A New Model of the Economy

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Presenting a radical revision of modern economic theory, this analysis adjusts the entire range of economic thought in relation to the fundamental part played by land, the significance of credit—especially in the banking system—and the crucial impact of the taxation method. The resulting system based upon natural law, economic security for all, fair distribution of output, and the opportunity for self-fulfillment through work draws upon the masters of economic thought—from Smith and Ricardo to Marshall, Schumpter, and Keynes—but also provides new insights by highlighting concepts often omitted from current studies of their works.

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PART ONE - Principles

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ECONOMICS as a subject of serious study has grown up within modern societies that have been deeply affected by land enclosure and the industrial revolution. In Britain the work of Adam Smith, Ricardo and Malthus achieved fame during the decades when a final great wave of land enclosure gathered pace and the new industrial towns forged weapons for the Napoleonic wars and capital for the railway age. Such an origin has coloured the development of economic thought ever since. The apparent diminution in the part played by land in the economy, the accumulation and enhanced productivity of capital, the need for an expansion of financial resources and for the growth of limited liability companies, and above all the idea of labour as primarily employed rather than autonomous, all these outstanding features of the new industrial economy gave rise to concepts in the study of Economics which have become entrenched. It is time that such concepts were re-examined.

The ideas that have emerged from 200 years of intellectual advance in Economics centre upon the question of production. After an initial period, especially associated with the writings of Ricardo, when distribution of the product between economic classes or factors was the major concern, most economists accepted the conclusion that production was the key issue. How could it be measured? What inhibited its growth? What determined its composition? Why did it fluctuate in cycles? After all, both political conservatives and political radicals have finally agreed that it is better to have a bigger cake than to quarrel over much about shares in a smaller one. Production has become the yardstick by which almost every economic policy is assessed, even though science and technology have more or less solved the technical problems of how to produce. And yet economic unease remains, sometimes amounting to disease, in the economic organisms of advanced economies. Could it be that to look almost exclusively at production is to fail to understand the many-sided aspects of human economic behaviour, including non-technical ones about production itself?

 

PART TWO - The Theory of the Firm Re-Examined

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SINCE THE Keynesian revolution of the mid 20th century, macroeconomics has held the field as the most interesting and vital area of the subject, particularly because of an obvious connection with policy making. Micro-economic issues, such as What determines relative prices?, What is the optimum size of the firm? and Do long-run costs within firms always rise? have become academic. Yet micro-economics underlies the macro-economics. Concepts beloved by macro-economists, like aggregate supply and demand and the investment /savings schedule, rest upon rarely questioned assumptions about individual firms. Supply curves are ultimately the summation of individual firms cost curves, with allowances for external economies and diseconomies. Similarly aggregate demand has an impact on the economy only through individual firms demand curves. The whole economy is more than the sum of its parts, as Keynes so effectively showed, but the nature of the parts profoundly influences the total outcome, even though it may not determine it. Physiologists may insist that the human body be studied as a whole organism, yet they do not neglect study of individual organs.

 

PART THREE - Factor Incomes

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IF WE CALL wages the value of whatever a worker produces in goods and services as a result of his labour (including under the term labour all productive activity, however skillful), then every society produces a surplus over and above total wages. This surplus may fall into the hands of landlords, employers or the government, as rent, profits, interest or tax revenue and be put to multifarious uses, but it remains a surplus mainly attributable to society as a collective entity. It is not derived from the efforts of anyone qua individual, but from the actions, or simply from the existence, of the collective body of citizens. Who receives this surplus initially and who receives the benefit of it two separate issues depend upon the laws and customs of particular societies. Economic History is largely concerned with these latter questions. It is encumbent upon economists, however, to analyse the implications for a modern economy of the origin, distribution and use of this surplus; a task singularly neglected by economists, at least since the late nineteenth century. This failure stems from their setting aside the concept of economic rent.

 

PART FOUR - Money and Value

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MONEY IS WHATEVER is generally accepted in payment of a debt. Although historically many things from courie shells to cigarettes have been so acceptable, in modern economies money as legal tender consists of coins authenticated by government and notes bearing a promise to pay by the central banker. Coins stamped by the government are acceptable wherever the government is trusted to have the power of taxation and therefore to possess the actual means to pay debts, if necessary in goods and services. Notes also are effectively backed by the power of taxation, since the central bank is usually either nationalised or fully supported by the government. Hence money is generally accepted because people trust the government. Legal tender, however, is a narrow definition of money, since bank deposits are also generally accepted as a means of payment.

The reason why money is needed at all is because all modern economies are built upon the division of labour and therefore upon the need to exchange products. Barter requires a double coincidence of wants: A must find B, who not only wants As product but also has something that A wants; a grossly inefficient form of exchange. A wants to exchange with X, Y and Z and to receive back goods from P, Q and R. Hence a generally accepted means of exchange is essential. Now in theory A could accept in payment a promissory note from X or Y or Z and exchange it later for the goods of P, Q or R. He cannot, of course, because P, Q and R will not accept promissory notes from strangers. If trust throughout society were very great this might be possible. If it were even greater, society would be like a family, where the internal division of labour within the household operates perfectly well without promissory notes. Money, therefore, arises from a certain level of trust (or distrust). Without any trust there would be no money; with complete trust there would also be no money.

 

PART FIVE - Public Revenue

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THE MODEL of an economy from which profits, interest and the toll levied by monopoly have been stripped away, brings into relief the place of taxation. This is not an unrealistic approach for two reasons. One is that a model of rent and wages only is a reflection of the natural division of production between the two primary factors of land and labour, of which profits and the rest are subdivisions. The other is that many of these subdivisions, if not all of them, are in fact largely the very long-term consequences of the way in which taxation has been levied. The latter reason may seem to overemphasise the role of taxation, but the formative influence of government upon the economy is exerted primarily through types and rates of taxes. Moreover taxation is intimately related to another principal determinant of the economy, the system of land tenure.

Modern analysis of taxation at the micro level deals with questions like incidence and welfare effects. At the macro level taxation features in models of national income determination as a leakage or withdrawal (see Chapter 20). There is, however, an important aspect of incidence at the macro level which is ignored. Once more the omission of land from the analysis leads to the oversight. When the fundamental division of production (and therefore national income) between land and labour is recognised, the impact of taxation has a macro dimension obscured by the theory of income determination.

 

PART SIX - Macro-Economics

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NOWHERE IS IT more true than in economics that the whole is not merely a sum of its parts. An economy is organic; parts of the economy interact with each other; each part has a function within the whole economy. Hence the fallacy of composition is only too common in thinking about economics, such as: if the price of a good or factor falls then more is demanded; therefore if all prices fall, total demand rises. Before Keynes published his General Theory in 1936, most people thought that a fall in the wage level would increase the demand for labour, and that if each individual saved more, all could save more.

Macro-economics concerns itself with the whole economy, rather than with questions about particular goods, services or factors of production. Since Keynes, who can be regarded more or less as its founder, the theoretical development has been considerable, and many schools of thought now do battle about such matters as the precise shape of the consumption function, the role of expectations and the time taken for the economy to reach equilibrium. However, all such arguments revolve around a roughly similar framework of concepts and models. A general summary of this framework is given below, with the proviso that exponents of macro-economics are sure to find points with which they disagree, but that these points may be inessential in relation to the critique that follows.

 

PART SEVEN - Conclusions

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THE ABOVE exposition has attempted to keep to issues that can be dealt with by economic analysis and has sought to avoid normative aspects, though the authors stance on some of these is no doubt evident. There remain to be considered various practical concerns about the collection of rent of land as public revenue, several of which involve explicit moral judgments.

Most obviously there is the view that land is legitimately owned by individuals, and that public collection of rent infringes valid property rights; in short that my land is a fundamental principle of social life and individual liberty depends upon it. In what then does property in land consist? Essentially four rights might be claimed: to use the land, to exchange, give or bequeath it, to spoil or destroy it, and to receive rent from it. To use land must always be a basic right of individuals or groups. Security of tenure to enable use for production or for homes cannot be denied as a right in any reasonable society. Indeed, we may well ask why many people in present day societies, including the UK, do not have it. How many can be evicted by a landlord or building society at short notice? How many more can be evicted from their workplace at even shorter notice?

 

APPENDIX - Rent and Landlord’s Claim

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