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Henry George: The Common Sense of Taxation (1881 article)
Henry George: Progress & Poverty: Wages & Capital: The Meaning of the Terms (Book I, Chapter 2)
Rev. A. C. Auchmuty: Gems from George, a themed collection of excerpts from the writings of Henry George (with links to sources)
Bill Batt: The Compatibility of Georgist Economics and Ecological Economics The starting point of the
Georgist framework is rigorous definition of
the three factors of production — land, labor, and capital, as in
classical economics. It should be further pointed out that these
factors are mutually exclusive and jointly exhaustive of all things of
economic value. Something must necessarily be in one category or
another; there is nothing outside this
total classification. Understanding of what constitutes labor differs
little from definitions given elsewhere, regardless of which theory is
used. But definitions of land and capital differ somewhat from common
practice as well as sometimes in theory. Therefore, it is helpful to
spend time explicating the definitions of each as they are used in
Georgism, and to point out where these definitions diverge from those
most often employed in neoclassical economics applications. Many
contemporary economics texts begin by taking note of the
land-labor-capital distinction, but then make little use of it later.
These distinctions will make apparent why Georgist economics leads to
very different explanations of economic phenomena as well as to
different policy solutions.
Critical to an understanding of Georgist economics is its recognition of land as a special and unique factor of production. “Land,” to Georgists, as true for classical economists throughout the 19th century, is taken to mean not just the surface of the earth and locational space; it means also any and all those natural resources and non-human works that today can exact a market price. It includes the wealth of the earth in all its natural forms, the air and water as well as material elements. It includes phenomena of value like the electromagnetic spectrum used to transmit communications signals, and landing time slots such as have value at airports. As the world economies enter a new age of high technology, these radio spectrums and time allotments have gained ever increasing value. So also with geosychronous satellite orbits and most recently the genetic codes of all the biota on earth.10 ... It is equally important to distinguish those factors that are not land in the classical sense of its economic use. Natural resources such as coal, oil, and minerals, once removed from their natural state are no longer regarded as land. A diamond lodged in the deep earth is land; that same diamond discovered by a prospector and then cut and polished by a jeweler, is no longer land but capital. Likewise, fish in the ocean are land, but fish once caught and in a boat are capital. This is why, in any courses taught on Georgist economics, considerable time is devoted to basic definitions. To carry the distinction just one step further, land in the Georgist lexicon, is not wealth, whereas in neoclassical economics it is. In the course of later discussion of the Georgist view relative to the ecological economics approach, this will emerge as a critical distinction, as it helps to demarcate the boundaries of what activities fall within the realm of economic behavior and what activities remain marginal. This separate and identifiable
recognition of land has significant
importance for the definition of capital
too, because capital, then,
cannot be land. Capital, rather, is the product of labor and land (and
perhaps other past capital) to add to the increased store of capital of
individuals or of the community. Capital can be of many types, ranging
from monetary wealth to technical knowledge. The store of capital
applied to land and labor results in the further production of capital
wealth. Capital allows labor to be employed with greater efficiency and
productivity, through the use of technology and instruments and with
increased human skill and knowledge.
The next important step in understanding Georgist economics is recognition that each factor of production has its economic price: the price of labor is wages, the price of capital is interest, and the price of land is rent. When any of these prices are unpaid, distortions result in the economic equilibrium and problems become manifest in other realms of nature and society. In neoclassical economics compensation for the use of labor and capital continue to be important in the formulas and calculations employed to explain the economy. But for neoclassical economics, David Ricardo’s “law of rent” is essentially ignored and has be come for all practical purposes an artifact in the history of economics. Rent continues to exist of course; it is simply uncollected, left in the hands of those who maintain monopoly control of certain services of nature, adding to their market value in ways that distort the balance of markets. Failure to recognize the importance of land rent (sometimes called economic rent) is for Georgists critical to an understanding of the problems of contemporary economies and economic analysis.14 ... Rent becomes critically important in Georgist economics, because rent is the increment of market gain that accrues to choice land parcels. This insight arose originally in the context of agricultural societies, where differential qualities of land were recognized by varied payment in rent. An individual’s return on investment was represented by his labor — that was his and his alone to keep. So also were whatever capital goods he acquired through the efforts of his past labor. On the other hand, whenever land offered a higher yield separate from whatever the individual’s labor investment might represent, this constituted a windfall gain above and beyond what might be minimally expected. This is land rent, and it exists even if it isn’t collected. Today, as earlier noted, the greatest land rents derive from their location, grown out of nearby social investment. The concept of rent needs
further explication precisely because it is
so foreign to 20th century students, even those who have been schooled
in economics at it is currently taught. Land rent has no relationship
to the word rent as it is used in contemporary vernacular, that is,
when one rents a car or an apartment. Rather, rent is a surplus,
defined as the return on investment above and beyond what is minimally
required to bring a service into production. To take just an elementary example,
consider that there are three parcels of land available for farming and
three farmers of equal ability and enterprise. But suppose the
parcels differ in their productive capacity, due perhaps to their
fertility, access to water, and so on. If planted with similar quality
seed, the three parcels will yield different quantities of harvest, the
one with the highest quality land having the best return. The one with
the lowest quality land would in like fashion have the lowest
return. Economic rent is defined as the amount of surplus harvest
qualitatively measured by the difference between the parcel with the
highest return and that with the lowest return.
Even though its originator, David Ricardo, had in mind the differential return from agricultural lands, the concept of rent applies to other natural services as well. Consider what happens in the case of urban communities, using the simplest comparison with a tic-tac-toe board. When the lattice is completely undeveloped and consists only of vacant land squares, the locational sites have inconsequential value. But let us suppose that each square is then settled — the first by a hotel, the second by a department store, the third by a restaurant and so on — and supposing that the owner of the center square is reticent to build at all. Reserving his prerogative as titleholder he may intend ultimately to sell. Given the rules of economics as they apply today he may be wise to do so, keeping his money for other uses, as his square will have increased in market value more than all the others despite his having done nothing to improve it. It was this that prompted John Stuart Mill to observe that “Landlords grow richer in their sleep without working, risking or economizing. The increase in the value of land, aris[es] from the efforts of an entire community.. . .” 27 As will be discussed later below, the single greatest factor in determining the economic rental value of land today results not from nutrients or access to water but rather due to site value determined by location. And that can be priced and collected easily. 27John Stuart Mill,
Principles
of Political Economy, Book 5, ch 2, Sec.5.
Lastly, one must appreciate that
the market value of “land” of every
sort is entirely rent, as there is no human factor of labor that
accounts for its origination. Services
of nature have no prior cost to
bring them into production existence — the electromagnetic spectrum,
for example, exists regardless of human presence on earth and so
presumably does time. Ocean fish, fossil fuels, and heavy metals are
all found in nature, not the result of human creation. They are, in
19th century classical economics, the fruits not of man’s labor but of
God’s. And it is to God, or at least to God’s representative on
earth —
the lords and kings — that rent was owed, just as much as it was their
role to provide reciprocal services to the tenants of the land. That
bargain, so well refined in feudal economic arrangements, was an
equilibrium balance, disrupted, one might say, by the annulment of rent
collection and the exploitation of land without
recognition of its price. The practice effectively ended with what in
Britain is known as the “enclosure movement” of the early Tudor reign,
driving the peasants off the land into cities to provide cheap labor
for the early English industrialists.28 But
the theory continued long afterwards. Georgists today argue that land
rent should be collected from titleholders so that it is not left to
render economic distortions. This in turn affects the price of labor
and the price of money. Government’s role, whatever else it does, is at
the very least responsible for defending the commons, to ascertain
titles and to collect rent. Although there are many differences about
the proper role, scope and domain of government among Georgist
adherents, the collection of rent and the supervision of open markets
is central to its tenets.
Despite assiduous efforts to make clear the extent and the limits of the economic rent as a concept — known as well as land rent, Ricardian rent, and ground rent, even the best of contemporary neoclassical economists disagree. Some texts argue that certain athletes or other star performers with great natural ability reap returns for their efforts far above what is in fact necessary to “bring them into productive use.” The difference between what it would minimally take to entice them to perform and the price they are actually paid is all economic rent. Babe Ruth, Michael Jordan, Britney Spears, and the Beatles have all been compensated with impressive amounts of economic rent.29 Georgists and classical economists are of mixed minds, arguing sometimes that such payments are either wages or else are simply transfers that in no way reflect productivity.30 ... The Georgist approach to
taxation had many names: his contemporary
Thomas Shearman wrote two books calling it the “natural tax,” 41 and
more recently it has been referred to as the “incentive tax” 42 and
ground rent.43
It should be noted once more that, by whatever name, the “land tax,”
“site value tax,” or “single tax” to George covered a far wider scope
than simply locational sites, even though today this is the base that
is given the most attention. It covered any natural factor element that
humanity chose to put into service. Today, some of these parts of
nature which have come to be “owned” by private corporations (at least
insofar as their license to such use have become entitlements) are
worth millions. The electromagnetic spectrum that has been parceled out
to the communications industry has sometimes been “auctioned” for
one-shot revenue gains, is now for all practical purposes a freehold
title
in the hands of those industries.44 Were
those spectrum bands retained by governments and “rented,” the revenue
would likely be far greater. Whatever increased value now results
accrues to these private owners instead of to society.
So also in the case of the auctioning of “pollution credits” or tradeable permits, what in fact constitute the right of power industries to treat the air as a dump to the full extent which environmental tolerances allow.45 These “credits” are now “owned” by the private sector and traded back and forth among corporations, even though all people experience the consequences of its treatment. Airport landing slots, “prime time” broadcasting, and many other time-sensitive dimensions have all been handed over to the private sector with nominal benefit to the public. London Mayor Ken Livingstone has been a strong supporter of renting the landing slots at Heathrow and Gatwick Airports, and is at this very time exploring a rent recovery scheme to pay for the upgrade of components of the Jubilee tube line. 46 ... A Georgist agenda also calls for the regular auctioning of mineral extraction rights, fishing rights, and other access to natural resources in a way that their rent is returned fully and fairly to the public weal. Competitively assessed royalties especially on the extraction of mineral capital could yield billions of dollars. Alanna Hartzok has offered compelling arguments why rent from locational sites should be reserved to finance the services of local governments, rent from natural resources identifiable within a nation’s boundaries should be captured to finance national governments, and rents of those resources beyond national borders should be used to finance world governments.... read the whole article |
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