.


SCI LIBRARY

Foundations, Professors
and "Economic Education"

Harry Gunnison Brown



[Reprinted from the American Journal of Economics and Sociology,
Vol. 17, No. 2 (January, 1958), pp. 145-155]


I


RECENTLY I RECEIVED from the American Economic Foundation, 295 Madison Avenue, New York 17, an illustrated folder by Fred G. Clark and Richard Stanton Rimanoczy entitled "What Are Tools?" The authors state that "any piece of mechanical equipment is a tool of production." Then they go on to include among such tools not only the roof over the equipment, the walls around it and the floor under it, but also "the land under the floor." And then they add: "A coal mine, an oil well, a forest, an ore deposit, or any other natural resource becomes a tool of production to the men who extract from nature the raw materials which go into manufacturing."

By thus putting all land and, in general, all natural resources into the category of "tools," the authors turn the reader away from considering a very fundamental question. This fundamental question is whether an income derived from man-made equipment that cannot come into existence at all unless there is both labor and saving, is on no stronger an ethical and social utility basis than is an income one can receive just because others must pay him for his permission to work on and to live on the earth, in those locations made productive and desirable because of geological forces and community development, and for his permission to withdraw fuels and minerals from the earth's subsoil deposits.

Lest this statement seem to some readers not entirely clear, we may illustrate by reference to the case of New York City.[1]

New York is situated on a great natural harbor. If there were none to use the harbor except a few pioneer farmers on Manhattan Island trading their surplus produce for the textiles and other goods of Europe, landing space for a very few boats or perhaps for a single one would be all that would be needed. But as the rich interior of the North American continent was settled, with its mines of iron ore, copper and coal, its prairie and river-bottom wheat and corn land, and its other resources, more and more goods were produced to be poured through the port of New York into foreign countries. And, of course, more and more foreign goods were wanted in exchange, which could most advantageously pass through the same port. Today there is needed in New York City a large population to meet the requirements of this great tributary country.

If all the present population of New York were whisked away overnight, the land of New York would still have great value because of the need for millions of men and women on it to serve the commerce of the back country. A new population would move in and take up the important work for the rest of us which can be done nowhere else so well. Those who own that part of the earth's surface would be in a position to make this new population pay handsomely for the privilege of working for us there and of living where we need to have them live in order that this work may be effectively done. In short, the newcomers would have to pay for permission to work and to live on that part of the earth.

The demand of the tributary country for this service makes a demand for the use of the land by the people who must live and work there in order to render the service. Incidentally, too, it makes necessary a tremendous demand-and correspondingly high rents and values -- for the use of especially well-situated lots for the location of department stores, lunch rooms, banks, lawyers' offices, etc. Such sites and buildings are needed to shelter those who supply near at hand the requirements of those who must live there to serve the non-sea-coast sections.

Surely, the rent of land is in a very peculiar sense socially produced rather than individually earned, and ought to be sharply distinguished in thought from interest on capital produced by men's labor and saving. And if there is any kind of return which is peculiarly fitted to be a source of public revenue, it is the rent of land.

In this connection we must remember that fertility elements put into the soil-including fertility elements maintained through constant renewal -- by a farmer, are, in the economic sense, capital rather than land. In the city we construct capital mostly on the land. In the country we often put it, largely, into the land. The investment in such fertilizing of the land is capital as truly as the buildings, drainage systems, terracing, planted fruit trees, machinery and livestock.

No one can deny, of course, that the building of roads and railroads and the way in which population is distributed near or about a given piece of land affect the usefulness of that land for production and so affect its value. Such value is community-produced and is not produced by the owner of the land. An individual or a comparatively small group of individuals may produce or reproduce a house, a machine, a factory or a locomotive. But no group that does not approximate a hundred million or more in numbers can produce, or reproduce, the situation advantages of Manhattan Island. Such situation advantages are, in the main, by-products of activities not directed to the end of producing these advantages. When all superficial resemblances are allowed for and all qualifications made, it remains true that there is, in general, a most significant distinction between land and capital, a distinction of the greatest importance for public policy.

If facts like these were noted in the Clark-Rimanoczy pamphlet or folder, there might be readers who would wonder whether an income received from being able thus to charge others for permission to work on and live on the earth, should not be taxed more heavily than income derived from capital brought into existence by work and saving. Instead the authors hurry their readers on to the statement that "profit" is collected from customers "on behalf of the people who supply the tools of the business," that "profit is the key to tools and tools are the key to prosperity."

Without a hint that the earth with its subsoil deposits and other resources was not made by men and that its existence is not the result of "profit," they hurry along to the statement: "No profits, no tools-no tools, no prosperity."

Then, finally, comes the authors' peroration:

When and if the American people ever become convinced that profit is evil and that suppliers of the tools do not deserve a reward, America will have reached the beginning of the end.

Thus is the incautious and gullible reader tricked into applying a perfectly logical defense of income from the tools one's work and saving have brought into existence, to the utterly different case of income derived from giving others permission to work on and to live on the earth, in those locations made productive and reasonably livable by geological forces and community development.


II


BUT LET US TURN to another "Foundation," this time the Foundation for Economic Education, Inc. (FEE), Irvington-on-Hudson, N. Y. Let's inquire whether the "economic education" it purveys helps those who read -- or "study" -- its literature, to get some comprehension of the distinction between income from man-made capital and income that stems from title deeds to valuable parts of the earth.

In this organization's monthly publication[2] appears a short article, "Help Wanted," by F. A. Harper, staff member of the Foundation and formerly a teacher of economics at Cornell University. The article pictures the case of a man who reads an advertisement in his evening paper, offering $22,705 a week for an "experienced tool operator" who must, however, provide his own machine. In the morning he telephones, makes an appointment and applies for the job, assuming that whatever the machine may be, he can get one easily enough from Sears, Roebuck and Company or some other establishment. He is dumbfounded to learn that the "machine" required weighs over ten thousand tons and costs several million dollars.

This introduction gives Dr. Harper an enticing lead for his argument that "tools" come "from prior sacrifice in the form of savings," that the mere wage earner gains greatly from having "tools" to aid him and that it is "foolish" for him to refuse to operate tools unless he receives, also, some of the income "required to induce savers to save."

It is true, of course, that capital cannot be produced unless there is saving. How, for example, can men who do not have independent means spend their entire time building a factory or a ship or tunneling under city streets and (perhaps) under a river for a subway, unless somewhere there are others through whose saving they can receive the food, clothing, fuel, etc., without which they and their families could not live? If they were not so provided for, would it not be necessary for them to spend much or most of their own time catching fish, picking fruit, digging potatoes, hunting game, baking bread, making themselves clothing, etc.?

This relationship between saving and investment and the production of capital is one I constantly stress. To that extent I go along with Dr. Harper. But it is precisely because of this relationship that I favor a tax policy which bears more lightly on the capital that really does depend on saving for its coming into existence, than on community-produced land value. There is, however, nothing in Dr. Harper's article which even remotely suggests that he would favor such a tax policy -- i.e., that he would favor taxing community-produced land value at any higher rate than the capital men make. Let me recall the argument for doing so.

The land-value tax has two advantages -- even for the propertyless worker -- over the income tax. The first is that it makes unprofitable the speculative holding of good land out of use, and thus enables the worker to be better supplied with land and thereby to produce more and, therefore, to be worth more.

The second advantage is that the land-value tax leaves to those who save, the full natural reward of this saving, in the added productiveness of industry made possible by the additional capital. They truly own their capital instead of having it, as now, largely owned, in practical effect, by the taxing government which takes a large part of the income it yields. Therefore, capital would-and some highly significant but as yet little publicized Australian data show that it does-flow into and increase in such a community or state or nation, and its workers would be better provided with capital as well as better provided with land. Thus, again, the workers would be able to produce more and could command higher wages.

The clear logic of the matter indicates not only that to relieve capital from taxation, so far as we can, by drawing heavily on the annual rental value of land, tends definitely to the strengthening of the free private enterprise system. The same logic indicates that to follow the opposite policy, i.e., to abolish the tax on land and take by taxation practically all the yield of capital, must lead to the management of all or practically all industry by the State, with saving thereafter compulsory.

Do we honestly believe the private enterprise system to be preferable to socialism, and do we want to keep it for ourselves and successfully "sell" it to countries now susceptible to socialist propaganda? If we do, what can be more important in our teaching of economics than that our students should come to understand why the second of these two divergent tax systems is so threateningly different in its to-be-expected consequences from the first?[3]

To the best of my knowledge and belief, the Foundation for Economic Education has never published anything, anywhere, to indicate the slightest sympathy for the tiniest movement in that direction, e.g., for the graded tax system' of Pittsburgh (and Scranton), Pennsylvania. Nor has the Foundation given its clients any "economic education" on the sharply contrasting effects of local land-value taxation versus local taxation of all property, in the many Australian cities and districts that have the one system and the other. The staff of the Foundation have certainly had adequate opportunity to familiarize themselves with the facts. But their publications seem never to have revealed to their readers any of the results of what is perhaps as closely analogous to a laboratory experiment as we can usually hope to have in economics or, probably, ever have had in the economics of divergent tax policies.

The Foundation for Economic Education has issued recently, however, as part of its "Special Essay Series," an article by Murray N. Rothbard, who is described on the title page as an "economic consultant, writer, and part-time member of the staff" of the Foundation. This essay, which is in typewritten form, is said to be "offered in response to inquiry" from those asking the Foundation "to consider or appraise or explain various aspects of the single tax theory." The article is entitled: "The Single Tax: Economic and Moral Implications." It has not yet been printed in whole or in part in The Freeman and, presumably, goes only to inquirers.

Mr. Rothbard's discussion, also, makes no reference to the statistical data from Australia, or to any experience with land-value taxation in Denmark, New Zealand or South Africa. The statistical studies in Australia, particularly, are sufficiently complete and point so consistently in one direction, that it might have been difficult for the author, had he presented the relevant data, to convince his readers of the malign effects of substituting land-value taxation for taxation of man-made capital. Apparently the author was concerned only with the "single tax" theory, as such. But let's consider some of his statements about it.

"A 100 per cent tax on rent," he says, "would cause the capital value of all land to fall promptly to zero. Since owners could not obtain any net rent, the sites would become valueless on the market. From that point on, sites, in short, would be free. Further, since all rent would be siphoned off to the government, there would be no incentive for owners to charge any rent at all. Rent would be zero as well, and rentals would thus be free.

"The first consequence of the single tax, then, is that no revenue would accrue from it. Far from supplying all the revenue of government, the single tax would yield no revenue at all! For if rents are zero, a 100 per cent tax on rents will also yield nothing."[4]

Here we are proffered the statement, under the aegis of a foundation for "Economic Education," that if "the single tax" took all of the rent for government, rent "would be zero" and so government would receive "no revenue at all."

Is it here presumed that if a landowner refuses to collect rent from a building owner whose building occupies his land, and thus the landowner is relieved (supposedly!) of paying the tax, government will not collect the tax -- or rent -- from the tenant but will permit him to use the land for nothing? Is it presumed that all landowners own nothing -- whether buildings, planted fruit trees or other improvements -- in or on their land? And is it assumed that no owners of buildings and other improvements have title to any of the land on which their improvements rest? Or is it presumed that landowners who do own improvements on their land, which improvements, under "the single tax," would not be taxed at all, would refuse to pay the tax levied on the land and thus blithely lose title to it and no longer be permitted to keep their buildings -- skyscrapers, for example -- and other improvements, on it? Just what is the presumption on the basis of which Mr. Rothbard makes his pronouncements?

But Mr. Rothbard contends further that "a 100 per cent tax means that land sites pass from individual ownership into a state of no-ownership as their price is forced to zero. Since no income can be earned from the sites, people will treat the sites as if they were free -- as if they were superabundant. But we know they are not superabundant; they are highly scarce. The result is to introduce complete chaos in land sites.

"Specifically, the very scarce locations-those in high demand -- will no longer command a higher price than the poorer sites. Therefore, the market will no longer be able to insure that these locations will go to the most efficient bidders. Instead, everyone will rush to grab the best locations. A wild stampede will ensue for the choice downtown urban locations, which will now be no more expensive than lots in the most dilapidated suburbs."[5]

Here we find Mr. Rothbard contending that "a 100 per cent tax on rent" would make all sites "valueless on the market," that sites "would be free," that rent, too, "would be zero," and that there would be "a state of no- ownership" of sites. Yet at the same time he contends that "everyone will rush to grab the best locations" which, presumably, if there is really "no-ownership," others can in turn "grab" from him!

That a 100 per cent tax on the annual rental value of land would ordinarily leave no inducement to the holding of title to land by a person who has and intends to have no improvements or other capital in or on it and who has no intention of using it productively, is of course true. So what? It is indeed difficult to see what advantage such ownership could have for the rest of society. Ownership of land under our existing tax system, by those who merely hold it vacant in the hope of gaining by their "foresight," is generally disadvantageous to others. Foresight, purely as such, deserves nothing whatever. The man who, foreseeing a rise in certain land values from a probable increase in or shift of population, puts himself into a strategic position to profit by it, is not thereby rendering any service to those from whom he derives return. Foresight used to give a service may, indeed, earn remuneration. Foresight used to get something for nothing is not deserving of any reward.[6]

In this connection we may note the fact that the "foresight" of land speculators not merely is a frequent means of getting something for nothing but that it may also decrease productive efficiency through holding good land out of use. Then the remaining land must be used more intensively and resort must be had to poorer land. Thus is the productivity (marginal product) of labor reduced, land rendered artificially scarce and dear and the rent of land raised. Thus are fostered congested slums. Thus is made inevitable the waste of extending electric light and telephone wires, gas and water mains, street car and bus service past hundreds of vacant lots, that those may be served whom land speculation has driven far from the center of their city. Wherever men would go to engage in commerce or industry, to establish homes or even to enjoy, near woods and water, a vacation season, there they find land speculators ahead of them.


III


BUT PERHAPS one's criticism of writers on economics outside of strictly academic circles should be tempered by consideration of the extent to which academic economists have blurred the distinction or, even, ignored or denied the distinction between capital and land and the distinction between income from the one and the other. Some textbooks do not even have the word "land" or the word "rent" in the index, and not a few omit all reference to land-value taxation.

Among the economists of the latter part of the nineteenth century and the earlier part of the twentieth, whose influence was the greatest in leading other economists to blur the distinction between capital and land, we ought certainly to include John Bates Clark. In his book on The Distribution of Wealth,"[7] "land" is included in "capital" and the income from either or from both together is "interest." The only other income is, in Clark's analysis, "wages," except that, in a "dynamic" state there may be "profits." The following passage from this book, in which Professor Clark discussed the contention that capital differs from land because the former can be increased by men, is especially relevant.

Let us, then, compare all land with all other capital goods; let us take all society into the field of view. In every group and sub-group there is land, and in every one there is capital in the form of artificial instruments. Neither the one agent nor the other can be increased in the aggregate at will. At any one time the amount of artificial capital in existence is as fixed as is the amount of land. Within any short time it is impossible to increase the general fund of artificial capital enough to make a perceptible difference in the conditions of social industry. At any one time we have to deal with a definite quantity of land, in combination with a definite amount of capital in artificial forms. Moreover, the distinction between land and other capital-goods, based on the notion that land cannot be increased and that other things can be, has obviously no validity in a static study; for the static assumption itself precludes all increase of capital.[8]

Here Clark is saying that one reason for classing capital and land together is that, even though we regard land as fixed in amount, yet "artificial capital," too, is "fixed" in amount at "any one time" and cannot be increased enough "to make a perceptible difference," etc., within "any short time" and that, anyway, if we assume a "static state," then artificial capital, like land, cannot be increased at all!

Here is the essence, in Clark's own words, of his viewpoint on the distinction between interest and rent:

What, then, is interest? Is it not a fraction of itself that a permanent fund of wealth annually earns? . . . Does a building, or an engine, or a ship literally earn in a year a fraction of itself ? .. . The capital that is embodied in the buildings, the engines and the ships of the world does enlarge itself in this way. It earns interest; but what the concrete instruments earn is not interest, but rent.

A popular and accurate use of the term rent makes it describe the amount that any concrete instrument earns.... In a use of terms which harmonizes with practical thought and which, as we undertake to prove, is entirely scientific, rent and interest describe the same income in two different ways. Rent is the aggregate of the lump sums earned by capital goods; while interest is the fraction of itself that is earned by the permanent fund of capital ....

Science has proposed a different distinction between rent and interest. It has tried to confine the former to the product of land-and that, too, without taking account of changes in the value of land-defining it as what a tenant pays to his landlord for the use of the "original and indestructible" properties of the soil. This usage probably would never have grown up if the science of political economy had originated in America, where land has always been a commercial article, and where the man who buys a piece of it reckons whether he can get as good interest on his investment in that form as he can in any other.[9]

It is true that the return on land and the return from capital can be stated, either of them, as a percentage or as a lump sum.[10] Superficially, then, the return from land and that from capital may seem much alike. But this is only superficially. For the return from capital is naturally reckoned as a percentage and ought to be so reckoned-a per cent on the cost of the capital. What we are interested in knowing in the case of the return from capital, is how much more we gain by following a roundabout process than a direct process of production, and how much the extra product amounts to in comparison with what the product would be had immediately consumable goods (present goods) been produced instead. In other words, we are concerned with knowing the per cent of the excess gain from roundabout production to what would be or would have been secured by direct production. In short, we are concerned with the fact that capital normally yields, during its lifetime, more than its cost of production (measured in the present-or consumable-goods and services that might be or might have been produced instead); and we are naturally and properly interested in knowing how large this gain is in relation to the cost of producing the capital which makes it possible.

But the value of land is not measured by any "cost" of "producing" the land. Hence it is essentially meaningless to inquire as to the per cent yield on cost.

It may be said, however, that Clark and the other economists who follow him do not refer to a per cent of cost of production but to a per cent of value. And, it may be asked, why is not the per cent of the value of land a matter of significance just as is the per cent gain on the value-and so the cost -- of capital.

The answer is that the value of land depends on the expected future yield and on the per cent at which this expected yield is capitalized into a present value. The -market rate of interest used in such a process of capitalizing, itself depends largely on and tends to be equal to the rate of net marginal yield of capital on the cost of production of capital. Knowing the cost of capital in terms of present consumable goods and services, and knowing the rate of net marginal yield on this cost, we know the per cent interest rate which should be used in capitalizing the anticipated future rent of land into a present sale value. Thus, the sale value of land has no independent significance but is merely a derivation from the anticipated rent of land and from an interest rate which is a function of the productivity of capital. To talk about the rent of land as a per cent on its value is, therefore, to emphasize as if it were important, a per cent of a value which itself can be arrived at only by knowing that per cent in advance.

The rent of land, then, is logically and properly expressed as a lump sum-in dollars; while the interest on capital is logically and properly expressed as a per cent on cost.

One wonders how many of the numerous neo-classical and other contemporary economists who have followed Clark in his analysis have plumed themselves, like Clark, on having seen more deeply into the problem of land rent than did Ricardo and other economists of the earlier (i.e., not "neo") classical school; whereas actually they have seen less deeply into it.

One wonders, too, whether there have not been a number of neo- classicals of conservative bent who, confronted with the contention of Henry George that the rent of land is the most ideal source of public revenue, and reacting antagonistically to this contention but in doubt as to just how to meet it, have been relieved at the thought that land rent is really a per cent just like interest on capital; and have felt that now, indeed, they could confound the land-value-taxers and discredit their philosophy!

But possibly the day has finally passed of easy victories over the land-value-tax philosophy, for conservative economists who have too easily accepted, and used in their propaganda, various superficialities and half truths and outright fallacies.


FOOTNOTES AND REFERENCES


  1. The following five paragraphs are taken, with only slight changes, from my Basic Principles of Economics, 3rd edition, Columbia, Mo. (Lucas Brothers), 1955, vol. I, pp. 490-1.
  2. The Freeman, Irvington-on-Hudson, N. Y., March, 1957.
  3. "Academic Freedom and the Defense of Capitalism," Am. J. Econ. Sociol., 15 (January, 1956), pp. 175 and 179-80. Cf. my Basic Principles of Economics, op. cit., vol. II, p. 136.
  4. Loc. cit., p. 4.
  5. Ibid., p. 5.
  6. Basic Principles of Economics, op. cit., vol. I, pp. 439-40.
  7. New York, Macmillan, 1899.
  8. Ibid., pp. 339-40.
  9. Ibid., pp. 123-4 and 137.
  10. See, for further analysis here, my article, "An Off-Line Switch in the Theory of Value and Distribution," Am. J. Econ. Sociol. (July, 1944). This article was reprinted in 1950 as Chapter 4 of Some Disturbing Inhibitions and Fallacies in Current Academic Economics, New York, Schalkenbach. See, also, my Basic Principles of Economics, op. cit., vol. I, chaps. XII and XIII.