Progress with Prosperity

School of Economic Science Annual Economics Lecture, 2012

Ian Mason, Principal and Head of Law and Economics, School of Economic Science

It has long been observed that the word “economics” is death at the box office1, but contemporary concerns are such that economics now troubles people and demands attention. People can see that our economic arrangements are not all that they should or could be.

Hence the call for a more ethical and principled economics which might go some way to allowing human beings to live well and prosperously, without causing harm and without running into the deep troubles that we are experiencing at the present time. There are many such voices ranging from Nobel Prize winners in economics to the Prince of Wales to journalists and commentators the world over. But the work of developing and formulating a new economics is not so straightforward. It is one thing to demand change; it is rather more difficult to say what that change might be.

There are three jobs to be done. One is to critique how things are now, objectively, sensibly and carefully; the next is to see what the possibilities are, and by far the most difficult is to get from the one to the other.

While there are many who can critique the present situation effectively and sensibly, there is not a great deal of agreement on possible alternatives or how to reach them. The School of Economic Science is no better placed than anybody else to do that – except perhaps for one thing, and that is that we have at least considered the importance of an ethical foundation for economics ever since the school was founded in 1937.

The School was founded on the assumption that there is truth and there is justice; that they are relevant to human affairs; and they can provide a guide for human affairs. So, the School set out to teach a form of economics that incorporated justice as a guiding principle – and it did so intending to follow the truth.

In this respect, truth is a bit like the North Star: it gives a sense of direction however remote the chances of getting there. And it does give a guide if we keep asking the question: is this true? That raises the question: how would you know? What we have taken as an answer in the School is that an answer or proposition cannot be true (at least in economics) if the outcomes are unjust. So, for example, imagine an economic philosophy based on the view that: “as long as I am all right, everything is all right”. It takes little thought to see that that outlook would produce unjust outcomes leading to the conclusion that that particular proposition is not true.

So truth, and the question, “Is this true?” give a dynamic and so does a sense of justice. The aim of our courses it is simply to foster that sense of justice because it gives a basis for understanding how things are working at the present time, of how they could work and of where we might actually go.

The question then must arise as to what justice is. That question has troubled some of the greatest thinkers in human history over thousands of years and it would be foolish for the School of Economic Science to say we have the answer, even if nobody else has. The best we can offer is some working propositions, even if they are controversial.

Following Plato, we would say that justice at the very least is a harmonious state of the soul. It is a state of the inner being of every human being. There are many who would dispute that and say: justice is a state of society, to which we would respond: well, if people are not at peace with themselves, it is unlikely that their societies will be peaceful either. If there is no harmony in the people, there is unlikely to be harmony in their community. This was Plato’s view and his exploration of the subject of justice begins by observing that, as it can be quite difficult to look into oneself, and find justice and injustice and discover what they are, it might be easier to look at society and see where justice and injustice appear, and then see if we can relate that to our own inner condition. The state of society and the state of the people in society are closely linked.

Another observation is that ideals are needed if a just, equitable and stable economics is to be established. It is unfashionable in this age to express ideals; to be idealistic. We are expected to be “realistic”. But being “realistic” all the time diminishes us, leading to a rather impoverished view of ourselves and of human potential. It is sometimes very useful to consider what human beings are capable of – how we could live if we really put our minds to it and joined together to live well. To do that we have to overcome the cynicism of the present age and look for and hope for a better and brighter future for generations to come.

The harmonious state of the soul is one which is lawful and ordered. It allows people to flourish and to flourish in a manner which does not impose on others and does not impose unduly on the material world in which we live, the Earth itself, the world of nature from which we draw all our sustenance. It requires both vigilance and self-control.

Beyond saying that justice is a harmonious state of the soul, Plato tended to concentrate on what it is not. Disharmony of the soul is caused by simple things: things that we all experience – anger, fear, pleasure, pain, jealousy and desire were his particular list, a collection of inner tendencies which few people escape. But we all know we can have some control over them. We can rise above them, and when we do we are better people. It is said: we are masters of ourselves, masters of our souls.

One of the key features of the way economics is explained in textbooks and colleges is in the juxtaposition of firms and households. The basic theory is that households own the factors of production – they own land, they own labour, they own capital. These they make available to firms – firms being the productive agents in the economy. Firms employ the factors of production to create wealth and then they pay it back to households in exchange for them. That, in very simple form, is the theory and it is essential to the way modern economics is taught and understood.

Now the firm, the productive enterprise, in recent times has become, in very many cases, the corporation. A corporation is a notional creature that exists on paper and in the eyes of law only, but nevertheless exists independently of the people who work in and for it. A household is also a rather nebulous thing to an economist, something to juxtapose against a firm and to account in a general way for the private ownership of the various factors of production. We would say, however, that insufficient consideration is given to the occupants of the household, namely householders.

Economists do have a name for the householder. He is called homo economicus. Homo economicus was described in the newspaper, Metro, a couple of months ago by Rory Sutherland, chairman of the Argyll group of companies and a senior businessman in the United Kingdom. He described a ‘Mr Logic’ who appears in a comic called ‘Viz’ as “a character bereft of interpersonal skills, incapable of understanding metaphor or context, and entirely blind to social norms. He solves problems not instinctively or intuitively but through logical calculation.”

Sutherland says: “There is a place where the philosophy of Mr Logic runs rampant — in the mind of economists, accountants, policymakers and business people. The scientific name for Mr Logic is homo economicus; the beast created to conceive elegant mathematical models of behaviour but with no regard for how people behave in reality.” It is one of the features of modern economics that it puts this strange person at the heart of the matter and says: “This is what economics is all about”.

The Chief Rabbi, Jonathan Sacks, had something to say about that – writing in The Times also in December last year: “The market gives us choices, so morality itself becomes just a set of evaluations. Not just to fulfil desire, but to ask whether this desire should be satisfied becomes redundant. We find it increasingly hard to understand why there might be things we want to do, can afford to do, and have a legal right to do, that nonetheless we should not do, because they are unjust or dishonourable or disloyal or demeaning. When homo economicus, displaces homo sapiens, market fundamentalism rules.” The word “sapiens” means “to discern, capable of discerning, wise, judicious”. Is it too much to hope that the human being at the heart of economics can become more homo sapiens than homo economicus?

This raises the question: What is the role of economics in relation to homo sapiens, to the wise discerning householder? I am fairly certain that one thing that can safely be said about economics and economic systems, and certainly about Governments, is that they cannot make people wise, just as it can safely be said that they cannot make people just. The most that can be asked is that they create the conditions in which wisdom and justice are more likely to prevail and in which the causes of injustice – our anger, our fear, our pleasure, our pain, our  jealousy and desire – are given as little rein as is possible whilst allowing people to remain free.

I think, generally speaking, in western societies in the civil sphere we have succeeded in doing this. Most people can walk down the street in many parts of the world feeling relatively secure that other people’s anger and fear and so on will not burst out and cause them harm, although we certainly know the places where that is not the case and usually try to avoid them because human beings cannot live where these things are given free rein. But we have been less successful at this in the economic realm. Systems have been allowed to develop that enable personal and corporate selfishness to prevail over common good. That is not the situation in the civil sphere where the ordinary laws of the land apply. But to a significant extent it is the case in the economic sphere.

So the next question is: How to create circumstances that encourage a different conception of economic man, or the economic being – the householder, male or female – who would be free and responsible? Free, because freedom seems to be something that is inherent in the human spirit.

I had a Christmas card from one of my predecessors as Head of Economics in the School. It said the usual things: happy Christmas, peace and goodwill, and there was a note saying: “It has been a bad year for dictators, long may it continue.” This reminded me of the 14th century English lawyer2 who wrote: “Freedom is a thing with which the nature of man has been endowed by God. For this reason if it be taken away from man it strives of its own energy always to return” As we watched the Arab Spring spreading through last summer and autumn and even into this winter we saw something of that spirit playing itself out on the southern shore of the Mediterranean Sea. Freedom is something essential to the human spirit.

This makes life even more difficult for economists because it means they cannot just impose their systems or solutions on others. The freedom to govern includes the freedom to misgovern and that has consequences. One can only proceed by reason and persuasion and by pointing out consequences and possibilities in the hope that people will follow. That is the logic of a democratic age. That is why it is heartening to see so many of you here tonight  because it shows an awakening of interest, a questioning, and a sense that something better could be found.

So what about our householder? We want to create an economic foundation that allows people to be free, to be social and sociable, and to participate in society, because it is certainly in co-operation with others that wealth creation becomes easiest. People need to be well-founded, in the sense that they are able to earn an adequate living, one which provides not merely for their material good but for the real prosperity that is built on that, namely the prosperity of happiness, wellbeing and fulfilment – the sense, as Professor Tim Jackson3 put it, that all is going well with the world: the sort of prosperity that allows people to feel that they can give more than they take and leave things better than they find them.

There are all sorts of obstacles to this, especially when people are in fear and, in particular, in fear for their economic foundations. Even setting aside the problems of the current financial crisis, we see that there is a whole range of deeper challenges. We know that populations are expanding and that relative populations are also causing difficulties: ageing populations in some places, very young populations in others. We know that there are difficulties in food distribution – not so much production, there seems to be enough food for everybody, but getting it to the people who need it at a price they can afford is already a major problem. So much so that a very large part of world’s population is permanently in some sort of food crisis — either undernourished or positively underfed.

Water is also now a major problem. When water starts to run out, people become violent and possessive about it. Many industrial and agricultural processes use immense amounts of water to the extent that water supply per head of population is a serious problem around the world.

The idea that economic progress must be based on continuous growth is also a problem when we realise that even the bountiful Earth has its limits and that we need to find ways of working within those limits.

“Be fruitful and multiply and replenish the Earth4” was the command given to Noah. As our populations and productive capacity multiplies we need to be ever more careful of the need to replenish, because the more we take, the less there is to give. So this giving back, this completion of the circle of nourishment, becomes all important as it is the only way that economies can become sustainable.

Then there is the almost perennial problem of the distribution of wealth. It is well known that some parts of the world’s population are getting richer and richer while others are not. In some places there are welcome improvements but disparities cause their own discontents and difficulties. We see problems with energy and oil because our energy consumption has become so high. There are arguments about how much oil there is and it may well be another generation before we need to worry about whether there is enough of it. The more pressing question is whether we can extract it without using more energy to get it out of the ground than we can get out of the ground by using it.

Then there is the problem we have created ourselves: debt, and how our money systems work based on debt. All of these are deep and profound challenges, brought about by optimism combined with a blindness about the possibilities of human progress; a blindness to the lawfulness of the world that we live in and to the need to ensure that our actions comply with the natural laws that govern us.

Those are some of the deeper challenges that lie behind the financial challenges of the present time.

In our studies in the School one of the difficulties that has been observed is what we call homogenisation5 – the tendency to lump things together and assume that they are all the same. It happens a lot. The way we assess gross domestic product is an example.

Gross domestic product is the measure of economic activity in an economy. The measure is simply of all economic activity and there is no discrimination as to whether it is useful or not, and it is counted in money terms, so that everything is translated into money. If a price can be  put on it, it counts as gross domestic product. It doesn’t really matter, for the purposes of counting, what is being produced or what is being counted. So, for example, a nation of lawyers and accountants – which never produced a morsel of food – provided someone would purchase their services, could be an apparently successful nation with a high domestic product. Speaking as a lawyer, I am very conscious of the fact that I do not produce anything that is terribly useful to anybody. There are a few people, happily, who will pay for some services and that enables me to buy the things that count, like food and a place to live and clothes and the occasional holiday. But although it is not directly productive of wealth, nevertheless when people pay for my Opinions they count as gross domestic product, because our idea of wealth has been homogenised to include anything that is sold at a price.

A friend of ours in Australia did some research into GDP increases there. What he discovered was very simple: a lot of people were now being paid for doing things that were being done before but not being paid for: domestic services, cleaning houses, looking after children and things like that. As a result GDP was expanding without any real increase in the goods and services being produced in the economy.

That sort of lack of discrimination in the way that we look at things can create the illusion that we are creating wealth, or more wealth than before, when in fact we are not. This has consequences when we issue money based on production of wealth.

Then there is the idea of capital which has also been homogenised. In strict terms capital is wealth, that is the products of human effort, used to create more wealth. It includes tools, equipment, infrastructure and the like. In other words it is something that has been made and is being used to help to make or grow more things. It is a physical entity – tools and equipment are real capital. But to many economists, capital also includes land, or at least titles to land, the right to hold land against anybody else, and it also includes money. But money isn’t really wealth at all, it is only a claim; and land is not produced by anyone and cannot be increased in quantity, although it can be improved. In that sense it is completely different from capital which is in fact produced from land. If you conflate the three together: the real capital – the tools that you need – land or titles to land, and money, and call them all capital, you lose the power of analysis that enables you to see exactly what is needed or what  is happening because the three are quite different and respond differently to human demand6. When people say they need capital, sometimes they mean that they need money; sometimes they need money to buy real capital and sometimes they need a place to work. All of these are different and they have different implications for economic life.

The economists approach to land offers another example of the dangers of homogenisation. In economics land is just land. It has virtually no spatial dimension at all. In fact some have sought to write land out of the equation, saying that places like Singapore and Hong Kong have proved that land is no longer a consideration in economics7. That results from a failure to appreciate what land actually is. Not only is it the entire natural environment but it is also the space in which we live and work. One of its most evident qualities is location. No two places are quite the same. Across the globe every acre has its differences from every other and that has immense implications because it means that some places are significantly preferable for economic purposes than others; and some for some economic purposes, and others for other economic purposes – a fact which has received remarkably little attention in the economics of the ordinary world in which we live. It is that sort of homogenisation, a failure of analysis, which results in many of the economic difficulties that we now face.

An American writer and commentator, John Greer8, approached this – particularly in relation to gross domestic product – by proposing what he called a multi-tiered economy: that we should recognise and take account of the fact that the economy is not one great amorphous mass but in fact has quite different and distinct levels.

The first level is the natural economy – the world of Nature which has its own cycles, its own production and its own rules that do not vary very much. The natural cycle of production is the seasons and there is not much we can do about those. We can, by globalising the economy, have summer fruits available in the depths of winter but we cannot actually change the seasons; nature has its own cycles. Not only that, nature is the source of all the wealth that is produced, at least all the material wealth. If nature is not allowed to produce or is forced to

overproduce to the point of exhaustion, then human welfare and wellbeing are put at risk. Economists often assume that Nature’s provision is free, but businesses find that it is not that free when someone else happens to own it and they have to lease it from them. The natural economy is the foundation of the whole economic system, whatever economic arrangements human beings derive for themselves. Its health is essential to all of us.

Greer’s next level is the manufactured economy – the secondary economy which takes the things that nature provides and turns them into the things that we need, into real wealth, into artefacts that are produced by human populations, and that is a different level of activity. It probably includes services, not all of which make huge demands on the natural world -services like lawyers and so on who need a small place to sit and an awful lot of paper – but it is that part of the economy in which human beings are most actively and creatively engaged. This needs its own measures so that we recognise its inputs and its outputs. It needs measures that understand what is directly involved in the process and what the externalities are – what the consequences are that other people have to pick up.

The third tier of the economy is the financial economy – the world of monetary services which are extremely useful and important in making the rest work, but has different working rules of its own. Greer puts it simply: the financial world enjoys what are called positive feedbacks whereas the material world is more likely to work on negative feedbacks. It goes like this: you get into debt and that is a problem. You should do something about it. In the ordinary world the normal negative feedback would be “Right, we will pay off the debt”, but the wonders of the financial economy allow us to take a different view and say instead “We will deal with the debt by borrowing more”. You see what I mean? In doing so, both the debt and the amount of money in circulation increase thereby exacerbating the problem not solving it.

This is possible because the financial world has divorced itself from the natural world and the manufactured or made economy. It creates serious dangers for money systems everywhere because when money is no longer related to things it can buy it loses its value. Losing its value it becomes useless and people and economies that have spent a great deal of time accumulating monetary wealth find themselves extremely exposed because money is no more than a claim on wealth and if there is no wealth to claim, money is not worth much.

Greer’s analysis offers the opportunity of dealing much more intelligently with the different aspects of economic life, in a way which would allow people to flourish. In this we take a view that the land, which includes the whole natural environment, is of central importance, far more importance than it is generally given in economic textbooks. We do so because of the complete dependence that we all have on the natural world: because we are part of the natural world. We have our human nature and it interacts with the rest of nature as one complete whole. Human beings, like all beings, cannot survive without access to the natural environment, that is to say, to land.

The big issue arising in the world around us – as it has whenever economies have moved from rural simplicity to industrial complexity – is the terms upon which people have access to land.

One solution might be to nationalise all land. But one has to ask whether it is consistent with the ideal of a free and secure society that the government owns all the land, because whoever owns the land has the greatest power – complete economic power over everybody.

People need access to land and they need security of tenure. They need to be able to say “this is my place”. So how would the economics of a free householder work? It would be simple to recognise that exclusive possession of land carries obligations; that the basis upon which one person is able to hold a particular part of the world against the rest of the world is the simple basis of fulfilling economic duties towards the rest of the world and that as ordinary citizens we have a right to expect that those who hold land fulfil those duties.

This is much easier to see when we take account of the spatial dimension of land is recognised because one effect of this dimension, and of the differences in different places, is that it creates different advantages and disadvantages in different places. That in turn allows us to distinguish between what is genuinely the fruit of a person’s efforts and what is actually the fruit of an advantage they hold over everybody else. The simple obligation is to return that advantage to the community as a whole and that can be done through a tax system.  The tax that is prescribed, or is most usually prescribed for doing it, is a tax on land values. The language itself becomes complicated – it is sometimes referred to as a land tax although it isn’t a tax on land at all, it is a tax on value. It is a tax on the desirability of a particular location; a tax, on desire or demand.

Most commonly it is described as a tax on the economic rent of land. But the term “economic rent” has become so generalised, and indeed homogenised, that it is quite difficult to use it at all because few economists agree on precisely what it means. Even fewer recognise that when it is applied to land it is describing something different to the same term applied to something like a particular personal ability.

Some people are able to command high incomes because of their particular abilities: Bill Gates is an example; or perhaps the sportsmen, entertainers and superstars who attract high incomes by their abilities. They are not depriving anybody else by using those abilities, they are simply selling an ability that they have to people who enjoy their performance or enjoy the service that they provide. That is an economic rent that they can rightly command because their abilities give them have an advantage over the rest of us while taking nothing from us. I think I would say in a free society: good luck to them9.

But when their advantage derives simply from being able to prevent people from doing what they otherwise could do, then it is different. We might then say it is not so just, or even that it is unjust, because Nature is here for all of us. The principle at the heart of it is that Nature, represented by land, belongs to no one. We can’t take it with us, we can’t keep it and we didn’t create it.  It follows there is an obligation that goes with the occupation of land. I do stress that I am not suggesting that you can’t occupy land, because of course we must; all that is being said is that there are obligations that go with it. These obligations include simple things like keeping the land in good condition and paying any economic rent to the community that generates it.

Economics textbooks pay little attention to what is known as the “incidence of taxation” – the effect of particular taxes in different places. This again is a result of not really appreciating the spatial dimension of land as a factor in economics.  We saw one effect a few years ago when, for very sound reasons, the Government took the view that it would be good to impose an annual increase in the tax on petrol. It was hoped that increasing petrol prices would cause people to use their cars less, as indeed they are now  doing, although it is not merely the tax that is causing the difficulties, it is changes in oil supplies and the whole world economic situation as well.

But notice where the protests came from? They came from the margins of the economy; the places where business margins were tightest; the places where it is most difficult to create enough wealth to live on. They came from there because it was there that the tax had the most impact. Most taxes have an impact like that. It is much easier to create enough wealth to pay taxes in some places than in others. This is because one effect of taxation is to increase the cost of everything taxed because revenues must increase to cover the cost of the tax.

A study carried out in the School more than 20 years ago into the coal industry in the United Kingdom showed that the reason the British coal industry closed down was that the amount of tax paid by the then nationalised industry to the then Government was such as to make the price of coal coming out of UK mines more expensive then coal coming from open-cast mines in Columbia and other places in South America. The result was that the coal industry was rendered uncompetitive by the tax system. Few people actually listened to that analysis but British governments effectively taxed the British coal industry out of existence. It is only just beginning to recover now that the price of coal has gone up enough to meet the burden of taxes as well as the price that people are prepared to pay for coal.

Close examination of the tax system shows that it is possible to relate public revenue to the productivity of different places rather than of different people. That can be done through a tax on land values. It may be that we have to be more ingenious than that. The economic rent of land is certainly being collected, somebody is getting it. It is not that we are trying to find a new source of wealth or a new source of revenue; the wealth is already being created, the rent is already being collected. Those who can collect the rent, who are described by economists as rent seekers, do very well. The ability to collect the economic rent of land enables people to become very rich and is one of the reasons for immense disparities between rich and poor the world over. A just tax system could redress this, and needs to, because studies in various parts of the world are showing again and again that it is not absolute wealth that causes discontent and dissatisfaction in societies, it is disparities.

It seems that up to a certain level increases in material prosperity are very important. Happiness indexes show a very steep rise as material circumstances improve, but only up to

a certain point. Thereafter, they level out. People don’t get any happier by the production of more wealth once a certain standard of living is achieved and it is not a particularly high standard of living, most of us here probably exceed it(10).

What does cause difficulties is when people see that other people are doing much better than they are. That is what causes discontent. It certainly contributed to the discontent that resulted in the Arab Spring. The tax system can be used as a very subtle instrument to deal with that, but it does need to be very intelligently examined in order to do so. That is a primary art of government, to be able to so use the tax system to level out inequalities in the accumulation of wealth in a state, not to the extent of making everybody the same or insisting that everybody only has the same income or anything of that kind, but to the extent that the disparities do not become so great as to cause discontent. Governments can’t make people happy but they can create conditions in which people are more likely to be happy; they cannot create contentment but they can create conditions in which people are more likely to be contented; they can’t even make peace, they can only make war, or stop doing so.

I think that understanding that there are limits to what governments can do, and that there is a huge onus on people as a result, is something that has been lost from common understanding in the last century or so. The interaction between people and government has changed. Government has become the great provider and justice itself has become a function of government, when in reality it is a personal virtue. So we go to the Government and demand justice and in doing so we look in the wrong place.

Somebody once described politicians as people who are very keen to change the world but don’t want to change themselves. That may lie behind many modern cries for justice – the justice that we want is to be as we are without changing. But what the present situation really calls for is some careful self-examination by our human population of the standards by which we live and whether in fact those standards can be sustained.

There comes a time when people have to become independent and not dependent; when people have to be responsible for themselves and not expect others to meet their responsibilities. I don’t think it is going too far to say that that time has probably come, that

we can no longer continue to demand of governments that they provide more and more for the people but rather to demand that they provide the conditions in which people can provide more and more for themselves. It is that sense that we ascribe to the householder in a reformed economic outlook. Creating the conditions in which a free independent householder, inspired by justice, is most likely to thrive seems to be a proper aspiration of government. The science of economics is ultimately a servant of government – not of business or of individuals but of government – it is a science of government and it is about creating those conditions.

Without doing so, I dare say that we will get out of the present crisis one way or another more or less successfully. There will be another period when things all seem to be going swimmingly, at least where we are, but then it will all happen again. But a lot of people are asking for more than that and asking for better than that. We would do well to heed those voices, and economists would do well, and we in the School of Economic Science would do well, to listen to those voices and do our utmost to see the way through to a more just and more equitable economic order.

Those are the thoughts that are pressing amongst the economists in the School at the present time. They are intended to meet the demands of the age we live in and I hope that we will continue think and question in this way because ultimately that is what we are here for: to be of service to the world and to the community in which we live through our studies in economics and, of course, philosophy and all that flows from them.

1 Robert L. Heilbroner: The Worldly Philosophers 6th Edn. Preface

2 Sir John Fortescue: De Laudibus Leges Angliae (In Praise of the Laws of England)

3 Timothy Jackson: Prosperity Without Growth: Economics for a Finite Planet: Earthscan, 2009

4 Genesis: 9 v1.

5  Some economists would probably prefer the term ‘aggregation’ which in hindsight might be a better term to use but the original is retained here.

6 For example, an increase in demand for produced goods can produce either an increase in price or an increase in production; an increase in demand for land cannot produce more land, only an increase in price; an increase in demand for money may produce a fall in the value of money, or inflation, or simply an increase in debt, but will not, by itself, produce more goods or more land.

7 e.g. J K Galbraith

8 John Michael Greer: The Wealth of Nature 2011 New Society Publishers

9 Although I might advise a Chancellor to exercise his taxing powers quite vigorously.

10 See for example, the New Economics Foundation publication: The Great Transition 2010