Part 7
Related to the problems thus suggested is the policy commonly and widely known as “the Single Tax,” the fiscal method proposed and widely popularized by Henry George for initiating and promoting an evolutionary process in the direction not only of ethical readjustments of fiscal methods but also of ethical readjustments of the Economic relations of mankind to Natural Resources and to Artificial Objects produced from and upon Natural Resources in accordance with natural Economic law.
That policy rests upon three Economic principles. One is the principle that Land (Natural Resources) is not an individual inheritance but is a common inheritance. Since no man or body of men ever has or ever can create Land, it is by edict of natural Economic law the inheritance of all that are living. But inasmuch as Land cannot be well utilized (such Natural Resources as the sea and other open waters excepted) unless subjected to private possession for farming, mining, manufacturing, merchandising and homes, or the like, private possession, control and management of areas of Land are an Economic necessity. To adapt that practical necessity, therefore, to the common right, the Single Tax policy proposes to make private possession secure without prejudice to common ownership, by the assignment annually, through taxation, of the annual Economic Rent or Value of all Natural Resources to Governmental treasuries by way of annual compensation to the community for the annual values which the community gives to that Land. Concurrently the Single Tax policy would exempt Artificial Products and their producers from all taxation, on the principle that Artificial Products (Wealth) are the private property of their producers and purchasers.
The contention of “Single Taxers” is that such a policy would place Taxation upon a sound and ethical basis; that it would secure to utilizers of particular Natural Resources the full value of their use; that it would properly take from them for the benefit of all, the value of their monopoly of possession of common property; that it would stabilize the value of monopolized but unused Natural Resources (Land) at the level of their value for use, thereby abolishing speculation in the future values of Natural Resources; that it would open opportunities for Labor in its broadest and fullest sense to utilize Natural Resources in the production of Wealth (Artificial Objects) from Land (Natural Resources); that it would remove the artificial and lessen the natural barriers to Trade; and that it would bring about conditions of industrial freedom and equality on the basis of which every other needed social or Economic reform could rest securely and function effectively.
As the practical approach to that fundamental Economic reform--that reform of which its principal and distinguished advocate, Henry George, said that it would not accomplish everything in the way of Economic adjustment, but that without it nothing could be accomplished, for without it every Economic improvement instead of raising Wages raises Rent, instead of increasing the compensation of producers of Artificial Objects increases the values of the Natural Resources from which alone Artificial Objects can be produced and on which alone they can be traded, used or enjoyed--as the practical approach to that fundamental Economic reform the Single Tax policy proposes its application gradually. It aims to substitute by stages the Taxation of Land according to its value as a commodity, for the present unrighteous and obstructive taxation of the actual uses of Land.[6]
[6] See “Progress and Poverty,” “Protection or Free Trade,” and “Social Problems,” by Henry George, and “What Is the Single Tax?” by Louis F. Post.
Irrespective, however, of Taxation problems or of private _versus_ common rights, and retaining the long-time technical terms for primary Distribution of Wealth--Wages as to Wealth not allocated to Landownership, and Rent as to Wealth so allocated--we may proceed to our study of Rent for Landownership as the secondary allocation of Wealth in Economic Distribution.
II. RENT FOR LANDOWNERSHIP
For the use of any Land which is more desirable in its natural state than the best to be had for the taking, part of the Wealth produced from and upon it by Labor is allocated, through operation of Natural Economic Law, to the Distributive category for which the technical Economic term is Rent.
That allocation of a share of Labor-produced Wealth to Rent necessarily diminishes the proportion allocated to Wages, but it does not necessarily lessen the quantity.
Without Rent, Wages takes the whole Product; with Rent, Wages can of course take only a fraction of the whole. Yet as a result of enhancement of Labor-power--specialization, steam, electricity and other productive developments--that fraction of the whole may be greater in amount than the whole in less productive circumstances.
Rent is that proportion of total Wealth production which results from the use by Labor of Land lying above the Economic frontier, which in Economic terminology is best known as the Margin of Production.
For illustration, here are two tracts of agricultural Land of equal area and equal accessibility. One will yield to a standard of Labor-power more Wealth than the other, for the soil is richer. It will therefore be in greater demand by Labor than the other. Consequently, if its potential yield of Wealth be large enough and Land of its quality and location scarce enough to attract Landownership, Labor can utilize it only on condition of paying to that ownership a Wealth premium for the privilege. This premium is Rent. If paid periodically, it would be regarded as “groundrent”; if the “groundrent” were capitalized for selling or other commercial purposes it would take on some such term as “land value” or “selling value” or “capital value.” But whatever the form or the colloquial term for it might be, this premium for superior Land is technically classed in Economics as Rent. As Ricardo[7] expressed it at a time when “Land” seemed to mean only agricultural soil, “Rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.” Its tendency is to absorb all the Wealth produced from and upon superior tracts above what could be produced by like Labor from and upon inferior ones.
[7] “Principles of Political Economy.” Chapter II.
Still better agricultural Land would extract still higher Rent out of the Wealth product for the like special privilege of Production. Thus, with alterations in the so-called Margin of Production, the natural allocations from Wealth to Wages would rise or fall as the Margin receded or advanced, whereas the natural allocations from Wealth to Rent would rise with the advances of the Margin and fall with its recession.
The same marginal principle applies to other kinds of Land precisely as it does to the agricultural, some advanced Economic students to the contrary notwithstanding. For a non-agricultural illustration, here are two mineral deposits. One is more easily worked than the other, or more conveniently situated with reference to demand for the mineral product for Consumption. It is therefore more attractive to Labor than the other. Consequently, Labor will naturally yield to the ownership of the superior deposit (Land) a larger proportion of the mineral it extracts (Wealth) than to the ownership of the inferior deposit. The proportionate excess is Rent.
For still another illustration of the same Rent principle, here are two building-sites in a town or city. They are of equal size, and in every other physical respect equally desirable. But one of them is at the center of the business or other social activities of the town or city, the other at the outskirts. The former being in the Economic sense more desirable for Labor purposes than the latter, Labor yields to its ownership a larger proportion of Wealth as Rent than to the ownership of the other.
In a vast variety of special instances, such as those used above for illustrative purposes, Rent exacts from the flow of Wealth a continuous allocation which depends for its proportions to the aggregate flow upon the desirability of different qualities and locations of Land (as the Natural Resource factor in the production of Wealth) relatively to the desirability of such qualities and locations as may be had for the taking.
“The rent for any piece of land,” writes Max Hirsch, the Australian economist,[8] “is determined by the excess of its productivity over that of an equal area of the least desirable land in use, after the sum of exertions which in both cases yield the most profitable result has been deducted.”
[8] Page 127 of “Democracy vs. Socialism.”
All such exactions are phenomena of natural Economic law. Land exists in quantities to which Nature assigns impassable limits, and this limited supply of Land varies in fertility and in desirability of location. He who produces from and upon better grades will naturally achieve greater or better results with the same expenditure of Labor than he who produces from poorer grades. This difference is measureable by variations in the productive grades of Land, from nothing in excess of production cost on the lower side of the Margin of Production--the poorest in demand, the Economic frontier--to something in excess of production cost on the higher side of the Margin, the hither side of the Economic frontier, and to more and more for higher and higher grades up to the best.
It should be observed in this connection that the Margin of Production, the Economic frontier, is not a surveyor’s line, like the boundaries of a farm or a county or a State. It is a term for an Economic difference, from lower to higher degree in the desirability of particular Natural Resources though they be separated by long distances or short ones.
Nor need the intervening space recede from highest to lowest by geographical degrees, or relative desirability depend upon richness of soil or mineral deposits.
Trading opportunities may do much to determine the Margin. A rich gold deposit beyond the reach of trading possibilities lies below the Margin, for it cannot be utilized. A farm twenty miles away from a trading center would be nearer the Margin than one two miles away, even though the two farms were equally productive, because the marketing costs would affect the Value of the product prejudicially. Space for a building-site a hundred and fifty feet from the nearest street line would be nearer the Margin than one fronting on the street.
Although the old conception of the Margin of Production--“margin of cultivation,” as it was called--as bounding an open space of free agricultural land be obsolete, the principle of the Margin remains, namely, that the better the opportunity to profit by use of any location on our earth over use of the most profitable location thereon to be had for nothing, the higher will the Rent of the former be. That marginal principle will persist so long as some locations are preferable to others. And in those circumstances Rent will continue and be allocated with reference to “marginal” or zero-value Land. The better the opportunity to profit by the use of any location above the most desirable to be had for nothing, the higher will be the Rent of the former.
Whether the surplus of Production or possible Production be called Rent for Land, or deductions from Wages for superior opportunities to Labor, or be otherwise distinguished from Wages for Labor, it none the less exists as a distinct and natural allocation of Wealth produced from and upon Land by Labor. Although Rent depends wholly upon Labor for its Production it is a differential gain in Wealth which is due not to superior productiveness of Labor but to relative superiority of different kinds and locations of Land.
This continuous allocation to Rent of shares of Labor-produced Wealth may--it constantly does--take on Capitalized forms. As Wealth is produced it flows toward the productive factors in two distinct and continuous streams--Wages for Labor and Rent for Land. But as Land has in business custom the rank of a commodity, the legal right of its owners to appropriate Rent assumes the form of Capitalized Land Value. An annual income from Rent, for example, be that income actual or only potential, may be bought and sold in business intercourse for a Capital sum or “purchase money.” Commonly it is so sold along with the legal Land title by which it is secured to the owner, but often with Artificial improvements, the whole being called “real estate,” as if the improvements and the Land were fundamentally identical.
As a result, the word “rent” takes on in the customary business sense a different meaning from the meaning of Rent in the normal Economic sense. In private business it may mean annual “groundrent,” or annual house-and-ground “rent”; and when capitalized, all legal rental rights may be combined in Price or Value. A concurrent custom is the transformation noted above of Rent for Land into Capital value or selling Price.
Such capitalizations operate as mortgages upon future Production; and as the capitalizations increase, that kind of mortgage burden grows in Economic weight. If Production continues advancing, the consequent increase of Wealth as a whole easily bears the burden, which rests then upon the naturally increasing Rent allocation rather than upon Wages. But in consequence of such capitalizations, Rent tends to become a football for Land speculation. This results in excessive capitalizations of Rent, which tend in turn to lower the Margin of Production, the Economic frontier, abnormally. As a consequence, Rent exactions in the form of speculative Land Prices rise above capitalizations of Rent at normal levels.
Exemplifications of such Economic phenomena may be observed in any community where at any time speculative Prices for Land have figured. In such circumstances, so long as Wealth is sufficiently increased by Labor--whether from improvement in Labor-power or from progressive advantages in Land opportunities,--increasing Rent is offset by increasing Wealth, and Economic prosperity abounds. But when increase in Wealth-production lags behind Rent, prosperity is checked and a “slump” in Land-values, Economically perilous, follows.
Other causes of Economic depression than “slumps” in speculative Land-values there doubtless are. They spring from such superficial maladjustments in the processes of Trade as are connected with defective banking, fluctuations in the values of corporate stocks and variations in Money standards from lack of effective stabilization. Even as to business depressions apparently so produced it is, however, exceedingly difficult if not impossible to declare with certainty that the leading part is not played by speculative Land values. For in our neo-feudalistic era, Land values are intricately confused with Wealth values in corporation stocks and bonds. To the extent that Land values and Wealth values are thus mingled, it is quite impossible to account for many Economic upheavals without more distinctive inventories of property in Trade and more accurate Economic classifications than in business circles or among advanced students of Economics have as yet been reached.
Before passing to the next subdivision of Distribution, it may not be a diversion to direct attention to the most remarkable distortion of technical Economic terms that has yet harassed Economic thought with confusion. This is the attempt of some Economists to identify Rent with Wages, by ascribing extraordinary compensation for extraordinary human service to “rent of ability.” As a subclassification of Wages there could hardly be any objection to this assignment except its tendency to mix Rent for Land with Wages for Labor in the minds of students. As a fundamental classification, however, its absurdity is manifest. Can anybody “rent” his ability, however great it may be, without putting it at work? Could the ablest physician, for instance, get a fee unless he offered to work with his ability? Could the most brilliant author command royalties unless he wrote books? Of course not. It is only as one works or promises to work that he is compensated for any degree of ability. Although Landownership may command compensation in Rent for such special opportunities as the Land offers to Labor, regardless of whether it is utilized or not, Man cannot rent his ability without obligating himself to use his ability; and the man who obligates himself, though he may call his compensation “rent” if that pleases either his vanity or his love for confused thinking, gets for his ability no rent whatever. What he gets is Wages for making his ability serviceable as a Labor unit. Nor is such compensation any the less Wages or any the more Rent, if it be (as with lawyers) a retainer for pledging future service which in the end has not been required of him. Compensation for work, or for a contract to work, is Wages whether the contract be in consequence of the worker’s ability or regardless of it. All compensation for service units, from lowest grades of ability to highest, is in Economic terminology and analysis, not Rent for Land but Wages for Labor. The bricklayer, contrasting his Wages with the Wages of an apprentice, might call his larger income “rent of ability,” if that flattered him; but his doing so, though it might enhance Economic confusion, would not alter the Economic relationship of Wages for Labor and Rent for Land. If Economic thinking is to be done with definite terminology instead of word-juggling, all compensation for human service must be expressed by a technical term different from the technical term for premiums for varying grades of Natural Resources. The accepted technical terms are Wages for Human service and Rent for Natural Resource advantages. Though “rent of ability” be picturesque in dramatics, it is farcical in Economics.
The importance to Economic study of assigning every item of Economic phenomena, Distributive as well as Productive, to its appropriate Economic category--Labor or Land in Production and Wages or Rent in Distribution--cannot be lightly ignored nor carelessly trifled with. Nor can it be too strongly emphasized. Without such assignments Economic phenomena are like printers’ “pi”; so assigned, they may be studied with precision.
III. TRADE
The Distribution of Wealth, as well as its Production, is effected through Trade. As in the Productive Process from the very beginning of Labor specialization up to the point of delivery to ultimate consumers, so in the process of Distribution, Trade is the continuous and the culminating agency. It determines the kind of Wealth and the quantity that each factor in Production shall receive.
We have seen that Labor as a whole, a social unit, produces Wealth from Land and that this activity and this result are governed by natural Economic law--by natural relations of Economic effect to Economic cause. We have seen also that a correlative natural law, a correlative connection of effect to cause, constantly allocates one portion of the total Product to the Labor factor and another portion to the Land factor. We may readily see, moreover, that those two primary allocations subdivide into almost infinitesimal and extremely confusing secondary categories, comprising every variety of Labor, every variety of Land, every variety of Wealth, every variety of Economic desire. It is to satisfy those desires out of that continuous flow of Wealth that the infinitude of processes indicated in the next preceding Lesson enter into the comprehensive Productive Process which includes delivery to ultimate consumers, and that an infinitude of corresponding processes enter into Distribution.
Many of those processes overlap, playing now a part in Production and now in Distribution. Some of them are natural, some are customary, some are legalistic. But all are subject to the cooperation or to the obstruction of natural law as manifestly as is the navigation of a sailing vessel on the ocean. In so far as the customary or the legalistic do not conform to natural Economic law, natural penalizations inevitably result; in so far as they do conform to natural Economic law, the results are socially as well as individually beneficial. As with gravitation in the physical universe, so with its correspondent force in the Economic domain.
Not only, then, are the minute details of Labor specialization merged in Productive wholes and delivered in their completeness to ultimate consumers by means of Trade, as we learned in the next preceding Lesson, but, also by means of Trade, the two great divisions of Wealth (Wages and Rent) are assigned respectively to Labor interests and to Land interests in proportions determined by comparisons of Value.
Individual deliveries, in contrast with Distribution into the two basic categories, Wages and Rent, consist in the delivery of Wealth to individuals in proportion to the effective demands of each. Their demands are limitless, for when satisfied with quantity they naturally demand quality. But there is a limit to all effective demands. The limitation on the one hand is the producer’s ability to produce, and on the other the consumer’s ability to obtain in Trade. Ability to produce depends in high degree at any time upon the general productive knowledge of the time. Ability to obtain depends upon the Economic power in Trade of the individual seeking to gratify his wants. If he is isolated from all the rest of mankind, he is outside the Economic circle and can obtain only what he himself directly produces. If he is one of an absolutely free community, he can obtain what others are willing to give him in Trade for the service he renders directly or indirectly to them. If Production be arbitrarily obstructed, whether by impediments to Natural Resources or to Trade, his ability to obtain Wealth is not so much according to what he produces or to the service of any other kind that he renders, but according to his command over the sources of Production and the channels of Trade whereby he may levy tribute or escape it.
As human services naturally tend to exchange at par for equally desirable human services, so do different forms of Wealth, each product of human service, tend to exchange at par for equally desirable forms of Wealth; and as Wealth in the Rent category and Wealth in the Wages category are alike service-products of Labor applied to Land, exchanges of every kind of Wealth tend to be effected on the basis of equality in the expenditure of Labor for their Production.
Let it now be carefully observed and faithfully remembered in this connection, that however various the kind and the amount of Wealth that individuals receive, each variety is but a subdivision of Wealth as a whole, and is therefore either Wages or Rent, those being the two primary divisions of Wealth in Distribution. A “captain of industry” may get a large share of Wealth for his service while a skilled laborer gets a small share for his; but each will take his share from Wages, not from Rent. On the other hand, the owner of a rich mining opportunity may get a large share of Wealth and the owner of a small area of farming land or a village building-lot may get a small share; but each will in that respect get Rent, not Wages. To the extent, however, that the “captain of industry” derives any part of his income from Natural-Resource privileges, that part is Rent; and to the extent that the mine owner or the farm owner or the village lot owner derives any part of his from his service, that part is Wages.