Austrian Economics
versus Georgist Economics

David Hershey

[Reprinted from The Illinois Georgist, Vol.5, No.3, Fall 1993]

This summer I had the good fortune to attend a five day seminar on Austrian economics at the Foundation for Economic Education in Irvington-on-Hudson, New York. I specifically went to find the Austrian perspective on George. I was pleased to find an outstanding library at FEE with many books and articles on George. Also the instructors, Dr. Hans Senholz, Dr. Israel Kirzner, Dr. Ed Opitz, were all familiar with George's ideas and patient with my many questions. I would especially like to thank Dr. Opitz, who because of his great respect for A. J. Nock, had studied George a great deal and generously provided me with letters he had written to debate George's ideas with fellow members of FEE.

The Austrian disagreements with George center on their contention that land is not a unique factor of production. To Austrians land is bid upon, like labor and capital, by entrepreneurs competing for scarce resources to supply consumers with the goods they want. Market pricing allocates land to those who want it most. Any attempt to tax land results in effective land nationalization. Since it is impossible to separate the contribution of land from improvements any taxing scheme would be arbitrary. Granting authority to the government to tax ground rents, rather than leading to greater justice and freedom, would only expand the power of government and their control over our lives.

George defines land as not just the surface of the earth but all natural resources. Wealth is produced when man, through his labor, harnesses the forces of nature to serve his ends. Land is passive in the production process. By itself it does nothing to satisfy men's desires. It is only when man mixes his labor with the natural resources that value is created. George fully supports the Lockean homesteading principle, whereby the right to ownership is earned through improving land. Property is established through productive work. George, by separating and distinguishing the factors of production into land, labor and capital, provides a clearer understanding of the production process and the economic problem than do the Austrians that lump together land and capital.

Dr. Israel Kirzner objects that under the land tax sites would no longer be put to their highest use. In his words, "Downtown Manhattan could have a chicken farm next to a high rise." Most people who have thought about the land tax have come to the exact opposite conclusion. Some fear overdevelopment. They're concerned there will be no parking lots because they don't generate enough revenue to pay the tax. One can rest assured, however, that developers will take into account the needs of the car owner when the value of their offices, stores and apartments could not be realized if there was no way of reaching them.

It is true the land tax would spur development as those with prime locations would have to put them to their best use to pay the taxes. Holding property off the market would be difficult in that the owner could be paying as much tax as his neighbor with a fully developed lot. The chicken coop owner would surely be bought out by a more ambitious competitor.

This highlights the difference between a land tax and land nationalization. Under the land tax, individuals would still hold the titles in land, and land would still trade. One would simply lose the privilege of receiving the benefits of holding out of use the best site or the land richest with natural resources. These benefits would be distributed evenly through the taxing mechanism. When the land tax is used to replace taxes on incomes and interest it becomes the ultimate supply side solution to spurring economic growth. The active elements in production, labor and capital, have the right to keep all they earn, while the benefits of the passive element, land, are distributed back to society. It is society progressing in population and improvements that causes the value of land and natural resources to increase. The land tax returns these increases to their source.

Some authors believe that a land tax would be impossible to implement because of the difficulty in separating the value of land from its improvements. The answer to this problem has already been solved by the real estate appraisal profession. Through their three pronged approach to estimating value, the cost approach, the comparable property approach, and the income approach, they describe the methods of approximating a value for lands. The comparable properties method can be applied to valuing two sites. After adjusting for differences in the building and improvements the remaining value is attributable to the site. If we're dissatisfied with the appraisal process we need only compare it with our current methods for measuring income taxes to realize that precision is not an attribute of the taxation process.

Dr. Opitz noted that the power to tax and the power to control access to the land are too dangerous to be lodged together within one group. "It would be in the interests of liberty to keep the two functions separated." I sympathize with Dr. Opitz's concerns. However, history teaches us that the only effective guard against excess governmental power is an alert and ever vigilant citizenry. Separation of powers, Bills of Rights and Constitutions are more words on paper unless people are prepared to voice their objections and act to stop injustice. An educated and aware population is the only effective check to arbitrary political power.

To me George's ideas withstood the test of Austrian criticism. There is more that could be said on each of these issues. Both schools have much they could learn from the other. I welcome contributions from anyone with further thoughts on these issues.