Henry George on My Mind

Michael Kinsley

[Reprinted from the New York Post, 24 October, 1989;
copyrighted held by The New Republic, Inc.]

Some agency in Tokyo announced recently that Japan is now richer than the United States, thanks largely to the explosion in Japanese land prices. Adherents of the American economic philosopher Henry George will recognize the fallacy immediately. How is a society enriched by the fact that the same land now sells for twice as much? This simply represents a transfer of wealth to land owners from those who wish to own land: overwhelmingly, other Japanese.

Henry George was born 150 years ago in Philadelphia. He dropped out of school at age 13, wound up working as a printer in San Francisco and, in 1879, self-published his masterwork, "Progress and Poverty." It became a best-seller, and George himself became "the third-most famous man in the United States" after Mark Twain and Thomas Edison, according to his granddaughter Agnes George DeMille (yes, the choreographer). Soon after George died in 1897, however, his theories were almost completely forgotten.

George began from the premise that there are three factors of production -- labor, capital and natural resources (primarily land). All the world's wealth is created from these elements and divided among the worker, the capitalist and the landlord. But whereas the return to labor is the reward for effort and the return to capital is the reward for saving, the return to land is the reward for nothing more than possession of a limited resource.

The rising value of land, George reasoned, is not the result of the owner's efforts but a result of the growth of society. If you own land, "you need do nothing more. You may sit down and smoke your pipe; you may lie around like the lazzaroni of Naples or the leperos of Mexico; you may go up in a balloon, or down a hole in the ground; and without doing one stroke of work, without adding one iota to the wealth of the community ... you will be rich."

The landowner's profit, George maintained, is merely a tax on the truly productive factors, labor and capital. And George's solution was to tax away the entire rental value of land, using the proceeds to abolish all other taxes. "Taxation which diminishes the earnings of the laborer or the returns of the capitalist," he argued in good supply-side fashion, "tends to render the one less industrious and intelligent, the other less disposed to save and invest." By contrast his solution would, in one swoop, "raise wages, increase the earnings of capital, extirpate pauperism, abolish poverty, give remunerative employment to whoever wishes it, afford free scope to human powers, lessen crime, elevate morals and taste and intelligence, purify government and carry civilization to yet nobler heights."

Obviously there are problems with this magic cure-all. Land is not the root of all economic evil. And George had no satisfactory answer to the complaint that most current owners of natural resources paid at least part of their current value, so expropriating all that value through taxation would he unfair.

But George's instinct that the hidden "landowners tax" on the productive elements of society would grow with time and prosperity is probably correct. According to Federal Reserve figures, the share of America's national wealth represented by land grew from a fifth in 1946 to a quarter in 1988. There is the same amount of land in America as there was at the beginning of the postwar boom, but landowners' claim on all the wealth that has been produced since then has grown disproportionately.

Real estate has always been the largest category in the "Forbes 400" list of the richest Americans. In the 1989 list, just published, it slips narrowly to second place with 77 out of 400. But most on the list owe at least a part of their wealth to ownership of real estate or mineral resources such as oil. America's richest man, John Kluge, increased his fortune by $2 billion last year simply by owning cellular telephone franchises given away free by the government. Henry George was viciously witty about fortunes built on government-granted monopolies.

What I like best about Henry George is the way he combines radical egalitarianism with an equally radical belief in free-market capitalism. But he noted the difference between capitalism in theory and the actual economy he saw around him. He distinguished between the accumulation of wealth and the creation of wealth. And he recognized that wealth accumulated in nonproductive ways was not merely unfair but actually bad for economic growth.

George would sneer at the policy of giving away broadcast licenses for free. He would understand the logic of an excess-profits tax on domestic oil and gas. He would see the futility of various current liberal schemes to "help" first-time home buyers through government subsidies, all of which will simply get capitalized into higher home prices. He would go ballistic over the idea of reopening the capital gains tax break for real estate.

Above all, perhaps, George would observe how the developed world has been suffering in recent years from real estate sickness. At times when the reward for happening to own a middle class house has been greater than the reward for middle-class labor, this disease has twisted values, sucked away productivity and redistributed wealth at random. And if, as many believe, the process is now going into reverse, the dislocations will be just as severe.