The Junker fallacy is itself a fallacy

The Prussian Junkers were an aristocratic class of landowners who dominated the old German Army. They led Germany into two disastrous world wars. One reason they did so is because they dreamed of gaining vast agricultural Estates to the East. The only way this was possible was through conquest and the reduction of the Slavic population to slave like status.

By contrast, in modern Germany, industrialists can grow ever richer simply by exporting manufactured goods to free and prosperous neighboring countries. If a particular magnate wants a big country estate- he can pay for it just as he can pay for a penthouse apartment in Manhattan or a Yacht at Antibes.

Pakistan is a country dominated by its Army just as Germany was dominated by its Junker class. It too dreams of conquest. Over the last three decades it has fallen behind China, India and now even Bangladesh- a country which the Pakistani Army looted, raped and perpetrated genocide in, before India intervened.

Why has the Pakistani economy declined so dramatically, albeit in relative terms?

Prof. Atif Mian writes in the NYT

Consider the unproductive moneyed class which instead of investing in real businesses buys urban land and sits on it. This is an idle activity that adds nothing to the country’s output and contributes directly to Pakistan’s low investment rate. The value of land keeps rising, not because of any effort by the landowners but because of an urbanizing population.
The correct policy response to discourage such activity would be to tax the value of land appropriately. This would dissuade the rich from hoarding land and instead incentivize them to invest in real businesses. Land would then be available for more productive uses and at cheaper prices. Moreover, the revenue generated from land taxes could fund much-needed urban infrastructure.
While instituting a land tax addresses multiple problems in a single strike, carrying through with the policy requires courage as a large percentage of urban land is held by the powerful elite. Pakistan’s leadership must develop the courage to put the interests of the collective above those of the privileged few.

Tyler Cowan thinks Mian is committing 'the “Junker fallacy,” namely he argues that land speculation on net drains funds from business investment — a basic mistake in economics'.

Elsewhere Cowan explains that there was an earlier view that early Germany did not grow because the Junkers bought land instead of investing in capital.

This Junker fallacy is itself a fallacy. Land is a positional good. There is an externality such that if your neighbor sells his house for a big sum then your own house becomes a matter of pride and is more valuable to you. Your new neighbor is likely to be of higher class and a runaway process of gentrification may have been initiated.

Similarly, there are external economies of scope and scale involved with investment in manufacturing. If a neighboring start up in your industry has a successful IPO, your own valuation goes up. Credit becomes cheaper. Ancillary industries are attracted. The industry gains countervailing power against rent-seeking bureaucrats and politicians.

Entrepreneurs are those who, in a given Society, are licensed to combine factors of production. The supply of entrepreneurs may be greatly restricted by race, class, caste, gender, education, political orientation and so forth. Because of the existence of externalities, there are strong mimetic effects within entrepreneurial classes. Thus, it is plausible to think that within a particular geographical area, there may be a trade off between real estate development and industrial development. No doubt, both can coincide. Consider Bangalore. It was considered the ideal retirement City for bureaucrats and thus had superior amenities for the Anglophone professional class. Then Rajiv Gandhi reduced red tape for the IT industry which burgeoned for exogenous reasons. There was a positive externality between real estate development and the growth of the IT sector because of the similar class origin of those who wanted to buy homes there and those who wanted to grow their businesses there. Sadly, the City became increasingly unlivable because au fond, a trade off remained.

India is not Army dominated though, no doubt, it has a rapacious politico-bureaucratic class. Still, where 'casteism' is curbed, industry can burgeon alongside appropriate real estate and agricultural development. This was Modi's Gujarat model which, sadly, the BJP is finding it difficult to export to certain other parts of India. One big constraint on industrial development is being able to protect one's investment with force where the State is unwilling to do so.

It is a fallacy to think Entrepreneurship is in unlimited supply or that the Rule of Law comes free of cost. The fact is, in Army dominated regimes like Prussia under the Junkers or Pakistan under the army, those who can combine other factors of production without being robbed of the profit from taking on risk represent a narrow class of people. This class faces a coordination problem. If all entrepreneurs concentrate on one class of asset, they can protect their investment from rent seekers as well as those whose surpluses have been unconscionably expropriated. Not so, if they go in different directions. They have to hang together or hang alone. Thus, they can use their own goons as well as the police and the courts either to make real estate profitable in certain regions by crushing peasant or other resistance. Alternatively, they can invest in industry and use their own goons as well as the coercive power of the State to crush Trade Union and other types of extortion. A choice has to be made.

Sociologically speaking, there is a familiar pattern here. Mercantile communities from the sub-continent built palaces in their ancestral place but lived and worked in Cities around the globe. The Chettiars and Marwaris are examples of this. For Pakistani businessmen, a superior alternative may be to do industrial investment outside Pakistan while hedging against the continual fall of the Pakistani currency by turning spare cash into land banks and high end housing developments. Notionally, these will be sold to expat retirees who have been laboring or running businesses in the Gulf or elsewhere.

People like Prof. Atif Mian have idiographic knowledge of their own countries. It is foolish to accuse them of supposed nomothetic fallacies which only exist in the minds of stupid academics. The supposed inventor of the Junker Fallacy, Fritz Machlup, never in fact endorsed the view attributed to him.