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THE POLITICAL ECONOMY OF LAND: Putting Henry George in His Place
Frank Stilwell and Kirrily Jordan
The Journal of Australian Political Economy, December 2004.
JOURNAL OF AUSTRALIAN POLITICAL ECONOMY No 54, p. 120
Land is the most basic of all economic resources, fundamental to the form that economic development takes. Its use for agricultural purposes is integral to the production of the means of our subsistence. Its use in an urban context is crucial in shaping how effectively cities function and who gets the principal benefits from urban economic growth. Its ownership is a major determinant of the degree of economic inequality: surges of land prices, such as have occurred in Australian cities during the last decade, cause major redistributions of wealth. In both an urban and rural context the use of land – and nature more generally – is central to the possibility of ecological sustainability. Contemporary social concerns about problems of housing affordability and environmental quality necessarily focus our attention on ‘the land question.’
These considerations indicate the need for a coherent political economic analysis of land in capitalist society. Indeed, the analysis of land was central in an earlier era of political economic analysis. The role of land in relation to economic production, income distribution and economic growth was a major concern for classical political economists, such as Smith, Ricardo and Malthus. But the intervening years have seen land slide into a more peripheral status within economic analysis. Political economists working in the Marxian tradition have tended to focus primarily on the capital-labour relation as the key to understanding the capitalist economy.1 Neo-classical economists typically treat land, if they acknowledge it at all, as a ‘factor of production’ equivalent to labour or capital, thereby obscuring its distinctive features and differences. Keynesian and post-Keynesian economists have also given little attention to land because typically their analyses focus more on consumption, saving, investment and other economic aggregates.
1 A significant contributor to the analysis of land and rent within the Marxian tradition is David Harvey (see, for example, Harvey, 1982: 330-367). However, it is notable that Harvey comes from a background in geography, not economics.
However, there is an alternative current of political economic thought for which ‘the land question’ is central. This is the tradition based on the ideas of Henry George. This article seeks a balanced assessment of the usefulness of George’s ideas in the modern context. It outlines how insights derived from Georgist thinking can help in dealing with contemporary economic, social and environmental problems, while noting deficiencies and additional concerns. Following a general summary of Georgist ideas and policy proposals, six themes are addressed:
George and Georgism
What are the key ideas advanced by Henry George and promoted by his followers? Like Marx’s analysis and the political movement he inspired, George needs to be understood in historical context. Although not a trained economist, his ideas gained widespread currency in economic debates throughout much of the Western world in the late nineteenth century. Also like Marx, his analysis stemmed from both ethical and economic considerations. He was primarily concerned with exploring the reasons why poverty and destitution coexisted with economic growth, and saw the root cause of these problems in the prevailing policies towards land. It is this focus on land, contrasting with the Marxian focus on capital, that is the characteristically Georgist emphasis.
George saw land as a community resource provided by nature, to which every human being had an equal right. He argued that, since land was fixed in supply, the system of private land ownership allowed the wealthy few to enjoy exclusive rights to land and its benefits, while alienating the poorer majority from land ownership and forcing them to pay rent to landowners in order to access this necessary resource. Moreover, the collection of rents by landowners allowed them to increase their wealth without contributing to the productive efforts of society. As the population grew, so too did the demand for land, forcing rents and land values ever higher. In addition, increases in land value resulting from publicly-funded developments, such as roads and public transport systems, unduly benefited landowners at the expense of the community. Such unearned gains from landownership encouraged speculation in land, pushing prices even higher, while exposing the economy to the risks of speculative ‘booms’ and ‘busts’.
One might expect such arguments to have led to the advocacy of land nationalisation. But George thought this unnecessary because a tax on land could be effective in capturing the economic surplus arising from land ownership. This tax would generate all the revenue necessary to fund public expenditures. George thought that such a land tax would permit the removal of other taxes on labour and capital, which he regarded as inherently inefficient. He argued that taxes on incomes, sales, and payrolls, for example, acted as disincentives to production and active endeavour, thereby stifling economic growth and creating a barrier to full employment. A land tax, by contrast, would be both economically efficient and more equitable in its distributional effects.
George’s advocacy of replacing all existing taxes with a single tax on land values was powerful. He argued that this tax would redistribute the wealth that would otherwise accrue to private landowners, forcing them to repay the community for their exclusive use of a public resource. Moreover, such redistribution would reduce wealth inequalities and allow massive improvements in welfare provisions and public services. In addition, removing taxes on labour and capital would boost economic growth and provide a stimulus to employment. Conversely, taxing land values would reduce speculation in land and depress land prices, allowing greater access to landownership while reducing economic instability.
The publication of George’s major treatise, Progress and Poverty, in 1879 stimulated widespread interest. Supporters emerged throughout the Western world, roused by George’s explanation of wealth inequalities and inspired by his proposed solution of a single tax on land. However, this initial wave of interest subsided, and George’s ideas have been almost universally ignored in ‘respectable’ economic circles during the last century. They have been accorded the status of a historical curiosity, at best (see, for example, Heilbroner, 1968: 166-73). But a Georgist movement advocating a land tax has persisted and the last few years have seen a partial resurgence. While still ignored by the economic orthodoxy, interest in George’s work has been stimulated by modern concerns about housing affordability and environmental decay. Such revival of interest recognises that these problems stem, in part, from inadequate policies relating to land. Some members of Green parties, in particular, have embraced Georgist ideas.
Not all those attracted to Georgism embrace the extreme single-tax position. A more pragmatic position emphasises retaining a mix of different taxes but putting more emphasis on land tax revenues and less on income, consumption, payroll and other taxes. In the Australian context a pragmatic Georgism emphasises:
2 However, it is pertinent to note some support from an otherwise unlikely source – the Federal Government’s Productivity Commission. Its recent report on First Home Ownership (2004) explores the case for shifting from stamp duties to higher land taxes.
The Moral Issue
Georgism has a distinctive ethical basis. So a review of the contemporary relevance of Georgist political economy can usefully begin by making this explicit. The key moral issue is the private appropriation of public wealth. As George recognised, land is a ‘gift from nature’ and, as such, is rightfully a community resource. Hence, those deriving benefits from the private ownership of land should recompense the community for the privilege. This principle has strong echoes of the idea of ‘usufruct’, a pre-capitalist term denoting a person’s legal right to use and accrue benefits from property that does not belong to them. In return, the user is obliged to keep the property in good repair and pay all costs as a ‘ground rent’ (‘Lectric Law Library, n.d). The concept of ‘usufruct’ has fallen out of common usage, so one hesitates to try to revive it. Moreover, as Richards (2002) notes, ‘it is difficult to image how this word could be employed, or brought back into circulation, in the modern world, since we live in a world in which people tend to be remarkably unsympathetic to the property rights or claims of others’.
However, the principle of ‘usufruct’ goes to the heart of the question of how best to balance collective and individual rights and interests. George’s solution of a tax on the value of land squarely addresses this issue. By returning a proportion of the land value to the community in the form of taxation revenue, restitution would be paid for the use of a community resource. This is an ethical justification for land taxation.
Indeed, one could say that the term ‘tax’ is a misnomer because what is really involved is value created by the community being retained by the community rather than being appropriated by private landholders. For example, under current arrangements landowners receive ‘windfall’ gains when the market value of their land rises as a result of publicly provided infrastructure being built nearby, or when local government zoning decisions reclassify their land as appropriate for further development. In this way, individual landowners stand to reap huge benefits at the expense of community-generated processes. Such arrangements create an odd incentive: allowing landholders to appropriate the unearned wealth generated by rising land values, thereby rewarding this unproductive activity, while taxing productive endeavour. The Georgist land tax ‘remedy’, by contrast, would eliminate such perverse incentives and thereby more effectively align private and public interests in the use of society’s resources.
However, the Georgist position cannot claim to provide a fully comprehensive solution to the moral issue of balancing individual and collective rights. While land tax addresses the private appropriation of wealth from land, it does not address the appropriation of wealth from other sources. The characteristically Georgist focus on land as the source of the maldistribution of wealth is limiting in this respect. Political economists have long argued that the accumulation of capital also arises from the exploitation of labour, for example. Whether the exploitation of labour is systemic, as Marx argued, or exceptional is properly a matter of debate. Either way, the point is that an ethical basis for the economic system, and for the tax system in particular, needs to take account of both land-related and other sources of unjustifiable wealth appropriation. The moral issue thereby links with a second concern of more explicitly economic character – the sources of inequality in the distribution of wealth.
Georgist analysis strongly emphasises landownership as a principal source of inequality. Because land is a strictly limited resource, its private ownership necessarily excludes large sections of the community from its benefits. A landowning class thereby gains political economic power. In George’s own time the social identity and power of this landowning class was distinctive. Those who could not afford to buy land were forced to pay rent to the wealthier few who could. By taxing the value of land, George posited that publicly created wealth could be recouped from the private landowners and redistributed throughout the community more equitably in order to address social goals.
Are George’s arguments about land ownership and wealth inequality relevant today? Australia provides an interesting example, because land is the single largest item in national wealth. Laurie Aarons outlines the concentration of farming land in particular in the hands of a few very wealthy corporations and individuals – what he refers to as ‘corporate squattocracy’ (Aarons, 1999: 23). The relentless increase in urban land values in recent years has also produced dramatic redistributions of wealth. In the State of New South Wales, for example, land values increased by about $361 billion over the period 1993 – 2003. The existing land-based taxes clawed back only $44 billion in government revenues, comprising only about 12% of the land-related economic surplus. So 88% was retained as ‘unearned income’ by landowners (Stilwell and Jordan, forthcoming). A higher rate of land tax with fewer exemptions could have substantially reduced this private wealth appropriation. This is not necessarily to posit the desirability of recouping 100% through land tax, because that would certainly raise major problems of people’s ability to pay, given that much of the increased wealth resulting from land price inflation has not been realised as current income. But it is indicative of the current imbalance between private and public appropriations of the surplus arising from increases in land-based wealth.
However, it is also pertinent to note that land ownership today is significantly less concentrated than in George’s time, with around 70% of Australians being home-owners (including those in the process of purchasing their homes with mortgage finance). According to the recent Household, Income and Labour Dynamics in Australia (HILDA) Survey, home-ownership is unevenly distributed between income groups, with 56% of households in the lowest income quintile owning their own homes, compared to 85% of those in the highest quintile (Kohler et al, 2004: 10). But this distributional inequality is significantly less marked than the ownership of other assets, such as shares for example. Of course, most land ownership for residential purposes involves very small tracts, typically only about one-sixth of an acre in the suburban areas of the major cities. Flat-owners, growing annually as a proportion of the population, usually own less land and do so more indirectly through strata property titles. So the form of land tax (that is, whether flat rate or on a progressive scale, whether applying to all land or only that above a ‘threshold’ value, or exempting owner-occupied property) becomes crucial to its effectiveness as a mechanism for tackling distributional inequality. It is also crucial to the political acceptability of land tax reform.
In addition, it is apparent in modern economies that not all socioeconomic inequalities stem from the unequal capture of the economic surplus associated with land. Inequalities are also generated by unequal access to capital, educational and employment opportunities. These inequalities are imperfectly correlated with wealth deriving from land ownership. Hence, additional means of redress are needed, as J. K. Galbraith and other institutional economists have consistently argued (e.g. see Galbraith, 1992; 2002: chapter 3). For example, ‘floors,’ such as minimum wage requirements and ‘social security’ payments, must be provided to guarantee a minimum income to all members of society, including those excluded from the production process. A strong, albeit unfashionable, case can also be made for ‘ceilings’ to limit excessive salaries, such as those of some top corporate executives, which far outweigh their productive contributions to society. The average executive remuneration levels in major Australian companies increased from 22 times average weekly earnings to 74 times average weekly earnings in the period 1992-2002 (Shields et al, 2003: iii). It may be, as George argued, that ‘the increase of land values is always at the expense of the value of labour’ (George, 1966: 224) but the complex distributions of income received by capital and labour are not readily explicable in terms of an analysis focusing exclusively on land.
A third aspect in this ‘stocktaking’ of the relevance of Georgist analysis and policy to contemporary political economic conditions concerns the persistent problems of housing affordability. The difficulty of purchasing, or renting, affordable housing has reached social crisis proportions in many large cities around the world. In Sydney, for example, a median-priced house could be bought for just under four years of average Australian earnings in 1986, but an equivalent house in 2003 cost over twelve years’ worth of earnings (Stilwell, 2003). This constitutes an enormous barrier to home-ownership for a younger generation, a problem that both Federal and State Governments have sought to redress by the provision of first home-buyers’ subsidies.3 It is not typically the house itself that has been the cause of the inflation, but the price of the land on which it stands. So, looking at the situation from a Georgist perspective immediately directs our attention to how the demand and supply of land affects housing affordability.
3 These subsidies can have counter-productive effects to the extent that they increase demand and therefore the price of housing. See, for example, the Report of the Productivity Commission Inquiry into First Home Ownership, (2004: 71-73).
The demand for land involves both use values and exchange values. People seek land because the housing built on it provides shelter and security, but they also purchase it as a store of wealth and a means of capital appreciation. A particularly important driver of real estate prices has been the speculative demand, as investors seek capital gains in the property market. In Australia, this has been such common and longstanding practice that it has been referred to as ‘the national hobby’ (Sandercock, 1979). By ‘creaming off’ a part of this potential capital gain, a higher uniform rate of land tax would act as a disincentive to this property speculation, and could therefore be expected to exert a downward influence on property prices. Georgists have always been emphatic that land taxes are different from other taxes in this respect – they depress prices because they reduce demand. So the usual fears that a tax will be ‘passed on’ to customers (such as housing tenants, in this case) do not apply.4 By making land less attractive as an item to be purchased in the hope of making capital gains, land tax can therefore be an important check on the inflationary process.
4 This issue is discussed in more detail in Gabbitas and Eldridge (1998: 151-154). The Productivity Commission Staff Research Paper written by these authors suggests that, while passing on the tax is unlikely to occur in the short term, in the longer term supply-side responses may shift some of the burden onto subsequent buyers and/or users of the land.
However, while a higher uniform land tax could be an important
component in a policy addressing housing affordability, it seems
unlikely to provide a complete solution. The severity of the housing
problem in Australia, for example, also derives partly from the
dwindling supply of public housing. Public housing is now less than 5%
of the total housing stock and falling (National Housing Alliance,
2004: 5). Governments have withdrawn funds from public housing and
tightened entry requirements (for example, lowering the threshold for
the means test). This has caused public housing waiting lists to
lengthen and put greater pressure on the private rental sector. More
and more people have been forced into circumstances of significant ‘housing stress,’ paying
a third or more of their net income for housing (Hawtrey, 2002), and further
adding to inflationary pressures
on housing prices.
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper