The following article is by Lindy Davis, the Program Director of The Henry George Institute and an editor of The Georgist Journal. It is part of our series of bringing economic theories that are more or less similar or allied with Distributism to the attention of our readers. This article deals with "Georgism," sometimes called the "single-tax theory."
by Lindy DaviesHuman civilization finds itself at a terrifying crossroads. The list of dangers is appallingly long. Would it make things a little less scary to group our challenges into main categories? I've come up with three:
3) Environmental Crisis (including the ideas of "overpopulation and necessary "limits to growth")
2) Economic Stagnation (a chronic problem that takes many forms, including recessions, arrested development and debt crises).
What's number one? We might forget it sometimes, among the long menu of calamities vying to frighten us, but it is at the root of all the others: Poverty. Until we solve that problem, all the other ones will keep getting worse. Until we solve the problem of poverty, we can only place band-aids over ever-deepening wounds and, somehow, hope for the best.
But is there a solution? Various programs have been tried. The solution of a planned economy which would banish competition failed, spectacularly. The "liberal mixed economy" under various guises of "social democracy" aided by "labor unions" has led to today's "race to the bottom." The ideology of "laissez faire" -- a market free of regulation, if not actually a free market -- is causing suffering and havoc around the world. That's what we're told, anyway. But in truth: when abundant labor is compelled to seek scarce employment, there will always be a race to the bottom. Technological progress, free trade and improved education simply steepen the slope.
Henry George claimed, very persuasively, to have identified the root cause of poverty, and the fundamental solution. Perhaps he was wrong. But if he was right? Then we shouldn't waste another minute, should we? Let's briefly examine what Georgist theory says about the fundamental cause of poverty.
Standard Explanations for Poverty
Henry George begins by evaluating the standard explanations for the persistence of poverty amid increasing progress and plenty. Could it be a lack of capital? Does the need to pay wages cut into our ability to store up the tools and equipment we need to move the economy forward? This is a pressing question for development policy: nation after nation has gone into unpayable debt in the attempt to "build a manufacturing base" and "develop export industries" -- only to wind up poorer and deeper in debt.
In fact poverty has never been caused by a lack of capital, and it cannot be. The reason is simple: capital is a product of labor. Tools, machines, seeds, information processors -- all these things are products of human labor. If people have access to natural resources, they can produce capital. They always have. If poverty were caused by a lack of capital, why should there still be hunger and homelessness in advanced economies that are awash in sophisticated capital? Poverty cannot be explained by any lack of capital.
Could the root cause of poverty be our earth's incapacity to cope with increasing human numbers?
It's interesting that overpopulation has been claimed to cause poverty for over two hundred years. In the days of Malthus the earth groaned under the weight of less than one billion people, and yet many believed something urgently had to be done! In the 1960s and 70s the "population bomb" scare predicted huge die-offs after world population reached fifty billion or more. Since then, every prediction of the plateau population level has been revised downward; current predictions call for a leveling-off at somewhere between 9 and 12 billion. (The UN Food and Agricultural Organization estimates that with current farming methods the world can feed more than 30 billion people.) In fact, there is a clear, robust correlation between increasing prosperity and declining fertility: it's called the "demographic shift" and is thoroughly documented.
Sheer human numbers can't be blamed for the persistence of poverty. Supposedly "overpopulated" Ireland and India exported food throughout their years of famine.
Nowadays, another form of Malthuisianism is taking hold: maybe we can grow enough food, after all -- but can we meet the ever-increasing energy demand? What is all this "production" doing to our planet, our only home? Surely something's about to kill us all; it just stands to reason: global warming, hurricanes, floods, wars over dwindling fossil-fuel resources, nuclear proliferation, terrorism...? If we go on the way we're going, we're done for!
These dire outcomes are not entirely unlikely but they are by no means inevitable. Every dismal prediction is based on extrapolating current trends. However, history shows us that one thing we cannot do, with any reliability at all, is extrapolate from current trends! When virtually every tree in the Eastern half of North America had been cut down for firewood, there was a "firewood sustainability crisis." When people were dying of black lung disease in coal-burning London and New York, there was an "urban sustainability crisis." Right now there is a "peak oil crisis."
But we don't have to burn oil forever. In the January, 2008 issue of Scientific American, three solar-power experts explained how the United States could, using only modest improvements of existing technology, derive two-thirds of its entire consumption of energy from renewable, nonpolluting sources by 2050. Significant public investment would be required, yes: approximately half the cost of the war in Iraq. Our energy and environmental problems are solvable. We may, indeed, fail to solve them. But we must put to rest the excuse that the earth's resources are insufficient: it simply isn't so.
The Laws of Distribution
If we cannot blame poverty on insufficient resources, nor on an inability to produce capital, what then? Poverty must be a problem with the distribution of wealth. In some ways, this is a "no-brainer" -- yet, where does it lead us? Is the distribution of wealth in society merely a political arrangement? Are there any eternal, underlying principles that can guide us?
This line of thought led Henry George (like the other classical economists) to seek the Laws of Distribution. Society creates a certain amount of wealth. Among what distinguishable groups is the wealth divided? These groups are called the factors of production. If we're going to talk about the distribution of wealth, the factors must be clearly defined and mutually exclusive. How else could we tell what part goes to each? Up until the Great Obfuscationist Movement of the early 20th century (otherwise known as Neoclassical economics) three factors were universally recognized: Land, Labor and Capital. They are defined as follows:
Land -- the entire material universe, except for human beings and their products; all naturally-occurring forces and opportunities.
Labor -- all human exertion, whether physical or mental, in the production of wealth.
Capital -- products of labor which are used in the process of production.
Labor, working on land and using capital, produces wealth. What is wealth? It is the set of things that 1) are material; 2) are a product of human labor; 3) satisfy human desires; 4) have exchange value. To be classed as wealth in political economy, a thing must satisfy all four criteria. For example: land is not wealth, because it is not made by human labor. Money is not wealth, because it does not satisfy human desires. Items that have sentimental value are not wealth if no one is willing to give something valuable in exchange for them. This unambiguous definition allows us to explore questions of wealth distribution.
Using these definitions, we can deduce the basic laws of wealth distribution from two basic, common-sense observations: 1) No production can happen without access to some land; 2) People seek to satisfy their desires with the least exertion.
The second is a bit like Adam Smith's principle of selfishness, but there is a crucial difference. George does not presume to know what people's desires are. People can have selfish, or altruistic, or ascetic, or athletic desires -- no matter. Whatever it is that people want, they try to get it with a minimum of irksome toil. And what constitutes irksome toil? That's different for everyone, too! Some people run marathons for pleasure; some compute large prime numbers, just for fun.
This endless variety of human desires is what makes trade such a powerful economic force. Whenever we give up something, to get something we want more, the person we're exchanging with does the same thing! Each is better off. If each partner in the trade were not better off, they wouldn't agree to trade in the first place.
But we're getting ahead of ourselves. We were searching for "Laws of Distribution" that would give us insight into the fundamental problem of poverty. Why does poverty deepen as material progress advances? What can be done about it?
The Market for Labor
When we talk about poverty, we're talking about a state of affairs in which people are willing and able to work for their living, but they cannot find work -- or the work they can find pays them no more than mere subsistence. Poverty can be understood, then, as a problem in the market for labor.
"Wages" is the term for the price of labor. Now, we recognize that unemployment exists -- in other words, that a relatively abundant supply of workers competes for a relatively scarce supply of jobs. Competition among laborers bids down the price of labor -- the wage -- to the lowest level that workers will accept for doing that kind of work. What's the lowest level that workers will accept, if they lack any special skill or other advantage? Bare subsistence. Their alternative is starvation.
But, if the prospects of the jobs offered, say, by industrial society are so poor -- no better than bare subsistence -- why don't workers find ways to employ themselves? Indeed, they will, if any viable self-employment opportunity presents itself. What's the minimum requirement for a better opportunity? How about a small farmstead of one's own? It wouldn't be an easy living, but in good years one could store up a bit of surplus, which would make life a little easier.
The alternative to subsistence wages, then, is free land -- if there is some. That leads us to the basic principle of wealth distribution: the Law of Wages (derived from David Ricardo's long-recognized Law of Rent): wages depend on what labor can enjoy on the best land that's available for free.
Of course, labor and capital must pay to use any land that's better than the free land. In modern economies the value of choice sites is astronomical. Indeed, our most valuable natural resource, by far, is land that offers no mineral riches, provides no game animals, and will yield no crops: the world's most valuable natural resource is urban land.
What gives value to land? The community that surrounds it! The people that live nearby and who travel past it; the public infrastructure that makes advanced production possible on it; the huge demand for resources that lie beneath it. As the community grows, so does the value of land.
Free Land? Where?
We said that wages, at the base, depend on what ordinary workers can gain, working for themselves on land that is free. But where is the free land today? Is there any? You might find street vendors setting up shop on sidewalks, or people fishing off of docks. You could stake a claim to acreage on the moon (some have done this) or in the middle of the desert, but: no. There's no free land today -- no viable alternative for self-employment. A permanent glut of labor supply.
The market for unskilled labor is the only one that exhibits the properties of what economists call "perfect competition." The product is interchangeable; there's no shortage of it. In microeconomic terms, in a perfectly competitive market, price is equal to marginal cost. What's the marginal cost of a laborer? You guessed it: subsistence. The alternative is starvation.
There's no free land. Does that mean the earth has run out of room? It would, if we could show that all the available land were being efficiently used, but that is certainly not the case. Natural resources are egregiously wasted, all around the world. In the wealthiest cities, large areas of valuable land lie idle, as their owners wait for higher prices in the future. Meanwhile, millions go hungry while giant farms grow feed for animals -- or crops for export. Agribusiness receives payments to hold fields out of use to "stabilize" food prices. Investors discover that producing wealth is far less profitable than simply holding onto valuable real estate and, later, pocketing its increased value.
There is a built-in incentive in our system to hold land for speculation. How does this work? The supply of land is fixed. There will never be any more of it. And land is needed for all production. As an economy grows -- becomes more productive, as technology and trade allow greater yield from the same effort -- the demand for land increases, and its supply stays the same. This means that the share of wealth taken by landowners gets bigger, whenever the total economy grows. This creates an irresistible incentive to hold land out of use.
The more the economy grows, the greater the expectation of future growth in land value, and the more land is held out of use! This further restricts the supply of land, and increases the price -- until labor and capital can no longer afford to pay it! When this happens, production starts to decline, and we're in the bust phase of the boom-bust cycle.
The Role of Government
Even a modestly advanced economy needs some public goods. As societies grow, there is an ever-greater need for streets, schools, public safety, etc. Even though it's obvious that society stands to benefit from such things, people have always struggled to find some sensible, acceptable way to pay for them. This perennial wrangle became the classic "left-wing/right-wing" debate. Far on the right, they tell us that self-interested private ownership is the fairest and most efficient way to assign resources. The government should do as little as possible, just exercise essential "traffic cop" functions. Far on the left, they protest that the "free market" can only lead to consolidation of giant corporate concerns, to the rich getting richer and the poor getting left out; either there will be a violent revolution, or some sort of "redistribution" must be used to rectify the injustice.
That brings us full circle, right back to where we started. The "dismal science," eh?
Let's consider an example of the problem of public goods. Like many great cities, New York City found itself, at the start of the 20th century, in desperate need of modern public transportation. So, a huge public/private partnership built the subway system. It was carrying some half a million riders per day, even before the advent of the automobile -- and it proved a tremendous engine of city growth. Fares were kept low, so workers could afford to ride. Financing was often a problem. By the 1970s, New York was in a fiscal crisis, and the subway system had become a dingy, broken-down relic (which still, nevertheless, carried New York's workers to their jobs). It can be said that all New Yorkers benefited from the subway system. But, those who used it paid for it. And, the taxpayers paid for it. One group, however, derived great profits from the subway, and scarcely paid for it at all. Proximity to transportation is a prime determinant of land value. It's a gift to landowners. Just like all public services and infrastructure: a gift, from productive workers and taxpayers, to rent-collecting landowners.
Henry George looked at this mess, this paradox, and saw a solution. As society grows more complex, it develops a greater need for public goods. But, how to pay for these things, without overburdening producers? Why not return to the community what the community itself has created -- the value of land? Had New York City paid for its subway system out of land rents, it could have done away with fares (and the cost of collecting them) and would have had ample funds to support a system which, in turn, brought great vitality to the city.
Today's conventional wisdom advocates "broad-based" tax systems. We're told that all taxes are bad; they burden people and slow the economy -- so to spread the burden around (and incur the least resistance) we should tax as many different sources as we can. Income, sales, excise taxes, lotteries, sin taxes, import duties, estate taxes, taxes on real and moveable property. The US federal tax code is thousands of pages long and changes every year; states and cities have codes of their own. Georgists look at the tortured logic of "broad-based taxation" and cry, "Away with them all!" There is one fair and efficient source of public revenue. All taxes must be done away with, and the value of land must be taken for public revenue.
Radical -- and Essential
This reform is doubly just -- for it simultaneously removes two great injustices. Everyone has a right to life, and everyone needs land to live. If we must pay private "owners" for access to land (and where is this not the case, today?) then we must pay for our own right to life. Also, public goods -- which benefit landowners -- are paid for with wealth that has been confiscated, via taxation, from its producers.
The reform is doubly efficient -- for it simultaneously removes two great inefficiencies. By collecting the rent of land for public revenue, it removes the burden of taxation from production. And by eliminating the incentive to hold land for speculation, it removes great waste and inefficiency in our use of natural resources.
But even more that that: the reform makes it possible for us to make sense of our relationship, as a species, with our home. The earth is not owned by anyone. It must be held in trust for all people, and all life. It's no accident that our ability to destroy all life on earth has coincided, in a single generation, with our awareness of our home as a single, fragile oasis in a huge, cold universe.
Getting there won't be easy. But it's our only hope.