Home > Uncategorized > Bob Solow, Matt Rognlie, Paul Romer, Mason Gaffney, the economic statisticians and rent incomes.

Bob Solow, Matt Rognlie, Paul Romer, Mason Gaffney, the economic statisticians and rent incomes.

Are we witnessing one of these rare moments when rock solid intellectual positions suddenly become fluid and start flowing? One of the problems of neoclassical economics is the replacement of the classical ‘land, labour, capital’ trichotomy with the ‘labour, capital’ dichotomy. But suddenly it seems to leap back into the mind of economists. This might seem like an arcane detail of the history of economic though – but it isn’t. Removing ‘land’ (i.e. unproduced but valuable inputs like land, aquifers, stocks of oil, clean water and the like) from the income equations rules out rent incomes. According to Mason Gaffney (here) removing ‘land’ from economic theory was a conscious act, subsidized by land owners, to disable for instance the systematic taxation of land rent incomes. And with, according to Gaffney, dire consequences. Writing about Henry George he states 

To most modern readers, probably George seems too minor a figure to have warranted such an extreme reaction. This impression is a measure of the neo-classicals’ success: it is what they sought to make of him. It took a generation, but by 1930 they had succeeded in reducing him in the public mind. In the process of succeeding, however, they emasculated the discipline, impoverished economic thought, muddled the minds of countless students, rationalized free-riding by landowners, took dignity from labor, rationalized chronic unemployment, hobbled us with today’s counterproductive tax tangle, marginalized the obvious alternative system of public finance, shattered our sense of community, subverted a rising economic democracy for the benefit of rent-takers, and led us into becoming an increasingly nasty and dangerously divided plutocracy

But suddenly two economic giants, Paul Romer and, of all people, Bob Solow, stress the importance of rent incomes. Paul Romer stresses rents in an interview (here) and though his criticism of economics is much more limited than the criticism of Gaffney his verdict of as brutal. The ideas of Bob Solow, put forward in a lecture are summarized by Branko Milanovic Solow seems to be less harsh but he shows admirable criticism of his own work. This is interesting as Solow’s growth theory (which earned him a Nobel prize) is based on only two factors of production and is the basis of the entire neoclassical growth and distribution project and stresses the idea that incomes are equal to marginal product of capital and labour (which rules out rent incomes). Neither of these two economists mentions land, but Matthew Rognlie does. He does not seem to conscious of what he in effect is doing – but he is bringing land back into the equation (the ‘linkname’ of his article is aptly (emphasis added): http://www.brookings.edu/about/projects/bpea/papers/2015/land-prices-evolution-capitals-share). This should of course have been land-prices-landowners-share (mind that he is writing about the extremely expensive land underlying houses) but the point is that he is literally bringing land back into the equation. And therewith: ownership (my data for the Netherlands are consistent with those of Rognly for the USA, Canada, Japan, Italy, France, the UK and Germany). This are of course only three economists, but their ideas seem to have been received very well. How is this possible? In a technical sense: because of the national accounts statisticians. Nowadays, these do not only provide us with estimates of production and income but also with estimates of wealth and capital. And after much deliberation they decided that, when you want to measure capital (assets) it is unavoidable to make a distinction between produced an unproduced assets. They also use a multi sector quadruple accounting approach (financial liabilities from one sector show up as assets of another sector) which enables us to disentangle debt relations. Also (more on this in a separate post) the price used to estimate the of different kinds of capital is not always equal to its market price – as some kinds of capital do have monetary production costs and therewith a cost price but are not sold on any kind of market. In an analytical sense, the decoupling of wages and productivity and the housing bubble seem to have played a role. The understanding of rent incomes still seems to be rather dull. Events like the interest incomes of money creating banks – which have this money creating power because of a government charter –  or the rise in value of houses and land underlying houses enabled as well as caused by this money printing are not yet mentioned. But steps in the right direction are being made.

  1. May 5, 2015 at 11:59 am

    What you always wanted to know about rent and profit
    Comment on ‘Bob Solow, Matt Rognlie, Paul Romer, Mason Gaffney, the economic statisticians and rent incomes.’

    As it happens, the interconnection between profit, distributed profit, ‘rent’ and land ownership has already been untangled by Constructive Heterodoxy under the title Essentials of Constructive Heterodoxy: Institutions
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2598721

    The correct rent theory is part of the new heterodox curriculum
    http://axecorg.blogspot.de/2015/04/new-curriculum-cross-references.html

    Why should anybody wait for Bob Solow, Matt Rognlie, Paul Romer, Mason Gaffney ‘to take steps in the right direction’ (as orthodox economists they are irrecoverably over the cliff)? The real message is that Heterodoxy has already settled the question.

    Egmont Kakarot-Handtke

  2. Ezra Davar
    May 6, 2015 at 11:09 am

    The statement ‘One of the problems of neoclassical economics is the replacement of the classical ‘land, labour, capital’ trichotomy with the ‘labour, capital’ dichotomy’ is incorrect at least related to Walras; because of that Walras’s original theory differs essentially from of post-Walras economists’ theory.
    Walras, from the Production Economy, discussed the problems of production of the consumption goods by means of services of primary factors, i.e., three production services are introduced: land capital, personal capital, and fixed capital. Moreover, Walras discussed the problem of price (all types) regulation of productive services or products.
    Walras discussed this for the three types of services (land, labour and fixed capital), starting with land-services: ‘In the case of the maximum price, either a certain number of entrepreneurs would find it impossible to purchase any land-services at all, or they would all have to with less land-services than they would like. … In the case of minimum [price], either a certain number of land-owners would be unable to sell any land-services at all, or they would all find it impossible to sell as much as they would like’ (ibid. p.432). This also applies to labour-services (ibid. pp. 432-33).
    In contrast, Keynes, in his General Theory, did not discuss land capital and income is determined without it. What is much more amazing that the modern authors have been trying to remedy contemporary financial-economic crisis by the models where the land capital is absent at all.

    • May 6, 2015 at 3:29 pm

      Vacuonomics
      Comment on Ezra Davar

      Among the numerous defects of Walras’s approach the worst is that he deals with a zero profit economy. In other words, he talks about capitalism without profit. So he has not much to say about the real world.

      For the correct relationship between profit, distributed profit, and land ownership see: Essentials of Constructive Heterodoxy: Institutions
      http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2598721

      Egmont Kakarot-Handtke

  3. May 8, 2015 at 7:42 am

    Yes, agreed, but you spelled it “Nobel price” and it’s called “Nobel prize”

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