Distribution of Wealth
in a Georgist Economy
Graham Hart
[An address presented to the Centennial Celebration
commemorating the Hundredth Anniversity of the publication of Progress
& Poverty, San Francisco. August 1979]
An exercise to determine the
value of economic rent under present conditions and the effect
of the collection of economic rent as the sole source of public
revenue, together with the abolition of all forms of
disincentive taxation and legal monopolies.
Consideration is also given to the effect of the reduction of
disincentive taxation and the curtailing of bureaucratic
socialism without the collection of economic rent for revenue,
as advocated by the Institute of Economic Affairs.
Note - In order to follow the reasoning presented, it is
necessary for the reader to have a general knowledge of
classical political economy according to science developed and
terminology used by the American economist Henry George.
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When I was a young man in the nineteen forties, an old friend, whose
fiery oratory, peculiar to the Welsh race I well remember, encouraged
me to join him in Sunday afternoon open air meetings on the Perth
Esplanade. These meetings continued for many years until the beginning
of the television era. Sometimes we would hold an audience of up to a
thousand people for a couple of hours.
Mr. William Bell became my lifetime friend until finally I conducted
his funeral service. It may be of passing interest to note that my
friend regarded himself as an athiest, although a more earnest man,
dedicated to the ideals of Christianity, practiced through the
brotherhood of man, never lived. His last request was that the funeral
service be conducted by a Georgist. Mr. Bell taught me many aspects of
the Georgist philosophy which, although I had read all of George's
works including Progress & Poverty several times,
otherwise might not have registered.
One remark I well remember which bothered me for many years -- "All
taxation ultimately is at the expense of rent." In those days,
taxation by modern standards was very low, so also was economic rent,
and those of us who have failed to appreciate the full significance of
this observation, for so long may well be excused.
During a lifetime of writing and speaking for our cause, constantly
in the company of Georgists, I have never heard this most important
and now vital subject, featured as a major issue. The initiative
should have been taken to focus the spotlight on this central truth,
the importance of which cannot be over emphasised, that unless the
bargaining power of labour and capital is improved and ultimately
brought into equity with that of the land holder, all taxation
ultimately will be at the expense of rent.
This recent declaration has met with a mixed reception in my country.
Upon closer examination, however, and after rereading the relevant
Chapter VI of Progress & Poverty, most Georgists have now
agreed, but some are still unable to see what should be so obvious,
once stated. There have been vague notions that we would all be so
much better off if only taxes and extravagant spending on the welfare
state could be reduced. Our opponents and even many who support some
degree of taxing land values, shake their heads sadly and claim that
there would not be enough revenue arising from land rent, to support
even the most elementary and limited form of government.
Our response, after looking at the visible value of rent from such
statistics as are available to us, has been, reluctantly to agree, but
to look the other way and talk vaguely of the savings which could be
effected in the cost of government under a Georgist economy and of the
enormous increase in productivity which would be possible under a
Georgist form of government and which in some way would increase
wages. Be this as it may, it is still begging the question and is too
vague and hypothetical to arouse much support for our cause.
This line of argument also has landed us with some strange
bedfellows; those who agree with the confining of governments to their
proper functions and see the absurdity of protective tariffs, but are
silent on the vital subject of land reform. Such people, and many of
us with them, believe that free trade with efficient government and
lower taxes will achieve progressive results, without courting the
unpopularity of interfering with the privileges of the rentier, class
in the initial stages of our programme of reform. Nothing could be
further from the truth; the partial application of laissez faire, as
economic historians should know, would be worse than useless and would
drive any country, sufficiently deluded to try the experiment, to some
form of totalitarian government, quite possibly by means of bloody
revolution.
In order to confirm beyond the possibility of doubt that taxation is
at the expense of rent and reduction of taxation to the advantage of
rent, it is necessary, if somewhat tedious, to marshall the evidence
which, we as Georgists, accept and follow wheresoever it may lead,
without reservations, inhibitions, or the influence of preconceived
ideas, even those of long standing.
From the time of Malthus it has been accepted that wages tend to the
minimum for which men will consent to work. George agreed that when
all natural opportunities are monopolised, wages may be forced to the
minimum at which labour will consent to reproduce; and that all
increases in productivity, under such conditions, will be to the
advantage of rent, because the bargaining power of labour and capital
is inferior to that of land holders, whose land may remain idle
without cost, whereas labour and capital must live and be maintained.
The reasons that wages and interest, the returns to labour and
capital, tend to a minimum unless an element of monopoly is
introduced, are as follows: -- Those who have only their labour to
sell, together with their dependents, must be fed, clothed, sheltered,
educated and taken care of in sickness and in old age. They cannot
afford to remain idle for any length of time. Similarly, those who
invest their wages indirectly in enterprises requiring the use of
capital, in order to obtain a greater return at a later period, must
keep such capital employed, otherwise, whether the investment be in
machinery or goods in the process of exchange, or in factories, or any
form whatever, it will deteriorate. Machinery requires maintenance,
goods will corrode or rot according to their nature, industrial
processes will become obsolete and redundant and a replacement factor
must be provided, before a net return on capital investment can
result.
Capital, which in reality is only wealth arising from labour applied
to land, the enjoyment of which is deferred, for the ultimate greater
satisfaction of desire, is subject to all the disadvantages though in
different form to labour. It cannot remain idle for long periods.
Land, on the other hand, is not similarly affected, it has no cost of
production. Much of its value arises from situation only, i.e., from
proximity to the more densely populated areas. Agricultural land even
improves in quality by remaining unused for a time. Provided
population remains and government services are maintained, whether
particular sites or areas are used or not, potential value and,
therefore, value in exchange will remain.
Some land can lose its value by movement of population to other areas
and for other reasons which seldom happen.
Valuable land also is relatively fixed in extent. Demand increases
with pressure of population and advancing technology. Despite any
possible disadvantages that may be involved with land holding, the
bargaining power of the land holder, under present conditions is
infinitely greater than that of labour or capital.
Unless public charges are made conditional upon the holding of land,
returns to labour and capital will depend on the competition of
labourers and capitalists with each other for the use of land. This
condition would be equalised if public charges were levied on economic
rent. Land then, could not remain unused. Land holders also, would
then be obliged to compete with each other, to attract labour and
capital to engage in production and accept employment on the land
holders' particular sites. By one means or another, land would have to
be put to use in order to pay the rent.
The law of supply and demand, then would equalise bargaining power
between the three factors concerned, with special advantage to none.
Not only, are all forms of taxation which bear on production and
consumption at the expense of rent, but so also are the rewards from
legalised monopoly and the cost of inflation, which is only a
disguised form of taxation.
If wages and interest are forced, because of inferior bargaining
power, to the minimum return that workers and the investors of capital
are prepared to accept, it follows that the additional costs arising
from monopoly and inflation will not be absorbed by labour and capital
but will be passed on and eventually be at the expense of rent.
The waste of human effort, also inseparable from disincentive
taxation and bureaucratic administration, otherwise,would add to
productivity, increase the demand for land and, therefore, be to the
advantage of rent.
Although not generally apparent, there is a substantial ingredient Of
rent in many forms of taxation; this is indeed a diversion of economic
rent from land holders to government, which lowers land prices
corresponding! kerbs the bargaining power of land holders and is to
the advantage of labour and capital. With the remission of such taxes,
this marginal benefit would be lost.
The labour movement has blindly accepted the teachings of Marx, that
capital is the employer and exploiter of labour; from which the false
belief has developed that wages are drawn from capital.
This explains the continual demands for shorter hours of work, for
more pay, often quite unrelated to earnings and prices consumers are
prepared to pay, for premature retirements, for the sacking of married
women, for artificial wage and price fixing, for go slow tactics, for
strikes and disruption of industry, for compulsory unionism, for the
creation of unnecessary jobs, subsidising employment and unemployment,
at the taxpayers' expense, for the discouragement of labour saving
devices and the promotion of waste and inefficiency, also for attempts
to restrict immigration.
Such strange behaviour, no doubt, is inseparable from the socialist
method of raising wages by creating monopoly conditions in the labour
market, but the side effects are so destructive of normal standards of
decency, order and recognition of human rights that the net gains are
at heavy cost to the community. There must be a better way.
It is a common belief that the number of jobs are fixed in extent and
that every man in work deprives another man of employment. The exact
opposite, we all know to be the case; every person in employment
produces wealth, much of which will be exchanged for the products or
services of others. So each person employed generates employment for
others. It is the unemployed who create unemployment in a society
engaged in specialised production.
Wages and interest are drawn from production and not from capital;
each man advances a week or a month's work before receiving his wages;
farmers may wait a year for their returns and investors, in some
cases, many years. The use of capital increases efficiency and the
rewards of industry but is not the origin of employment or of wages.
It is mainly the counter monopolies created by the Trade Union
movement, which have increased living standards above the level of
subsistence.
There is no doubt that combinations of workers, can and do raise
wages; such increases, however, are at the expense of rent, rather
than of capital, and when land is monopolised, any weakening of the
power of the trade union movement would be to the advantage of rent.
The owners of capital also combine to resist wage demands, secure
tariff monopolies and subsidies, eliminate the competition of their
weaker rivals with 'take over' bids and fix prices above market value
etc. The net rewards ultimately are at the expense of rent and not of
labour. The abolition of such practices, therefore, would be to the
advantage of rent.
Monopolies in the labour and capital markets, do not work uniformly
for all labour and all forms of capital investment. The more powerful
unions and industrial monopolies fare better than their weaker
associates, but the higher living standards achieved, increase the
minimum standards which the lesser privileged will accept, and so
there is a measure of averaging the advantages, to increase wages and
interest generally.
The higher rewards to labour and capital arising from monopoly are
not without cost; however, production is reduced, lawlessness and the
crime rate worsen and secondary unemployment is generated. For
example, in Austral] an aboriginal is not allowed to work unless he
can earn the minimum wage decreed by the white mans' tribunals, which
in general he cannot and, therefore, is condemned to idleness and
degradation, which often leads to crime and debauchery.
Ambitious young couples determined to beat the system, often work at
two jobs and live together without marrying. Average types live in
muddled confusion doing the best they can and the below average just
drift and degenerate.
The waste and loss of production generated by monopolies in the
market for labour or capital, reduces the demand for land, raises the
margin and, therefore, is at the expense of rent. It follows that a
reduction in industrial lawlessness and the abolition of policies
which reduce the hours of work and the efficiency of labour and
capital will increase production and therefore, the demand for land,
lower the margin and increase rent.
Of recent years, there has been a resurgence of a school of
economists, preaching the doctrine of partial application of laissez
faire, without land reform. The Institute of Economic Affairs, for
example, would reduce taxation and government spending and curb trade
union and industrial monopolies, without realising that the benefits
achieved would be to the advantage of rent, increasing unemployment
and poverty and the income gap between rich and poor. Such policies
would not be tolerated under democratic government and would lead to
dictatorship and revolution.
Wages and interest cannot be increased generally unless the
bargaining power of labour and capital is improved and brought to
equity with that of land holders. This can only be done by collecting
land rent for revenue and forcing valuable land into use. Rents would
fall initially, as idle land was released, but thereafter would
increase with rising productivity, as incentive was restored to labour
and capital, as the senseless waste of taxation was abolished and as
respect for law and order was restored.
Buoyant revenue, sufficient to support highly efficient government
would then be ensured, together with the full earnings of labour and
capital.
Economic rent available to a Georgist form of government would be
equal to the annual value of all taxation at present taken by
governments plus the residual rental value of land remaining with land
holders, increasing with the rise in productivity and the abolition of
monopolies and declining as the bargaining power of labour and capital
tended to improve and ultimate equate with that of land holders.
Arguments and reasoning developed to this stage have been highly
theoretical, although such theories have been and can be confirmed by
observation.
The case, however, might be strengthened by considering the effects
of reducing taxation under various forms of government policy.
It should be obvious to Georgists that all forms of government in the
so-called developed countries are highly socialistic. Wealth is
confiscated from producers on an arbitrary basis, by legal force
without regard to the right of property in the product of a person's
labour and without regard to service rendered in exchange.
Taxes are levied on the socialist principle of ability to pay, but
assessments in this regard are often wide of the mark. If a man has a
large house, the size of his family regardless, it is often wrongly
assumed that he has greater ability to pay. If a man works hard to
increase his income, regardless of his commitments and obligations,
the tax gatherer assumes, again without foundation, that his ability
to pay is correspondingly greater. Socialists often turn the blind eye
to those whose ability to pay arises from investing in land, situated
in the path of progress and whose incomes arise, without the
expenditure of labour, from the rising value of land in a progressive
community.
The distribution of wealth through the agency of government services,
particularly under the welfare state, is based on the hypothetical
socialist theory of need, which is quite impossible to define since
each person, if needs are unrelated to effort, finds that his or her
needs are insatiable and without limit. The assessment of need,
therefore, must be by bureaucrat decree and impossible of equitable
achievement.
Taxes vary to suit the political climate. Some are imposed directly
on the processes of production and others indirectly on consumption.
Both methods are equally disastrous in discouraging the production of
wealth.
It is assumed, as the natural order for a poor and under privileged
class, always to exist, side by side with a rich and over privileged
class and that governments must continually plan to rob the latter and
endow the former. There is no concept that both conditions are
unnatural and arise only because of bad government.
There is no concept of, or distinction made between, incomes arising
from industry and enterprise on the one hand and incomes arising from
the power to levy tribute, on the other.
The failure of governments to raise adequate finance on this basis
leads to public debt, unrelated to the use of capital and to
inflationary pressures, which, with the aid of a fiduciary monetary
system, enables governments to tax all income levels regardless of how
small and to transfer indebtedness to future generations in violation
of every moral concept of human rights.
In the process of attempting such impossible conditions of government
finance, an unnatural demand for land arises because opportunities are
created to "cash in" on the future growth of the community
and which serve as a hedge against inflation and taxes based on work
value.
This further destroys the prospects of stable government by
increasing the proportion of those who are able to live without
working and decreasing the proportion of those who must, not only,
live from their own efforts, but must also support the idle, tribute
levying class.
Rent, under conditions which depress the bargaining power of labour
and capital, must be unnaturally high and wages and interest
unnaturally low.
It is important to understand such basic concepts when attempting to
forecast the distribution of wealth in a Georgist economy.
In order to forecast the trends arising from our proposals, which are
twofold, (1) to collect rent for revenue, and (2) to abolish taxation,
it is necessary to consider the objectives both separately and
jointly.
With regard to the abolition of taxation, although this is not
possible without collecting land rent for revenue, it is interesting
to consider the effect of a very substantial measure of tax relief,
without any change in the present conditions of land tenure, generally
in line with proposals of the Institute of Economic Affairs.
The best way to gauge the effect of a remission in taxation is to
consider how wealth, if not confiscated as taxes, would otherwise be
spent or invested.
The conditions of access to land would not be changed, therefore, it
would not be realistic to consider any improvement in the bargaining
power of labour and capital and, therefore, any improvement in
unemployment, inflation or the public debt structure.
Those in the lower income bracket would undoubtedly increase their
expenditure on consumable goods. This would increase the demand for
land and raise rent. Others would seek avenues of profitable capital
investment. Industry is at present over capitalised in relation to
demand. There are not many capital enterprises working above 60%
capacity. But assuming this lag to be taken up by increased consumer
spending, then the additional capital investment would increase the
demand for raw materials and rent would rise accordingly. Those with
surplus funds, however, will invest in the best market open to them
and with rising rents, buying land in the path of progress has so many
advantages, with which the capital market will have to compete, that a
large part of tax reduction, undoubtedly, would be invested in land
speculation.
The net effect of the proposals of the I.E.A. will be to increase
rent and lower wages and interest as a proportion of production. This
in turn will increase unemployment and thus the demand for government
welfare, create additional inflationary pressures and the demand for
non interest earning credit.
Under such conditions any substantial reduction in taxation,
ultimately, will be the advantage of rent, rather than of wages and
interest and the proposal would become an impracticable pipe dream,
impossible of fulfillment.
If such a policy could succeed it would require dictatorial powers
with direction over labour and capital, as in Communist countries,
otherwise the gap between rich and poor, between over and under
privileged, would widen to alarming proportions, accompanied by
increasing lawlessness and crime and the inevitable drift to
revolution.
Under such conditions the exercise of power by trade unions to create
artificial monopolies in the labour market would be more important and
necessary than ever.
The users of capital, similarly, would be obliged to seek higher
protection, subsidies and whatever monopolies could be achieved by
political lobbying.
In other words, an increase in the senseless, unnatural class war
between labour and capital would result. The two active factors in
production which, in reality, are but one factor, working either for
direct consumption, or by storing labour applied to land, for the
winning of greater rewards in the future, are natural partners in
productive enterprise, and the unnatural conflict stimulated by
Marxists, succeeds in diverting attention from the real issues.
Real wages and real interest rise and fall together, in an opposite
ratio to rent. The interests of labour and capital, therefore, are
identical and opposed to those of the land holder.
When wages are high an added inducement is necessary, sufficient to
induce the foregoing of present satisfactions. When wages are high, it
pays to increase the use of capital equipment. So the higher demand
for capital increases the return to interest.
The proposals of the I.E.A. would inevitably increase class hatreds
and lead to the breakup of orderly society.
How differently the economy would react to the same proposals, not
only for tax reductions, but eventually for the total abolition of all
taxation, provided the rent of land were taken for revenue, without
which prior condition, other reforms of a basic character are
virtually impossible.
The bargaining power of labour and capital can only be restored to
equal parity with that of the land holder when rent is taken for
revenue. It will then be unprofitable to hold valuable land idle, or
underdeveloped, in relation to its rent earning capacity. Valuable
land must be put to use in order to earn its rent potential. When rent
is taken for public revenue, land holders will compete with each other
to secure the services of labour and capital. Wages and interest will
rise because of the improved bargaining power of labour and capital.
Rent will fall initially, as land reform is introduced, not only
because of rising wages and interest but also because of the release
of valuable land above the margin, previously held idle for
speculative gain. As more land becomes available to labour and capital
competition will cause rent to fall.
Thereafter, because of the enormous increase in productivity, due to
the restoring of incentive to labour and capital, thus creating an
additional demand for land, the margin will begin to fall and rent
will rise, but not, however, at the expense of wages and interest,
which will be assured of full value as each contributes to production.
With full employment assured for labour and investment for capital
and so, with insecurity removed, men will cease to scramble with each
other in fierce, cut throat, competition. The emphasis will return to
quality as it was in the days of the craft guilds. There will be time
for leisure and the mental and spiritual satisfactions, with the
certain knowledge that employment will always be available when
required.
Land rent would lose the speculative element, or future value, as
inflation disappeared and investors realised that there was no profit
to be made from gambling in land. There would be closer settlement and
cheaper services within the metropolis but greater incentive for
decentralisation as rural life and smaller communities became
economically viable. The idle rich and the idle poor and those
wastefully employed would come to delight in the newly found
satisfactions of doing useful work and in creative pursuits. With such
conditions established, crime and vandalism together with the
addictive forms of escapism, not to mention the suicides of those who
have lost hope, progressively, would disappear.
The pinnacles of rent in the congested overcrowded cities would
decrease. There would be a greater spread of land use and consequently
of rent and with these conditions, environmental problems would
decline and the conservation of natural resources would be made
easier.
Alternative materials could, more easily, be produced to replace
those in short supply, as the free market began to operate, freed from
the inefficiency of bureaucratic control.
Population growth would respond naturally to living conditions,
attuned more closely with nature and from the division of labour,
greater prosperity would flow.
Prices would fall in highly mechanised industries and rise in labour
intensive industries and demand would respond accordingly, to usher in
a new way of life, in which the joy of useful service would
predominate.
To this stage the returns to labour and capital have been considered
jointly, because of their common interests, but no enquiry into the
distribution of wealth would be complete, without some consideration
of the separate rewards of each.
- As wages rise, so greater inducements must be made to labour,
sufficient to ensure the foregoing of present satisfactions, in
return for greater rewards in the future,
- The use of capital in modern production is so important and the
advantages of its use so great that very little inducement should
be needed,
- The opportunity to speculate in land would cease. The capital
market would not then have to compete with this other form of
investment,
- With governments assured of adequate land rent revenue, the
need for public borrowing would cease, or be greatly reduced. The
users of genuine capital would not have to compete with this
alternative form of investment,
- Enforced private debt is a logical consequence of government
debt, taxation and bad land policies. The servicing of such debt
do not necessarily involve true interest, nevertheless there is a
measure of competition with the use of real capital, which would
reduce in a Georgist economy,
- Inflation also increases the demand for spurious interest in
competition with the investment of real capital,
- The production of wealth would be so easy, in a Georgist
economy, with all present disincentives removed, that adequate
capital would be available to support highly sophisticated
industry,
- There would be fewer people with very high surplus incomes
seeking capital investment.
In the foregoing instances there are factors inducing both increases
and reductions in real interest. Precise predictions are impossible.
I believe that interest would stabilise at about 5%, which rate held
steady for centuries before most of the current, dishonest practices
under reference, were introduced. This would certainly be higher than
current rates, after risk and monopoly are accounted for. The audience
can attempt to assess the net yield of 14% interest under conditions
of 10% inflation and with taxation averaging over 50%.
Spurious interest would disappear proportionately as land rents were
to be taken for revenue in lieu of taxes.
There are some, even included among the ranks of our people, who
believe that the taking of interest is immoral and that interest would
disappear in a Georgist economy, claiming that since all forms of
wealth, and therefore capital, are subject to depreciation, that the
borrower is performing an equal service to the lender, in returning
his capital in tact after the expiry of the loan period.
Since all men seek to satisfy their desires with the least exertion,
it is difficult to believe that men would over produce rapidly
deteriorating forms of wealth for use as capital.
Precious metals are almost indestructible, whereas other forms of
wealth last only a few hours. It may be freely observed that investors
select the forms of wealth for use as capital, that will provide
capital replacement, plus an added return, during the useful life of
such capital and, therefore, will earn real interest.
The foregoing examination of interest is of incidental concern only
and is added to dispel misconceptions, rather than to make a positive
contribution. The important consideration is to understand that rent
would be adequate for good and efficient government and that the
return to labour and capital also would rise as bargaining power, was
restored in a Georgist economy.
Henry George believed that the natural increase of flora and fauna to
be the origin of interest, but upon mature consideration it is evident
that this also is the origin of wages and rent and indeed, the
sustenance of human life. It is impossible to conceive of any form of
life, including man himself, that could exist without the natural
increase of living creatures which in turn depend upon the germination
of seed and the growth of plant life.
That which is common to all factors of the production and
distribution of wealth, must cancel out, as a basic, anterior
condition and in fact be the subject matter of the science of
political economy, rather than an objective condition.
This also is a matter of general interest, affecting only the
relationship between wages and interest. Our basic concern is the
effect of taking rent for revenue and abolishing taxation.
Rent would be adequate, not only for the traditional and normal
functions of government but also to support those semi communal
services such as schools, transport and health which, however, could
be administered with greater efficiency by private enterprise.
Governments should only be involved in functions which, by their
nature, are necessary monopolies and in which the freedom of
competition is impracticable.
As Henry George so truly recognised -- association in equality is the
law of human progress, which can only be achieved by the collection of
rent for revenue. Once it is perceived that taxation is at the expense
of rent, then the adequacy of rent for government revenue can, so
easily, be demonstrated and further, all that can be earned will be
the due reward of labour and capital, without the payment of tribute
to those who have been able to appropriate the community created value
of land. The share of production to the community as rent and to
labour and capital as wages and interest, will be measured in the free
market with equal bargaining power to all the factors of production
and distribution which are so vital to each.
All this we are prepared to sacrifice by the failure to expose a
handful of communists, indoctrinated economists and satellite
politicians and in the process, risk the entire future of Western
civilisation.
Every cent that can be raised within our movement and from the
suffering populace at large, should be devoted to effective publicity
before it is too late.
Henry George said a hundred years ago - "I know," and he
did know, "that the present social adjustments cannot continue,
even now I see the clouds are rising. Will the dams hold back till the
floods rise to fury and we pass back into bloodshed and anarchy?"
National leaders who persist with the fallacy that the economy can be
rehabilitated without doing anything about the land question, and who
still appear to believe in Santa Claus, must accept a heavy
responsibility for economic and moral degeneracy and the weakening of
the ability of their country even to defend itself.
Those who accept public office have a duty to inform themselves of
the "stock in trade" of their chosen vocation. Ignorance is
not regarded as an excuse for laymen who break the statute law,
neither should it be so regarded for those who break the natural laws
of political economy.
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