How did Knight come to Chicago? John D. Rockefeller funded Chicago spectacularly in 1892, and started raiding other campuses by raising salaries. Rockefeller picked the first President, William Rainey Harper. Harper picked the first economist, J. Laurence Laughlin, from Andrew Dickson White's Cornell (he liked Laughlin's rigid conservative and anti-populist views). Harper drove out Veblen in 1906, then died, leaving Laughlin in charge of economics until he retired in 1916. He passed the torch to J.M. Clark, the son and collabourator of J.B. Clark.[60] Frank Knight first came to Chicago in 1917 from Laughlin's Cornell. The apostolic succession is fairly clear from Rockefeller to Harper to Laughlin to Clark to Knight.
According to William Barber, the early institutional decisions helped shape the "observable outcome" at Chicago to this day: in plain English, Chicago is still the lengthened shadow of John D. Rockefeller (Barber, 1988d, pp. 242, 248, 263-4, 265). We may assume that the man who hired publicist Ivy Lee to polish his tarnished reputation also picked his own private University President with that in mind. Rockefeller and Harper are long gone, but the problem they exemplify is as perpetual as the maldistribution of wealth and the corruption of politics. "It is not what has been given but what is hoped for that influences most the policy of university authorities" (Ross, 1914, p.166).
In terms of numbers, and intensity of feeling generated, Knight probably produced more NCEists and NCEism than anyone in history. He made no secret of his firm opposition to Henry George and ideas that might aid or comfort Georgists. His enduring interest and his viewpoint are clear from the title "Fallacies in the Single Tax" (1953).
In treating rent, Knight totally fuses the individual and the social viewpoints. A cost to one firm is a cost to society: there is no aggregation problem, no fallacy of composition, and no remote possibilty that "rent" might have more than the one meaning he assigned to it.
Anyway, to Knight all land value is a human product. The single tax, says Knight, is an invention of city men who never knew the soil (recall Alvin Johnson and his "fresh cheeked maidens"). Among the human activities and investments that create land, by Knight, is "killing off previous claimants" (1924, rpt. 1952, pp.167-69). It reads like a caricature of Chicago, but it is Chicago, from the fountainhead himself. The American Economic Association has laid on its hands, reprinting it as a "classic."
Consistently, Knight also argues that slave-owners had just title to their slaves, because of society's sanction, and - note this well - because there was open competition for the capture of slaves (1953, p.810). Competition is the key, it can justify anything. Presumably this would also justify lesser forms of larceny and embezzlement, so long as thieves compete, but Knight does not address this matter. There is some irony in that Knight's roots lay deep in the "Land of Lincoln." "Summary liberation" of slaves, i.e. Lincoln's Emancipation Proclamation, was unethical according to Knight. Compensation was due the owners - (not, apparently, the slaves). He does not tell us what persons in "Society" should bear the necessary taxes to do so. One wonders if the young Knight had ever been allowed to read Huckleberry Finn. His paramount value is protecting property in unearned wealth.
"Society" was to blame for slavery, wrote Knight, and society should pay (cf. Ely, 1914, p.779, cit. Young, p.305). Could this be the origin of the allegedly "knee-jerk liberal" doctrine that young hoodlums who gun down robbery victims are blameless because it is society's fault? Little wonder that Knight later wrote that the competitive system lacks most elements of fairness (1935, p.60). Was he not projecting onto the system his own grim fairy-tale of what it should be, and reacting against his own travesty?
Consistently, again, Knight wrote that land yields no unearned surplus so long as competition keeps the returns to individuals at market levels (1924, rpt. 1952, pp.167-69). A "run of free income," (as Veblen called it), ceases being a surplus to Knight as soon as someone buys it from someone else. This ideological position was taken also in the same decade by W.I. King (1921), R.T. Ely (1927), and Shannon and Bodfish (an Ely employee) (1929), and has grown universal among NCEists. An "efficient market" is now one in which arbitrage has adjusted purchase prices such that every new buyer makes just a competitive return on what he bought, regardless of what that might be (we have already seen Knight apply this to slaves). The origins of property are of no concern, only the trade in property.
The market is also "efficient" so long as no opportunity for arbitrage goes unexploited. It's a wonderfully circular, self-vouching system of thought: by definition, no such opportunity does go unexploited. Getting back to basics, an efficient land market would seem to be one that got land allocated to its highest and best use. In NCE, this is assumed to be the by-product and result of arbitrage. It is as though betting on a horse-race is what makes a certain horse win. Indeed, William T. Ziemba, Professor of Management Science at the University of British Columbia, has provided us with an appropriate model, a perfect travesty of Knight's idea of an efficient market. "My system is based on the premise that the racetrack, like the stock market, is an efficient market - ..." Betting is efficient, says Ziemba, because "The odds created by the betting public generally reflect a horse's actual chances of winning a given race" (Ziemba). Those ideas overlook that the odds do not affect the outcome (plus, in this case, it doesn't matter which horse wins anyway). Land prices are in some ways like the horse race. They rise and fall from exogenous causes. Buyers bet on the outcome without affecting it. Knight's thought takes us so far away from basics that a professor of management science can mistake arbitrage for social efficiency.
"Choice" is everything to Knight. "Apart from a necessity of choosing, values have no meaning or existence." "...The cost of any value is simply the value that is given up when it is chosen" (1924, rpt. 1952, pp.167-69). Knight is clear that this undercuts classical ideas about taxing rent.
Knight did not rest with just defining away land rent. He also saw the need to define away land itself, following J.B. Clark. A strong and easily conveyed argument for untaxing buildings while "uptaxing" land is that it removes a disincentive to replace or remodel decrepit, obsolete buildings and other capital. Capital, unlike land, has a finite life. It depreciates and is reproduced. That is, it turns over. The reciprocal of turnover is a period of time, which the Austrians call a "period of production." This was anathema to Clark, who wanted to erase the difference of land and capital by making capital deathless, like land, and have capital consist of a mystical essence that could "transmigrate" into land and explain its value.
Knight took up Clark's anti-Austrian attack with multiplied vigor. In this context, anti-Austrian means anti-Georgist. Clark attacked Boehm-Bawerk in one or two articles; Knight churned out twelve, by Stigler's count (1987, p.57, col. 1), against Hayek, Machlup, Lange, and Kaldor. "Knight denies the existence of any 'primary' factors of production (read land) which contain no capital, and equally he denies the possibility of measuring the period of production ..." Stigler claims "victory" for for his old master, using the rather circular survival test that he has used elsewhere to define industrial efficiency. It is doubtful if Stigler would accept a popular vote to choose truth over error. It is no better, and perhaps a good deal worse, to accept the verdict, if that is what it is, of a profession whose role models are the likes of Clark, Edgeworth, Walker, Pareto, Ely, and Knight himself.
In the course of this anti-Austrian attack, Knight goes so far as to commit the "fallacy of the disappearing inventory." According to him, the existence of capital lets us treat inflow and outflow of goods through inventories as simultaneous. Likewise we may treat production and consumption as simultaneous, however long goods are stored up in inventory (Knight, 1946, p.387; this traces back to Clark, 1893a). It is something like saying we may treat collegiate matriculation and graduation as simultaneous, so long as there is a stock of students. The result of such thinking is to bypass the whole question of what capital is and does, and, damagingly for George, to erase a primary distinction of capital from land. Knight uses the point for this very purpose.
The lost distinction is that capital turns over; it is continuously being used up and replaced by hiring labour to produce more. The longer it takes capital to work through the pipeline, the more capital is required per worker and per unit of output, and the higher is the ratio of capital to labour. Add to that, the pipeline itself is capital. Likewise, since pipes occupy space, the more land is required. To keep the distinction of land and capital well lost, Clark and Knight were forced to dispute the Austrian capital theory,[61] which each of them did in their oft-cited debates with, respectively, Boehm-Bawerk and Hayek. These celebrated exchanges seem quite tedious and pointless, and even mystical, until one realizes their essential role in the imperative to slam the lid on Henry George and his idea of treating land and capital separately. They were essentially battles of Anti-Georgists vs. Anti-Marxists.
August Comte, founder of "Positivism," taught that all science deals either with relations of coexistence or relations of sequence. Production economics as taught today deals solely with relations of coexistence, ignoring relations of sequence. The popular Cobb-Douglas function[62] exemplifies the point. "Capital" there simply exists as a quantity at a point in time. Sequence virtually disappeared from standard economics until Keynes revived it in a macroeconomic context. Even Keynesians had to work out a "vertical" or instantaneous multiplier to communicate with people whose system of cognition left them uncomfortable with matters of sequence over time.
Production economics, meanwhile, has evolved into manipulation of symbols purporting to represent quantities of labour and capital conceived as substitutes at a point in time. Micro theorists avoid handling the sequential relationships, that labour produces capital and investment employs labour. They avoid defining capital, and explaining what unit of quantity measures it. The abstract axiomatic reasoning in micro-economic theory that students are forced to take as "The Core" of economics deals exclusively with these stylized relations of co-existence. This reasoning ignores the formation, measurement, meaning, depreciation and replacement of capital. Appreciation of land gets short shrift.
Knight, like Edgeworth and Pareto, had a dark, cynical, misanthropic outlook. "Truth in society is like strychnine in the individual body, medicinal in special conditions and minute doses; otherwise, and in general, a deadly poison. ... " (1947, p.325, cit. Stigler, 1987, p.59). The spirit is at an opposite pole from that of Henry George. Knight was not born to love anyone so Menschlich as George.
The JPE did give Harry G. Brown a good deal of space, it is true, but reading the kind of reply they let King publish tells one they were just baiting Brown. King's 1924 article is sarcastic, contemptuous, unedited rhetoric from beginning to end, with no shred of support for its wild-swinging allegations and reactionary value judgments. Brown was a neo-classically trained economist who used neo-classical tools to plead the Georgist case before other NCEists. He projected his own conscientious sincerity onto others, thinking he could reach them through reason, using their own tools and concepts. He was a very capable theorist; he pretty well established that cannot be done. In one exchange, a critic is said to have written "Brown's mind is as twisted as his leg" (Brown was crippled).[63]
Elitist as Pareto, King is capable of this: "... the man who saves and invests his savings in such property (land) is a citizen worthy of emulation and .. the thriftless man who does not accumuate such 'vested rights' is an object for scorn, derision, or contempt ... " (King, 1924, p.608).
King sees the rise of land value as part of the return to capital (1921), hence an incentive payment to stimulate saving and investing in real capital. That is not good investment theory, by today's standards. Today we would call this a "rent-seeking" explanation, and most economists would agree, I believe correctly, that such rent-seeking, where it works out as King posits, diverts investing out of its "natural channels" (as Spahr would have put it). They would also agree that in equilibrium, arbitrage pushes up the purchase price of land at the beginning of the investment cycle such that the land buyer receives only a market return on this price. In the Chicago creed, no opportunity for arbitrage goes unexploited.
The net result is to raise the overall credit requirement for being in business. To a NCEist that means no effect at all, but to small, marginal businessmen and renters of all kinds it is a large effect. It screens out many who otherwise would have enough capital to enter or remain in business - a matter of distressingly little concern to modern economists who, like Stigler, measure success solely by survival (what is it about Chicago that blinds people to circular reasoning?). It forces business owners to be tenants. The writer has developed this point in "Land as a Unique Factor of Production," published elsewhere in this CIT series (1994), in 1973, and in 1993b.
Initial street improvements may be charged to the benefited landowners, but all later costs should be charged "to the people" (p.66).
"No nation has ever found it feasible to adopt any single tax as the sole source of its income" (p.105). George's proposal is a "scheme" with an "ulterior" purpose: "he aims, like the socialists, at a new distribution of property" (p.106). This is "unjust," "inexpedient" (no reasons are given), and "not feasible." It is unjust because "The value of land, like that of other wealth, depends on the use to which it may be put." This is one of Plehn's many non-sequiturs, without further explanation.
The land tax is not feasible because "in no case would the scheme yield sufficient revenue." "It has been estimated" (no source is given) that the land rent of England is inadequate (p.108). No data are offered (nor could be, since England lacked a valuation of its land; the constitutional crisis of 1909 was precipitated over a proposal to value land, thus exposing it to taxation). In the United States, according to Plehn, data are not available to separate land from building values (p.108). (He seems to have this completely backwards. In fact, in California at that time, land and buildings were valued separately.)
This alleged lack of U.S. data does not deter Plehn, however, from stating with confidence and authority that the land base is too small. Getting into finer detail, George's "scheme" would shift taxes to farming lands. In the "professionalization of economic science," it seems, this paramount rule obtained: any stick will do to beat Henry George. (The revenue potential of land has been estimated in Gaffney, 1970, and is explored further in Private Property and Public Finance, a companion CIT volume.)
A high rate of land tax, necessitated by the small base, will "ruin the user of the land, and practically prohibit its cultivation" (p.109). (No support is given for this, but it certainly is frightening.) Some allege, writes Plehn, that untaxing capital will add to the taxable capacity of land, but that is untrue (no reasons are given) (p.109). Later he is to contradict this, noting that a property tax on the outstanding balance of mortgage loans is shifted to equity owners in higher interest rates (pp.225,249,252). According to the same logic, a tax on buildings is shifted into lower land prices. Consistency, however, was no problem for Plehn: he was the only authority within 1500 miles.
"A single tax ... will ... defeat its own ends by repressing the existence of the phenomenon which forms the signal for its assessment" (p.109).
"The general property tax is a failure ... it will have to be abandoned in America. ... No words are too strong to express the iniquities of this tax" (pp.218-19).
Property should be taxed on its income, not its value (p.219).
"... modern economic theory does not regard rent as an inevitable surplus, ... " (p.220)
Buildings are easy to value. "Unlike the land tax the building tax is regularly assessed each year" (p.223).
"So few farms ... are rented that they need not be considered" (p.254, n.1).
The land tax is partly shifted "when the land is used for agricultural purposes." This leads to a boom/bust cycle in which marginal farmers are often "ruined." In this way, the burden falls on "the farmers," even though the land tax may be shifted. Farmers are overtaxed by the land tax (pp.254-55). Taxes on urban buildings cannot be shifted; they are the same as land (p.255). Likewise, a tax on profits cannot be shifted (p.257).
Plehn's first edition, 1896, says little about income taxation. In his fifth edition (1926, p.272, cit. Groves, p.168, n.30) we do find an idea that is curiously missing from other early NCEists, but was just awaiting the 16th Amendment to surface. Plehn refers to unearned increments of land value as "capital gains," a camouflage that has of course become standard. He wants them exempt from income taxation on the grounds it would be double-counting to consider both the anticipation and the realization of higher rents as income.[64] Harold Groves disposes of this tersely and nicely. Capital gains "arise not as a flow of income from the fountain, but from the sale of the fountain itself. ... If depreciation and obsolescence ... are (negative) income, ... appreciation ... seem(s) entitled to the same status (i.e. as positive income)" (Groves, 1946, pp.166,180). Amen.
Interestingly, Plehn's position, seemingly so simpatico to rent-takers, took a long time to work its way into NCE, and is not all the way home yet. Professors Haig of Columbia and Simons of Chicago gave their names to the doctrine that increases in a person's wealth are income and should be taxable; they have many followers. How explain this failure of NCEists to press an advantage for rent-takers? Half an answer lies in their recognition of the paramount importance of the doctrine of uniformity. If "capital" gains were not income, that would mean they were unearned and non-functional, hence liable to even higher taxation, or outright confiscation, outside the income tax framework. Another part of the answer is that it is possible, and even standard, to endorse Haig-Simons in principle, but then cop out with the claim it cannot be administered, winning points with both sides while leaving the money with the rent-takers. Study of NCEists has made us cynical, but the rest of the answer may lie in the actual sincerity of believers in income taxation.
Seligman is Plehn's ultimate authority: Plehn cites him many times, slavishly. The only apparent reason for using his own book instead of Seligman's was to collect the royalties. Nearly all his ideas are borrowed, and garbled in transcription. Plehn illustrates how a writer of practically no ability could hold down and sterilize an important outpost for forty years, contributing practically nothing, so long as he clucked forebodingly against land taxation in the approved NCE manner. Multiply Plehn by 100 or so, multiply that by the average number of students each such professor confused, bored, and twisted, and you have the tragedy of American higher education in economics.