The 140 year cycle in macroeconomic thought


I am reading Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth: The Remedy by Henry George (free ebook available here).

I’ve been fascinated so far that the economic debates about the long recession of the 1870s are almost identical to those still occurring during the great recession. I would have expected more progress in macroeconomic thought in 140 years. 

Here’s George describing the utter disarray of the economic elite of the time in explaining how the depression had arisen, and where to look for a remedy.

This is shown by the widely-varying attempts to account for the prevailing depression. They exhibit not merely a divergence between vulgar notions and scientific theories, but also show that the concurrence which should exist between those who avow the same general theories breaks up upon practical questions into an anarchy of opinion.

Upon high economic authority we have been told that the prevailing depression is due to over-consumption; upon equally high authority that it is due to over-production; while the wastes of war, the extension of railroads, the attempts of workmen to keep up wages, the demonetisation of silver, the issues of paper money, the increase of labour-saving machinery, the opening of shorter avenues to trade, etc., etc., are separately pointed out as the cause by writers of reputation.

The modern equivalents are

1870s excuses                      2000s excuses 

over-consumption              → excess household debt

over-production                   → excess housing construction

wastes of war                        → government waste or regulation

high wages                           → high wages

currency debasement         → currency debasement

labour-saving machinery    → robots

I found even more interesting the debates about the nature of capital and wealth that occurred at the time. George criticised the writers of common textbooks for not being specific in their definitions which caused much confusion when applying economic reasoning to the problems of the day. It smelt an awful lot like the Cambridge Capital debates of the 1970s and reminded me of periodic debates (or indeed lack of debate) about the economic implications of foreign investment.

Here’s a snippet, which shows George would firmly be on the side of Cambridge, England in the capital debates, and would be firmly of the position that foreign investment is merely a transfer and is not wealth-creating.

As commonly used, the word ” wealth ” is applied to anything having an exchange value. But when used as a term of political economy it must be limited to a much more definite meaning, because many things are commonly spoken of as wealth which in taking account of collective or general wealth cannot be considered as wealth at all

Increase in the amount of bonds, mortgages, notes, or bank bills cannot increase the wealth of the community, that includes as well those who promise to pay as those who are entitled to receive.

The enslavement of a part of their number could not increase the wealth of a people, for what the enslavers gained the enslaved would lose. Increase in land values does not represent increase in the common wealth, for what land owners gain by higher prices, the tenants or purchasers, who must pay them, will lose.

And all this relative wealth, which, in common thought and speech, in legislation and law, is undistinguished from actual wealth, could, without the destruction or consumption of anything more than a few drops of ink and a piece of paper, be utterly annihilated.

By enactment of the sovereign political power debts might be cancelled, slaves emancipated, and land resumed as the common property of the whole people, without the aggregate wealth being diminished by the value of a pinch of snuff, for what some would lose others would gain.

There would be no more destruction of wealth than there was creation of wealth when Elizabeth Tudor enriched her favourite courtiers by the grant of monopolies, or when Boris Godoonof made Russian peasants merchantable property.

All things which have an exchange value are, therefore, not wealth in the only sense in which the term can be used in political economy.

Only such things can be wealth the production of which increases and the destruction of which decreases the aggregate of wealth. If we consider what these things are, and what their nature is, we shall have no difficulty in defining wealth.

What amused me is that George looked for answers in political economy

It must be within the province of political economy to give such an answer. For political economy is not a set of dogmas. It is the explanation of a certain set of facts. It is the science which, in the sequence of certain phenomena, seeks to trace mutual relations and to identify cause and effect, just as the physical sciences seek to do in other sets of phenomena.

Maybe it’s time to follow his lead, again, and look outside of sterile economic theory to resolve problems of macroeconomic instability.

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  1. Thanks for highlighting those most interesting excerpts from Henry George, Rumples.


    “….. Increase in land values does not represent increase in the common wealth, for what land owners gain by higher prices, the tenants or purchasers, who must pay them, will lose…….”


    “……Only such things can be wealth the production of which increases and the destruction of which decreases the aggregate of wealth. If we consider what these things are, and what their nature is, we shall have no difficulty in defining wealth…..”

    Here is Adam Smith’s take in “The Wealth of Nations”, 1776:

    “……..The general stock of any country or society is the same with that of all its inhabitants or members, and therefore naturally divides itself into the same three portions, each of which has a distinct function or office.

    The first is that portion which is reserved for immediate consumption, and of which the characteristic is, that it affords no revenue or profit. It consists in the stock of food, clothes, household furniture, etc., which have been purchased by their proper consumers, but which are not yet entirely consumed. The whole stock of mere dwelling-houses too, subsisting at any one time in the country, make a part of this first portion. The stock that is laid out in a house, if it is to be the dwellinghouse of the proprietor, ceases from that moment to serve in the function of a capital, or to afford any revenue to its owner. A dwellinghouse, as such, contributes nothing to the revenue of its inhabitant; and though it is, no doubt, extremely useful to him, it is as his clothes and household furniture are useful to him, which, however, makes a part of his expense, and not of his revenue. If it is to be let to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue which he derives either from labour, or stock, or land.

    Though a house, therefore, may yield a revenue to its proprietor, and thereby serve in the function of a capital to him, it cannot yield any to the public, nor serve in the function of a capital to it, and the revenue of the whole body of the people can never be in the smallest degree increased by it. Clothes, and household furniture, in the same manner, sometimes yield a revenue, and thereby serve in the function of a capital to particular persons. In countries where masquerades are common, it is a trade to let out masquerade dresses for a night. Upholsterers frequently let furniture by the month or by the year. Many people let furnished houses, and get a rent, not only for the use of the house, but for that of the furniture. The revenue, however, which is derived from such things must always be ultimately drawn from some other source of revenue.

    Of all parts of the stock, either of an individual, or of a society, reserved for immediate consumption, what is laid out in houses is most slowly consumed. A stock of clothes may last several years: a stock of furniture half a century or a century: but a stock of houses, well built and properly taken care of, may last many centuries. Though the period of their total consumption, however, is more distant, they are still as really a stock reserved for immediate consumption as either clothes or household furniture.

    The second of the three portions into which the general stock of the society divides itself, is the fixed capital, of which the characteristic is, that it affords a revenue or profit without circulating or changing masters. It consists chiefly of the four following articles:

    First, of all useful machines and instruments of trade which facilitate and abridge labour:

    Secondly, of all those profitable buildings which are the means of procuring a revenue, not only to their proprietor who lets them for a rent, but to the person who possesses them and pays that rent for them; such as shops, warehouses, workhouses, farmhouses, with all their necessary buildings; stables, granaries, etc. These are very different from mere dwelling houses. They are a sort of instruments of trade, and may be considered in the same light:

    Thirdly, of the improvements of land, of what has been profitably laid out in clearing, draining, enclosing, manuring, and reducing it into the condition most proper for tillage and culture. An improved farm may very justly be regarded in the same light as those useful machines which facilitate and abridge labour, and by means of which an equal circulating capital can afford a much greater revenue to its employer. An improved farm is equally advantageous and more durable than any of those machines, frequently requiring no other repairs than the most profitable application of the farmer’s capital employed in cultivating it:

    Fourthly, of the acquired and useful abilities of all the inhabitants or members of the society. The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person. Those talents, as they make a part of his fortune, so do they likewise of that of the society to which he belongs. The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labour, and which, though it costs a certain expense, repays that expense with a profit.

    The third and last of the three portions into which the general stock of the society naturally divides itself, is the circulating capital; of which the characteristic is, that it affords a revenue only by circulating or changing masters……”

    • Exactly and thank you, Rumples.

      Exactly and thank you, PhilB.

      These words from the dead expose the insanity in the obsession of the ‘little landlords’ to own dwellings to rent, which adds nothing to the economy and is a appalling diversion of capital.

      Just think for a moment. Does James Packer own a great string of houses to let? Or Rupert or Gina or Clive or any of the other wealthy people held up as paragons by an adoring media?

      They certainly do not. Their wealth is in ‘circulating capital’ and they have benefited mightily from avoiding landlordism.

      Genuinely wealthy people laugh behind their hands at the ‘Gearers” simultaneous embrace of concentration risk and leverage risk. The enduring value of a dwelling is measured by the rent it can command. This in turn is based on wages. Sure, house prices have diverged from rents in the last decade – but that remains their fundamental anchor and will revert when economic conditions change – as they are certain to do.


      Don’t Buy Now!

  2. Nice work.

    “Here’s a snippet, which shows George would firmly be on the side of Cambridge, England in the capital debates, and would be firmly of the position that foreign investment is merely a transfer and is not wealth-creating.”

    What a dangerous idea – for the government that is.

    The Federal Government is O4B “Open for Business” and that increasingly appears to means encouraging:

    1: The transfer of local capital assets (often oligopolistic assets with market power) into foreign control. With the benefits of such transfers of control simply ‘assumed’ and not clearly established and specifically explained for each proposed transfer.

    2: The ongoing sale of a large quantity of govt IOU’s to foreigners rather than locals, who simply bid up the exchange rate to acquire the $AUS to buy the bonds. The $AUS raised by this process being used to finance consumption.

    3: The ongoing encouragement given to TBTF banks to continue to borrow from off shore lenders for the pupose of domestic loans secured by existing residential real estate.

    A mountain of foreign investment, embraced by the government, that drives up the $AUS and produces very little if any tangible increase in wealth.

    If anything it reduces national wealth as an exchange rate bloated by transferring capital or interests in capital undermines the export and importing competing sectors.

  3. “Increase in the amount of bonds, mortgages, notes, or bank bills cannot increase the wealth of the community, that includes as well those who promise to pay as those who are entitled to receive.”

    This is an excellent description of the Australian Wealth.

    And our neo-liberal government doesn’t want to support car manufacturers, food processors, airlines, … because they actually create wealth.

  4. The debate is the same, because the underlying political dynamics is the same : capital is invested into the wrong thing (railway back then, real estate now), and there are no miracle ‘solutions’. The misallocation of capital have to be paid for. The main difference between then and now, is that the Reserve Bank printed money to spread to loss to everyone, rather than let the rich go broke, While there is a morality argument for punishing the rich, it will make things even worse.

  5. Careful there Rumple, start quoting Henry George and you’re likely to awaken the Meltfund demon, once awoken it will spill forth with such volumes of drivel as to drown out any further intelligent conversation.

    • I kinda like the old Meltfund Demon but it is selling its deeply satirical wares in the wrong place.

      There are a couple of property related forums I can think of, who would lap it up and eagerly invest in its ‘unique’ business model.

    • You don’t Meltie for that just bring in b_b who’ll swear up and down that house valuations are a zero-sum and neither constrain nor expand the monetary base because, after all , buyers are seller too!

    • Join the dots and the same pattern emerges that has always existed – the poor are used to protect the wealthy. I bristle at meltfund’s naked cynicism and spruiking, but some days I find myself despairing that his is the apposite conclusion. He is not unique in that worldview, of course; he could just as easily be part of the executive team of any banking/investment business, or a central bank governor in this or any similar country you care to name.

      Maybe it is time to embrace meltfund’s and other’s centuries’ old observations that in the long run the same themes will play out:

      our human appetites do not fundamentally change

      private economic monopolies are the norm

      financiers will always hold the most political sway

      the forces of globalisation are not going to be undone,

      the recycling of capital will always find its way into stable, desirable locations

      so ..

      if you are a thirty year old, with thirty to forty years of work ahead of you, why eschew debt for fear of being enslaved by financial liabilities to a third party ?

      you are, regardless of your level of risk aversion, faced with the near certainty of being captive to imperatives for coupling and reproduction and the financial obligations that implies.

      There is always uncertainty, but equally there is always opportunity. You can’t always time the former but if you are adaptable, intelligent, diligent, then you should be able to capture the latter

      You can’t fight the system. A social conscience is for suckers. Borrow as much as you can while you can. And above all, put all of that money, every cent, into the one asset used by the wealthy to keep the whole game running – housing.

      • Keep in mind that Meltfund does not actually do what it claims is obvious – buy and hold.

        It just buys under priced assets and sells them to excitable types who believe prices only go up.

  6. Here’s what is really amazing. Economics as it is currently practised lacks any kind of feedback loop to correct itself. It’s still just a whole mess of opinion dressed up with science-y language and pseudo mathematics.

    The whole profession is effectively worthless, it carries no mechanism for accurate prediction of the stupid theories that it’s proponents barf up. It is, as a profession and as an avenue of study, completely worthless.

    • there is very strong feedback loop in economy today – unfortunately the positive one

      economy is growing just because it’s growing -> economy is falling just because it’s falling

    • The problem in Economics is where the money comes from. An Economist friend of my used to say that economists are only paid to be wrong.
      Politicians only hire economists which back up their own theories or that of their voters. And they don’t like answers which would anger their own donors.
      This is why the Chicago school dominates, they don’t say anything to upset the money and even push things that suit the money very well.
      Problem isn’t lack of feedback it’s feedback rewarding bad economics.

      • So, it turns actually out that the only right way of describing the reality is trough political economy. everything else is djiba-djaba.

  7. Good conclusion Rumples. You’re obviously reading a shitload of economic papers over the last few months. Aren’t you finding – as I have – that the profession is often just an incredible intellectual endeavour that is quite worthless to the real world? Take macroeconomics – in its current state and for most of existence (about 80 years?). Its just a bunch of incredible intellectualising without any practical use or relevance to the real world. I almost think you should stop reading these pieces. Its got to distract from actual understanding.

    I love how simple observations become massive intellectual feats because someone, in needing to actually make such a statement, exposes the ridiculousness of the profession. For example, James Buchanan had to point out that “order is defined in the process of its emergence”, which his Austrian devotees think is just the most profound thing ever! Really, it is so self evident, its existence is a product of the profoundly irrelevant state of economics (in this case, general equilibrium rubbish, itself an incredible intellectual feat, but, really, its not useful). Behavioural economics is another such thing.

    • Completely agree. What’s worse is the tribal nature of economics (and other social sciences). The tribal dividing lines are so unimportant in the big picture, but they’re defended to the death and ultimately control which research gets attention in those fields.

      For example, I submitted a paper to one sociology journal and was told that my conception of trust would be unfamiliar to sociologists. It was rejected because that tribe didn’t use that particular word to describe the phenomena I was studying.

      So I submitted it to a different journal after some modifications explaining why my definition of trust is workable, where it comes from, and why it is useful in this context. The editor told me that I had ignored a vast literature on trust in sociology. The exact opposite of the previous editor who said trust would be an unfamiliar concept!

      At least I’ve learned that economics is not alone in its obsession with trivial matters while ignoring the big picture.

      Your point about emergence is one I make repeatedly. Every time I am in a seminar where a representative agent is used to describe a market-wide or economy-wide phenomena I challenge the presenter. They often defend their approach with ‘you don’t know this literature, this is the way it is done’. Scary. Or even ‘yes, but we abstract away from that’, which is simply saying we ignore the actual process that generates the phenomenon of interest.

      Maybe you read my piece on Coase who made the same points as you.

      • My biggest beef with the economics profession (not to detract from the many other beefs I have with them), is that they have completely lost sight of the understanding of economic land rent and the role played by “transport”; that was common place among the classical economists, Alfred Marshall foremost; and was also well understood by architects like Raymond Unwin and Frank Lloyd Wright; town planners like Ebenezer Howard and Patrick Geddes; social reformers like Charles Booth; property developers like Bill Levitt; and the car maker Henry Ford.

        Theoretical understanding was proceeding well through the contributions to the literature of Robert Murray Haig, William Alonso, Lowden Wingo, Tong Hung Lee, and Michael Goldberg – and then after 1970 the topic seems to have completely died. And we are now in the grip of literally global crises in which economic land rent in cities play a central role; and everyone is thrashing around in confusion and ignorance.

        I suspect that the people who know the most these days are the big rentiers in property and finance who are gaming the system. There needs to be a definitive book written about this. My sense of smell of a racket is alerted every time I come across pieces of evidence like Rockefeller family involvement in funding “land conservation” and “anti sprawl” advocacy from as far back as 1969…….. This sort of advocacy is massively well funded from a range of uber-wealthy donors today, all of whom seem to be significant holders of large and valuable property portfolios.

        I have also noted one academic after another going wobbly after their writings were starting to become dangerous to the racket.

        “Experts” in land economics who claim that regulations and regulatory quotas in supply of land for urban growth make no difference at all compared to an alternative scenario in which the regulations and quotas are absent, are a major part of this problem.

      • Yeh good article. I take a lot from Coase. (And where has Stephen Morris gotten to?)

        Your points on getting published are depressing, but ultimately unsurprising. I guess Coase showed though that if you really want to you can make your ideas be known if they are good enough, and it will be the rest of the discipline’s error in not acknowledging and incorporating them. I look forward to more

      • Interestingly, though, Hayek and Hirschman were both published in the American Economic Review. Shiller was published therein a few years ago, writing about economists as worldly philosophers. Perhaps the AER is a little broader than other journals, which may explain it, but its still very orthodox. I guess then there’s some recognition of this type of work from the gatekeepers, and therefore some hope.

      • (And where has Stephen Morris gotten to?)

        He got temporarily banned, and he hasn’t vounteered to return from it.

  8. It was the nonsensical sydney housing market that prompted me to really start reading about Economics. And it was Henry George where I found my first sensible answers. Australia used to understand rent and the problems it causes. Now our land tax is neutered and our politicians are mostly people who made money from rent.
    I hope the similarity with the past continues to include the eventual remedies or better ones. Hopefully without having to have a war or revolution first.

    • It’s part of the Australian psyche to, without the words explicitly, aspire to become a rentier – in our case, a landlord; money without work; income via capital position.

      We are uncreative and speculative, and a little lazy.

      Fallen human nature, unfortunately…

    • Glissom; don’t miss the role of the elasticity of housing supply.

      It was seldom land taxes that kept housing affordable for decades (and still does in dozens of US cities) because land taxes simply did not and do not exist. It was elastic supply of housing that “did it”.

      I am not convinced that land taxes would solve the problem. I do believe that we should be using land taxes INSTEAD of anti-sprawl policies, not using them as a “complement” to them.

      • Don’t quite follow you there PhilBest,

        We did once have land taxes in Australia. The federal tax was a little odd but it was on the unimproved value. Now we have smaller taxes on the improved value so not really proper land taxes.

        Land Taxes should make capital gains unprofitable and discourage land banking as well as retaining un-used land within cities. It’s not quite the magic cure Henry George anticipated but it should greatly reduce the problems in the housing market.

        While I accept that supply contributes to the problem I feel that our housing market failure is due mostly to demand not supply. ie. buyers paying too much because they expect capital gain profits or fear rising bubble prices. Increased housing on the edges does little to solve price problems further in. If we built a lot of houses on the edges of our cities I don’t think prices would improve until after jobs or other people moved out there. I’m fine with doing both, improve supply elasticity and apply land tax to the demand side. That way we still win if I’m wrong. And still win if you are wrong. Rentiers loose both ways.

      • The Federal Land Tax was abolished in 1952. The local land taxes have not changed by any significant amount. Therefore a price explosion should have occurred in the 1950’s, not from the late 1990’s onwards, if changes in policy on land taxes were the prime culprit.

        It is obvious in this day and age that there is a global mania for “constraining urban sprawl”, and the planning policies that have resulted, coincide convincingly with the onset of significant inflation in urban land values. This coincides in numerous different cases around the world; the UK in the 1950’s; Oregon in the 1980’s; Canada and Australia more recently. And the comparatively few cities without anti-sprawl regulations (pretty much all in the USA) still haven’t had price inflation.

        I really don’t understand how much more proof people can reasonably think they need before they will admit this reality.

        Regarding the price of property at each location in an urban area; “option values” mean that the price of land beyond an urban fringe with no UGB, will determine the price of land 10 km further in towards the centre, with a premium representing saved transport costs and time. This land in its turn will determine the price of land another 10 km further in. Finally the CBD itself is reached.

        I like to draw attention to the embodied land value in centrally located Houston condos:

        The land those are sitting on, within a few kms of the very centre of Houston, is far cheaper than actual greenfields fringe land in Australian cities at the prices that the planning racket has inflated it to. This is because greenfields fringe land value in Houston is determined by true rural value, not artificial scarcity and monopoly economic rent.

        That is, $10,000-an-acre land available to developers beyond the fringe, equals $20,000 per acre prices a few k’s further in, $30,000 per acre prices a few more k’s further in, $40,000 per acre prices a few k’s further in, $50,000 per acre prices a few more k’s further in, and so on. Even close to the very centre of Houston, the land cost appears to be less than $100,000 per acre. This really does accurately represent the savings on transport costs and time relative to the fringe; and of course the whole effect is diluted by the dispersion of employment. But Australian cities have dispersed employment too. The only reason for $1,000,000 per acre fringe land, is quotas set by urban planners, and bidding wars between land bankers for the available supply. “Option values” proceed from there.

        The irony is that FEWER people than before can afford more central locations, and it is literally visible on Google Earth that all cities with this planning racket have weirdly high density AT and just inside the urban fringe, which actually results in increased commuting distances and congestion when compared to cities with a normal spatial distribution of population, less and less dense out to the fringe.

      • Thanks for the great response PhilBest. There are certainly a lot more factors involved than just the Land tax changes. What the land tax does is attack the positive feedback in speculation, once that’s gone anything which pushes prices up starts the bubble off.
        Reduced mobility via stamp duty, investor subsidies, and planning and sprawl restrictions all make the problem worse. Something I failed to factor into the sprawl restrictions is like everything else as they make prices higher they also increase speculation strengthening the positive feedback loop.
        Really it makes sense to attack everything we can and the liberal planning US cities make a good case for just dropping the whole restrictive mess entirely.
        After concerted sensible argument from MB I’m going to have to concede that we need to remove land use restrictions as much as possible. I still think it’s secondary to Land Tax but certainly should be a high priority.

  9. The only thing I would take issue with is in the excuses section – “over-production → excess housing construction’.

    We have a choked supply of affordable housing. The overproduction is in the tiny, overpriced apartments in areas like Docklands and Southbank in Melbourne, but as they tend not to be the accommodation sought by owner-buyers, they don’t really count.

    • Yeah, I thought after ’70’s stagflation, that Keynesianism was buried for good with a stake through its heart.

      I am becoming more and more suspicious that the wider public in most countries today are the victims of a fraud by elites who are pushing policies for no reason other than that these policies will enrich them, the elites; and stuff the general welfare or future economic sustainability.

      Matt Taibbi at Rolling Stone is a great writer on this; in one incisive article he says how he has always scoffed about “the Illuminati” and conspiracy theories about elites controlling the global economy in the direction of takeover; but he says that he has come to believe that there most definitely are conspiracies to defraud the general public, taxpayers, etc; on the part of the people at the top of the finance sector and anyone in their pay.

      He speaks for me too on this point.