Academic journal article The American Journal of Economics and Sociology

21: A Cannan Hits the Mark

Academic journal article The American Journal of Economics and Sociology

21: A Cannan Hits the Mark

Article excerpt

Edwin Cannan (1861-1935) is best known for his 1904 edition of The Wealth of Nations, which became a standard. His next best-known work is a History of Theories of Production and Distribution, 1893. His book most relevant here is History of Local Rates in England, 1896. He was a professor at the London School of Economics, 1907-26, although a large inherited fortune let him live and rub elbows at Oxford, which he seemed to prefer. His later work was less noteworthy. He criticized both Marshall and J. M. Keynes, but without much impact.

Carman's Law

In 1907 Cannan fired off a round at local rating of site values. (1) It hit home. First he recited the logic of what today we call the "tragedy of the commons" (it was common coin long before Garrett Hardin). Then he pointed out that a city taxing only site values to provide free public services would attract too many people and too much capital. (2) A city is an "open economy," free to immigration of everything but land, something like an open range or fishery. Even if all cities tax only site values, cities with more rents per head may support public services at higher levels, and so attract immigrants. This distorts locational decisions, attracting people to jobs of lesser productivity where they may gain from better public services. This is "Cannan's Law."

There are three bad results from Cannan's Law. One is an uneconomical distribution of population, as cities with more rentable lands attract more of mobile labor and capital than they should. That is not to deny that people are attracted to New York for good economic reasons. Rather, it is that distributing economic rent freely to all comers attracts people above and beyond the good economic reasons. Thus, people move to New York to earn high wages, well and good; but in addition they may receive a high quality college education from CCNY, the "poor man's Harvard," paid from local property taxes. In the glory days of the Mesabi iron range, children of immigrant Finnish miners there in Hibbing, Minnesota, enjoyed some of the best schooling in the country, paid from local property taxes on iron ore. In Alaska and Alberta, workers receive high wages to overcome the harsh climate, remote locations, and other disamenities. That is economically sound, but in addition they get a cash dividend each year from the overflowing oil revenues. All that tends to draw more people, like flies swarming to fresh pie, than the wages warrant.

A second bad result is what economists call "dissipation of economic rent." To make it simple, consider a rich but crowded fishery where another fishing boat added to the crowd will not raise the total catch at all, but simply take fish from other crews who were already there. Interlopers will keep entering until the average boat and crew just make costs, leaving no net rent for anyone. This has long been standard economic lore. As Cannan writes, if a locality uses its rents to benefit all its "inhabitants," people will flock to the richest places until there is no further gain to immigrants because they have wiped out all the rent. (3)

A third bad result of Cannan's Law is to lower the incentive of local governments to provide public services that are open to all comers. It fosters local institutions and attitudes that are harshly hostile to newcomers and outsiders, especially to the poor, young, homeless, hungry, and vagrant. As Woody Guthrie, the Okie bard, sang of California, "Believe it or not, you won't find it so hot, if you ain't got that do-re-mi." That was in 1935, the year Cannan died; it remains true, only more so.

Carman goes on to say that if we are to tax site values, the tax should be national. It is not clear how sincere he is--his style is carping, condescending, elitist, and unsympathetic. Still, his logic implies it, and he does say it, however grudgingly. (4) On this point the great Alfred Marshall agreed, in a positive spirit (positive, that is, for Marshall, a famously "two-handed" economist), (5)

Why Heed Cannan? …

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