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February 27th, 2011 by Edward Miller

I haven’t found much cogent criticism of Henry George, and I’m always open to reading any serious critiques. In the discussion page of the wikipedia article on Georgism there was a link to a mutualist critique located within W. H. Van Ornum’s book “Why Government at All?

The focus of this blog post will be Chapter 2. If there are any other parts which you, my dear reader, find in need of a retort, I will kindly oblige.

    [George] defines interest as “all return paid for the use of capital, including compensation for risk.” But capital being a part of wealth is necessarily subject to the laws which govern wealth. Yet wealth is extremely perishable. From the time of its production it begins immediately to decay. Some forms of it will decay in a few days; some in a few weeks; and comparatively little will endure for a term of years. Now it is ridiculous to claim that it is still used after it has ceased to exist. But does interest cease when the capital, for the use of which it is paid, has perished? Not a bit of it! It remains a perpetual tax upon labor until the original amount of capital, undiminished by waste, has been restored.

By the definition of political economy, interest is simply the return from capital, regardless of the payment schedule. If it is all paid in a lump sum, then one doesn’t have to factor in the time value of money, but if the payment schedule to the producer is longer, then you are simply doing the same thing as paying in a lump sum but as if you had taken out a loan from the producer to pay it.

    Mr. George says: “That I, having a thousand dollars, can certainly let it out at interest, does not arise from the fact that there are others, not having a thousand dollars, who will gladly pay me for the use of it, if they can get it no other way; but from the fact that the capital which my thousand dollars represents has the power of yielding an increase to whoever has it, even though he be a millionaire.” Suppose then, a miser has the thousand dollars, and hoards it, how much increase will it yield him? Or even if invested in those forms which Mr. George assumes will yield a natural increase, such as orchards and vine yards, or herds and flocks, how will he utilize that increase without labor? Admitting the necessity [26] for labor in such cases, he still holds that “there is a distinguishing force co-operating with that of labor, which makes it impossible to measure the result solely by the amount of labor expended.” And so too, in precisely the same way, and to the same extent, when the mechanic utilizes the power of the steam, the waterfall, or of electricity to aid him in his work is “there a distinguishing force co-operating with that of labor, which makes it impossible to measure the result solely by the amount of labor expended.” Where does the product of this “distinguishing force” go to?

Everything is a part of nature, including humans, but it is access rights which we must be concerned with, not the question of whether something is natural. If we ask, “is this natural” to any phenomenon, the answer will virtually always be yes. Human labor directs the power of nature in ways useful to humans, and what George is asking is why one human is allowed to direct that power and another not allowed.

If all of the economic rent of a given location is paid out, then all of the forces of nature in addition to the community-generated wealth of the region would be factored in, and all production would have the rent fully accounted for… and as Ricardo showed, that recapture of the rent could not be “passed on to other classes of consumers.”

Some define all taxation as theft, so terminology becomes the issue here. One can only be stolen from, in any meaningful sense, if one has just claim over the possession in question. The recapture of rent is often misleadingly labelled as a “tax” in the same way that internalization of externalities is often misleadingly labeled as a “tax.” It is really more like restitution than taxation. Just as externalities could be internalized in any number of ways, so could rent be re-captured. Fred Foldvary put forth a model of geo-anarchism that does so via means not unfamiliar to mutualists.

    I think that even Mr. George will not deny that it rightfully constitutes a part of the rewards of labor. If this is true in the case of electricity it is true in that of interest. If not, why not? Again, if interest represents the average natural increase due to the reproductive forces of nature distinguishable from labor, why does it constantly fall? Is this distinguishing force less and less active? If so, may it not ultimately stop altogether? Interest would then abolish itself.

George explains why interest constantly seems to be falling under our current political-economic paradigm in the chapter titled The Law of Interest. The reason for this apparent contradiction (which is a theme he returns to often… why progress and poverty seem to go hand in hand) is that rent is eating up such a large share of total production, and that share actually increases as we see gains in efficiency, as per Ricardo’s Law of Rent.

What is left over after rent takes its slice is Wages and Interest, and, ceteris paribus, they tend to approximate one another since if wages are higher than interest we will tend to see an increase in the number of people choosing labor over entrepreneurship… which really gets at another fundamental point of George which is that capital is merely stored-up labor and there really are only two fundamental factors of production… nature and human creativity.

    No! The real truth is that one of the appliances, which have been devised to facilitate the exchange of wealth is money; and monopoly has seized upon that just as it has upon everything else which it can control, and by limiting the amount has been able to extort a price for its use. It differs in no respect from taxes and tariffs, or rents and royalties levied upon the production and exchange of wealth, for the benefit of those who do not labor.

It seems to be the idea of loans which mutualists object to, yet the need for loans is not a result of the Money Monopoly or any such thing, it is a result of the time value of money, differing needs and wants, and differences in the distribution of capital.

There is such a thing as seigniorage, which is a means of “extoring a price” for the use of money, though it is a rather trivial issue today. It is properly classified as economic rent, and as such could be subject to georgist taxation, but there are bigger fish to fry.

    Suppose now, I want a watch. The materials for its construction are in the earth. They are component parts of the land,—several bits of land. Labor is applied, and those bits of land are changed into several kinds of pig metal. But the only real change is that the labor has been impressed upon those bits of land. They have taken on the concrete form of pig metal, but they remain simply land plus labor. Exclude the land, and the labor, and nothing remains. Take another step toward the production of the watch, and we have but repeated the first; and when we have finished the watch, it is still only land plus labor. Exclude these two, and nothing remains; therefore, according to Mr. George’s own formula, capital is nothing. Apply the same process to any other form of wealth, and the result is precisely the same. Capital has not been a factor in its production, and is not entitled to share in the proceeds.

George would not say capital is not a factor at all, but that it is more or less a sub-factor. It is human creativity in a stored-up form. It can get tricky considering how many capitalists are simply rentiers in disguise since they lobby for protective tariffs, barriers to entry, patents, and so on… but if we speak of production by capitalists without special privileges, we don’t have to be very concerned, because as was mentioned previously:

    Interest falls because the number of capitalists, and the aggregate amount of capital seeking borrowers, increases faster than the borrowers do. The competition brings down the price.

Ornum continues:

    There is a circulation of wealth, and if that circulation is free, the distribution will remain unchanged, because the producer will insist upon getting an equivalent before he will part with it. The thing that does take place is a concentration; and it begins at the moment when the product passes from the hands of the laborer to the employer. The laborer is not free. He has been compelled to enter into a contract of employment by which he must give up his product for a stipulated price, which is inadequate. The concentration begins there. The circulation is not free. The inequalities here set up are further increased by every law or regulation which interferes with the freedom of that circulation. Is this too nice a distinction? I think not. To speak of the distribution [29] of wealth, when we mean a concentration, is to lay the foundation for serious errors. From this come all the arbitrary schemes for effecting an enforced equality of distribution, instead of simply clearing away the obstructions to the freedom of that circulation.

George would certainly agree that limitations on how people can go about trading the fruits of their labor are unjust restrictions of liberty, but when it comes to limitations to one’s sovereignty over land, there can indeed be solid justifications, and both georgists and mutualists recognize the injustice of absentee landlordism. Even Locke was concerned about this when he developed the Lockean Proviso, but George’s solution is far easier to administer.

If one wants to take a deontological position that at the highest meta-political level there exists a natural right to universal usufruct, then so be it, but within that we can cooperatively homestead Georgist communities… and I guarantee they would outcompete any mutualist communities. Though under no circumstance can the recapture of economic rent be put in the same category as taxation which steals from the fruits of labor, nor should it be confused for an advocacy of statism. It is a practical concept that can be administered under any number of political arrangements.

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12 Responses to “Any Critiques of Georgism?”

  1. I think identifying Van Ornum as a “mutualist” critic is probably a bit misleading. While he eventually came to adopt aspects of the mutualist project, such as a form of mutual banking (see his “Money, Cooperative Banking and Exchange), at the time he wrote “Why Government at All?” he was a disappointed Georgist, headed towards anarchism (ultimately of the “without adjectives” sort, I would say), but full of slightly wrong-headed critiques of the “fallacies” in Proudhon, etc. Van Ornum’s criticisms, at least in this particular text, should probably be understood as *internal* to the “single tax” movement in the US. As late as 1889, Van Ornum was busy trying to straighten out the readers of “The Open Court” on the question of land-value taxation. (See “Wheelbarrow and Land Values.”)

    The most extensive criticisms of George from the American individualists and mutualists probably occurred in the “Irish World” debates, which spilled over into paper’s like Tucker’s “Liberty.” J. K. Ingalls’ “Henry George Examined” is probably a much more interesting critique from those quarters, from a relatively sympathetic outsider.

    http://libertarian-labyrinth.org/archive/Henry_George_Examined

  2. Thank you, I will look into this with an open mind and hopefully write a post on it shortly.

  3. Ingalls’s piece is decent because it recognizes the injustice of the current system, but the alternative system he proposes cannot possibly return all the economic rent from land back to the community. We all own the Earth, period.

    Obviously Ingalls has anarchist views, so he dislikes any system that seems to require big-ness, yet certain things are universal. Just as it is the case that murder is never acceptable anywhere, so is it the case that private extraction of land rents is never acceptable.

    Obviously certain people will breach that, and even go so far as outright imperialism. Yet, it is never morally acceptable.

    Also, the dialogue propped up a staw man. Henry George would never say that some men don’t want land. He repeatedly states that all men require access to the Earth. He also never denied that mixing labor with land is necessary to create wealth. In fact, he states this explicitly and repeatedly. I have trouble believing Ingalls has read George. By extension, I have trouble believing you have.

    To contextualize why I’m passionate about this… I am a believer in the Citizen’s Dividend. I think people ought to receive their full share of the Earth’s natural and locational value. It is unacceptable for anyone to go hungry or homeless in the 21st Century. Yet, theft of income to achieve that is both immoral and, more importantly, quixotic given the Law of Rent.

    Under the Ingalls-Tucker approach, economic rent would still accrue to land-“possessors” and only mutual aid would be available to the poor… yet that mutual aid would, in addition to its inherent unreliableness, be blunted by the Law of Rent given that quite a lot of land monopolization would still be allowed.

    I am also just confused and concerned about the specifics. Is he advocating more of an occupancy-and-use system or a Lockean Proviso system, or some mixture. I cannot see anything consistent here.

    If absentee landlordism is unjust, then how can a distributed group of people get together and build a factory? Would they all have to live in the factory in order to maintain possession? Or would companies and partnerships of that sort simply be illegal?

    Let us assume we’ve both agreed that panarchy is the best meta-political system. Even under this condition, because of the obvious superiority of the Georgist model, it ought to be the one vigorously promoted.

    It must be recognized that not only is land monopoly unjust, but it is a “robber who takes all that is left.” It is the thing which makes almost all other economic reforms impotent, and the most urgent thing to critique. Mutualists may claim to believe that, and logically they are forced to agree, but their voices are curiously absent on that issue.

    Mutualists are rightly outraged by corporatism, as I am, but corporatism necessarily only steals that which would already have been stolen by the land monopoly. Eliminating corporatism just turns back the clock to the time of the landed gentry. Corporatism cannot and must not be one’s only economic focus, as it is for far too many mutualists.

  4. One of Henry George’s supporters was another newspaperman named Ernest B. Gaston. He organized the founding of the experimental community of Fairhope on Mobile Bay in Alabama. The community adopted “cooperative individualism” as their principles. Although Henry George never used this term (that I have found in his writings), the term is very descriptive of his general philosophical principles. As a long-time student of Thomas Paine’s writings, I describe Paine as the architect of cooperative individualism and Henry George as Paine’s successor in championing the cause.

  5. Some thoughts on this interesting subject.

    Wealth is the material product of human exertion that has exchange value — this last to clear from the definition any unimportant production such as making sand castles on the beach.

    Production takes time to reach the consumer (the target of the producer). Any material goods that are part of the process of production are given the name capital. So, factories, machinery, tools, and the product of labor on its way to the consumer is capital. If labor borrows some of this capital, he will pay interest. This is a time payment and is well worth paying for capital multiplies the production of labor which means it multiplies his wages.

    Production continues until it is in the hands of the consumer – whereupon production is finished and we can call it wealth.

    It’s worth looking at production from the point of view of labor (without whom there would be no production).

    Labor has two primary costs that are paid from his production — interest for the capital he borrows – something well worth its cost and rent for the location he must occupy in production.

    Rent may be regarded as the advantage given to labor by use of a location.

    Thus, he pays for what he gets. It’s a zero sum amount. He gets an advantage to his production, which is rent. He pays this to a landholder and is none the worse for the expense. After payment of interest and rent, everything else is wages, which is why there is production in the first place.

    Unfortunately, this ideal situation is not what happens in practice. Prices are set by something called the price mechanism. You may know a better as supply and demand. When demand for a good increases, its price rises. This increased price stimulates factories to produce and rush their goods to market. These goods satisfy demand, which slackens and prices drop back to equilibrium.

    Unfortunately, this doesn’t happen with land locations. Nothing can be done without access to land, so the demand for land is continuous. When demand for a location increases, the rent rises. But, more locations cannot be produced and locations cannot be moved, so rent continues to rise. Downtown Los Angeles rents are very high, yet some cheap Mohave desert land cannot be moved in to compete with the high rents.

    The price mechanism doesn’t work with land locations, so the cost of land keeps rising placing an increasing burden on labor whose wages drop as landholders become more demanding.

    How high does rent go? It increases until the wages of the poorest workers can go no lower. Any higher and the lowest paid workers will drop below subsistence and there will be, as Henry George put it, ‘a cessation of life’.

    This exaction is no longer rent — the advantage to production that attaches to a location. I prefer to give it the name rack-rent, an old term that seems appropriate. I define it as “The highest amount that can be exacted from a tenant while maintaining production.”

    A major contribution to rack-rent comes from the non-use, or under-use of land. A landholder with some ripe land doesn’t want to invest in it. If he does and a sale becomes attractive, any invested money is lost.Also the cost of knocking down the investment is deducted from his price. So, he holds on awaiting the eventual bonanza while refusing to invest in vacant land or spend money repairing slum properties. In any event, in an advancing economy, land prices continually rise as he does nothing. So, he waits and prospers. Should local expenses – say property taxes – become a nuisance, he can always inexpensively lay down a bit of blacktop and he has an income producing parking lot until the big sale.

    Meantime vacant and under-improved land helps to maintain rack-rents.

    Essentially, the advantage given to labor by his use of capital disappears into rack-rent. Yet, he must use capital to pay the rack-rent. Thus, immigrant labor in California’s Central Valley were given short-handled hoes to do their backbreaking labor. The Governor passed a law forcing farmers to supply long handled hoes, thus showing how to tackle problems!

    The extent of modern welfare societies tends to hide rack-renting and its consequences. It is interesting to note how welfare never seems to be enough and must be constantly upgraded just to maintain its level.

    A heavy land-value tax makes holding land from use difficult or impossible. Either the landholder must develop his locations or he must sell or abandon them. The consequence of so much acreage hitting the market is to drop prices and wipe out rack-rent. Further, when the full rent is recaptured, the landholder will receive no rent which income will go to the community replacing taxes on production..

    Georgists spend too much time on the income from collecting rent. The economic consequences are much more important.

    Harry

  6. Harry,

    I wrote this blog post before reading the Science of Political Economy, so I can’t verify that everything is accurate (well, unless I read my own post again, haha).

    Your response was a near-perfect georgist explantation of the definition of wealth, and the relationships between land, labor, and capital. However, I would slightly modify your statement that rent is “the advantage to production that attaches to a location.” I’d instead call it “the advantage to production that attaches to a location over and above the best available rent-free land,” and then in situations where there is essentially no rent-free land, this is where your definition of “rack-rent” could come into play.

    I’m sure you’re aware of that, but it is important for our readers that rent be defined as a “differential,” and tied to the “margin of production.” I notice when I don’t define rent that way, the more critical folks will be rightfully skeptical. You must explain why supply and demand doesn’t operate in the usual way, and Ricardo’s explanation provides that. For those still confused after hearing this, I like to define it as a power relationship. You need land to live, and they hold the keys.

    I agree with you that the economic consequences are of paramount importance.

    Thank you for your lucid explanations, and illustrative examples. Your thoughts on this are very well-organized.

  7. Michael hudson provides a good context to this discussion in his recent post, Simon Patten on Public Infrastructure and Economic Rent Capture. Not exactly a critique other than to say George may not have gone far enough in his prescriptions. Interesting stuff though.

    http://michael-hudson.com/2011/10/simon-patten-on-public-infrastructure-and-economic-rent-capture/

  8. AR,

    While I agree that the private collection of economic rent across the board is the proper target for public policy to fight, there are a number of reasons why it is proper for land rent to be the primary focus.

    That such rents are the most important should be obvious, considering that access rights to sites is essential for all life and all production whereas, say, patents on some widget can never attain such a status.

    This is why Henry George called land rent the “Robber Who Takes All That Is Left.” It isn’t that reducing one rent always causes other rents to rise, but rather they rise vis a vis their systemic position. Eliminating other rents causes land rent to claim a larger percent of the total production, but eliminating the private pocketing of land rent does not increase other rents.

    “Labor may be likened to a man who as he carries home his earnings is waylaid by a series of robbers. One demands this much, and another that much, but last of all stands one who demands all that is left, save just enough to enable the victim to maintain life and come forth next day to work. So long as this last robber remains, what will it benefit such a man to drive off any or all of the other robbers?” – Henry George, Protection or Free Trade

    Furthermore, Georgists recognize that in fact almost all the other rents can be done away with entirely whereas land rent is just an unfortunate fact of reality. It isn’t strictly necessary that we have patents, licenses, etc, but given the nature of land (fixed and limited in supply, uncreated by humans), the scarcities there aren’t artificial… unlike the other examples.

    Of course not all georgists agree about what to do with patents and so on, but the fact is that there is room for disagreement in that area whereas the land question is related to more fundamental concerns of justice. So Georgists don’t ignore the other rents, we merely recognize the primacy of rents relating to the natural world, and site rents in particular.

  9. Thanks for the reply.

    I agree that a fully implemented LVT should be the centrepiece of any reform program.

    It has always intrigued me that Marxian economics treats land rent as a derivative category. According to Mason Gaffney and Fred Harrison neo-classical economics has used some of these arguments almost verbatim (although for very different political aims) in order to de-fang georgism.

    http://www.masongaffney.org/publications/K1Neo-classical_Stratagem.CV.pdf

  10. > Let us assume we’ve both agreed that panarchy is the best meta-political system. Even under this condition, because of the obvious superiority of the Georgist model, it ought to be the one vigorously promoted.

    And that’s why I’m a geo-panarchist.

  11. Edward,
    I have just come across your site and admired your expose of the land question. I bumped into Henry George in 1998 and have read all his books. Needless to say, I agree with all you say. But in 2001 I also bumped into Silvio Gesell (1862-1930) who completes the land question with the money question. One valid point he makes, quoting Michael Flurscheim (d. 1916) is that the effectiveness of land value taxation is determined by how that money is spent. If spent in infrastructures, it makes the landlords who benefit by them increase the rent. But if spent in salaries, then it hits the landlords twice. Gesell proposes to pay mothers with it, since as producers of human capital they are ultimately responsible for the very existence of the land rent. What do you think?
    If you read Italian, I have published a short historical essay on the Land Question in http://www.nonviolento.blogspot.com. If you don’t, but are interested in the topic, I will translate it, but I need time. Cheers,
    Silvano Borruso

  12. Hi Silvano!

    I don’t believe that paying to salaries hits landlords twice because that misunderstands the point. It is similar to the misunderstanding promulgated by supporters of income taxation. The reason income taxation is fundamentally flawed is because income flows to holders of privilege, and taxing the flows of income does not change where the income is flowing. Thus, in terms of how rent is pocketed, it doesn’t matter so much where the revenues of land value taxation are spent. Any residual rent that is untaxed will continue to claim a share of the total production that is proportionate to the amount allowed to be pocketed.

    Of course I wouldn’t oppose the ideas you mentioned. It could encourage more births, which could get the developed world back to a replacement fertility rate. Though a flat Citizens Dividend for all citizens, including for children (in trust), is probably more fair.

    A georgist friend of mine is going to be holding a podcast interview on March 19th with Charles Eisenstein, who promotes Gesell. Tune in!

    http://www.3cr.org.au/economists

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