1. The Collection of Land Rent
If people are free to conduct their economic lives as they
please, so long as they do not harm others, in accord with the
universal ethic described in Chapter 1, then they live in a free
society with a free market. The ideal market economy is built on
a legal foundation in which human rights, including property
rights, are protected. Its two main principles are 1) self
ownership - each person owns his or her life and labor, and 2)
charging rent for the use of natural resources, since land cannot
be claimed from self-ownership.
Economic land rent is the potential, if not actual, yield on
land exclusive of capital goods tied to land, such as buildings.
The amount of rent is determined by the value of the uses to which
the land can be applied. Some rental value is due to natural
features, such as sunlight and rain for farm land. For urban land,
the bulk of value is due to human action: population and commerce
create a demand to be located in this territory, increasing rent
and land value. Still more site value and rent are created by
civic goods and services, such as transportation, security, and
parks. This rent generated by civic goods can collected by the
agency providing the goods, which can include private proprietary
communities and residential associations as well as governments.
But will rent alone supply enough revenue for government?
Land rent comes from three basic sources: 1) natural benefits, such
as proximity to water; 2) population and commerce; 3) civic works.
On the third source, the increase in rent generated by civic
services determines the socially desirable amount of the service.
If a service does not generate enough rent to cover the cost, then
it should not be provided. On the other hand, there is no such
market measuring device for taxes on labor, interest, wealth,
profits, and value added. Moreover, since economic land includes
all space, including the seas and the atmosphere, fees for
pollution are in effect rent paid for dumping on that land, which
when added to the rent of surface sites more than adequately covers
public expenditures. Given a certain budgeted amount of spending B,
and an amount of funds raised from other rents R, the amount
charged for pollution can be B - R.
If industries are to take full advantage of the economies of
scale which exist within cities, the revenue from land rent must be
used to supplement the fees charged by these decreasing cost
activities, such as busses and subways. This is not a subsidy,
since the transportation, street, park, etc., induces that very
rent that is then used to finance it.
The reason lies in the important distinction between marginal
and average cost pricing. Marginal cost is the increase in costs
due to the expansion of production by one unit. Average cost is
the total cost of production divided by number of units. Since the
marginal cost of an increasing-return (or decreasing- cost)
industry is below its average cost, if its prices are set at the
short-run marginal cost, the revenue will not cover the fixed costs
Thus, revenue derived from land rents is efficiently used to
supplement the revenues of decreasing-cost industries raised by
pricing according to the marginal costs, to defray those fixed
costs of services which are not marginally attributable to the
amount of output. The funds from land rent are, however, only
efficient if the service generates such rents in a free market.
An illustrative example would be the case of mass transit and
other forms of transportation. If transportation is funded by land
rent to cover its fixed costs, it can afford to price its output at
levels which represent the marginal cost of supplying the service.
In some cases, the provision of transportation is not even funded
by marginal pricing at all, or else the marginal cost is free.
Hotels, for example, do not charge for the use of the elevators,
the cost being included in the room charges, which amounts to a
type of rent. As demand increases, the producer can expand output,
thereby allowing the service to take full advantage of its economy
of scale. Finally, with lower prices and an expanded service more
people would be encouraged to use mass transportation and thereby
reduce the diseconomies of other modes of travel, such as
congestion on the roads.
In a society which seeks to limit government involvement in
the market place, subsidies would be shunned as producing waste and
inefficiency. But if the funding is derived from the rent
generated, then no subsidy is made. Projects which increase site
rents transfer tax-payers' money into the land-owner's pocket.
The provision of such public services financed by land rent
conforms to the benefit principle of public finance, and is similar
to the market provision of services, being neither an arbitrary
cost nor a subsidy. Such services can be and have been provided by
private organizations as well, along these very principles (see
2. The outcome of a pure market economy
In a pure market economy, there are no restrictions or taxes
on productive effort, including labor, enterprise, sales, and
profits. Community services, whether provided by government or by
private firms or associations, are funded by user fees and land
rent, including charges for pollution. How would such a world
differ from ours?
The claimed benefits of the community collection of rent (CCR), often under the rubric of land-value taxation, have been regarded as exaggerated. Not only have the proponents of CCR pointed out its efficiency and equity relative to taxation, but they have also claimed that it would greatly reduce if not eliminate unemployment and poverty, and with them many of our social problems such as crime, drug abuse, and urban sprawl.
Perhaps it will cure cancer too!
These benefits do not stem only from sharing rent, but from
eliminating the barriers that now intervene between enterprise and
resources. If CCR is a panacea, it is only because there is one
universal anti-panacea, a universal cause of social distress - the
use of force to prevent labor from freely accessing natural
resources. Removing this barrier is like taking down a dam - the
waters of enterprise will come gushing forth. We see this time and
again when countries have liberalized their economies. Is it not
interesting that when the rulers of socialist economies wish to
perk up their economies a bit, they reduce, not increase, taxes and
As Henry George (1879, p. 433) states, "With all the burdens
removed which now oppress industry and hamper exchange, the
production of wealth would go on with a rapidity now undreamed of."
It would be, he said, "like removing an immense weight from a
powerful spring.... The present method of taxation operates on
exchange like artificial deserts and mountains; it costs more to
get goods through a custom house than it does to carry them around
the world" (p. 434). Government punishes people with taxes for
building and producing as though they were crimes. It is the
removal of burdens, of restrictions and taxes and other imposed
costs, that would stimulate production, increase employment, and
raise wages. Exactly how much, no one can know. But with over 90%
of workers employed even with these burdens, it is reasonable to
conclude that the remaining 10% would be in demand with the
abolition of taxes on labor and enterprise. As evidence, we can
see the prosperity of Hong Kong and the high wages in Switzerland,
which have relatively more freedom than other countries, yet are
also far from pure market economies.
As George put it (p. 461): "Give labor a free field and its
full earnings; take for the benefit of the whole community that
fund which the growth of the community creates, and want and the
fear of want would be gone. The springs of production would be set
free, and the enormous increase of wealth would give the poorest
ample comfort. Men would no more worry about finding employment
than they worry about finding air to breathe; they need have no
more care about physical necessities than do the lilies of the
field. The progress of science, the march of invention, the
diffusion of knowledge, would bring their benefits to all." This
progress has two benefits, the direct and indirect. We already
benefit from the direct effect, from the knowledge itself, but the
indirect effect is to raise land rent. With CCR, we would all
equally benefit from this second effect as well, rather than it
going to landowners who contributed nothing to the progress of
Even if unemployment is not totally eliminated, eliminating
much of it will also have positive social effects, just as high
unemployment has negative effects, increasing crime, drug and
alcohol abuse, and generally demoralizing communities. As George
says, "Every productive enterprise, besides its return to those who
undertake it, yields collateral advantages to others" (p. 435).
These benefits are called "positive externalities" or "external
effects." If you plant a tree, the whole neighborhood benefits
from its beauty. And as George recognized, these territorial
externalities increase rent: "And in the value or rent of land is
this general gain expressed in a definite and concrete form."
As noted in Chapter 3, the community collection of rent
reduces the selling price of land, the formula being p = r/(i+c)
where p is the price of land, i is the real interest rate, and c is
the collection rate, the percentage of the land price p being
collected. For example, if c = .5, then the annual assessment
equals half the price of land. As c goes up, p must go down.
This decrease in selling price implies that enterprises do not
have to borrow large sums of money to acquire land. The rental
payment to the community takes the place of a mortgage. This frees
up loan funds for paying for capital and labor. Interest rates
would then drop, since there is much less demand for loans for real
estate, and the decrease in interest rates stimulates enterprise
even more. The elimination of land speculation also decreases the
cost of land for both enterprise and home owners, and, combined
with a sound banking system, would dampen if not eliminate the
business cycle and depressions. Land being held for speculation
would be put on the market for immediate use, and the more
efficient use of land would again increase productivity and
increase employment and wages. CCR would put in motion an upward
spiral of ever increasing productivity and employment.
"Consider the effect of such a change upon the labor market.
Competition would no longer be one-sided, as now. Instead of
laborers competing with each other for employment, and in their
competition cutting down wages to the point of bare subsistence,
employers would everywhere be competing for laborers, and wages
would rise to the fair earnings of labor. For into the labor market
would have entered the greatest of all competitors for the
employment of labor, a competitor whose demand cannot be satisfied
until want is satisfied - the demand of labor itself. The
employers of labor would not have merely to bid against other
employers, all feeling the stimulus of greater trade and increased
profits, but against the ability of laborers to become their own
employers upon the natural opportunities freely opened to them...
[T]he spectacle of willing men unable to turn their labor into the
things they are suffering for would become impossible."
Although the extent of these benefits cannot be forecast, the
direction towards substantially reducing unemployment and poverty
has a sound theoretical basis, and we need only compare those
countries which have tried economic freedom even on a small scale
- such as the growing East Asian economies - to those which have
not, to see empirical verification of the benefits from freeing
enterprise from imposed barriers and costs.
And these benefits also had advantages for the distribution of
wealth. Much of the unequal ownership of wealth stems from a
highly unequal ownership of land. The pattern typical in much of
Latin America, for example, is for much of the farm land to be
owned by a small number of wealthy families. But even in the
United States, land ownership is highly concentrated, especially
The collection of land rent by communities and governments,
its benefit shared equally by the population, would eliminate one
of the greatest causes of inequality, one which does nothing to
further production. On the other hand, inequalities of wages due
to different talent and effort would be left undisturbed, so that
those with the greatest ability, education, and determination would
have the full incentive to produce and create wealth.
As an economy grows, land rent tends to increase more than
proportionately, so the equalization of the benefits of the rent
equalizes the benefits from progress that spill over to a community
as a whole.
Henry George recognized that the removal of barriers would
stimulate technology as well. "It is mind, not muscle, which is
the great agent of production" (p. 444). "The increase in the
reward of labor and capital would still further stimulate invention
and hasten the adoption of improved processes, and these would
truly appear, what in themselves they really are - an unmixed good.
The injurious effects of laborsaving machinery upon the working
classes, that are now so often apparent, and that, in spite of all
argument, make so many people regard machinery as an evil instead
of a blessing, would disappear" (p. 445).
George, as a social philosopher as well as economist,
recognized that CCR would have profound effects on social life
beyond the advance of material welfare. "Noticeable among these is
the great simplicity which would become possible in government. To
collect taxes, to prevent and punish evasions, to check and
countercheck revenues drawn from so many distinct sources," all
these complications would be dispensed with (p. 454). CCR would
also eliminate much of the transfer-seeking, the lobbying of
government for favors, since first, there would ideally be
constitutional measures preventing such privileges, and secondly,
the absence of taxation would make this seeking more difficult
politically. Because, as local officials know, few taxes get so
much resistance to increases as a charge on real estate. Because
CCR gets capitalized into lower property values, any extra
government spending would imply funding from land rent, which would
stir an opposition from landowners. And if CCR was a fixed amount,
then this cap would also limit privilege-seeking.
The rise in wages that would flow from increased prosperity
would reduce the economic causes of crime. The elimination of
complex taxes and of much crime would then reduce "the great host
of lawyers who are now [even in 1879!] maintained at the expense of
producers; and talent now wasted in legal subtleties would be
turned to higher pursuits" (p. 455).
While government as a repressive power would be reduced,
governance as such would not be limited in a free society. People
could join voluntary organizations, including civic and residential
associations, which would provide whatever the members wished.
Many of these would be territorial and collect the rents generated
by their own services (see Foldvary, 1994). "Government would
change its character, and would become the administrator of a great
co-operative society" (p. 456).
In George's vision, social behavior would become transformed
by universal prosperity. Human nature itself would not change, but
the changed economic environment would induce the more benevolent
aspect of human nature to become more dominant and the more greedy
and apathetic aspects to become less so. Adam Smith in The Theory
of Moral Sentiments (1790, p. 9) recognized that "How selfish
soever man may be supposed, there are evidently some principles in
his nature, which interest him in the fortune of others, and render
their happiness necessary to him, though he derives nothing from it
except the pleasure in seeing it."
These principles he called "sympathy" by which he meant "our
fellow-feeling with any passion whatever" (p. 10). Sympathy is a
feeling of affinity and empathy with another person, group,
culture, or project. Henry George (1879, p. 458), in words similar
to Smith, stated: "The desire for approbation, the feeling that
urges us to win the respect, admiration, or sympathy of our
fellows, is instinctive and universal".
George felt that greed need not be "the strongest of human
motives" (1879, p. 457). Often, greed comes from poverty or the
fear of not having enough in the future. When prosperity assures
all who wish to work a well-paying wage, greed would be replaced by
benevolence (p. 461): "With this abolition of want and the fear of
want, the admiration of riches would decay, and men would seek the
respect and approbation of their fellows in other modes than by the
acquisition and display of wealth." George was perhaps too
optimistic about the reduction in the desire for wealth, which is
anyway not necessarily harmful to others. The more important point
is that the prosperity assured by the pure market economy would
reduce greed - the desire for undeserved gain - and promote
sympathy with one's community and with fellow human beings.
Economics alone would not do this, since upbringing and ethical
education are also needed in order to instil sympathy among the
population. But at least the economic incentives would be in the
direction of benevolence.
Neo-classical economics is based almost entirely on the
premise of self-interest. But to George (p. 462), "Shortsighted is
the philosophy which counts on selfishness as the master motive of
human action... If you would move men to action, to what shall you
appeal? Not to their pockets, but to their patriotism; not to
selfishness, but to sympathy. Self-interest is, as it were, a
mechanical force - potent, it is true; capable of large and wide
results. But there is in human nature what may be likened to a
chemical force; which melts and fuses and overwhelms; to which
nothing seems impossible. 'All that a man hath will be give for
his life' [Job 2:4] - that is self-interest. But in loyalty to
higher impulses men will give even life."
Whereas in modern neo-classical thought, even when sympathy is
acknowledged, self-interest is seen as the dominant motive, George
(p. 463) thought the opposite: "Call it religion, patriotism,
sympathy, the enthusiasm for humanity, or the love of God - give it
what name you will; there is yet a force which overcomes and drives
out selfishness; a force which is the electricity of the moral
universe; a force beside which all others are weak... And this
force of forces ... we may use for the strengthening, and building
up, and ennobling of society, if we but will, just as we now use
physical forces that once seemed but powers of destruction. All we
have to do is but to give it freedom and scope."
Though a society in which goodwill and benevolence are the
norm seems utopian to some, George showed how circumstances can
make it so in his example of a dinner party. In a company of
"well-bred men and women dining together," where the food is
plentiful, the people don't greedily grab food away from others.
"On the contrary, each one is anxious to help his neighbor before
he partakes of himself." Indeed, if anyone behaves greedily and
disregards others, "the swift and heavy penalty of social contempt
and ostracism would show how such conduct is reprobated by common
opinion" (p. 464). George noted that this behavior is common at
such parties, and if social conditions were like the party, with
enough wealth for all to live adequately and equitably, with no
fear of want, society would be like that too.
George adds that eliminating injustice and poverty would not
destroy the "stimulus to exertion," because "desire would remain"
(p. 466). "It is not labor in itself that is repugnant to man" (p.
467). Released from poverty and fear, people would work harder and
better, motivated not so much by necessity but by the pride and
satisfaction of producing, creating, and contributing. Great
artists do not create for bread. Lesser artists too are motivated
by more than groceries. As George said (p. 468), "the work which
improves the condition of mankind ... is not done to secure a
living... It is the work of men who perform it for its own sake...
In a state of society where want was abolished, work of this sort
would be enormously increased." People would be able, both in work
and in leisure, to develop their minds - George recognized that
many people have latent abilities that lie dormant due to lost
opportunities (p. 469).
The elimination of restrictions and taxes on enterprise has a
cascading effect, one benefit leading to another. Universal
prosperity will have more than material consequences; it will
improve the moral and social life of humanity. This does not imply
that there will be a utopia. There would continue to be problems
of personality conflicts and cultural clashes. Bias and negative
attitudes are not so easily eliminated. But the gross economic
problems and the social problems stemming from them would become
history, just as chattel slavery has been eliminated from much of
the earth. We cannot have utopia, but we can have a much better
world, and the economic knowledge required to achieve it is known.
The question in achieving a new world of prosperity, justice, and harmony is: how do we deal with the ultimate problems blocking the way? The ultimate causes of social problems are ignorance, apathy, and greed. Education will overcome ignorance, movements for reform informed by proper education will overcome apathy, and then a sound economy and government will overcome greed.