On Entrepreneurship, Growth and Rent-Seeking: Henry George Updated

William J. Baumol

[An excerpt from American Economist, Vol. 48, March, 2004. William J. Baumol teaches economics at New York University]

Progress and Poverty, that memorable work of Henry George, leaves us with three main messages: first, that the rent of land is an egregious contributor to inequality; second, that rent, unlike other income sources, can be taxed without detrimental incentive effects; and third, that this is so because pure rent is a payment for which the recipient provides no production to society in return. These ideas continue to stir his followers to this day, which at once raises a question. Since, as a share of the Nation's income, the rent of land has fallen to a mere two percent, how can anything so minuscule merit our attention, or the attention of the designers of economic policy?

I will show here that George's analysis continues to be pertinent and important, but is so primarily when it is generalized and its applicability thereby extended well beyond its original bounds. Economists have focused on the last of George's three observations listed above -- rent as the payment for zero contribution by the recipient -- and now use the term to refer to any such uncompensated payment. When, for example, a business conspiracy accumulates large monopoly earnings in an industry whose output is, if anything, reduced in the process, then economists deem that collaboration to have resulted in the acquisition of substantial "rent." It is rent in this generalized sense that is at the forefront of modern economic developments, as will be shown here.

Of course, the newspapers tell us every day, in sensational terms, that rent-seeking and rent-getting...