Excerpt from the book:

The Rise and Fall of an Economic Empire: With Lessons for Aspiring Economies

Colin Read

Published by Palgrave, 2010 (pp. 154-166)

A unique form of capital

Natural resource capital is different from the rest. A nation can make more machines with relative ease, and can even create more laborers and entrepreneurs, through procreation, education, and a supply of financial capital. However, it cannot create more resources. Natural resources, such as land, minerals, oil, and water, are in fixed supply. They can be recycled but cannot be created. For this reason, they can command a premium.

In a growing economy, the rewards to these factors are directly related to the extent that they can be expanded over time. Given the relative scarcity of these factors, a developed economy will reward machine producers and the providers of labor less than it will reward those most scarce factors such as the brilliant inventor, the highly skilled and rare sports star, or the land, min¬erals, oil, and water that become increasingly scarce as our needs for them expand.

For these reasons, economic theory predicts that the value of land, minerals, and other factors in fixed supply can rise dramatically as production grows over time. However, the earnings of laborers will rise more slowly and more in proportion to the average value of production economy-wide.

For instance, as population grows and as the economy replicates, the total value of production increases approximately proportionally. However, the good land close to the population centers becomes increasingly scarce, meaning that its share of the income from production rises more dramatically. Economies that begin to feel a constraint in available land resource will see dramatically rising land prices as a nation develops, leading to the conclusion among many that land close to the centers of production is the best investment for a growing economy.

In effect, it is these most scarce factors of production that usurp the bulk of the surpluses generated by a growing economy. Moreover, it is the owners of these natural resources such as land and minerals who earn the greatest rewards and income over time. As population grows, we see that the dispar¬ity between the income of laborers and the income of resource owners grows over time.

I can offer a concrete example of this wealth redistribution effect. In the most developed countries toward the end of the Second Industrial Revolution in the 1950s, it was typical that a single income earner in a family could support the financial needs of an entire family. A third social and industrial revolution began in the 1960s that moved many more women into the workforce. However, while a family might be able to prod¬uce more income, their quality of life did not rise substantially. Instead, homes that once cost perhaps two or three year's income for one bread¬winner quickly rose to three or four year's income for two breadwinners. Meanwhile, single income earning families found it almost impossible to buy homes.

This example demonstrates how the additional surpluses generated by an economy rapidly expanding because of an increase in labor participation may absorb the gains by making one sector, the resource owners, much better off. Meanwhile, the larger sector of wage earners finds it increasingly difficult to make ends meet.

In other words, such a growing economy typically does not grow evenly. Instead, entrepreneurs, resource owners, and those who own the financial capital desperately in need in a quickly growing economy may profit proportionally more with expansion. Others' income may rise as well, but their purchasing power can fall if prices rise more quickly. Meanwhile, income disparities between the haves and the have-nots may widen over time.

This natural tendency for income disparities to widen over time as the sup¬ply of scarce resources is stressed can be partially ameliorated through progres¬sive taxes designed to shift income from the rich to the poor. Such progressive taxes are couched in terms of the "fairness" they create. A 100% tax?

Such redistribution of wealth can be obtained in other ways. For instance, the nineteenth-century economist Henry George recommended a large, indeed 100% tax on the value of land." His rationale was that land increased in value not because of any effort from the landowner, but rather as a natural conse¬quence of a growing economy.

George noted that an economy grows because of the infrastructure a society invests in its own economic future. Therefore, a 100% land tax would compen¬sate government for its investment in the economic infrastructure that gave rise to growth. He also observed that such a land tax would obviate the unpro¬ductive speculation of land and would make land more affordable, if not more profitable.

However, George did not propose to tax the capital improvements on land. He proposed a tax on the physical land to pay for the cost of government in an era in which the size of government was substantially smaller. Then, government did not engage in significant transfer payments between various classes of taxpayer. Consequently, it would have been possible to have taxes on the land pay for the government-provided economic infrastructure that gave rise to land values in the first place.

Such a tax would also narrow the income gap that arises in a growing econ¬omy. Gaps would remain in the incomes of those who invent and create and those who labor. However, by reducing the burden of economic infrastructure on all and concentrating it primarily on the owners of fixed factors of produc¬tion, the average income of laborers would rise. So would their ability to pur¬chase land that no longer rose in value for speculative purposes.