30 January 2005

30/01/05. The Corruption Of Economics (excerpts)

The Corruption Of Economics

by M. Mason Gaffney (Univ. of Calif. - Riverside) excerpts
Source: http://www.henrygeorge.org/science/gaffney.htm

Bibliography - "Neo-classical Economics as a Stratagem against Henry George" http://homepage.ntlworld.com/janusg/coe/cofe10.htm

Text on Ezra Cornell/Alvin S. Johnson:

To understand Johnson, it helps first to understand his matrix, Cornell University. Cornell was named for and in part funded by Ezra Cornell, the creator of the new Western Union monopoly (Gates, p.97), and its appendage, the AP news monopoly. These organizations had victimized a San Francisco journalist, Henry George. He, in turn, had attacked them bitterly. Cornell's attitude toward George may be surmised from the fact that George in 1869 campaigned to have Western Union socialized (Barker, pp.118-19 et passim). Ezra Cornell was its major owner.

Cornell (both Ezra and his University) also speculated in western lands on a massive scale (Gates). The major obstacle to their financial success was that local governments taxed their lands, something they fought hard for decades. Ezra Cornell "located more than half a million acres of rich lumber (sic) lands in the Northwest with New York Agricultural College scrip" (Hacker, p.394, citing Gates, 1943). To the robber baron, a state University with land scrip was an integral part of the basic business of seizing public domain, the chicane on which George had been first to blow the whistle (George, 1871).

Cornell University was molded by its wealthy first President Andrew Dickson White (q.v., below). Young Richard T. Ely, being scouted by White in Germany, "was interested in his psychology and the way he worked cleverly with Ezra Cornell and with Mr. Sage, [1] a benefactor, and one of the trustees of Cornell University" (Ely, 1938, p.57). Western Union - AP was not only the source of Cornell's fortune, it was an instrument of thought control, used for planting stories and bending news, including news about itself (Myers, p.493). We would underestimate Mr. Cornell to imagine he did not understand his University could be used the same way. If he did not, President Andrew Dickson White certainly did.

The power of controlling higher education is greater than merely slanting news stories. The "silver cord" draws us back to love and support alma mater. She becomes a thing of worship and purity, a secular Virgin Mary that rises above human failings. She symbolizes our best ideals and aspirations. She is the scene of newly opening vistas, society at a higher level, sparkling friendships, tender sentiments, exciting memories, lifelong loyalties formed "High above Cayuga's Waters" or "'Neath the Elms" or at "Alt Heidelberg," singing "Thy Sons Shall Ne'er Forget," "A Song by the Fire," "Stand, Navy down the field," "Going Back to Old Nassau," "Gaudeamus Igitur," "To the Blue and Gold," "Fair Harvard," "Lord Jeffrey Amherst," and, in the donative years, croaking out "Golden Days, full of innocence and full of truth." Woe to the messenger bringing news that The Virgin of our Golden Memories was procured to condition our minds for the gain of another. Yet, that is what we must do to understand who created NCE, and why. Truth is also a positive value. It is not always pleasant nor pretty; it is just what shall make you free.

The Morrill Act of 1862 gave land scrip to the states in proportion to their populations, so New York State got the most. Most states sold out their scrip for quick cash, but not New York (Gates, p.245). State land offices were quite corrupt, even for that tainted era, so New York handled its scrip in a very clubby way. New York sold Ezra Cornell (E.C.) its scrip at somewhat less than market. E.C. agreed to use it to enter lands to benefit a Morrill Act College (Agricultural and Mechanical). [2] In general, he seemed to merge and identify his interests with the college. By 1867 he had more agricultural college scrip than any other individual: 500,000 acres (Gates, p.31). The figure later rose to a million acres.

E.C. was, among his other interests, an Ithaca real estate promoter, investing in railways to boost the town. Very likely he had a sincere interest in promoting education, as he professed, but good works and self-interest need not be at odds: he also understood the effect on Ithaca land prices of snaring the new Morrill Act funds. So did rivals around the state, but E.C. had an edge: he was loaded with money from the Western Union monopoly he had created. He gave $500,000 to start the college, and thus secure the Morrill scrip for Ithaca, under his control.

New York State Senator Andrew Dickson White had wanted Syracuse to be the place. He and E.C. both regarded the Morrill scrip inadequate for more than one campus. E.C. won White to the Ithaca site by his large donation of cash (Gates, pp.52,55). White then became President of Cornell University. Would we be too cynical to suspect that was part of the deal? E.C. had not forged the Western Union monopoly without mastering David Harum's credo, "If you can't lick 'em, j'ine 'em."

In 1867 E.C. was preparing to sell some scrip, but paused to join with other states to "manipulate the market" to raise the price first (Gates, p.58). Monopoly was in his reflexes. He retained most of the scrip, however, and slowly bought up western lands. He specialized in pine lands in northwestern Wisconsin. His purpose was to create - again - a monopoly (Gates, pp.95, 97). This was not to be a monopoly of production - there were no mills, no timber culture, no roads built, no river drives - but just a regional monopoly of virgin timber and timberland held for sale at advanced prices. E.C. was a pure speculator and land monopolist, without exception or apology - the very antithesis of Henry George. Gates rates him as a weak business administrator because some of his funds leaked away to grafting agents, but he seems to have understood synergy: everything he did supported everything else. Land speculation and monopoly and higher education went hand in hand.

A speculator's ultimate goal is to sell, but some prefer quick gains, even though small, while others favor big gains, even though slow. E.C. was the second kind. His fortune had come from hanging onto telegraph stock for the long pull (Gates, p.97), and he applied the same model speculating in Wisconsin land.

This way of investing University funds brought E.C. into intense, prolonged conflict with new towns and counties in Wisconsin. It was not just an adversary but a hostile, emotional relationship, with a high level of dishonesty and self-righteousness on both sides. Georgism was not invented by Henry George, it was endemic throughout the middle border, as Gates' many books have brought out. Local taxes "threatened to swallow up the enterprise" (Gates, p.106). These local property taxes were pure land taxes because land is all E.C. owned in Wisconsin. Gates devotes a full chapter, pp.137-76, to "Tax Warfare" between E.C. and Wisconsin. Apparently Cornell won out: "in proportion to the price for which its lands were held the taxes were exceedingly light" (Gates, p.175).

If E.C. won out, it was because back in Ithaca it was an obsession: "When high taxes were threatened ... Cornell's (sic) university's officials acted promptly to protect its rights. Cornell's interests were identical with those of other large holders of pine land, and frequently they all worked together ... the greatest concern of the Cornell officials was the burden of taxation on the property ... " (Gates, pp.137-38).

That is the atmosphere that prevailed in the Cornell administration in an era when administrators hired and promoted and fired with no checks and balances whatever. It is most unlikely that President Andrew Dickson White or his immediate successors would have tolerated any professor of economics who defended the Wisconsin towns and counties; it is most likely they would have hired someone to defend their position as absentee land speculators. Such a person was Alvin S. Johnson of Columbia, a student of and personal secretary to J.B. Clark.

Alvin S. Johnson (1902) expounded the new definition of rent that NCEists were substituting for the original. As part of this shift, the unit of analysis used in economic theory was shifted to "the firm," or at largest "the industry." The society and the economy as a whole got lost. Formerly, rent was simply the return to land. NCEists redefined it as the surplus over opportunity cost of any resource at any time, thus removing any difference of land from labor or capital. It would have been courteous had they chosen a new word, since they were talking about something different, but courtesy was not the idea. The idea was to remove from land the dangerous stigma of yielding unearned values, targetable as taxable surpluses. (We dispose of this issue below, under Pareto.)

Further to the end, in 1914 Johnson published "The Case against the Single Tax" in The Atlantic Monthly. The influential, topical Atlantic would not have been devoting its scarce space to such an arcane topic unless it were alive and impendent at the time. This sea was rising, and Alvin Johnson put his finger in the dike. His theorizing was highly supportive of his political position. That is not uncommon, per se, nor necessarily unproductive. At least his ideas, like those of Adam Smith, Ricardo, and Keynes, were relevant to a real issue, unlike most of what is published today. Rather, we should not remain innocent of why NCE is what it is, and what it has done to us.

Was it really a live topic? Belittling, even sneering allusions have become standard, suggesting otherwise. In fact, single-tax initiatives were run and running in several western states. A few cities (Bellingham, Pueblo, and Houston, for example) moved to levy property taxes exclusively on land. In California, a "pure single-tax" initiative won 31% of the votes in 1916 (Large Landholdings in Southern California, 1919). The Manhattan Single Tax League was knocking on the door (Marling), and was to get part-way in the door in 1921 (see below under Ely). Cleveland elected two single-tax mayors, over a string of terms, roughly synchronized with the Liberal Party string of Governments in Edwardian England. The first, Tom Johnson, was Henry George's chief political lieutenant and financial angel. The second, Newton D. Baker, was to become a power and Secretary of War in Woodrow Wilson's Cabinet. Toledo, Ohio, had two single-tax Mayors, Samuel "Golden Rule" Jones, and Brand Whitlock. Pennsylvania's Legislature opened the door for Pittsburgh's enduring "graded tax plan," initiated in 1913 (Jorgensen, p.162). Four western provinces of Canada were won over almost completely, helping, among other things, to make Vancouver and Victoria two of the most beautiful cities in the world. Sydney, Brisbane, Wellington, Johannesburg, and other cities were exempting capital completely from the property tax, raising all their local revenues from land alone (Madsen, 1936). The AAAPSS devoted 78 pages to it (1915); the National Tax Association devoted 64 (1915); Great Debates in American History (1913) devoted 51. Robert Murray Haig delivered his three reports on it in 1915; the Committee on Taxation of the City of New York delivered its final report (Marling, 1916). California's Georgist irrigation districts were revolutionizing state and national agiculture. Yes, it was a hot wire. [3]

Johnson's major theme is that the single tax is "a device for the spoliation of the middle class" (1914, p.30), because they own most of the urban land, and all the farmland. Like Willford King later, Johnson's image of America is an idyllic small town, unnamed, where everyone owns the same amount of land.

Johnson's image of egalitarian landowners is projected without benefit of data, and without referring to the earlier well-known exchange between George and Walker. It overlooked the fact that his own employer, Cornell University, had for years sat on over half a million acres of western lands, completely idle (see above). The level of scholarship demanded by NCE editors of those who derided George is seen in the following.

"The Single Tax philosophy originated with a city man, ... a sound agriculture is based on ... the farmer, his ... love of the countryside, the jollity of the country picnic and dance, the fresh cheeked maidens who eagerly accept the role of sweethearts of country boys and develop into contented farmers' wives" (Johnson, 1927, p.224).

This publication was sponsored by the American Economic Association. The publication committee consisted of E.R.A. Seligman, R.T. Ely, J. Hollander, B.M. Anderson, Jr., and J.M. Clark (son of J.B. Clark). It was reprinted in 1967: apparently the leaders of The American Economic Association still considered it exemplary scholarship.

Johnson is the link between Clark and Frank Knight. Johnson was a student of, and personal secretary to J.B. Clark. He was soon to be the mentor of Frank Knight at Cornell. One finds "much of Knight's mature thought" in his 1916 Cornell thesis (Stigler, 1987), with extensive credit given to J.B. Clark (Dewey, 1987). The title of Knight's popular 1953 article, "The Fallacies in the Single Tax," is interchangeable with Johnson's 1914 title. Even the "fresh cheeked maidens" of Johnson show up in Knight, who, in turn, molded the Chicago Department in his image. The chain is unbroken from Seelye to Clark to Johnson to Knight to Stigler, Friedman, Harberger, and now thousands of Chicago-oriented economists. They dominate much of current doctrine and policy, metastasizing through government posts, high banking, academia, editorial boards, granting agencies, and the burgeoning think tanks subsidized by rent-takers to mold opinion for the deepest and most generic of their "deep lobbying."

Richard L. Biddle, Director
Henry George School of Social Science
Henry George Birthplace Museum
413 S. 10th Street
Phila., PA 19147
Web: http://www.geocities.com/henrygeorgeschool
Email: HGSPhila@comcast.net
(215) 922-4278 office
(215) 407-9555 cell


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