A note from me, Kris:
I’ve condensed and refactored the review while adding many of my own comments. It was a great personal learning exercise for something I’ve been interested in.
The Problem Stems From A “Bold Claim”…
…namely, that the resilience of poverty, oppression, and inequality in the face of advancing economic development is not some embarrassing accident we'll eventually get around to fixing, it's an inescapable consequence of our socioeconomic system.
George opens by observing an unkept promise made by Industrialists:
it was expected, that labor-saving inventions would lighten the toil and improve the condition of the laborer.
Industrialization should have freed humankind from drudgery and want. And yet George instead sees:
complaints of industrial depression; of labor condemned to involuntary idleness; of capital massed and wasting; of pecuniary distress among business men; of want and suffering and anxiety among the working class
If we finally have the necessary material conditions and technology for utopia, why this suffering, waste, and inefficiency?
And what's the deal with industrial depressions? How can there be periods where laborers desperately want to work but can't find employment at the very same time capital sits around in useless piles, begging to be put to productive use?
Contra popular explanations at the time, George argues it "can hardly be accounted for by local causes" such as military expenditures, tariffs, type of government, dense vs. sparse populations, or paper money vs. hard currency. This is because he sees the same basic problem everywhere no matter how different the countries themselves are. Behind all of these troubles George says there must lie a common cause.
Pulling no punches, the man lays the blame at the feet of progress itself:
that poverty and all its concomitants show themselves in communities just as they develop into the conditions toward which material progress tends - proves that the social difficulties existing wherever a certain stage of progress has been reached, do not arise from local circumstances, but are, in some way or another, engendered by progress itself
George insists sloppy terminology leads to sloppy thinking. Naturally, he spends an entire chapter beating words to death to correct this.
Is a thing's value how much labor it takes to make the thing, or how much labor someone's willing to exchange for the thing?
Nowadays Labor Theory of Value is most commonly associated with Marx. Marx picks a lane and says the value of something is tied to the amount of "socially necessary labor" required to produce it.
George goes the other way:
It is never the amount of labor that has been exerted in bringing a thing into being that determines its value, but always the amount of labor that will be rendered in exchange for it.
- Henry George, The Science of Political Economy, p. 253
In other words, "a thing's value is whatever someone is willing to pay for it." This is in line with the so-called marginal revolution and modern theories of value.
Production is labor applied "to the production of wealth." You know, productively. This is all human exertion that isn't punching a concrete wall and rewards you for your efforts with something that fits the definition of wealth. Said wealth is the "product of labor."
Labor is the exertion of human beings. It's possible to labor to no avail (try punching a concrete wall), but typically humans labor towards an end, such as gaining wealth. But whether or not we accomplish anything with our efforts, George calls them labor. Labor isn't just making things, by the way – it's also moving or exchanging them.
whatever is received as the result or reward of exertion is "wages."
No distinction here is made between blue-collar work and white-collar work – whether one is called "hourly pay" and the other is called "annual salary," George calls them both "wages." It doesn't matter whether you receive them from your boss, from customers, or from nature. If you do work and get something from it, you have received "wages."
Wealth is produced when Nature's bounty is touched by human labor resulting in a tangible product that is the object of human desire.
Labor is required, but the amount and type doesn't matter - George offers the example of simply picking a berry off a bush as an act that transforms nature's gifts into human wealth. Note particularly that human desire is an important requirement of wealth; it doesn't matter how much work someone put into something, if it doesn't gratify human needs or desires in some way, it's not wealth.
The value of these things may differ, but as long as they're tangible, originate in nature, someone ever did a lick of work to make or acquire them, and a human being somewhere desires them for any reason, they're wealth.
What’s Not Wealth?
Forms of money represent are claims to wealth but are not wealth in themselves. they are pointers to wealth (and of course they are valuable — but you can imagine the link between them being severed in certain states of the world. The distinction is important to understand what is actually happening).
- Stocks and Bonds These are also just claims on wealth. A creditor's title to Debt isn't wealth, either, it's just a claim on the debtor's (typically future) wealth. And, writing as he was not long after the Civil War, George points out that Slaves are not wealth either but, represent "merely the power of one class to appropriate the earnings of another class."
- Intellectual property Copyrights, patents, and trademarks are all different forms of Monopoly – the exclusive, government-granted legal right to do a particular thing (publish a certain book, manufacture a certain product, use a certain name in business, etc). The exclusive right to do or produce a thing, valuable as it may be, is not the thing itself. Monopoly is not wealth.
Wealth, thus defined, is the terminal "ground truth" bits of the economy, and all the financial layers on top are fancy IOUs that just encode various claims on it.
George offers a thought experiment to test if something is wealth: if you produce a pile of gold, fish, or Lego bricks, you've clearly increased the amount of wealth in the world. But if you produce a giant pile of IOUs that just records who owns what and who owes what to whom, it doesn't matter how many of them you pile up or how long the chains of ownership get, you still haven't increased the amount of real wealth in the world.
Again, this isn't saying the IOUs aren't valuable, they are. But they're only valuable because they ultimately point to real wealth. If you magically transported everyone over to a hypothetical Earth 2, carrying over all of Earth 1's money and financial instruments but none of Earth 1's tangible wealth, the value of all those IOUs would instantly evaporate.
"wealth devoted to procuring more wealth", and it's the next thing he insists everyone is hopelessly confused about.
He quotes Adam Smith, agreeing with him thus far:
That part of a man's stock which he expects to afford him revenue is called his capital.
...and also gives us a short etymology lesson on the origin of the term:
The word capital, as philologists trace it, comes down to us from a time when wealth was estimated in cattle, and a man's income depended upon the number of head he could keep for their increase.
("Per capita" being the Latin for "by head")
All capital is wealth, but not all wealth is capital.
George notes capital is often described as being "stored up labor", and endorses this view – but what it really means, is capital is stored up production. It's not literally the labor that's stored up but the wealth generated by it, set aside and then dedicated to the purpose of getting more wealth.
George insists that it is the owner's intention that transforms wealth into capital. If you buy an old factory to throw parties in for your hipster friends, it's just wealth. But the minute you decide to put it to work to make something useful (or start charging your hipster friends a cover charge at the door), it becomes capital.
What’s not capital?
- A laborer's daily bread and the clothes on their back do not count as capital
A person has to eat and wear clothes whether they work or not. The laborer's tools can however be counted as capital, because their purpose is to assist the laborer in getting more wealth by working for wages
- Labor by itself can never be capital The products of human labor become capital when they are stored up and set to the purpose of getting more wealth. To muddle this distinction defeats the point of having separate terms for those things at all, and prevents us from reasoning meaningfully about how they relate to one another. Labor is not capital, and neither is labor by itself wealth, it produces wealth – and if it ain't wealth, it ain't capital.
And this all brings us to a special category: Land
The unique specialness of land is George's entire schtick and the very core of his philosophy.
The term land embraces, in short, all natural materials, forces, and opportunities
The important thing to grasp about land is that it comes before everything humans do or make, and is itself a thing no human can make.
Nothing that is freely supplied by nature can be properly classed as capital Land is not wealth. And since it's not wealth, it's not capital.
- Land is not wealth Yes, it "comes from nature", humans are always productively applying their labor to it, and it certainly seems capable of gratifying human desires. George sees this reasoning as understandable, but insists it's the root mistake that leads other political economists astray – because for George, land just is nature itself.
- Land is the ultimate source of all wealth, but it's most useful to think of it as a generator It is a completely separate entity from the wealth that human labor and desire draws from it. Players of Magic: the Gathering and Settlers of Catan should already have a solid grasp of this distinction:
Magic: The Gathering
Settlers of Catan
Other examples of land
- In modern times, George would grant electromagnetic spectrum and orbital real estate for satellites the same status of "land" that already applies to farmland and terrestrial real estate. We don't even need to speculate about whether he'd attach this status to sunlight because he straight-up predicted solar power:
Even the lack of rain which makes some parts of the globe useless to man, may, if invention ever succeeds in directly utilizing the power of the sun's rays, be found to be especially advantageous for certain parts of production.
We must never put land in the same category as wealth, labor, capital, wages, production, money, or anything else. If you treat land the same way you would a bar of pig iron, an hour of work, or a dollar bill, before you know it you'll get poverty paradoxically advancing alongside progress, inexplicable bouts of industrial depression, literal genocides and holocausts (he's dead serious about this), and The Rent Being Too Damn High.
Wages, Capital, and Labor
The reviewer compresses several chapters because they all address the same question from different angles:
Why, in spite of increase in productive power, do wages tend to a minimum which will give but a bare living?
He starts by debunking an implicit assumption that misleads policy
George argues that wages aren't drawn from capital but instead from production
George starts with the simple case where wages are paid in the form of direct, concrete wealth, then moves on to the more complex case where people are paid in money and other instruments.
- George goes on to say it doesn't matter if you're paid in money or directly in wealth, because the money is a direct claim on the underlying wealth.
- It also doesn't matter if you get paid on commission. [Imagine a whaling ship where each crewman gets paid a share out of whatever the ship catches. When the ship sails back into port with a hold full of whale oil and bone, the crew gets paid in money, the owner simultaneously adds to his capital oil and bone. The crew's money directly represents their share of the concrete wealth that is the oil and bone. The owner's capital hasn't decreased, and the workers drew their wages directly from the production.]
- It doesn’t matter if the project is long and capital-intensive George points out that as laborers labor, they progressively add value to whatever they're producing. Take the case of a shipwright building ships for an employer – even if the boss can't sell a half-finished ship, it still holds value (for one, it costs less to finish a half-finished ship then no ship at all). And with every stroke of the laborer's work, the employer who owns the shipyard gets an incremental increase in his stock of capital.
It is not the last blow, any more than the first blow, that creates the value of the finished product – the creation of value is continuous, it immediately results from the exertion of labor.
- George freely admits that capital can be required for certain kinds of work, but he disagrees with what its purpose is. It's not a pool that wages get paid out of.
Why debunking the mistaken assumption is so important
George hammers away at this because thinking wages are drawn from capital leads to a false conclusion, namely that "labor cannot exert its productive power unless supplied by capital with maintenance.”
- Well, workers need food and clothing and they get paid by their employers, so you could imagine capital as a limiting factor on labor. But food and clothing aren’t capital, just wealth, as we said before.
- And with regard to wages, the point is that the employer always gets "paid" first, because the second the laborer produces value, the employer's capital increases
- TL:DR – George hammers to absolute death the idea that Laborers derive their own maintenance (food/shelter/clothing/etc) from their wages, with George insisting it is drawn from production and... you guessed it, not from capital.
- A note on how seminal George’s views were:
At least some of George's ideas will not seem so radical to modern readers (especially those already critical of capitalism or neoclassical economics), but it's important to understand that at the time almost everything he was saying was considered deeply radical and shocking. Capital was the fundamental driving force of the economy and labor was utterly dependent on it, and the Malthusian theory of overpopulation was the accepted explanation for why wages were low and workers were starving.
If wages aren’t drawn from capital, then what is the role of capital?
Capital "increases the power of labor to produce wealth.". Capital is a force multiplier that supercharges the productive power of labor.
- By enabling labor to apply itself more effectively (power tools go brrrr)
- By availing labor of the reproductive forces of nature (cows make baby cows)
- By making possible the division & specialization of labor (you dig bait, I'll catch fish)
Capital does not:
- supply labor with raw materials (nature does)
- provide for the maintenance of workers (who eat bread by the sweat of their own brow)….the only way capital actually "limits" productivity in real life is in the degrees by which it force-multiplies labor's productivity and unlocks certain forms of labor in the tech tree. The kind of "limit"
George objects to the idea that you need capital just to get any work done at all, or that without capital to sustain it, labor will shrivel up. Instead, capital is rocket fuel that labor supplies to itself by investing a portion of its wages. Because the prevailing theories of George's time are based on incorrect ideas about the relation between wages and capital:
"all remedies, whether proposed by professors of political economy or workingmen, which look to the alleviation of poverty either by the increase of capital or the restriction of the number of laborers or the efficiency of their work, must be condemned."
In short, more investment, more protectionism, and more efficiency programs can't, won't, and haven't fixed poverty and industrial depressions because they all proceed from false premises.
The Laws of Distribution
When society produces wealth, who gets different shares of it, and why?
Three factors in production: Land, Labor, and Capital and the name of their “return”:
- The reward you get from production by owning Land is called Rent.
- Land has value because people are willing to pay you for the privilege of using it.
the return to land
Rent, in short, is the share in the wealth produced which the exclusive right to the use of natural capabilities gives to the owner. Land has zero cost of production because it's already there and you can't make it. This means that any payment or benefit you can realize by excluding others from using land (or its fruits) is necessarily "in excess of the costs needed to bring that factor into production." …Wikipedia's definition of economic rent is negatively connoted as “excessive”. All land rent is Economic Rent!
Any piece of land has only one seller, and no producers. This further meets the definition of Monopoly– Greek for "one seller." This is why you hear Georgists talking about "Land Monopoly."
The price of rent derives from the most marginal land available. Rent is determined by the "margin of production" (AKA the "margin of cultivation") – the difference between how much you can produce from a particular piece of land (Lot A or B) compared to the least productive alternative (Lot C). I, as the landlord am not really doing anything here other than owning the land, and yet I can extract a huge amount of value because, unlike capital, land is a hard limit on labor – you can't work without a place to work or without material that comes from nature. And so I take my share first without really contributing anything to production other than gatekeeping access to land. [See what happened here: George is conferring a special status to land because unlike capital, land is a prerequisite for production! This idea was radical in Malthusian zeitgeist where capital was seen as a prerequisite to production: Rent, in short, is the price of monopoly, arising from the reduction to individual ownership of natural elements which human exertion can neither produce nor increase.]
- The reward you get from production by supplying Labor is called Wages.
Wages, like interest, are limited by the margin of production.
Within that limit there's not much to understand about how wages work except that people seek to satisfy their desires "with the least exertion," which is a fancy way of saying people don't like to get ripped off.
- The reward you get from production by supplying Capital is called Interest.
Interest is a term intended to express the return to capital alone and nothing else.
George gives the common definition of interest as "the return for the use of capital, exclusive of any labor in its use or management, and exclusive of any risk, except such as may be involved in the security." This is pretty close to what we want – something that expresses the sole return to capital without mixing in anything else.
Capital is wealth devoted to getting more wealth. So if capital is wealth that begets wealth, it makes sense that if I lend it out to you, I miss out on the potential for it to grow while it's out of my hands. George says I am justly entitled to ask for more back than I originally gave you.
Interest thus springs from the "reproductive" powers of capital, whether that's biological reproduction, or the more abstract reproductive force of exchanging things so that you have a more valuable distribution of capital than you started with.
As for how it relates to the other two returns to production – the more powerful the "power of increase" the capital has, the greater return interest can claim compared to wages. If you're ploughing a field and I lend you a tractor which makes you ten times as productive, I can justly claim more compensation for that than if I lend you a mule that only makes you twice as productive.
However, rent still holds the whip hand, so the margin of cultivation determines how much return is left over to divvy up between interest and wages. This is because the net "reproductive" value of capital goes down given rent is a general tax on overall productivity. The amount I would have gained by using the thing productively over the period of time it was out on loan (the amount I can justly charge in interest) is reduced by how much I have to pay in rent.
Profits is "almost synonymous" with revenue, assuming you have some left after you deduct expenses. It means a gain in money or wealth, but the trouble is this gain is a mix of rent, wages, and "compensations for the risk peculiar to the various uses of capital." What we want is a term that means the return to capital alone, totally separate from the return to laborers and landowners. [Kris: the commitment to proper return attribution warms my heart. One of the most difficult aspects of performance evaluation in trading/investing is decomposing luck from skill. In the ideal framework, you’d want to extract all the return that is not due to “beta” which is cheap exposure to acquire. You want to identify idiosyncratic skill/alpha/edge. By isolating the components of return we are more capable of assigning prices we are willing to pay for those idiosyncratic and often “uncorrelated” sources of return. George was a stickler for creating an accounting paradigm that actually represented reality. Thus represented, we can have meaningful discussions about the trade-offs of policy and outcomes just as conservative accrual accounting gives a better representation than cash accounting for a business’ opportunities and challenges]
- Land is "all natural opportunities or forces" and its return is rent.
- Labor is "all human exertion" and its return is wages
- Capital is"all wealth used to produce more wealth" and its return is interest
George says the false assumption at the root of the old theories is in thinking of "capital as the prime factor in production, land as its instrument, and labor as its agent or tool."
Instead, George asserts:
- "Labor can be exerted only upon land"
- "It is from land that the matter which it transmutes into wealth must be drawn"
- "Capital is not a necessary factor in production”
Therefore, we should always put land first in all our inquiries rather than capital, which ought to come last.
Where land is free and labor is unassisted by capital, the whole produce will go to labor as wages. Where land is free and labor is assisted by capital, wages will consist of the whole produce, less that part necessary to induce the storing up of labor as capital. Where land is subject to ownership and rent arises, wages will be fixed by what labor could secure from the highest natural opportunities open to it without the payment of rent. Where natural opportunities are all monopolized, wages may be forced by the competition among laborers to the minimum at which laborers will consent to reproduce.
This is the reason George says that wages are so high in "new countries" where there's more land available than in countries where it's been locked up for centuries.
Here's how it all fits together:
Though neither wages nor interest anywhere increase as material progress goes on, yet the invariable accompaniment and mark of material progress is the increase of rent – the rise of land values.
where the value of land is highest, civilization exhibits the greatest luxury side by side with the most piteous destitution
How land-based wealth inequality stems from:
1. Population growth
Generally speaking, as you get more people your productivity grows exponentially rather than linearly:
The labor of 100 men ... will produce much more than one hundred times as much as the labor of one man
That's thanks to specialization and division of labor. This happens without needing any technological advance.
As labor's productivity goes up, it makes it worth developing on more marginal (ie, less productive) lands, pushing the margin of production down (and outward geographically), which gives landlords more room to jack up rents…A bustling town is a more valuable and productive place to live than a tiny hut in the middle of a remote forest. In the town there's a butcher, a baker, a candlestick maker, and others to supply you with whatever your heart desires. In the middle of the forest you have to do everything yourself, regardless of how abundant the natural resources might be. Every neighbor that moves in to town makes you "richer" in this sense because they contribute to the total productive potential of your community.
Population increase also drives productivity by making things valuable that were useless before. Let's say there's some resource on some land, say iron ore. Even if you have all the technology to mine and smelt it, you probably aren't capable of doing this whole operation yourself, and if nobody else lives there you don't have anybody to sell the iron to. It's the presence of a civilization that will give that ore its value, and for that you need to increase the population. Until population shows up to give it value, the ore is "latent potential" in the land.
Increasing population increases the share of rent (and decreases the share of interest and wages) in two ways:
- It lowers the margin of production
- It brings out the latent potential of land
The result: land speculation
As soon as there's a whiff of progress in a given area everyone starts HODLing land, but not to use it themselves….The only thing investors actually maximize is risk-adjusted rate of return. When you know rents will increase, your best return comes from buying extra land, not improving the land you have. George shows how the logic is well internalized by the speculator:
Take now... some hard-headed business man, who has no theories, but knows how to make money. Say to him: "Here is a little village; in ten years it will be a great city—in ten years the railroad will have taken the place of the stage coach, the electric light of the candle; it will abound with all the machinery and improvements that so enormously multiply the effective power of labor. Will in ten years, interest be any higher?" He will tell you, "No!" "Will the wages of the common labor be any higher...?" He will tell you, "No the wages of common labor will not be any higher..." "What, then, will be higher?" "Rent, the value of land. Go, get yourself a piece of ground, and hold possession." ...without doing one stroke of work, without adding one iota of wealth to the community, in ten years you will be rich! In the new city you may have a luxurious mansion, but among its public buildings will be an almshouse.
I don't think it's a coincidence that real estate is one of the oldest investments on Earth and the principal concern of basically every war ever.
2. Technological advancements
Tech saves labor. It lets you accomplish the same thing with less work, or more things with the same amount of work. This leads to more wealth being produced. What do you need to produce more things?
Capital is nice to have, but the two things you must have are labor, and land.
So wanting to make more things means more demand for land, because you can't labor without it. And when you reach the productive limit of the land available to you, you seek out more marginal lands, extending the margin of production. Demand for land goes up, land values go up, and soon enough The Rent Is Too Damn High. This means that as you introduce advanced machinery, the extra productivity they bring gets soaked up in rising land values, which gets extorted as rent…every labor-saving invention, whether it be a steam plow, a telegraph, an improved process of smelting ores, a perfecting printing press, or a sewing machine, has a tendency to increase rent.
- As a historical aside, I'll point out an extreme example of this: the cotton gin.
This device massively decreased the amount of labor required to process cotton, which ironically increased the spread of slavery (slaves being laborers compelled to pay all their wages in rent). As the amount of slave labor required to process a unit of cotton went down, the margin of production was extended to more marginal lands. This caused the rents on the best lands to go up, further enriching slave-owning plantation landowners and increasing their influence. With the margin extended, demand shot up for land previously deemed unsuitable for cotton production, increasing the pressure to admit new states to the union as slave states. The gin's effect on entrenching slavery was so profound that it's commonly blamed for prolonging the institution and laying the foundations for the Civil War.
[Kris: George’s case is not against capitalism but what is effectively just substituting human monopoly for nature’s monopoly because we fail to do proper attribution of factors of production and their respective returns.
Our failure of to account for the role of land properly (specifically by treating it as equivalent to other forms of capital as opposed to a fixed, inelastic supply granted by nature) leads to a host of economic distortions.] I’ve included excerpts/observations from the review under each of these headings. But the main point is:
A lot of those "capitalists" are landowners in disguise, because in non-Georgist frameworks land is typically considered a kind of capital. George says landowners oppress both labor and capital, cheating both hard work and investment out of their fair share
Misallocation of returns to capital vs labor
Speculation has a tendency to press the margin of production down until it's just past its limit, forcing labor and capital to accept returns so small that it actually hinders production or ceases altogether.
The saving grace is that as long as the population is growing and/or technology is improving, productivity will go up, and production will start again. But soon enough the land values go up.
- This drives speculators bidding up the price of land, anticipating future even higher land values,
- which stresses the productive margin again
So you get a cycle –
- productivity rises, economy booms,
- land values rise,
- production stagnates or stops.
No matter how complicated or sophisticated the economy gets with layer upon layer of financialization and abstraction, when you unravel it all George says this is the ultimate cause. [Kris: The mechanics are well-captured by the Minsky cycle]
This is how you get the baffling situation where able hands are eager and willing to work, capital is ready to employ them, natural materials are abundant, and yet the laborers are idle and the factories stand empty.
Less productivity than we might otherwise have
- Is this still relevant in the modern age, with the internet and work-from-home? Obsessing about land just feels so 19th-century. Well, in Silicon Valley rents are famously off the charts, and those and all other rents seep into the economy at every level. Workers priced out of living close by have to spend more time and money commuting longer distances to work, and businesses must devote an increasingly larger share of their production to landowners who aren't actively contributing anything to productivity. What else could explain how a family of four making $100,000 in San Francisco is considered to be living below the poverty line?
Perpetuation of inequality that is derived by monopoly/legacy instead of merit
No matter how hard you try, "there is no occupation in which labor and capital can engage which does not require the use of land." Whenever anyone does labor, the owner of some piece of land – whether it's the farm in the middle of Kansas that grows your food, the lot upon which the server farm sending you these bytes sits, or the ground that right now sits beneath your feet – is sticking their finger in the pie.
- What happens when the productivity of land goes up?
Let's go back to Lot A and Lot B, both 100-util fields. Let's say they belong to different landlords, and I'm a tenant on Lot B. I improve the soil of the field I'm working on so now it's worth 110 utils.
What happens? My landlord raises the rent, of course! [Kris: And the limit of this will follow the law of Rent]
The only way wages (the return to labor) and interest (the return to capital) can go up as productivity increases, is if land values fail to rise at the same rate…rent is a general tax on overall productivity.
Though neither wages nor interest anywhere increase as material progress goes on, yet the invariable accompaniment and mark of material progress is the increase of rent – the rise of land values…where the value of land is highest, civilization exhibits the greatest luxury side by side with the most piteous destitution
- The reason why, in spite of increase of productive power, wages constantly tend to a minimum which will give but a bare living, is that, with increase in productive power, rent tends to even greater increase, thus producing a constant tendency to the forcing down of wages.
- On average and in the long run, no amount of hard work from labor, no force multiplication from capital, no increased gain from co-operation and specialization, no labor-saving invention or increase in personal efficiency, work ethic, or morals, can escape the long reach of rent
- George notes that the mass die-off of the Black Death in England in the 1300's significantly reduced the productivity of the individual laborer, and yet wages went up. That's because the decreased population also caused a massive drop in competition for land, in turn causing rents to plummet.
The monkey wrench that causes the boom-bust cycle of industrial depressions is rent, and even though we have more than enough material wealth to provide for everybody's needs, rent prevents us from distributing it fairly and equitably.
[Kris: Note that “equitably” has nothing to do with some moral justice as we are used to considering in classic tradeoffs between equality and efficiency.
There is no tradeoff here!
What we are seeing is that we do our accounting wrong and that much of the return we ascribe to capital is really just rent and as demonstrated needs to be treated differently]
He doesn't want to confiscate land, or force everyone to live on some giant hippie commune.
He proposes instead to let everyone continue to "own" land exactly as they do now, but we should impose a special tax to neutralize the perverse incentives of land rent.
He anticipates a lot of pushback on this, and promises that his remedy:
George asks, "what constitutes the rightful basis of property?" What gives you the right to say "this is mine?"
- George asserts as self-evident the principle that a person is entitled to the fruits of their labor.
- If you improve land in some way, you're entitled to own and use that, of course. That's the product of your labor.
But to claim exclusive and permanent ownership of the land itself – from which all wealth springs and without which labor is impossible – is to demand the product of other's labor. So to invoke the sanctity of private property to defend private land ownership is self-refuting.
But what about the right of "I was here first?"
- Well, George points out that in most cases someone was there before you were, too (and often they were removed by force). Just because you arrived one second, one minute, one year, or one decade before someone else doesn't give you some fundamental right to exclude others from access to nature's free gifts. [Kris: this argument has always felt obvious to me and why I have little sympathy for NIMBY policy that begins with “I was here first”. The appreciation of your land is compensation you can use to soften the blow of being pushed out of a high-cost area where the carry costs might now be intolerable. My enjoyment of low density suburbs does not give me the right to preclude building more housing — I can sell my in-demand house and move somewhere else that is not becoming more dense if that’s my preference…the profits from my home in an area that density wants to invade is sufficient compensation]
- Many Native Americans already had a roughly Georgist understanding of land – treating it as common property, and it was precisely the colonialists' conception of land as private property that was the mechanism by which the indigenous population was expelled and their lands seized.
- The English first practiced this on their own people – once upon a time wide swaths of land in England were held in common until the government privatized those lands and gave them out to well-connected gentry in a process called Enclosure. If you've ever heard of the Luddites, you should know they weren't merely rebelling against the march of technology, they were also fighting against the forcible seizure of their lands by industrialists, who far from being salt-of-the-earth free-enterprise entrepreneurs, were in actual fact crony capitalists stealing the people's land with the aid of anti-free-market subsidies and armed thugs, all supported by Big Government™.(”free markets for me, not for you”)
Private ownership of land leads to serfdom.
The essence of slavery is that it takes from the laborer all he produces save enough to support an animal existence, and to this minimum the wages of free labor, under existing conditions, unmistakably tend.
George points out that even though Slavery was abolished, the Southern landowners just changed the brand name to "sharecropping" and were able to continue to extract tremendous wealth from "free" Black Americans in the form of rent.
Okay, but excluding evil Southern plantation owners, don't landlords deserve compensation for their work? What about Ms. Nguyen, the nice lady who manages your apartment block and went the extra mile for you when your A/C went out last summer?
I like Ms. Nguyen too, but let's contrast her with Mr. Slumlord, who owns the apartment block next door that's superficially identical, but who won't help you when your A/C goes out in the middle of summer.
- Ms. Nguyen charges higher "rent" for her much better maintained units because part of that "rent" is actually her justly compensated wages for her labor in managing them, as well as interest from returns on the capital she's invested in their ongoing improvement and maintenance. She also collects a good bit of true Georgian rent because she is, after all, a landlord. [Kris: Again notice the accounting]
- Mr. Slumlord puts in as little work as he can get away with and invests as little capital into maintenance as will keep the state off his back. His return is almost entirely rent. And the only reason he can charge rent in the first place is because of the valuable location – value the community produced, not him.
And that's the real injustice of land rent – the community produces the value, but the landlord charges rent to access it.
Can actually be practically applied
Land value tax you only pay tax on the "ground rent", which is the value of your land, but not the improvements.
- All improvements come from labor, and optionally capital, and so its fair for those factors to take their return. If I "rent" you my hotdog stand (but not the lot it sits on) my return would be classified as interest in George's framework because the hotdog stand isn't land, it's capital – the stored-up fruits of my labor that I'm using to get more wealth.
- The problem with our current system is that when anyone in the community builds improvements, it makes adjoining land more valuable, and then those adjoining landlords jack up the rent. This makes things worse for everybody but the landlords.
- What if I plant some nice trees, and invest in some landscaping to stop erosion? Where's the line between "improvements" and "ground rent?"
George's insight is that extra value from my improvement "spills over" from my land and is soaked up by the ground rent of your land. So under a land value tax, we can correct for the perverse economic incentives, distortions, and oppressions that come from land rent without having to actually take your land from you…Your house is still private property, but the value of the land it sits on is common property.
(the principal cause of land value increase is the productivity of your neighbors. An empty lot in the middle of nowhere is worthless, but an otherwise identical empty lot in the middle of New York city is priceless. As they say in real estate - "location, location, location." The reason location is valuable is because of the activity and contributions of the community, and yet the landlord claims the right to seize it all as rent.)
In most cases it's pretty straightforward to separately assess the value of a plot from the value of what sits on it (modern property tax assessors do this already), but George grants that in some edge cases with the passage of time at least some improvements will be subsumed into the land value and that's okay…But it will be said: There are improvements which in time become indistinguishable from the land itself! Very well; then the title to the improvements become blended with the title to the land; the individual right is lost in the common right.
It is the greater that swallows up the less, not the less that swallows up the greater.
- Okay, ground rent bad. How much should we tax it? 100% Take the rent the tenant has to pay each month, calculate the portion attributable to the value of the unimproved land itself, and send it to the taxing agency. (In practice Georgists often talk about rates closer to 85+% given real-world limitations in assessment, but the point is to hit it as hard as you possibly can. Get close enough and you still have good effects.)
Will solve all our problems once and for all
- Won't land taxes jack up land prices?
No, actually - in fact it will do the opposite, because such a tax is laser-calibrated to eliminate speculation, which makes up the bulk of inflated land values, and thus rent. Tax land for the full ground rent and you make real estate more affordable, not less.
- Won't it enable an all-powerful centralized nanny state? Quite the opposite – land value assessment is a fundamentally bottom-up, localized task, so it naturally empowers local municipalities at the expense of distant central authorities. Also, income taxes, wealth taxes, investment taxes, etc, require an ever-vigilant centralized bureaucracy peeking into every aspect of an individual's life to catch tax evaders, who have every incentive to hide their assets or even just flee. Land can't move or hide, and nowadays we have tools like GIS to make it even easier to assess.
Under land value tax, nobody needs to pry into your personal life or impose burdensome accounting rules on your small business that actually entrench the power of giant corporations
- Today land value tax is widely considered to be the only tax that doesn't suffer from Deadweight Loss
- So does this mean there can never be profitable landlords ever again?
Since nobody produces land, it's the one thing you can tax without getting less of it. This drives out speculators entirely. Speculators can no longer distort rents by bidding up the price of land and holding it out of use, and can no longer compete with those who actually intend to use the land. This restores the proper balance of land, labor, and capital.
Now if you work harder, or invest more capital, you can actually expect to see an increasing return without it all being gobbled up by ever-increasing rent. It eliminates the speculative distortion that is the unearned privilege of landownership…Land value tax is just about the only kind of tax that can't be passed off to someone else.
Of course not – they just have to earn their living honestly like everyone else. Remember, we don't tax the improvements, just the "ground rent." So Ms. Nguyen still gets paid for all her honest work and judicious investments, but Mr. Slumlord doesn't make a dime until he gets off his lazy butt and does something productive.
- Modern economists have some interesting things to say about George's ideas, too.
- In 1977 Joseph Stiglitz demonstrated that land rents have a tendency to almost perfectly equal the value of investment in public goods. He called this the Henry George Theorem.
- Milton Friedman famously called land value tax the "Least Worst" tax.
- But one of my all-time favorite endorsements will always be that one time the economist Ramin Shokrizade unwittingly re-derived land value tax from first principles to (successfully!) fix recessions in EVE Online.
- Land in Times Square will still be a lot more valuable than land in Podunk, Saskatchewan, but both will approach the same price as the LVT rate gets closer to 100%.
- George sees this as a good thing.
This encourages people to actually make use of valuable land rather than holding it out of use, blighting the urban core and forcing development to sprawl out for miles in every direction, leading to worse transportation and more pollution.
But... doesn't this mean that if people aren't putting land to productive use, they'll eventually be pressured to sell it off to someone who will?
Without land value tax you get situations where somebody can anticipate that an empty lot will become valuable in the future, buy it, HODL forever, lobby against future development that would depress their property values, and now you have the Bay Area's housing crisis. Or buy an apartment block, do the absolute minimum the tenants will tolerate without killing you, constantly jack up the rent as the city grows, and you get slums.
[Kris: The optionality or extrinsic value now has more theta…the option is far more expensive…the question in my mind is “why should we not make the option less affordable? What do we gain by subsidizing speculation for a good with inelastic supply?”]
- Isn't building too much stuff bad for the environment? Won't this encourage over-development?
- No. What's bad for the environment is sprawl, which the current system encourages and which the land tax would directly attack. If you want dense, walkable cities that don't depend on cars to get around, you should eliminate land speculation.
- A good objection: Isn't Georgism just going to price the poor Carl Fredricksens out of their homes so that someone with a more "productive" use can have it instead?
- For starters, if you're worried about kindly old people losing their homes, that's a thing that's happening already, and most of the time it's because The Rent Is Too Damn High, and our existing system is net worse on this score. We are currently facing an unprecedented crisis of evictions in tandem with the COVID pandemic, and it's not like things were peachy before. And even though homelessness seems to be declining in the US overall, it's getting worse in the most prosperous cities, exactly as George predicted.
- Even if the state isn't confiscating everybody's land, if you can't pay your land taxes you have no choice but to sell your land, right? Isn't this morally unjust to the Carl Fredricksens of the world?
- First, it's not a given that Mr. Fredricksen will be worse off on net: he already pays income and sales taxes, capital gains on any investments, as well as property tax which taxes both land value and the value of his house. As speculators leave the real estate market the land tax that replaces his property tax drop will drop, and his house is an improvement that goes entirely untaxed.
- Also, if the speculators holding onto all the most valuable real estate in the downtown districts are forced to give it up, there won't be as much competition for land and so there's a good chance developers won't be interested in trying to buy up land in a bedroom community in the first place
[Kris: It’s important and worthwhile to read the above arguments, counters, and justifications. But the key point, in my opinion, is a land value tax is not happening in isolation. This tax would be in lieu of many existing taxes and in fact I think taxes on the commons are preferable to taxes on income]:
Back in George's day it was even argued that a 100% land value tax on ground rents should be the only tax – the "Single Tax," replacing all other tariffs, duties, and other taxes (keep in mind this was in the late 1800's and Federal income tax wasn't introduced until the 16th amendment in 1913).
To sum up, if we tax the ever-loving hell out of ground rent, George says we'll see the following benefits:
- Make housing much more affordable
- Eliminate perverse incentives and speculation
- Encourage the most efficient use of land
- End wage slavery and rack-rents
- Encourage investment and innovation
- Lower or eliminate some other unpopular taxes
- Not hand everything over to a centralized planned economy that probably won't work
- Fund a Universal Basic Income and public goods [Kris: and get rid of the web of entitlements we already have?]
Extra: Dunking On Malthusianism
Lars’ book review has multiple appendices but I thought it was worth re-printing Henry George’s critique of Malthusianism because people who would reject Malthusianism if you asked them outright unknowingly spew rhetoric indicative of a dark, self-serving Malthusian mindset.
George Dunks on Malthusianism
Malthusianism in George's time was wildly popular, and often invoked by the ascendant proponents of Social Darwinism who took Charles Darwin's theory of "survival of the fittest" and recast it as a moral justification for the Just World Hypothesis. Essentially, those that are doing well do so because they are more "fit", and those that are less "fit" tend to perish, and furthermore, this brutal process will actively "improve" the human race. This philosophy was the energizing intellectual force behind both the Eugenics movement and Nazi Germany.
George clearly hates everything about this philosophy but attempts to steel-man it anyways:
The Malthusian doctrine, as at present held, may be thus stated in its strongest and least objectionable form:That population, constantly tending to increase, must, when unrestrained, ultimately press against the limits of subsistence, not as against a fixed, but as against an elastic barrier, which makes the procurement of subsistence progressively more and more difficult. And thus, wherever reproduction has had time to assert its power, and is unchecked by prudence, there must exist that degree of want which will keep population within the bounds of subsistence.
The weak form of Malthusianism is "people are as dumb as deer and will breed endlessly until there's not enough food and everyone starves to death."
The strong form of Malthusianism is, "of course people aren't mindless deer charging into a brick wall, but there is a firm upper limit that can only give so much before nature will cull the herd without mercy."
And by George, we can't just dismiss the strong form out of hand: "what seems clearer than that there are too many people?"
However, George is suspicious of how easily the Malthusian theory justifies contemporary economic assumptions and assuages the moral sensibilities of the establishment:
The great cause of the triumph of this theory is that, instead of menacing any vested right or antagonizing any powerful interest, it is eminently soothing and reassuring to the classes who, wielding the power of wealth, largely dominate thought... It furnishes a philosophy by which Dives as he feasts can shut out the image of Lazarus who faints with hunger at his door;
He points out how it lets self-styled "Good Christian Men" reframe their own greed and indifference as just plain good sense:
In this view, he who in the midst of want has accumulated wealth, has but fenced in a little oasis from the driving sand which else would have overwhelmed it. He has gained for himself, but has hurt nobody. And even if the rich were literally to obey the injunctions of Christ and divide their wealth among the poor, nothing would be gained.
(Aside: I've heard this exact defense offered by many of my fellow Christians)
Okay, George makes a strong moral case. But a moral case isn't enough, and I think this is where many activists of all political stripes go wrong. If you attack the premises of an idea as "dangerous" because it could lead to bad consequences, you're still stuck with a real problem if the premises that animate that "dangerous" idea turn out to be actually true. If they're true we're stuck with them, and unless your competing policy admits to the same grim facts, your opponent will just dismiss your entire argument and more importantly, so will their audience.
But if the premises aren't true, then the dangerous and scary policy prescription – say, "let the Irish starve to death" – is both evil and unnecessary. History has shown that many officials will shrug their shoulders at "evil" policies so long as they believe them to be "necessary."
Cool, we've established that Malthusianism is bad.
Now let's establish that it's wrong.
From where we're sitting in 2021, we don't even need George to refute Malthusianism, history has done that for us.
Instead of increasing at an exponential rate, fertility rates are crashing all over the world. Not in one country, but in virtually every country, and in many the birth rate is already below replacement. Fertility rates have been crashing so hard that some are calling it a "Global Fertility Crisis." The absolute size of the human population is still growing, but this is just due to inertia; the human population will peak somewhere between 9 and 10 billion in the 2060's, and then decline from there.
The two main things Malthus got wrong were failing to anticipate 1) advances in food production technology like the Green Revolution, and 2) that humans can control their own fertility rates.
George's strongest arguments against Malthusianism strike directly at the provably false claims of its 19th century proponents and provide some extremely salient applications of George's philosophy.
George takes up the cause of India, China, and Ireland, which were often cited as examples of "overpopulated" countries where many have starved and been forced to emigrate. Per the Malthusians, this is the fault of too many of these poor, ignorant, and deficient people crammed together in too small a space.
By George, it can't be the fault of population density – in his time, Germany, Belgium, England, Netherlands and Italy all have higher population densities than India, China, and Ireland, and could therefore support higher populations with the right conditions. And there's certainly nothing wrong with the people themselves:
This arises from no innate deficiency in the people, for the Hindoo, as comparative philology has shown, is of our own blood, and China possessed a high degree of civilization and the rudiments of the most important modern inventions when our ancestors were wandering savages.
It arises from the form which the social organization has in both countries taken, which has shackled productive power and robbed industry of its reward.
India is poor not because it has too many Indians, but because it is oppressed by too many Englishmen:
The millions of India have bowed their necks beneath the yokes of many conquerors, but worse of all is the steady grinding weight of English domination... India now is like a great estate owned by an absentee and alien landlord
George gives us lots of details about the plight of India, China, and Ireland, but for the sake of brevity I'm just going to present the heartbreaking case of the Great Irish Potato Famine and let it stand in for all three.
To sum up, from 1845 to 1852 there was a period of mass starvation and disease in Ireland. About one million people died, and another million fled the country. The entire population dropped by about 25%:
The extreme poverty of the peasantry and the low rate of wages there prevailing, the Irish famine, and Irish emigration, are constantly referred to as a demonstration of the Malthusian theory worked out under the eyes of the civilized world.
Many prominent intellectuals of the day looked at the crisis, shook their heads, and said – what do you expect when those ignorant Irish Catholics breed like rabbits and strain Ireland's carrying capacity to its limit? It's just natural selection at work!
George will have none of it:
The laborer was just as effectually stripped by as merciless a horde of landlords, among whom the soil had been divided as their absolute possession, regardless of any rights of those who lived upon it.
Okay, they had to pay some rent, so what? Didn't they bring their suffering on themselves? Why, the intellectuals ask, didn't the Irish work harder, why did they not improve their local economy and agricultural base? And most importantly, why did they depend on a single monoculture crop (the potato) if a single blight could knock out their entire food supply?
By George, because The Rent Was Too Damn High!
tenants... even if the rack-rents which they were forced to pay had permitted them, did not dare to make improvements which would have been but the signal for an increase of rent. Labor was thus applied in the most inefficient and wasteful manner.
The Irish were really trapped. Working harder to improve the farmland to increase its yield could actually leave them worse off. Any increase in their land's productivity goes to the landlord in the form of increased rents. But even this structural impoverishment of the land wasn't sufficient to cause the famine. Ireland still produced enough food to feed its people:
For when her population was at its highest, Ireland was a food-exporting country. Even during the famine, grain and meat and butter and cheese were carted for exportation along roads lined with the starving and past trenches in which the dead were piled.
People were literally starving and dying, but because of the structure of land ownership they couldn't even pay their rent, let alone purchase the food grown from their own lands and raised with their own hands. Since the local population couldn't afford it, the (English) landlords sold it abroad to the highest bidder.
It went not as an exchange, but as a tribute – to pay the rent of absentee landlords; a levy wrung from producers by those who in no wise contributed to production... they lived on the potato, because rack-rents stripped everything else from them.
The Rent Is Too Damn High, and it's not because the designated underclass of the day have too many babies or are too uneducated, too ignorant, too religious, too lazy, or too foreign.
George gets really mad about this, and calls out John Stuart Mill and Henry Thomas Buckle by name for lending credence to the Malthusian explanation of Ireland's suffering.
I know of nothing better calculated to make the blood boil than the cold accounts of the grasping, grinding tyranny to which the Irish people have been subjected, and to which, and not to any inability of the land to support its population, Irish pauperism and Irish famine are to be attributed; and were it not for the enervating effect which the history of the world proves to be everywhere the result of abject poverty, it would be difficult to resist something like a feeling of contempt for a race who, stung by such wrongs, have only occasionally murdered a landlord!