The Theory of Rent
Needs a Theory of History
[Reprinted from Land & Liberty, Winter
WALL STREET analyst Dr. Michael Hudson argues
that the Georgist fiscal philosophy will not make headway in
practical politics until its advocates present a viable historical
doctrine of the role played by land, its rent and its capital
He proposes two streams of action:
- Promote serious professional discussion of
the importance of taxing land so as to un-tax labour and
direct capital investment.
- Explain the need to shift bank lending
away from real estate speculation so as to steer the economy's
savings back into direct capital investment.
His research programme comprises two parts:
1. Re-establish the importance of land and its rent as a shaping
force of history by creating a group of economic historians
focusing on the land issue; and organ/zing a prestigious series of
colloquia on land use and the evolution of land rent and taxation.
2. Create a statistical model to demonstrate the importance of
land and its rent in national income, and of land-value gains in
the nation's balance sheet of wealth.
For years, admirers of Henry George have been bewildered at how many
leading economists acknowledge that a tax on land is the least
intrusive and least distorting form of tax (because it does not deter
the production of more land), only to drop the matter rather than
making it a central take-off point for their theorizing and policy
While many academic economists grant the theoretical point they do
not see its political importance. After all, real estate is taxed
locally at only a fraction (about 1%) of its market price, and pays
little significant federal income tax. There is little discussion of
changing matters, for public discussion deems it fair to tax income
and sales via a value-added tax and related taxes on consumers (that
is, on labour).
Although land rent formed the central thrust of classical economics,
it has become marginalized as a sub-discipline ('land economies'). To
counter the popular neuralgia that views real estate as a dry subject,
we need to give the study of land a critical ideological mass. It is
necessary to take rent beyond economic theory, and re-establish it as
a political doctrine by establishing popular awareness of its dominant
role in today's banking and finance, economic polarization and general
prosperity or depression. For economic theories are perceived by the
public in terms of their broad sweep - their ability to explain where
the economy is going over time. If a viable core theory is to be based
on land and its rent, it cannot be viewed as being merely a marginal
phenomenon; it must be perceived to be an important force shaping
society's broad contours. More specifically, the role of land and its
rent must be seen to be of such central fiscal and historical
importance that it cannot be left out of account by economic
theorists, historians or the designers of fiscal systems.
In the century since Henry George elevated land rent to a central
political focus in Progress and Poverty (1879), the perception
of land's importance has become marginalized even as its actual role
has grown. Economists have telescoped the analysis of land into
capital-in-general, despite the fact that land represents the major
source of capital gains. The economic interpretation of history has
been dominated by Marxists focusing on class conflict between labour
and capital, not on the role of land tenure and rent in history.
The problem is thus not simply to get economic history into the core
curricula, but to make the land issue central to economic history, and
hence to the study of our own society's future.
For the idea of taxing land to become more widely discussed as a
viable policy, the role of land and its rent - and of land's dominant
role in the economy's capital gains -- must be established. For this
to occur, land value and the magnitude of rent must be re-incorporated
into economic theory. But this academic recognition in turn has a
precondition. What is necessary is not only rent theory 'in the
abstract', but a wide awareness that land value and rent are
quantitatively important and behave uniquely. Fortunately, this can be
1. Theories of land value and rent must go beyond technical
microeconomic 'tools', to become a political doctrine.
Successful economic theories establish themselves as doctrines and
'isms' which involve policy advocacy at the broadest economy-wide
level. Theories of land, for instance, are perceived in their
embodiment as ideological doctrines. This is what made Progress
and Poverty so powerful. Any theory must be capable of being
persuasively applied to history as a law of social motion, for this is
the way it shapes how people think about the future.
On the basis of Ricardo's treatment of rent, British political
economy elaborated theories of value and prices, productive and
unproductive employment, and a set of related concepts through which
the economic history of civilization could be interpreted. To make
this leap from theory to doctrine, however, it was necessary to go
beyond analyzing economic rent in terms of value theory (i.e., as the
excess of price over production costs, defined to include normal
profits). The Ricardians showed how rent tends to rise over time at
the expense of wages and profits, finally grinding economic progress
to a halt.
Some of Henry George's followers tried to do the same by applying
rent theory to urban real estate and natural monopolies, but the
movement lost the historical thrust that it enjoyed at the hands of
Thorstein Veblen, Francis Nielsen and a few others.
2. The importance of a doctrine of land-use and its taxation lies
in its ability to explain (and indeed, to warn) how rent relations
will shape society's future evolution.
A theory of land and its rent can demonstrate how today's polarizing
economic trends are leading to something other than the commonly
accepted 'business as usual' expectations. It can show the warping of
our fiscal system, of our financial system (how savings are recycled
largely to inflate real estate bubbles), and how tax favouritism for
land speculation deters new direct investment and development.
What is remarkable is that no such perception exists, despite the
excesses of the 1980s. Much of the explanation lies in the degree to
which classical economics took a Marxist rather than Georgist path. In
view of this development, it is useful to ask why Marxism emerged so
victorious, driving George's name off the social and political stage.
The answer is not to be found in economic theory as such (i.e. Marx's
theory of surplus value), but rather in the way that Marx's ideas were
elaborated into a social doctrine and infused into the academic social
sciences, while George's ideas were not.
At the hands of Marx's followers, historical materialism offered more
than just an economic theory or 'tool' as such. It offered an
explanatory key to the unfolding of history. Marx and Engels
translated their ideas into anthropological terms by elaborating Lewis
Henry Morgan's Ancient Society, and V. Gordon Childe followed
up by describing the origins of urbanization in Marxist class terms.
Marxist views of ancient and medieval history were expounded by Max
Beer's Social Struggles in Antiquity (already before there
were Marxist classes!). Moses Finley, Ste. Croix and others carved out
the field in Marxist terms.
Unfortunately, much of what emerged was an anachronistic misreading
of history. Antiquity's revolutionary cry was not one of wage-slaves,
but a demand for cancellation of the debts and redistribution of the
Admirers of George included the German sociologist Franz Oppenheimer,
but his work came to be absorbed into the Marxist tradition, as did
that of Werner Sombart. For the fact is that it was almost only the
Marxists who retained a long historical view. George's followers let
the social dimension of Progress and Poverty be stripped away,
narrowing his idea from a doctrine of collecting rent to fund public
budgets, to the status merely of a (micro-) theory of price formation,
exiled from the core economics curriculum to the academic wastes of
land economies'. Singling out rent theory to the exclusion of all
other dimensions of political economy, sociology and history turned
George's idea into a narrow theoretical point.
Georgism might have countered Marxism on its own ground of historical
materialism by pointing out the importance of the land question in
antiquity, in medieval Europe, and in the tribal communities analyzed
by anthropologists. Yet it was the Marxists who picked up what the
French call le longue duree of social and economic
3. A doctrine of rent must be able to explain the broad sweep of
history, including the future.
Instead of building on the classical economic tradition by doing for
urban land prices what Ricardo did for the value of farmland, the
followers of George have removed the theory of economic rent from its
historical context. Marxism has thus been left alone to claim the
mantle of classical political economy.
To become a doctrine, economic theory must place itself in the
context of the social whole. It must involve a theory of history, of
social behaviour, and even of intellectual history, for it is natural
to think of the whole, and intellectually crippling to think of only
the parts. Let us therefore ask what pitfalls befell the Henry George
movement and blocked it from successfully institutionalizing its rent
and fiscal theory as a viable doctrine.
To become a political doctrine in its own right, the theory of rent
would have to involve a view of the economy at large, and indeed to
become nothing less than a theory of society and of history. It would
explain the progress of rent over time, and how the appropriation of
rent (and the land's breaking free of taxation) has shaped societies
for better or worse, affecting the distribution of income and wealth
so as to promote prosperity or poverty.
By creating a political doctrine based on grounding taxation on the
land's rental value, the theory of rent had an opportunity to mount a
challenge to become the Economics of the Future. It might, in short,
have become as fullblown a doctrine in its own right as Marxist
To achieve this broad political appeal, it would have had to place
the taxation of land in the context of overall fiscal policy, by
calculating the volume of revenue available to be taxed. It also would
have traced what landlords did with the rent they received. For if
they used it to build new factories and employ labour so as to expand
productive activities, they would have been vehicles for economic
welfare. But as Ricardo, John Ramsey McCulloch and John Stuart Mill
observed, landlords tended to dissipate their rental income by hiring
unproductive labour (such as servants). The problem with rentier
income was that it ate into investment, substituting a parasitic
overhead for underlying economic growth. Under existing conditions,
the monopolization of land rent threatened to grind prosperity to a
This perception provides a key to understand today's post-industrial
4. Any theory should be illustrated statistically.
A land tax requires popular awareness of the magnitude of rent and
land-value gains. Yet today, a century after George's death, the
magnitude of rent and land-value gains remain a secret that has not
been demonstrated to the public at large (although the banking and
insurance industries have learned it well). Followers of Henry George
have not related the magnitude of rental income and land-value gains
to the economy's overall income and capital gains, or to its fiscal
needs. Without such a calculation it is not possible to gauge the
extent to which the failure to tax real estate's rental income has
been the major contributing factor to the US government's chronic
A statistical quantification of rent would show it to be the major
element in the economy's build-up of wealth. This is why real estate
forms the most important form of collateral underlying the banking and
credit system, and hence is the foundation of credit bubbles and the
business cycle. It also is an increasingly important element in
industrial cost structures, and of living costs for consumers. Yet by
playing these roles, real estate provides scarcely any of the federal
government's fiscal needs. Indeed, land-value gains are generated
precisely because real estate cash flow is virtually free of income
taxation. Only by calculating the magnitude played by rent in each of
these dimensions can its specific importance be demonstrated -- its
potential for taxation, on the one hand, or the extent to which
private appropriation of rent is recycled into yet more mortgage
lending to inflate the land bubble.
5. Georgist theory in particular must be statistically quantified
to be deemed important.
The concept of 'fully' taxing the land has not been spelled out
statistically. The real estate industry is left with its small print
in the tax code, providing legal loopholes to minimize its fiscal
obligations. Yet instead of advocating the full taxation of land, many
Georgists have leapt on the anti-tax bandwagon opposing a rise in
overall real estate taxes.
The upshot is that no Georgist institution today is calculating the
annual magnitude of rent and of land-value gains. Failing to
popularize such calculations, the Henry George movement has failed to
get off the ground. Indeed, one may ask, what are its institutions all
about, if not to undertake this basic research? What do they have to
interest the public, if not something relevant to say about the volume
and incidence of rent, year after year, and its impact on the credit
system and other economic conditions?
The proper task of the Henry George institutions should be to carry
forth the legacy of his spirit by translating rent theory into a
quantitative statistical format, to explain to the world what is
important about the land and other natural resources.
Yet not all groups in the Georgist camp endorse taxing increases in
land value, or closing tax loopholes such as over-depreciation so as
to impose an income tax on rental cash flow, or imposing property
taxes of more than the nominal 1% of real estate values in an
environment where prices are rising by about 10% annually. Such
ideological disputes have deterred the necessary empirical study.
6. Rent and land-value theory need to be incorporated into the
broad financial theory of saving. For in today's world, most rental
income is paid out to mortgage bankers as interest, and is recycled
into new real estate lending to inflate the land bubble.
Modem economies have transformed the social context of rent. Over the
past century it has become normal to buy real estate on credit. The
upshot is that the bankers and other mortgage lenders (including
insurance companies and pension funds) have ended up with most of the
rent, in the form of interest. They recycle most of this interest into
new mortgage lending to inflate land prices all the more, thus
generating yet more capital gains for real estate developers. Whereas
British landlords a century ago were accused of dissipating their
resources on servants, the church and other unproductive labour
(including a penchant for military adventurism), today's mortgage
bankers transform rental income into interest charges to pay for an
increasingly burdensome financial sector.
Recycling mortgage interest into new lending tends to create an
ascending spiral of land prices. Rent is extracted from the economy
and paid to the banking system, which recycles it to inflate the real
estate bubble. This makes home ownership more expensive, along with
office space and industrial plant.
It is remarkable that today, more than a century after Progress
and Poverty's publication, followers of Henry George have made
little attempt to incorporate this financial development into their
treatment of rent.
For a modern macro-economic rent theory to recognize these processes,
it is necessary to integrate rent theory with banking theory to create
a general theory of rentier income, and of society's growing
debt - mortgage debt, public debt, business and personal debt. Every
flow of income, of saving and of debt must be related to the whole
system-wide process, not treated in isolation.
7. Today's fiscal crises stem largely from a failure to tax rent
and land-value gains.
A strong case can be made that the United States, Europe and Japan
have run increasingly large budget deficits as a result of their
failure to tax real estate (along with the oil and gas sectors, mining
and the air waves). The government's failure to tax real estate leads
to budget deficits financed by yet higher interest charges. Yet the
lion's share of the rental income freed in this way has not ended up
in the pockets of the landlords, but has accrued to the banks and
Rental income thus has been transformed into interest. On the
economy-wide level, new savings tend to constitute an accrual of
interest on past savings (by the wealthiest 10% of the population plus
the large institutional investors) that are lent out in a credit
pyramid growing at an exponential rate (the rate of interest).
8. Integration of the 'real' economy and finance -- with finance
the most 'real' driving force.
Economists analyzing land-rent should be in the forefront of all the
groups to understand the remarkable stock-market run-up since 1993,
for what has fuelled this run-up is accumulated rental cash flow,
recycled as savings. The mechanism is classical in its simplicity.
Rent is squeezed out of real estate and paid to the bankers and other
mortgage lenders as interest. Indeed, landlords are willing to pay all
their net rental income over and above costs as interest, in the hope
of reaping capital gains - mainly, land-value gains.
The creditors recycle their interest income into yet more lending --
mainly mortgage lending under normal conditions. But since 1991 there
have not been normal conditions. The world real estate bubble burst
(except in Russia, where it was just beginning). The banks' loan
policy was based mainly on mortgage lending, which had fallen into
depression. With this market dead, they lowered the interest they
offered depositors, so as to reflect what they could earn by investing
these deposits in government bonds. (The Federal Reserve System's
quarterly flow-of-funds statistical reports clearly document this
manoeuvring.) Depositors had grown accustomed to high rates of return
during the bubble years of the 1980s. In search of continued high
returns, they shifted their savings out of the banks into money-market
funds and mutual funds. These in turn invested their new-found money
not in real estate, where the banks had been putting it, but in the
stock market. The upshot was a run-up in the Dow Jones from 4,000 to
6,500 points, while real estate prices barely budged.
The stock market has been inflated by savings that hitherto have gone
into bidding up the price of land. Who should see this more clearly
than Georgists? They need only remember their rent theory to see the
extent to which real estate is the primary source of economic surplus,
new saving and capital-market funding. Yet the Henry George movement
has not pursued the analysis of rent to ask what happens to rental
cash flow (and land-value gains) when it no longer is recycled into
new mortgage lending. Land speculators are vilified, but not the
mortgage bankers standing behind them and supporting their tax breaks
politically, in the knowledge that most land rent will be transmuted
into mortgage interest in due course.
A successful theory must warn of a major anomaly soon to appear. One
seems to be at hand in the teeter-totter movement between stock market
and real estate gains. As a symbiosis has developed between the real
estate sector, finance and insurance, the dream of post-industrial
economies voiced in the 1970s is turning out to be merely a real
estate and stock market bubble (euphonized as 'gentrification'),
rather than an upgrading of productive capacity and living standards.
It is the lull before the storm -- a storm most likely to hit when
governments find they have sold off all their assets in order to keep
paying interest to their bondholders. At this point, they must either
default or begin to tax their real estate holders and the financiers
The theory of rent and land value gains can offer an explanation of
this crisis by showing how real estate investors expend their cash
flow, and how the economy's savings are channelled to increase real
estate prices so as to create financial bubbles.
As a proportion of total US state and local revenues, real estate
taxes have shrunk from nearly 70% a half-century ago to just about 30%
today. While gross rental revenue was in the neighbourhood of
$600-$700 billion in the early 1990s, only about 0.3% of this was paid
out as federal income tax.