After the Crash: Designing a Depression – Free Economy

Citation

Johnson, M. (2011), "After the Crash: Designing a Depression – Free Economy", International Journal of Social Economics, Vol. 38 No. 5, pp. 494-495. https://doi.org/10.1108/03068291111123183

After the Crash uses the current economic crisis to motivate a collection essays by Mason Gaffney on macroeconomic cycles. In doing so, it provides a very different perspective on market cycles, when compared to that portrayed in the academic or popular press. The essays, combined with the introduction, offer a serious and informed call for radical changes as to how we view the roles of land, capital, and taxes in making or ameliorating economic crises.

The book offers a good introduction to the works of Gaffney, as well as an excellent primer on how to recast the message of Henry George for modern times. In this sense, the book provides a nice companion to the recent International Journal of Social Economics special issue on Henry George as a Social Economist and Radical Reformer (Volume 36, Number 4, 2009).

After the Crash is comprised of three essays by Gaffney, largely from his early career. These are paired with an introduction by Clifford W. Cobb. In this, Cobb takes us briefly through the current US crisis, emphasizing the role that land speculation played, and argues that the theories commonly presented by economists are flawed for an excessive reliance on financial analyses and for failing to take real estate seriously.

The first essay, “The role of land markets in economic crises,” discusses the ways in which land speculation biases capital investment, causing an excessive, and in the long‐run, an insupportable growth in land prices. This is accompanied by over development and over investment in infrastructure, which compound the problem. Much of the theory is pure George, though developed with a theory of capital unique to Gaffney. Given the influence of George on Gaffney, it is perhaps not surprising that he develops a modern take on George's land tax as a solution to the overexpansion‐contraction cycles endemic to capitalist economies. As relates to the current crisis, taxing the value of land (assuming assessments keep pace with rising prices) would slow the demand for land as an investment and simultaneously increase tax levies. Such a system would have slowed speculation and could have prevented the current crisis – or at least dampened the total effect.

“A new framework for macroeconomics: achieving full employment by increasing capital turnover” addresses the mechanisms by which misallocations of capital occur. In this essay, Gaffney works with Swedish economist Knut Wicksell's concept of the “valence” of capital – the frequency by which capital turns over and interacts with labor. The key to capital is its ability to employ labor, and thus the current tax code, with its emphasis on labor taxation and exemptions for capital, thus distorting efficient investment. The current favoring of durable capital investments has the unintended consequence of reducing the demand for labor, thereby negatively affecting wages and employment. Again, the solution revolves around tax reform and eliminating the distortions in tax treatment of capital and labor.

In the last essay, “Money, credit, and crisis,” Gaffney takes up the role of banks and regulations in business cycles. Again, much of the argument hinges on issues associated with investing in land. Banks that lend too heavily for land are at a risk of losing the confidence of the general public; banks that hold land as an asset are also at risk. This sort of over‐speculation played an important role in the economic crises of both 1929 and 2009. Gaffney's solution is quite radical; he proposes limiting bank assets to short‐term investments and prohibiting land from being used as a collateral asset.

What is clear from the three essays is that Mason Gaffney foresaw many of the roots of the current economic crisis. Deregulated banking and unchecked land speculation were significant contributing factors to the downturn. Given this, as a reader, I wanted to know more about the original context and motivation for the essays and whether they are re‐publications or re‐workings of previous materials. All we are told is that the essays are from Gaffney's early career, and that the second essay was originally published in 1976.

Overall, After the Crash provides a compelling alternative vision of the current economic crisis. Mason Gaffney shows us again the importance of heterodox economic voices, demonstrating how Georgist and institutional economics can add to the practice of economic policy. Gaffney's solutions for smoothing business cycles and for tax code reform are provocative and interesting. Policy makers would do well to consider them.