At the same time, related topics of money, credit and interest are subjected to searching questions, such as 'How do banks create money?' and 'Why is there an interest rate at all?' The answers point to a way out of the current confusion over the proper role of the banking system.
Finally, taxation is examined, with a view to how present-day taxes inhibit the economy by their damaging impact on the margin of production, defined with reference to land. This leads to a conclusion which draws together the various elements of the 'new model', and which has serious implications for any economist or politician hoping to remedy ominous symptoms of disaster, like the current banking crisis, in today's economies. In short, the book offers a model for fundamental reform.
About the Author:
Brian Hodgkinson qualified as a Chartered Accountant, then gained a first in Philosophy, Politics and Economics at Balliol College, Oxford, and won the George Webb Medley University Prize in Economics
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About the Author
Brian Hodgkinson was a chartered accountant in the city of London and a graduate from Balliol College–Oxford. He is the founding editor of the economics journal British Economy Survey and the author of The Advancement of Civilisation in the Western World, Bhagavad Gita, and The Essence of Vedanta.
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A New Model of the Economy
By Brian Hodgkinson
Shepheard-Walwyn (Publishers) LtdCopyright © 2008 Brian Hodgkinson
All rights reserved.
ECONOMICS as a subject of serious study has grown up within modern societies that have been deeply affected by land enclosure and the industrial revolution. In Britain the work of Adam Smith, Ricardo and Malthus achieved fame during the decades when a final great wave of land enclosure gathered pace and the new industrial towns forged weapons for the Napoleonic wars and capital for the railway age. Such an origin has coloured the development of economic thought ever since. The apparent diminution in the part played by land in the economy, the accumulation and enhanced productivity of capital, the need for an expansion of financial resources and for the growth of limited liability companies, and above all the idea of labour as primarily employed rather than autonomous, all these outstanding features of the new industrial economy gave rise to concepts in the study of Economics which have become entrenched. It is time that such concepts were re-examined.
The ideas that have emerged from 200 years of intellectual advance in Economics centre upon the question of production. After an initial period, especially associated with the writings of Ricardo, when distribution of the product between economic classes or factors was the major concern, most economists accepted the conclusion that production was the key issue. How could it be measured? What inhibited its growth? What determined its composition? Why did it fluctuate in cycles? After all, both political conservatives and political radicals have finally agreed that it is better to have a bigger cake than to quarrel over much about shares in a smaller one. Production has become the yardstick by which almost every economic policy is assessed, even though science and technology have more or less solved the technical problems of how to produce. And yet economic unease remains, sometimes amounting to disease, in the economic organisms of advanced economies. Could it be that to look almost exclusively at production is to fail to understand the many-sided aspects of human economic behaviour, including non-technical ones about production itself?
To what then should economists turn as the central issue of their subject? Where better to look than to the genius of Plato, whose initial outline of the State is that of a single economy. For the theme of the Republic is justice, which is surely the touchstone for any economic study that might arrive at conclusions of permanent benefit to all.
You remember the original principle which we were always laying down as the foundation of the State, that one man should practise one thing only, the thing to which his nature was best adapted; – now justice is this principle or a part of it ...
Plato, Republic, Book IV, p.433, trans. B. Jowett, Random House, New York, 1937
Many of the ills of modern society, extending beyond those strictly economic, flow from the disregard of this root concept of the work appropriate to each person's nature. So accustomed have we become to the idea of work as an unfortunate necessity, as a means to earn a living, as wage-labour, that we forget its essential character as the prime means of self-expression for most people in society, whether employees, employers, unemployed or owners, men and women alike. Frustration, depression, even neurosis accompany its neglect; greed, laziness, carelessness invade the workplace; unemployment, inefficiency, loss of production beset the economy.
No one doubts that the small minority of people who are able, for whatever reason, to practise what they love doing, what they are naturally talented to do, are happy in their work and usually in their lives. Self-employed workers who are artists, craftsmen or members of a learned profession, for example, usually exhibit a degree of commitment, interest and enjoyment in their work rarely found amongst employees, especially those with little opportunity to choose the type and conditions of their employment. Few indeed are those who would claim to find a deep and lasting freedom through work. Yet such economic freedom, which is distinct from the civil freedom under laws which prevent assault, imprisonment or defamation, should be available to everyone in a well-governed society.
Were people thus free to create with hands and heart and mind whatever they choose to offer to society in return for their own share in its wealth, there would be few problems of production. The economics of society would become the economics of abundance. History abounds with examples of the much greater productivity of free labour compared with that of slaves. Freedom is the one great incentive to produce, exceeding by far the paltry 'rewards' offered to workers in unfree conditions in the form of overtime, bonuses, perks or promotion. Nor do men and women who find fulfilment in work usually seek to accumulate riches beyond their reasonable needs. They do not have the inclination, or even the time, to exploit others; they do not wish to live off the labour of others, for that would be to deny their own economic freedom, found in the pursuit of what they love. Devotion would characterise their work, as it does even now for some to whom service to the community transcends hard and often unrecognised effort.
The ideal of economic freedom of this kind is not a dream, though it may be a vision. Indeed, it is an economy in which people are treated as a means to others' ends, such as profits, that is the dream. How such a state of illusion originated and grew is a matter for historians of ideas; but what conditions enable it to be perpetuated now is a proper subject for economists. Let our enquiry then be, 'Under what conditions is economic freedom at present denied, and under what conditions may it be, in the course of time, fulfilled?'CHAPTER 2
But when we Stoics say that the universe is formed and governed by nature, we do not mean that it is just stuck together mechanically, like a lump of earth or a piece of stone or something of that sort, but organically, like a tree or an animal in which there is nothing haphazard but an appearance of order which is akin to art.
Cicero, The Nature of the Gods, pp.156-7; trans. H.C.P. McGregor, Penguin, London, 1972
IT IS A MARKED feature of the scientific culture that has emerged in the Western world since the 17th century that the physical sciences have discovered natural laws of great scope and explanatory power, whilst the social sciences have achieved less. This has led to much debate about whether they are sciences at all and to the formulation of statistical generalisations to fill the gap. Laws are both universal and necessary; statistical generalisations or correlations do not meet such strict requirements. Hence Economics in particular has become a 'soft' science characterised by a great deal of opinion, vagueness, and disagreement. As one American President said, he wanted a one armed economist as an adviser, because all the economists he ever met kept saying 'on the one hand ... but on the other hand ...'.
Too often economists look to the outer manifestations of their subject matter, rather than to its inner qualities. Natural scientists do not so often make this mistake, as the immense growth of such subjects as nuclear physics and biochemistry demonstrates. Since natural laws are expressions of the nature of things, be they physical objects or human beings, it is to human nature that any social scientist should look in order to find the laws that govern both individual action and social phenomena. Since the investigator is a man himself, the student of human nature has the advantage of looking both within himself, as well as at the behaviour of others, for evidence.
Of course, this raises problems of subjectivity, but a detached observer is in principle able to observe both inner and outer phenomena with an impartial eye. It may be difficult to turn aside from, say, entrenched political attitudes and from deep personal feelings when investigating social phenomena, but the opportunity is there. Thus the social scientist needs to train himself to observe the concepts, beliefs and prejudices in his own mind. Thereby he may obtain at least a valid degree of objectivity. Ultimately, he relies upon the truth that Man's nature is universal, that all men and women are fundamentally the same, so that the more he avoids identifying his own personal attitudes with objective facts, the more he penetrates towards the truth about himself and therefore about humanity. This is the greatest blessing of social science, not its greatest bane, as is often supposed. Other problems, like the impossibility of precise experiment and the inexhaustible range of variables beloved by modern social scientists, remain. Yet such problems often arise from ignoring certain fundamental and incontrovertible facts about mankind. One example illustrates clearly that this ignorance may stem from vested interests, which directly or indirectly influence economists' investigation. It is an unquestionable fact that everyone needs land to live on and – for most people – to work on. However, the economic consequences of this fact, such as its effect upon the distribution of income, are substantially overlooked.
What then do we mean by natural laws that arise from human nature? We may begin our analysis with a brief discussion of seven examples fundamental in any economy, which enter into the discussion developed in later chapters. They concern work, land, co-operation, capital, credit, surplus and freedom.
First and simplest is that people desire to express themselves through work. Every human society at all times and places exhibits this desire. The conditions under which work takes place are manifold; they range from peasant coffee bean growers of South America to the Princeton laboratory of Albert Einstein, but everywhere at all times the vast majority of people work from an inner necessity. Particularly since the industrial revolution, work has become associated with wage-labour. Even so the unemployed man or woman often becomes desperate to work again, not just for an income, but for personal satisfaction. Even those whose work is of a frustrating and unsuitable nature retain a strong desire for work itself, unless they are finally driven into a state of abject hopelessness. Modern technology may reduce hours of work and years of employment, but those who acquire more leisure time are often singularly keen to take on productive and creative activities. We all recognise how, in the film The Bridge on the River Kwai, British prisoners of the Japanese, forced to work in appalling conditions on the notorious 'Burma Road', became proud of the bridge they built. Except for a philosopher perhaps, it is acutely distressing to do nothing at all.
Human nature also requires land. Indeed all the elements of earth, air, water and fire, in the form of sunlight, are essential. Questions now arise in modern Economics about the availability of unpolluted air and access to water, but the freedom of the latter three elements has generally been beyond dispute. It is the earth, or land, which is most contentious. As economists have long recognised, land is best defined to include both the dry surface of the earth and natural resources within, on and above it. These include such vital products as oil and metal deposits. Land in this inclusive sense is needed for all productive processes, in short for work, but equally it is needed as living space. These primary requirements of human existence – work and space – make the conditions under which land is available of fundamental significance to individuals and to society. Variations in those conditions shape the economic development of a community. If, for example, land is held under absolute private ownership, the economy usually exhibits the accumulation of vast wealth in the hands of a minority; if, on the other hand, it is held absolutely by the government authorities, as in the Soviet Union, the power of the State over individuals' lives becomes overwhelming. These consequences are the operation of natural law. Economic historians are aware of this, as their analysis of societies like feudal Europe exhibit, but for whatever reason – vested interest is one – economists regard conditions of land tenure as legal studies or, at best, land economy, and fail to see the implications. The effect upon the distribution of income, for instance, is largely obscured by leaving capital payments for freehold land out of account, even though these are, in fact, merely the capitalisation of a series of annual rents. Similarly the differential between urban and rural land values is mainly ignored, although crucial in understanding a modern economy.
Work on land is the basis of every economy, but natural law extends also to the character of work. By nature people vary greatly in their inherent talents, capacity for learning, and adaptation to circumstances. Social conditions, education, training, personal wealth and much else determine what kind of work an individual may choose or be compelled to follow; yet by nature each will be urged in particular directions. As Adam Smith – or perhaps Plato – was the first to emphasise, such specialisation by ability is greatly enhanced by constant practice. Smith himself argued that an inherent desire to exchange generated the need to specialise, rather than the reverse (The Wealth of Nations, Volume I, Chapter 2, p.12, Everyman, London, 1953). Whatever the direction of causality, however, it is certain that specialisation and exchange are interdependent. Exchange is a form of co-operation, which leads to organisation in working groups, like firms and other bodies. Within organisations, as the word implies by analogy with a living body, there is an exchange of products. Human gregariousness strengthens this process. Natural sympathy and the desire for company underpin the economic phenomena of co-operation.
Human nature finds expression also in each individual's attempt to satisfy his or her desires with the least effort. Everyone walks from A to B by the least arduous route, unless there is a special reason for choosing otherwise, such as scenic beauty; nor will someone dig a field twice when once is sufficient, or write two cheques when one is enough. Upon this principle rests the oft-quoted definition of Economics as the study of the allocation of scarce resources to alternative uses. Why not allocate them irrationally? Reason demands the most efficient use of means to given ends. Waste is unreasonable and defies the principle of least effort. Co-operation, however, gives to the desire for efficiency a special and most influential means, namely the use of capital. For mankind's ingenuity long ago discovered the use of tools, which embody the intention to economise on effort. A spade saves the labour of hands, a telephone the labour of travelling, an atomic power station the labour of mining and transportation. Capital as the use of produced wealth in the production of further wealth is the natural progression of this principle of least effort. Roundabout ways of producing are intended to be, and often are, efficient in human labour. So the existence of capital is merely the natural consequence of a universal desire. The present day confusion of real capital with financial instruments, like shares, bonds and so on, greatly obscures this fact.
All production, of course, takes time, even if it is not roundabout. Using capital tends initially to extend the time of production, if the creation of capital goods is included in the measurement. Growing a crop takes a season; manufacturing agricultural machinery adds time to the production cycle. What follows from this is that all production of necessity requires credit. What does the producer eat and wear whilst he produces? He is fed and clothed by others, with whom he exchanges his product either directly or indirectly via the use of an intermediary like money. Exchange itself involves credit, for who hands over his product first? One must wait and trust the other party to deliver his product in return. Even the use of a stakeholder to hold the goods on behalf of both parties means that the stakeholder himself must be trusted. Giving credit indeed means extending belief that the other party will pay. Without such belief production would cease, for society depends upon exchange and all productive processes take time.
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Table of Contents
Economic Freedom 3
Natural Law 6
The Significance of Land 13
The Theory of the Firm Re-Examined
Perfect Competition 25
Monopolistic Competition 39
The Law of Rent 71
Transfer Earnings of Factors 90
Money and Value
Money, Credit and Interest 137
Value and Price 154
Historical Analysis 188
Natural Monopoly 205
Outline of Macro-Economic Theory 231
Critique of the Theory: Land 256
Critique of the Theory: Money and Credit 273
Critique of the Theory: Taxation 285
The Model Reformed 291
The Reformed Economy and World Trade 308
Business Cycles 313
PracticalProblems of Rent as Public Revenue 325
Rent and Landlord's Claim 339
Select Bibliography 341