Academic journal article The American Journal of Economics and Sociology

Simon Patten on Public Infrastructure and Economic Rent Capture

Academic journal article The American Journal of Economics and Sociology

Simon Patten on Public Infrastructure and Economic Rent Capture

Article excerpt

Along with Edmund James and Richard T. Ely, Simon Patten studied in Germany in the late 1870s. As in America, Germany's national interest called for an alternative economic policy--and hence, a supportive body of economic theory--from that of British free-trade orthodoxy, which left public-sector investment out of account. "I became imbued with the German view," he wrote, "and came home hoping to help in the transformation of American civilization from an English to a German basis" (Patten 1912, in 1924: 273). The German Historical School's focus on national differences in political and economic institutions reflected its concern with state leadership in protecting industry and pioneering social welfare policy by enacting labor laws such as old-age pensions. Patten saw Germany's creation of a public railroad network in particular as increasing its competitive industrial power along similar lines to those that protectionists in the United States were following. National price structures were being shaped not merely by wages, profit, and interest rates, but also by public spending and tax policies.

Returning to the United States, Patten saw a mixed economy shaped by public investment in transportation, education and other infrastructure, protective tariffs, and subsidies. His friend James was appointed senior professor at America's first business school, the Wharton School of Finance and Economy at the University of Pennsylvania, in 1883, a year after it started classes. In 1885, James, Ely, and Patten took the lead in founding the American Economic Association. Three years later James helped bring Patten onto the Wharton faculty as its first professor of economics, a chair Patten held until 1917. (I summarize Patten's life and major writings in Hudson 2010.)

From his defense of protectionist trade policy to his advocacy of social reform, Patten recognized that national economies were at different stages. America differed from England, as did Germany and other countries confronting British industrial competition. Free-trade policy was not appropriate for conditions that called for steering economic evolution along the most productive lines. And what British economists treated as universal actually reflected its class structure, especially its hereditary groundrent stemming from the Norman invasion.

Free-trade economists attributed America's high wage levels to the nation's vast backwoods of available land on which to settle as an alternative to working in factories. Like other protectionists, Patten found this explanation insufficient. American industrial labor had to be sufficiently productive to sustain higher living standards. This required investment in capital, which in turn required protective tariffs and public infrastructure investment. Patten recognized that rising productivity, public investment, and wage levels went together. That is what enabled well-fed, well-trained, and well-housed American labor to undersell "pauper labor."

American free traders who followed the lead of British economists in urging governments to stand aside bought the idea that market forces by themselves would produce the most efficient outcomes. But what are markets, reformers asked, if not carefully constructed arrangements shaped by tax laws, land and property tenure, government subsidies and price regulation, educational systems, and infrastructure? Would not a market without regulation or public services become "free" for predators?

The institutional and sociological economists who emerged from the American protectionist tradition and German Historical School were almost alone in retaining from classical political economic thought the concept of economic rent (the excess of market price over intrinsic cost-value) as unearned income. Defenders of property and opponents of tax reform found this focus on rentier revenue disturbing, above all its application to land ownership, and the monopolies and trusts created by Wall Street. …

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