The Prospector and Economic Rent

Harry Gunnison Brown

[Reprinted from the American Journal of Economics and Sociology,
Vol. 12, No. 3 (April, 1953), pp. 301-304]

THE CASE FOR APPROPRIATION by government of all or most of the annual rental value of land and natural resources is so strong that refusal to accept it seems hardly to be accounted for otherwise than from failure to under- stand it. Many of the misconceptions of it which tend to prevent acceptance I have sought to analyze in various books and articles previously published. But perhaps not all of the misconceptions have been analyzed with sufficient clarity and fullness.

Occasionally someone objects to the appropriation-or very heavy taxation -- of the royalties from such subsoil deposits as gold, silver, copper, coal and oil, on the basis that such a policy would deprive the prospector of an adequate return. This objection may not be sound, but it ought certainly to be given careful consideration.

I

BUT WHATEVER REASONABLE CLAIM the prospector may seem to have, we must be careful not to use it as a basis for rewarding persons who do no prospecting. Consider, for example, the case of oil deposits. In general, the prospecting is done by an oil company through its employees. Skilled geologists are hired, drillers are employed, capital is used. Yet some wells prove to be dry. The company must, on the average, if it is to continue in business, make enough extra on production from the good wells, to compensate for the labor and the use of capital applied to searching for and drilling the wells that never yield. But the owner of a piece of land, from which the oil company gets oil, commonly did not himself discover the oil. He certainly did not make it or deposit it beneath the surface. He derives an income only because he is in a strategic position, under our present land tenure and tax system, to charge those who do these things for his permission to remove from the ground what he did not discover or make or deposit. As Henry George said:[1]

It is a well-provisioned ship, this on which we sail through space. If the bread and beef above decks seem to grow scarce, we but open a hatch and there is a new supply, of which before we never dreamed. And very great command over the services of others comes to those who as the hatches are opened are permitted to say, "This is mine!"

If such an owner is entitled to anything, it can be only to compensate for possible injury to capital he has invested on (or, as with fertilization and drainage ditches, in) the land.

If it should be said that without hope of appreciable reward he will refuse his permission to drill, there appears to be a simple and logical answer. It is to assess his land higher and, therefore, tax it more, because of the likelihood that it does contain oil. This is what the free market does to the value of such land, in our present system. Such a tax would, in general, bring consent to drilling and, of course, if no oil could be found, the assessment (and, therefore, the tax) should be at once reduced to its former level. And in case the owner is ready from the start to permit drilling without delay and does permit it, there is no argument for raising the assessment. or tax prior to such drilling and the discovery that oil is present.

If, in spite of the above considerations, any reader nevertheless continues to insist that the mere owner, as owner, must receive a royalty as an inducement to permit drilling, it can still be contended that beyond a relatively moderate royalty, the tax could be so steeply graduated as to take most of the rest for the public, without significant adverse effect. But a provision for assessing and taxing as, probably, oil bearing, those pieces of land whose owners refuse to permit drilling, is, I believe, the logical and best solution.

II

As REGARDS the so-called prospector, it must be said that when land has been privately appropriated, with the owner's title including all sub-soil deposits, it is the owner-unless he is unaware of what the prospector has found-who is in a position to demand a royalty. The prospector, whom some of the opponents of a land-value tax program appear to be so eager to help, can hope for large gains only if he can buy (or lease) the land from a landowner who does not know-and perhaps does not even suspect-that it contains what the prospector has found to be in it. Nevertheless, it must be admitted that there have been prospectors who have discovered mineral deposits on the public domain, where they have been allowed to file claims and get legal sanction for exclusive exploitation. How about their rights?

We have here, I think, a claim that may fairly be compared with the reasonable claim of an inventor, and perhaps the discoverer should be dealt with approximately as is the inventor. We do not give to the inventor a perpetual monopoly but a temporary one; it may run only for seventeen years. For this policy there are two good arguments. One of these is that a temporary monopoly is likely to be a sufficient inducement to the invention and its use.

The other argument is, I think, seldom stated, though it should be. It is based on the principle that reward should depend on contribution, that a proper economic system rewards those best who best serve the consuming public, and rewards them in rough proportion to the amount of their service in any given period and to the length of time the service is given. On this principle the inventor is not entitled to a perpetual monopoly. His invention is, in large degree, the indirect product of the work of many minds. By now we would have the airplane, even if the Wright brothers had never been born. But we would not have had it so soon. Thus, the particular inventor is properly credited with our having the use of the idea sooner than we would have had it without him. It seems reasonable, therefore, that he should have a monopoly during that period; and, of course, we have to make an estimate of how long it is likely to be, since nobody can exactly tell. But the inventor is definitely not entitled to a permanent monopoly, to payments for his services during many years after we would have got the invention even without any of his services.

I see no good argument for treating the discoverer of a natural resource or piece of land of any kind, any more generously in this respect than we treat the inventor. For it is not to be supposed that if the particular discoverer had not found the resource or piece of land it would never have been found. A monopoly of his discovery for a limited period should be enough. And I think there may be good reason for some special limitation or restriction in the case of discoverers beyond what is called for in the case of inventors. For, in the case of a natural resource, even though monopoly is allowed only for a limited number of years, the holder of the temporary monopoly may try so hard to secure the maximum possible return during those years, as to destroy or ruin the resource prematurely and so reduce greatly the total wealth which can be produced from it. It would seem appropriate, therefore, either to limit the total amount which the discoverer is permitted from the resource, or to make rigid requirements regarding the method of extraction.

When the inventor's monopoly has reached full term, the logical policy is to open the field to competition. When the prospector's privilege has reached full term, the logical and reasonable policy is to appropriate or tax drastically thereafter the royalty or economic rent. And of course, when the owner is also the operator, the tax should logically be based on what the royalty would be if the owner and operator were different persons.