The Geoist Theory of Recession/Depression

Bryan Kavanagh

[Reprinted from Progress, March-April 2005]

In classical economics, production (P), was distributed between land, labour and capital, as rent (R), wages (W) and interest (I); that is: P = R + W +1.

The classicists defined land as all natural resources exclusive of man, that is, land, sea and air, so that, unlike current rubbery economic definitions which also regard some returns to labour as 'rents', rents in the classical sense are those yields only from land, mineral licences, fishing rights, sites on the electromagnetic spectrum, aircraft flight paths, etc.

Henry George refined classical distribution theory further in Progress and Poverty by putting a syllogism along the following lines:

• (i) Rent-seeking behaviours create the dual pathologies of increasing land prices and taxation, the servicing of which becomes a deduction from the incomes of both labour and capital.
• (ii) Taxation and privately capitalised land rents devour the benefits of technological innovation, thereby creating unsustainable debt levels, involuntary poverty and recurrent periods of economic recession and depression.
• (iii) Therefore, taking natural resource rents for public purposes, instead of taxing labour and capital, will obviate:
  
  o the rich-poor gap created by a faulty distributional system
  o unsustainable debt levels poverty and dispossession, and
  o economic recession and depression
  

By transposing non-earned 'rent' to the left side of the equation, viz, P - R = W + I, George suggested that if all community-generated resource rents were captured for the community for public purposes, then taxation and land price need not be deducted from earned incomes (from the work and savings of labour). He argued that this "fiscal adjustment" would reconcile labour and capital, permitting a complementary relationship to develop between the operative factors of production.

George held that the social capture of community-generated resource rents, a surplus in the production process, would rectify the distributional system and remove the inducements to cyclical bouts of land speculation, the invariable outcome of which is socially damaging economic recession, or, less frequently, devastating economic depression.