Georgism: Part Three

I’ve made it through Chapter 15 of Henry George’s Progress and Poverty.  I’m finding his book quite enlightening. I believe it would be enjoyable to those Spirited Reasoners who, like me, appreciate logical writing (especially those of us who suffered through economics courses in college.)

George takes pains to define what he calls the three elements of economic production: land, labor, and capital. The fruits of these he describes as rent, wages, and interest, respectively. He opines, and I agree, that much of our difficulty in understanding economic theory (and governmental policy in that regard) can be traced to the sloppy way we misuse those terms. When we use the terms the way he defines them, we discover that they can be used as terms in simple algebraic equations. Thus, if economic output = rent+ wages+ interest, then we can move terms around and say that  wages = total output – rent – interest.

Rent, according to George, is the yield that the land produces all by itself, without the help of labor or capital. Thus, we might find wild berries or other crops growing on a plot of land, and the value of that food would be considered rent. If we then apply some labor to pick the berries and sell them, we would expect the price of the sale to equal the value of both the rent and the wages. Note that capital would not be necessary at this point, unless we needed a vehicle or other machinery to harvest the crop. In that case, our sales price would equal the value of the rent, the wages, and the “interest” on the capital. (His use of the word interest is unique, but I’m getting used to it. I just think of it in terms of stock dividends. Those of you who are disciples of Henry George should let me know if I’m getting this wrong!)

Ultimately, I’m looking forward to reading his theories about the fairest and most efficient ways for a successful society to structure taxation. But I haven’t gotten to that part in his book yet. Even so, I’ve found the following ideas refreshing:

  • Labor produces capital and not the other way around. This concept becomes self-evident when we think back to the most primitive society. (I’ll paraphrase his examples for purposes of brevity.) Suppose our society consists of only three families: one that fishes, one that hunts, and one that grows crops. The fishing poles, hooks, and lures used by the fishing family are all produced by the work of their hands–i. e., the “capital” they use in their business is really just a product of their labor. The bows and arrows created by the hunting family are also produced by labor, as are the hoes and other implements manufactured by the growers. A medium of exchange is devised–perhaps colorful rocks or beads–to account for the fact that the bounty of fish, game, and crops do not always arrive at the same time. Thus, the fishing family collects beads in exchange for their fish, then uses those beads later in the year to pay for game and crops when those commodities are ready for purchase. These stored up beads, which we call capital, are really just stored up wages. Thus, capital is nothing more than wages kept in a form that can maintained for future use. Note how George’s common-sense view of capital turns our modern-day notion of “capitalism” on its head. Most of us have come to think that it is the owners of capital who create wages. Not so, says George.
  • George calls it a law of human nature that people will gravitate toward those jobs that will satisfy their desires with the least exertion. For that reason, the only explanation for a society in which people are working strenuously for unreasonably low wages is because someone is monopolizing the land and/or capital needed to perform the necessary tasks. He notes that if land were free, as was the case in newly settled territories, then these hard workers would naturally move into those areas to avoid paying rent. They could then produce whatever crops or products they desire and keep all the fruits of their labor. In other words, their wages would not be taxed through the payment of rent to landlords.
  • In well-established economies, all the land is owned, and thus most wages tend to be taxed through some sort of rent payable to landlords, even those these rental payments are often disguised. I’ve heard that George prefers taxes on raw land for exactly this reason–the idea being that those who own unimproved land are doing nothing to benefit the greater economy.

Could Georgism be a solution to the excesses and caprices in our current system of taxation? Stay tuned.