Edwin Cannan

Mason Gaffney: A Cannan Gets the Range

Edwin Cannan (1861-1935) is best known for his 1904 edition of The Wealth of Nations. His other 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 Professor at the London School of Economics, 1907-26, although a large inherited fortune let him reside at Oxford and dabble at London part-time. He criticized both Marshall and Keynes, although without much effect. His later work drew little enthusiasm.

In 1907 Cannan fired off a round at local rating of site values. 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. 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.
• 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; it is truer today.

Cannan 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. On this point the great Alfred Marshall agreed, in a positive spirit (positive, that is, for Marshall, a famously "two-handed" economist). ... read the whole article

Mason Gaffney: Canada's System of Revenue Sharing

Cannan's Law

The last time I discussed this subject was in Las Vegas before a tax group. I started out by saying 'I hope there are no Canadians here!' It would be vain to say that to this group, so I'll say I hope there are no sober Canadians here, at least none who possess a high degree of expertise on this subject, because I may have to skip over some of the high spots. I lay some claim to being Canadian myself, I should say. I have two children who have dual citizenship because they originated in Canada, or possibly three children depending on where you stand on the right-to-life controversy. But at any rate I would like to emphasise that the Canadian system of revenue distribution, fiscal sharing, or equalisation as we call it in Canada, is much more based on correct principle than the one you find in the United States. By 'correct principles' I mean the ones I just enunciated.

At any rate, let's begin by looking at the similarities between the federal systems in the United States and Canada. In both countries we find something called 'vertical balancing' which means that the senior governments send money to the junior governments. We find also something called 'horizontal balancing' which means that the payments are made more to the poorer governments, those that are poorer on a per capita basis, than to richer ones. We have the principle that the Crown may not tax the Crown. We've an economic principle, which I'll call Cannan's Law. The cannan here is not a weapon, but an economist of very little note, Edwin Cannan, who however did make one very important point. He made it in the period when the single tax in England was on everyone's lips. And if you read the Economic Journal, the stuffy, establishmentarian journal of the economics profession, it's full of criticisms of the Single Tax. 

See also another article on Cannan's law

No respectable English economist could fail to write at least one article criticising the Single Tax. And Edwin Cannan criticised it in the following way. He said, in effect, local taxation of land makes private land an open range. His idea was something like Garret Hardin's idea of the 'tragedy of the commons'. Or I should put it the other way around because Hardin came later and he obviously borrowed from those who wrote earlier. But the general idea is, you may think you have tenure control of land but if the municipal government can tax that land and use that money to finance public welfare services, public education and other things that are open to all comers, then you will end up with an uneconomical distribution of population. You'll have more people clustered around the honey pot in places like Vancouver where there's a lot of economic rent per capita than you will in areas with less economic rent per capita.

So we found in the mining country of Northern Minnesota back in the days when iron ore was worth something. They had the best schools in the mid-west there at the iron mines and all those Finnish miners' kids got first rate educations. You run into them everywhere now: they've become an awful nuisance -- very well educated though.

All this tends to distort the economical allocation of population and also to reduce the incentive of local government to provide public services that are open to all comers. That I refer to as Cannan' s Law. And you find that, of course, in all countries. It's an economic law. ... read the whole article