooks is that they introduce many terms - no doubt to show scholarship. Most of them are unnecessary and/or confusing. I have no quarrel with adding more terms, but I would want them to be unique - not already covered - and useful in the science. The most important characteristic of defined concepts is that they are mutually exclusive. This is true of the basic terms of Political Economy. Nothing can be in two defined concepts. That's why the the Classical terms are so useful in reasoning things out. //////////////////////////////// As I said, if you start entering the psyche of Labor, it will become a different science. What is the return to innovation? Royalties or licence fees. Several human sciences these days are entering into the psyche of Labour, particularly about people as consumers and the real reason why they buy non-basic products from their discretionary income. /////////////////////////// Now you have introduced to more returns to add to Rent, Wages, and Interest. As they are a payment for labor, they are wages. ///////////////////////////// I suppose it is increased production. What is that increased production -- wages? But, wages are the return for the exertion of Labor. As innovation is carried out by Labor, that's all right. However, if you separate innovation, you had better have another return for it. By all means complicate things. As before, the return is royalties or licence fees. That's quite simple, isn't it? In Henry George's time these scarcely applied because Americans were "adopting" the innovations of Europe (and gaining a big leap forward) without paying for them (just as they're now complaining that China is doing the same!). //////////////////// There are various payments to labor - salaries, commissions, profit-sharing, royalties, and so on - but they are all wages in Political Economy - that is a return to Labor for his mental and physical exertion. ////////////////////// Energy is produced by and is part of capital. How else? What is the return to energy? No. Energy can only be released via innovation. Man was sitting on raw coal for 150,000 years and used occasional outcrops for cooking or making pots but he only used it to release energy in versatile form after a series of innovations. Even the Chinese, who tapped into natural gas as early as 200BC and used it for street lighting never got round to using it to make steam power. (Yet, like the Greeks at about the same time, they had steam-powered toys! In both cases, an additional innovative shift of mind might have altered history totally! Significant innovation is an extremely rare event. For example, up until about 1600AD all the farmers in Europe used to sow seeds wastefully by broadcasting. Yet 2,000 years previously a particular Chinese farmer had discovered the immense productivity that was gained by sowing seeds in rows. Unfortunately, Marco Polo happened not to have observed or recorded that on his travels. Otherwise the whole history of Europe would have been advanced by 400 years.) ////////////////////// All of these are examples of mental and physical exertion. They are Labor. With a few blips, productivity has been continually increasing. While it is interesting to detail some of the ways this happens, the basic three terms cover them. //////////////////////// Further, you have thrown out Labor. The man who produces the car, the aircraft, the kitchen table, the toilet roll, is left out of your foursome. That's a shame. It is a shame, but I'm not throwing Labour out. Modern productive processes are doing that. The car used to be assembled in Henry Ford's time with about 500 man-hours of muscular effort. Today, an incredibly more sophisticated car is produced with about 15 man-hours. In the lifetime of young people today it might even be produced with 0 man-hours of effort. ////////////////////// In what Factor are the people who perform the 15 man-hours? Zero man hours is in the realm of fantasy science fiction. It may one day occur when production is carried out only by capital. But let's come down to earth. The car is produced with Labor (15 hours of it), capital, and land. Then what happens to it? How much labor will be required to get it into the hands of the consumer? Quite a lot I suggest. /////////////////////// An enormous amount of good thinking has gone into the 7 basic terms of Classical Political Economy. The basic four - Land, Labor, Capital, and Wealth, cover everything in the universe even God! In other words the complexity has been reduced to bite-sized chunks that enable analysis to begin. One ancient religion had the whole world as sitting on top of a turtle and could explain everything on that basis. Classical Political Economy has long gone by the way of the turtle religion. Like science, economics itself is best dealt with at several different specialist levels. As in science, some economists haven't the faintest idea of what other economists are saying. ////////////////// I could say the same thing about science and phlogiston. Don't try guilt by association! /////////////////// The seven terms (including Rent, Wages, and Interest) are the bedrock on which the entire science is based. A major reason why modern economics is such a mess, even though some of our brightest people are involved in it, is that the basic terms were corrupted by economic politicians and ideologues. Their bedrock turns out to be sand and as they can't go back to change their beginnings they become ineffectual. Modern economists would find your seven terms too simplistic. For example, the term "rent" can be a free-market return on the use of an asset or it can be an income from the exploitative use of a scarce resource. Wages can be a free-market cost or it can be the minimum resources given to a slave to merely survive. //////////////////////// You are merely pointing to the inadequacies of the present terminology. The label Rent was removed from the return to land and placed on a different concept - which itself is a bit vague. Land was removed as a separate Function and became part of capital. When real estate began to soar, it wasn't the improvements that zoomed, it was the land-values. We had a land-bubble but modern economics wasn't equipped to handle it so it became a "housing bubble". This made analysis of the problem virtually impossible. This can be checked by looking at factory manufactured housing which remained competitive (that is the house without the land). //////////////////////////// Henry George was a brilliant man -- there's no doubt about that -- but he lived in simpler times. America was still basically an agricultural society. Industrialization and consumerism has only just got started. Land (in terms of space for farming) was much a more important element in most people's minds and daily lives than today. Like the Diggers and Levellers in Cromwellian times in England, George fell upon a simple declaration that land belonged to humanity. This can arouse a great emotional response. But land doesn't belong to humanity anymore than it does to the whole species of termites who also swarm over much of it all round the world and build colonies for which they fight to the death to protect from maraudering termites. Land doesn't belong to everyone and never has done. Specific areas of land are owned by specific people. It was, and is, owned by those who use it and, more importantly, can protect it, whether by groups wielding stone axes or by legal rules today. ///////////////////////// Land was the name given to Natural Resources by the Classicals. (Termites are Land as is water, air, the sun, and suchlike.) George said that philosophically, no-one had more right to land than another. Is this not correct? Would you argue differently? We have a common right to Natural Resources. This is a philosophical discussion which can serve as a basis for further thinking. However, a commons must be managed or we will meet trouble - a la Garret Hardin. Land is simply a label. We could call Natural Resources Rumpelstiltskin if we wished. The name is a label fixed to a defined concept. It's the defined concept that is important, yet much time is spent quarreling over words. Much less philosophical is what has happened. The ownership of land has produced a history of force, fraud, and theft. The present owners may be blameless, but the ownership they enjoy is probably a relic on some nasty behavior in the past. How can the wrongs of the past be redressed? Many way have been suggested and carried out. Land reform is constantly in the news. Nationalization, general distribution, government purchase and awarding, but George had the best idea that was not new with him. It goes back to Mencius and perhaps earlier. The Physiocrats who influenced Adam Smith supported l'impot unique - a single tax. Urban land has value because of the presence and access of the community around it. This 'rent' that attaches to a location increases toward the city center where people tend to concentrate. Importantly, Rent is not produced by the user of the land. It's an advantage given to a location by the people around it. So, collecting it has a moral tone. The community is merely re-capturing the values it created. But if all land value is collected there will be nothing left to capitalize into sales value. The sales value of all land will be zero. Whether you have 10 acres of Manhattan, or one acre of the Texas Panhandle, the land you are holding will have a sales value of nothing. Yet, its value as an agent of production will remain. So we have easily equalized ownership. You may have 100 acres with a sales price of nothing, I may have 1 acre with a sales price of nothing. /////////////////////////// I believe that a Georgist land-tax would be a tremendous step forward for any government and people that adopts it -- but for quite different reasons than emotional ones based on a false assumption. ///////////////////////////// Nothing emotional about it, nor is there any false assumption. ///////////////////////////// Keith Keith Hudson, Saltford, England
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