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Factors of Production
and their returns
H.G.Brown: Significant Paragraphs from Henry George's Progress & Poverty, Chapter 5: The Basic Cause of Poverty (in the unabridged: Book V: The Problem Solved)
Henry George: Justice the Object — Taxation the Means (1890)
Why, look at it here today, in this new country, where there are as yet only 65 millions of us scattered over a territory that in the present stage of the arts is sufficient to support in comfort a thousand millions; yet we are actually thinking and talking as if there were too many people in the country. We want more wealth. Why don't we get it? Is any factor of production short? What are the factors of production? Labour, capital, and land; but to put them in the order of their importance: land, labour, capital. We want more wealth; what is the difficulty? Is it in labour; is there not enough labour? No. From all parts of the United States we hear of what seems like a surplus of labour. We have actually got to thinking that the man who gives another employment is giving him a boon. Is there any scarcity of capital? Why, so abundant is capital today that United States bonds, bought at the current rate, will only yield a fraction over 2% per annum. So abundant is capital that there can be no doubt that a government loan could be floated today at 2% and little doubt but that it would soon command a premium. So abundant is capital that all over the country it is pressing for remunerative employment.
If the limitation is not in labour and not in capital, it must be in land. But there is no scarcity of land from the Atlantic to the Pacific, for there you will find unused or only half-used land. Aye, even where population is densest. Have you not land enough in San Francisco? Go to that great city of New York, where people are crowded together so closely, the great majority of them, that physical health and moral health are in many cases alike impossible. Where, in spite of the fact that the rich men of the whole country gravitate there, only four per cent of the families live in separate houses of their own, and sixty-five per cent of the families are crowded two or more to the single floor — crowded together layer on layer, in many places, like sardines in a box. Yet, why are there not more houses there? Not because there is not enough capital to build more houses, and yet not because there is not land enough on which to build more houses.
Today one half of the area of New York City is unbuilt upon — is absolutely unused. When there is such a pressure, why don't people go to these vacant lots and build there? Because though unused, the land is owned; because, speculating upon the future growth of the city, the owners of those vacant lots demand thousands of dollars before they will permit anyone to put a house upon them. What you see in New York, you may see everywhere. Come into the coalfields of Pennsylvania; there you will frequently find thousands and thousands of miners unable to work, either locked out by their employers, or striking as a last resource against their pitiful wages being cut down a little more. Read the entire article
Nic Tideman: Basic Tenets of the Incentive Taxation Philosophy
The Proper Disposition of Returns to Different Factors of Production
The idea that the rent of land is properly collected by governments is an example of the more general idea that it is important to distinguish the different "factors of production" identified by classical political economy. The return to each factor has a proper destination.
Replacing Existing Taxes
When we say that the appropriate recipient of rent is the public treasury, it should be understood that this is not in addition to existing sources of public revenue, but rather instead of existing sources of public revenue.
While one might call such fees "taxes," we consider that designation inappropriate, because the word "tax" connotes an exaction from someone of something to which he or she has a just claim, and we deny that there are such just claims with respect to land. We expect that the collection of fees for the full value of opportunities assigned by governments would provide adequate revenue for all necessary government expenditures. ... Read the whole article
Nic Tideman: Using Tax Policy to Promote Urban Growth
Urban growth is desired because it raises peoples' incomes. In a market economy, incomes can be divided into components derived from four factors of production:
Thus a successful urban growth strategy in a market economy must either increase the amounts of land, labor, capital and entrepreneurship that are used in a city or increase the payments that are made per unit of each factor, or both.
The land that a city has is fixed (or if it changes, it does so at the expense of other administrative units). Therefore, with respect to land, socially productive urban growth means adopting policies that raise the productivity of land. Labor, on the other hand, is reasonably mobile, and capital is highly mobile. Entrepreneurship springs up and fades away with the rise and fall of opportunities. Therefore, in a market economy, the payments that must be made to attract these factors are substantially outside the control of a city. Thus the growth of a city with respect to labor, capital and entrepreneurship is achieved primarily by making the city a place that attracts more of these factors, taking the rates of wages, interest and profits that must be paid to attract them as given by market forces.
Tax policy is critical for urban growth because taxes on the earnings of labor, capital and entrepreneurship drive these factors away. A city that desires to grow should refrain from taxing wages, interest or profits and concentrate its taxes on land, which does not have the option of moving away.
Certain other sources of public revenue, in addition to the rent of land, have the characteristic of not discouraging growth. These sources of revenue involve either charging people for using scarce opportunities that no one created, as with land, or charging people for the costs that their actions impose on others.
A city that wishes to grow should confine its search for revenue to these sources. In this way it will attract more labor, capital and entrepreneurship, thereby raising the rent of land, which can be collected publicly without discouraging growth.
Additions to the stock of capital are extremely important for urban growth, because of the impact of abundant capital on wages and rents. When capital is abundant, labor and land are more productive, and the more productive they are, the higher wages and rents are. ...... Every activity that is continued should pass a test of providing adequate value for money. Most of the worthwhile activities of local governments raise the rental value of the land in the vicinity of the activity by enough to pay a substantial fraction if not all of the costs of the activity.
Thus the rental value of land is a natural first source of financing for local public expenditures.
Making the rental value of land a principal source of local public revenue has both an equity rationale and an efficiency rationale. The equity argument for social collection of the rent of land is founded on a recognition that the rental value of land has three sources.
The efficiency argument for social collection of the rent of land has two parts.
To achieve the potential efficiency of public revenue from land, it is important that people not be charged more for the use of land, just because they happen to be using it particularly productively. The rental value of land should be reassessed regularly, the values that are determined should vary smoothly with location, and they should be available for public inspection so that all users of land can see that they are being charged amounts commensurate with what their neighbors are being charged.
Social collection of the rent of land also facilitates the privatization of land. If every user of land is charged annually according to the rental value of the land that he or she holds, then it is possible to undertake a just privatization of land simply by passing out titles to the current users of land.
No one will be disadvantaged by not receiving land. Future generations will not be deprived by not having been awarded shares. And the community will have a continuing income from the rent of land.
The efficiency that is entailed in using the rent of land to finance public activities applies to certain other sources of public revenue as well:
1. Charges on any publicly granted privileges, such as the exclusive right to use a portion of the frequency spectrum for radio and TV broadcasts.
All of the above taxes are positively beneficial and should be collected even if the revenue is not needed for public purposes. Any excess can be returned to the population on an equal per capita basis. If these attractive sources of revenue do not suffice to finance necessary public expenditures, then the least damaging additional tax would probably be a "poll tax," a uniform charge on all residents. If some residents are regarded to be incapable of paying such a tax, then the next most efficient tax is a proportional tax on income up to some specified amount. Then there is no disincentive effect for all persons who reach the tax limit. The next most efficient tax is a proportional tax on all income.
It is important not to tax the profits of corporations. Capital moves from where it is taxed to where it is not, until the same rate of return is earned everywhere. If the city refrains from taxing corporations they will invest more in St. Petersburg. Wages will be higher, and the rent of land, collected by the government, will be higher. The least damaging tax on corporations is one that provides a complete write-off of investments, with a carry-over of tax credits to future years. Such a tax has the effect of making the government a partner in all new investments. With such a tax the government provides, through tax credits, the same share of costs that it later receives in revenues. However, the tax does diminish the incentive for entrepreneurial activity, and it raises no revenue when investment is expanding rapidly. Furthermore, the efficiency of such a tax requires that everyone believe that the tax rate will never change. Thus it is best not to tax the profits of corporations at all. If the people of St. Petersburg want to share in the profits of corporations, then they should invest directly in the corporations, either privately or publicly. The residents of St. Petersburg would be best served by refraining from taxing the profits of corporations. Creating a place where profits are not taxed can be expected to attract so much capital that the resulting rises in wages and in government-collected rents will more than offset what might have been collected by taxing profits.
The taxes that promote urban growth have at least one of two features.
Kris Feder: Progress and Poverty Today
Economists will recognize his analysis as a precursor to the modern marginal productivity theory of functional distribution. His story is framed in the language of what is today called classical political economy, though George was careful to avoid inconsistencies of definition and reasoning which, he showed, had led other economists astray.
A central feature of the British classical school was the classification of productive resources into three "factors of production" - labor, land, and capital. Most classical economists had conceived of these in terms of three great social classes (the workers, the landed aristocracy, and the capitalists). George, on the other hand, identified them as functional categories, distinguished by the conditions under which the factors are made available for production.
In a competitive economy, the earnings of the factors of production measure their separate contributions to the value of the product. Payments for the use of labor are called wages; payments for land are called rent; the income of capital is interest. In George's terms, the distress of the working classes had to do with a persistently low level of real wages. "Why," he asked, "in spite of increase in productive power, do wages tend to a minimum which will give but a bare living?"
The book proceeds systematically. First, George explores the prevailing scholarly and popular explanations, which relied principally on the famous population theory of Malthus, in combination with the "wage fund" theory of British political economy. Together these theories implied that the aggregate income of labor depends upon the amount of capital devoted to the payment of wages. An increase in wages required an increase in the amount of capital per worker. However, any rise in living standards above mere subsistence motivated workers to marry younger and bear more children, until population growth caused capital per worker - and, therefore, wages - to recede again. ... Read the whole articleA.J.O. [probably Mark Twain]: Slavery
Suppose I am the owner of an estate and 100 slaves, all the land about being held in the same way by people of the same class as myself. ...
Suddenly a brilliant idea strikes me. I reflect that there is no unoccupied land in the neighbourhood, so that if my laborers were free they would still have to look to me for work somehow. ...
Most of them think they would like to have a piece of land and work it for themselves, and be their own masters. ...
"But," softly I observe, "you are going too fast. Your proposals about the tools and seed and your maintenance are all right enough, but the land, you remember, belongs to me. You cannot expect me to give you your liberty and my own land for nothing. That would not be reasonable, would it?" ...
Still I am ready to do what I promised — "to employ as many as I may require, on such terms as we may mutually and independently agree." ...
So they all set to at the old work at the old place, and on the old terms, only a little differently administered; that is, that whereas I formerly supplied them with food, clothes, etc., direct from my stores, I now give them a weekly wage representing the value of those articles, which they will henceforth have to buy for themselves. ...
Instead of being forced to keep my men in brutish ignorance, I find public schools established at other people's expense to stimulate their intelligence and improve their minds, to my great advantage, and their children compelled to attend these schools. The service I get, too, being now voluntarily rendered (or apparently so) is much improved in quality. In short, the arrangement pays me better in many ways.
But I gain in other ways besides pecuniary benefit. I have lost the stigma of being a slave driver, and have, acquired instead the character of a man of energy and enterprise, of justice and benevolence. I am a "large employer of labour," to whom the whole country, and the labourer especially, is greatly indebted, and people say, "See the power of capital! These poor labourers, having no capital, could not use the land if they had it, so this great and far-seeing man wisely refuses to let them have it, and keeps it all for himself, but by providing them with employment his capital saves them from pauperism, and enables him to build up the wealth of the country, and his own fortune together."
Whereas it is not my capital that does any of these things. ...
But now another thought strikes me. Instead of paying an overseer to work these men for me, I will make him pay me for the privilege of doing it. I will let the land as it stands to him or to another — to whomsoever will give the most for the billet. He shall be called my tenant instead of my overseer, but the things he shall do for me are essentially the same, only done by contract instead of for yearly pay. ....
For a moderate reduction in my profits, then — a reduction equal to the tenant's narrow margin of profit — I have all the toil and worry of management taken off my hands, and the risk too, for be the season good or bad, the rent is bound to be forthcoming, and I can sell him up to the last rag if he fails of the full amount, no matter for what reason; and my rent takes precedence of all other debts. ...
If wages are forced down it is not I that do it; it is that greedy and merciless man the employer (my tenant) who does it. I am a lofty and superior being, dwelling apart and above such sordid considerations. I would never dream of grinding these poor labourers, not I! I have nothing to do with them at all; I only want my rent -- and get it. Like the lillies of the field, I toil not, neither do I spin, and yet (so kind is Providence!) my daily bread (well buttered) comes to me of itself. Nay, people bid against each other for the privilege of finding it for me; and no one seems to realise that the comfortable income that falls to me like the refreshing dew is dew indeed; but it is the dew of sweat wrung from the labourers' toil. It is the fruit of their labour which they ought to have; which they would have if I did not take it from them.
This sketch illustrates the fact that chattel slavery is not the only nor even the worst form of bondage. When the use of the earth — the sole source of our daily bread — is denied unless one pays a fellow creature for permission to use it, people are bereft of economic freedom. The only way to regain that freedom is to collect the rent of land instead of taxes for the public domain.
Once upon a time, labour leaders in the USA, the UK and Australia understood these facts. The labour movements of those countries were filled with people who fought for the principles of 'the single tax' on land at the turn of the twentieth century. But since then, it has been ridiculed, and they have gradually yielded to the forces of privilege and power — captives of the current hegemony — daring no longer to come to grips with this fundamental question, lest they, too, become ridiculed.
And so the world continues to wallow in this particular ignorance — and in its ensuing poverty and debt. Read the whole essay
a synopsis of Robert V. Andelson and James M. Dawsey: From Wasteland to Promised land: Liberation Theology for a Post-Marxist World
Beneath all ideologies, there are basic factors and relationships that underlie economic behavior. To understand the (otherwise inexplicable) omission of attention to land's economic importance, it is useful to go back to these basics.
Now, the objective of all economic behavior is the satisfaction of human desires. Human beings always seek to satisfy their desires with the least exertion: this self-evident proposition lies at the heart of our concepts of economic value and exchange. The primary thing needed for satisfaction is, of course, the tangible things, made from natural resources, that satisfy human desires and have exchange value. Things that meet these four fundamental criteria are termed "wealth". But money, bonds, and mortgages are but claims upon and measures of this value; they are not the wealth they symbolize.
A clear understanding of these basic definitions points immediately to the primacy of land as an economic factor. Human beings have inescapable material needs of food, clothing and shelter. Regardless of how long a chain of exchanges they may pass through in a modern economy, these things ultimately have their source in the land; they can come from nowhere else. Human beings need land in order to live. But if we must pay rent to a private land "owner" for access to the gifts of nature, it amounts to being charged a fee for our very right to live. Read the whole synopsis
Bill Batt: How Our Towns Got That Way (1996 speech)
As recently as a century ago classical economic thought still regarded land for the most part as the common heritage of mankind. From Adam Smith, through Thomas Malthus, David Ricardo, and finally with John Stuart Mill economic productivity was regarded as a function of three interacting factors: land, labor, and capital. John Locke also accepted these premises. To achieve optimal economic productivity, one had to exact the appropriate price from each of those factors. The price of labor was in wages; the price of capital was interest; and the price of land, particularly following the thinking of David Ricardo, was rent. Rent in its classical sense means payment for the use of something in fixed supply, or, more generally, payments above the costs incurred for its creation. Disequilibriums and inefficiencies in economic development resulted if the appropriate prices were not paid for each factor. But, as we shall see, there were powerful interests in this country, bent on not seeing any rent extracted from land use, that persuaded the nascent economics profession at the end of the 19th century no longer to regard land as a separate factor and to redefine the terms of production instead in two- factor theory. This was concurrent with the inclusion of land as property, since called "real property." ... read the whole article
Rev. A. C. Auchmuty: Gems from George, a themed collection of excerpts from the writings of Henry George (with links to sources)
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper