Chapter XV: Taxes, Economic Rent, and Externalities

What Should We Tax?

We began our examination of government by looking first at proposals to reform the tax system and noting their deficiencies. We then looked at both the purpose and cost of government and noted that government has exceeded its legitimate purposes and hence its reasonable costs. We can now return to the question of tax reform, and determine how this should be done, because at the heart of governmental reform is tax reform. It is evident by now that the “starve the beast” strategy was a failure; under this strange diet, government “bulked-up” rather than “slimming-down.” Only by identifying the proper sources of public revenue, and insisting that government stay within these limits, can we hope to achieve any real reform. So the central question is, “What should we tax?”

There is a bromide about taxes that goes, “If you want less of something, tax it.” Currently, the burden of taxation falls on capital and labor. Now, I can't think of any reason why we would want less less labor or less capital; therefore, the fairest and best tax on labor and capital is a flat-tax of zero percent, with some notable exceptions, discussed below. But if we eliminate taxes on labor and capital, is there anything left? Is there anything in the economic universe that we want less of? I believe there is. In fact there are two things that can be taxed, one with no impact on economic development, and the other with the deliberate goal of limiting adverse impacts. The first thing is economic rent and the second is taxes on externalities.

Ground Rent

I repeat here our discussion of economic rent from Chapter X: Economic rent is an amount paid to a factor of production that is more than necessary to keep that factor in production in its current use. It is the very essence of economic inefficiency. For example, the price of steel must be enough to pay for the raw materials in the steel and to compensate the labor and capital that went into making it. If, however, the price rises very much above this amount, then steel claims an economic rent. This rent acts like a tax on all users of the steel, a tax that really doesn't buy anything, but only transfers money from one group (the consumers) to another (the owners). In the case of elastic, reproducible commodities (like steel), this is only a short-term problem, since (in competitive markets) the higher prices attract more labor and capital, the supply is increased, the prices fall, and the economic rent disappears. In the short-term, and for normal commodities, economic rent serves a purpose.

But this does not happen in the case of land; there, the rent is chronic and distorts the returns to both capital and labor. Recall the discussion of the law of ground rents from Chapter IX. Ground rent has the first claim on all incomes, and returns to labor and capital (“the wage line”) can only be paid after ground rent is satisfied. Moreover, this ground rent represents unearned income. Property increases in value because of the growth of population, improvements in technology, or off-site improvements. None of these things are attributable to the land owner; he merely reaps where he did not sow. All ground rent is economic rent. Land costs nothing to keep it in production. Capital and labor are consumed in the process of production and must be replaced; the land endures.

Consider a case where a landowner leases out a piece of property to an entrepreneur to build a factory. The factory lasts, say, thirty years, and at the end of the time it is “used up.” It is torn down and hauled away. But the land remains and is ready for the next use. All this time, the landlord has been receiving an income, and all the while the property has been increasing in value (assuming an increase in population and advances in technology). Yet the landlord did nothing to earn this income; it is strictly a reward for owning the property, not for using it. The income is due to the community, and by rights should go to the community.

Note that we are speaking of taxing only the ground rent; the improvements would not be taxed at all. The improvements to the property represent capital and labor, and their work should not be taxed. Only the ground rent, the portion provided by the community, would be taken, and taken at something close to 100% of its value. This is not a new idea. It was the form of taxation favored by economists from Adam Smith to Milton Friedman. It was most famously popularized by Henry George, a name that is forgotten today, although he was the most well-known and popular of the economists of the late 19^th and early 20^th centuries. Some measure of his popularity can be gathered from the fact that at his death, 100,000 people filed past his coffin, and thousands of others waited outside and could not get in to pay their last respects. Can you imagine the general public lining up to for the funeral of any other economist?

George's theory is often called a “single-tax” theory, because it reduces all taxes to ground rent alone. However, this is a misnomer, since it should be called a “no-tax” theory. A tax is a cost added to a price or subtracted from an income. A sales tax is added to the price, an income tax deducted from the income. And these taxes tend to get passed along to the final consumer. But the Georgist “tax” simply appropriates the income of the rentier, the person who lives off other people's work. Nor can this “tax” be passed along. Ground rent already tends to absorb all values over the margin of production; the price cannot be increased beyond this.

The major question is whether such taxes are just, whether the major burden of taxation should fall entirely on the rentier. Two points are important here: One is that the value of ground rent is due to the community, not the owner (Chapter IX). It is but justice that the community be funded from its own natural revenues. The second point is that ground rent always represents wealth without work, the primary source of both economic inefficiency and economic injustice. Wherever one person gets wealth without work, another must provide work without wealth. Clearly this is unjust, but it is also inefficient. The maldistribution of incomes affects such technical measures as the velocity of money and the incentives to invest, and thereby destabilizes the economy. But further, it leaves the community without a source of revenue for public purposes; the community therefore has no choice but to go after the returns to labor and capital, which negatively impacts both. Taking the ground rents impacts neither—any further than rent does, anyway. Therefore, we can assert that ground rent is the natural income of a community. Rent derives its power strictly from a legal claim to property; that is to say, it is a creation of government power, a power that recognizes no limits to property. But property, like any other natural thing, has natural limits. And the natural limit to property is that one should profit from its use and not from mere ownership.

Taking ground rent would have profound macroeconomic consequences. For one thing, land speculation would be unprofitable. The only way to make money off of land would be to use it, to employ it in providing a useful good or service to one's neighbors. The whole problem with the speculative rent line and the resulting land bubbles and subsequent contractions would disappear. The economy would be far more stable. For another thing, wages and investment would get their full return; both are now burdened by both rents and taxes. Without taxes on either, the work and investment climate would be very much improved.

But is it Enough?

Although many economists generally concede the superiority of ground rents, they also doubt that it is adequate, especially when the total government expenditures come to $5 trillion. In this critique, they are absolutely correct. It is unlikely that ground rents could support a government establishment that takes one-third of GDP, an amount that is growing, especially during this current crisis. But that is not so much a critique of the land tax as one of its greatest advantages. Under a land tax, the public revenues would be fixed and known. Government at all levels would be confined within the limits of their funding. But how much would that funding be, and is it adequate to a reasonable level of government?

Empirical studies are hard to come by, since local taxing authorities are not overly concerned with separating the price of the land from the price of the improvements. The best studies suggest that ground rent revenue would come to about 20% of GDP, or about 60% of funding at all levels of government.¹ This would certainly leave a big hole in the current level of government, but this might not be as big a problem as it appears at first glance. It would force government to consider what should be funded from general revenues, and what should come from user fees. We have already discussed how the highway system is the obvious example of an expense that can be moved from general revenues to tolls. But there are many items in the budget that are in fact services to particular clientèles. For example, the Food and Drug Administration is a service to the pharmaceutical firms, among others, and its entire budget should come from user fees. By cutting the bloated defense budget, going to debt-free money, eliminating useless departments such as education, charging public works to the properties that benefit from them, and such like measures, the federal budget could easily be cut by 40% without compromising any current services.

I suspect that the same rules would apply to state and local governments. The lion's share of these budgets are consumed by an ever-more-expensive education system. However, while it is certainly a duty of government to ensure that every child has the same opportunities to get an education, there is no reason for the state to actually run any schools, a task which they do not do well. A system of vouchers to parents would likely bring both great diversity and great economies to the educational system, while allowing the public to recoup their investment by selling the schools and putting the land back on the land-tax rolls. Support for education should also include some modest support for home-schooling.

Political Effects

Political power tends to flow to the greatest funding source. When the Federal Government gained the power to tax incomes, power naturally flowed upward, so that today senators and presidents routinely handle matters that are best left to the town council or the statehouse. A land tax, however, is most efficiently collected at the local level. The apparatus for doing so is already in place, since localities collect property taxes, though under widely varying rules and rates. The rules and methods would have to be standardized across the nation. But a land tax would entirely change the nature of government in the United States. With taxes collected at the local level, and divided in a fixed proportion among local, state, and federal authorities, we can expect that power will begin to flow back to the states and cities. And with a fixed budget, it will be easier to confine the federal government within its constitutional limits.

I suspect that the two great debates in a land-tax system will be how to split the revenues and which programs should be funded or subsidized from general revenues and which should be funded by user fees. As matters currently stand, states and cities have an incentive to “kick problems upstairs” to the federal government, where the money is. Relying on the federal budget allows local entities to claim a bigger share of the income taxes their citizens pay, and to isolate the local tax base from these responsibilities. But a land tax reverses these incentives; since the tax base is the same for all levels of government, only the division of the revenues is at issue. Local entities therefore have an incentive to accept greater responsibility and hence claim a greater share of the revenue.

Further, they have an iron-clad argument when dealing with the federal government; they merely need to ask about any particular program, “Where in the Constitution is this authorized?” Of course, they have that argument today, but they are not inclined to use it because the funding argument will always trump the Constitutional one. Under a land tax, both arguments will work in favor of the local entities. The land tax will therefore advance the distribution of power which is an essential part of distributism. It will also encourage leaders at all levels of government to offload as many programs as possible from general revenues to fee-based services.

The Land Tax and Distributism

In advocating the land tax, I am not advocating something without historical precedent or current practice. In fact, the majority of tax systems before the modern age were based on land. The English feudal system was essentially a land-tax system. And in the modern world, highly successful states like Singapore, British Hong Kong, and Taiwan are “Georgist” land-tax states. However, these states also indicate the problem with the land tax. In theory, the value of land should be easy for the authorities to calculate, since there is always an active market in land. And this is true, so long as there are no tax implications in separating the price of land and the value of the improvements. Two problems arise: One is that since improvements are not taxed, there is an incentive to attribute as much value as possible to the improvements and as little as possible to the land. The second is that when land ownership or control is concentrated, the landowners exercise considerable influence in setting the rules. Thus, a “pure” land-tax system has been difficult to establish or maintain over time. It tends to degenerate into a mere property tax which is insufficient to fund the state and becomes supplemented by income and other taxes (although usually at a much lower rate than in non-Georgist states). Large landowners like to see other taxes, because these are easier to avoid or to pass on to the final consumer.

The land tax works best where ownership is well divided and property not concentrated into large estates or tracts; in other words, in a distributist state. With land well distributed, political power is also well distributed, and the incentives to “off-load” the taxes from land to labor are decreased. On the other hand, a distributist state needs the land tax to prevent property from re-aggregating; without a land tax, the distributist state tends to degenerate into a capitalist state, and no one is better off. Therefore, a Georgist polity needs distributism for its implementation; distributism needs Georgism to maintain itself.

Other Forms of Economic Rent

Land rent is not the only form of economic rent, even if it is the most obvious and important one. Other rents arise from monopoly or oligopoly control of economic resources, from patents, from control of scarce commodities, and from occupying positions of power with large institutions, mainly the corporation. This rent manifests itself in various ways, but the most obvious way is suspiciously high returns to capital. To deal with these other forms of rent, I suggest that the corporate income tax be maintained, but only assessed when the return to capital gets to be outsized. I suggest that we adopt some figure as a “normal” return to capital, say 8%, and start a modest tax when double that return is reached (16%), a high tax when it is tripled (24%), and a punitive tax when it is quadrupled (32%).

This would not impact the willingness to invest. While in general high returns attract investment, such returns, like every other economic quantity, have a “marginal utility.” That is, at some point, higher returns do not attract additional capital, and at a higher rate, the returns actually act as a perverse incentive to discourage further investment. This is especially true in monopolies or oligopolies. When returns are so high, why invest to increase the supply and thereby lower the returns?

In the same vein, high-level executives often collect an economic rent in the form of perversely high salaries and bonuses. These salaries seem to be paid whether or not the enterprise is successful, and indeed some of the highest bonuses are paid for failure, such as when a CEO with a “golden parachute” is fired. These bonuses come out of the rewards that rightfully belong to the workers or the investors. One or two generations ago, a CEO would typically make 20 to 40 times what the line worker made; now CEO salaries run 300 to 500 times that of the line worker. The simplest solution is to require corporations to pay a tax penalty for such salaries. When a salary reaches some multiple of the line worker's salary, say 40 times, the company would pay at least a modest tax, a tax that at some point, say 200 times the average, becomes punitive, in the 75-90% range. Note that this tax would be on the company, not the executive. It would entirely change the nature of the negotiation with that executive, would be certain, and would be easier to collect.

Externalities

Aside from wealth without work (economic rent), the other great economic evil is forcing some portion of the costs of a transaction on some third persons who are not a party to the transaction. Firms, and especially large corporations, do their best to externalize as many of their costs as possible. The obvious example of an externality is pollution, by which a company will treat the common air, streams, and ground as a free sewer. This sewer will have no cost to the company, but surrounding communities will pay the cost in declining health, increased medical expenses, and shortened lifespans.

Externalities take many forms. One common form is subsidized infrastructures. The “free” transportation systems, for example, are actually subsidies to businesses that depend on wide distribution and supply networks. These subsidies work to the disadvantage of local businesses and suppliers, because they unfairly lower the transportation costs of national and international competitors. “Big-box” stores like Wal-Mart could likely not survive if their transportation costs were not subsidized. This is especially true since the greatest amount of damage to roadbeds is done by large trucks. If there were weight-based tolls for using the roads, it is likely that the Wal-Mart model would simply be uncompetitive with local and regional producers and retailers.

Externalities distort the price system and give companies that can externalize their costs a competitive advantage over those who cannot. As it works out in the real world, it is large, international companies that can more easily take advantage of externalized costs, leaving small and local competitors at a disadvantage.

Aside from going to fee-based services, like tolls, government should use its taxing power to force companies to internalize all of their costs. The current “big idea” for controlling pollution is “cap-and-trade” systems. But such systems convert pollution into a property right, and then give the right to the wrong people, to the polluters rather than those harmed by the pollution. Clearly, if you want more of a thing, turn it into a “right,” especially a marketable right. You may take it for granted that the producers can produce more forms of pollution, and therefore more property rights, faster than you can print the new deeds. The best method is a scale of taxes on pollution that increase over time so as to “encourage” a firm to internalize all of its costs.

In general, government should be vigilant to detect and eliminate externalities. No price system can function properly if firms are freely allowed to externalize their costs either to government budgets or to the public “commons.”

But Should We Cut the Budget?

We have assumed throughout this discussion that cutting government expenditures and eliminating economic rent and externalities are good things. The reality, however, is a bit more complex. The current industrial system actually depends on large government expenditures, economic rent, and the ability to externalize costs. So while cutting the budget in the abstract would be a good thing, in reality it would destroy the current system of industrial production and global trade.

So before we take our scalpel in hand to perform surgery on the budget, we need to understand what we are doing and where we are going. We need to couple fiscal reform with a reform of the industrial system itself. Otherwise, our surgery may be successful but the patient will die. What a new industrial system could look like, one not dependent on government largesse, is the subject of the next chapter.

1Fred Foldvary, “Intellectual Tyranny of the Status Quo,” http://www.econjournalwatch.org/pdf/FoldvaryIntellectualTyrannyApril2005.pdf.

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Distributism and Henry George

Before reflecting on the relationship between Distributism and Georgism, a few observations about Henry George himself are in order. Economic historians tend to conveniently forget that, with the possible exception of Adam Smith, he was the most popular of all the modern economists. By any standards, his books were bestsellers and made economics accessible to the public. One measure of his popularity is the fact that at his death, over 100,000 people filed past his coffin, and thousands were left outside, unable to get in. It would be difficult to imagine such an outpouring of grief for the death of any other economist. Yet, this very popularity was the cause of resentment on the part of “professional” economists, who have, in the main, attempted to marginalize George, if not to ignore him entirely.

But this hostility is difficult to understand. There is nothing in George that is incompatible with Smith or Ricardo or Mill, or even with most of neo-classical economics (the one economist he really takes to task is Thomas Malthus.) Indeed, there is no particular part of Georgism that is original to Henry George; rather, his genius consists in taking what was already out there and drawing out the implications. Smith had already favored the land tax (see Taxes: Advice from Adam Smith), Ricardo had developed the Law of Rents, and even Walras and Marshall, founders of neo-classicism, recognized the special status that land had in economic theory. What George did was to base his political economy on the fact, a fact not really disputed in economic theory, that land derives its value not from the landlord but from the community. No reasonable economist disputes this. Yet, all the values created by the community are appropriated by the landlord. It is the classic example of economic rent, a value paid but not earned.

Socialism recognizes only public values of land, and capitalism recognizes only private values, and hence both provide an incomplete description of land, which has both public and private values. George's solution is elegance itself: he socialized ownership of land while privatizing its development. By “taxing” the full value of ground rent, he made speculation unprofitable. At the same time, the use of land, that is, improving it by farming, mining, or building, gets its full value without any taxation at all. In other words, the community gets what the community creates, and the individual gets what the individual creates.

Nor is Georgism without precedent in history, or even the present moment. Indeed, before the advent of the modern capitalist and socialist nation-state, land taxes tended to be the main support of the state. As Adam Smith noted, the “customary rents” of the English feudal land system functioned more as taxes than as rents, that is more as amounts paid for services to the property, and less as Ricardo's “economic rent.” Moreover, there are modern states which attempt to be Georgist. In Hong Kong (under the British) all the land was owned by the government and leased out to developers. In Singapore, the government owns 76% of all the land using the same system. Taiwan, Korea, and Japan, are all, in one degree or another “Georgist” and they are all successful economies. (The popularity of Georgism in the orient traces to the fact that Sun Yat-sen, the father of Chinese Nationalism, was a disciple of Henry George.) So we are not dealing with a mere abstract theory, but one with precedent and example.

However, it should be noted that none of these states are examples of pure Georgism, and therein lies the key to the relationship between Georgism and Distributism. In theory, in a free-market economy, it should be easy to determine the ground rent of any piece of property. But in practice, in places where there are vast concentrations of ownership, this task becomes impossible. Large landowners use any number of subterfuges to hide the true value of the land, since this is the basis of their taxes. Hence, in the modern world, actual Georgist states tend to consist of half-measures and compromises.

Distributists and Georgists have often exhibited a certain hostility towards each other, as if they were pushing rival theories. But they are not. In fact, the theories are complimentary. Rather, it is a question of priorities, which comes first. In my opinion, (being a distributist), a system of well-divided property is prior, and without this Georgism cannot really and truly be implemented. But in a system of well-divided property, a land tax is needed to ensure that the worker gets the full value of his work and to maintain the division of property. This is to say that Georgism requires Distributism for it implementation, while Distributism requires the land-tax, or else property will merely re-accumulate. As a further point, Georgism provides Distributism with access to a sophisticated political economy and tools of economic analysis, for which we do not have to apologize to the “orthodox” economists; in fact, the analysis and the tools are much better.

It would be better for both views to have a better understanding of each other, as they are complimentary theories, and each adds something that the other tends to lack.

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Henry George and the Earth Imperative

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 Davies

Human 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.

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