The Synthesized Georgist-Libertarian Perspective on Markets and Planning

Institute of Economic Affairs, 2 Lord North St, London SW1P 3LB

6:30 PM, June 11, 2002

By Fred Foldvary

Department of Economics, Santa Clara University, California USA 95053

[email protected]

Good evening.

I am pleased to be here to discuss the synthesized Georgist-libertarian or geo-libertarian perspective on markets and planning.

First of all, I agree completely with Mark Pennington's excellent analysis of the British system of land-use planning. Centrally imposed planning is ineffective for both the public choice and the epistemic or knowledge reasons he indicates. And I agree that even local controls are subject to political influence and lack the market incentives for an efficient use of land.

And I of course agree completely with the radical remedy that Mark proposes, private contractual agreements such as covenants, contractual associations and proprietary communities, which I too proposed in my book Public Goods and Private Communities, indeed cited by Mark in this book.

The problem with such free-market analysis is not that it is incorrect. The problem is that it is incomplete. It does not fully confront the issues of territorial externalities and of taxation.

Libertarians tend to treat taxation as homogenous. To libertarians, taxes are coercive, they decrease incentives, so the fewer taxes the better. End of story.

But that is really only the beginning of the story. Taxes do much more damage than just extract resources by force. Conventional economic theory recognizes that taxes have an additional burden on the economy, an excess burden beyond the money paid to the state. Economists call this a "deadweight loss" because these resources are not transferred to others, but lost to the economy. By increasing costs and reducing output and investment, taxation prevents some resources from being allocated to the most valued uses.

This misallocation and waste of resources is huge. The American economist Nicolaus Tideman has conservatively estimated that in the USA, the excess burden of taxation is at least $1 trillion per year. We would be that much more wealthier if not for this excess burden.

Conventional economics also recognizes that the extent of the deadweight loss depends on the elasticity of supply and demand, meaning how much the quantity responds to a change in price. If the supply of a resource such as capital goods or labor is elastic, meaning its quantity decreases substantially if its price is higher, the deadweight loss will be higher. If the resource is inelastic, its quantity not changing much, the deadweight loss is smaller.

Land is an inelastic resources. The economic meaning of land is natural resources, such as space. Space is totally inelastic, since we cannot expand or contract it. It would be nice if we could import more land into the United Kingdom to make it bigger, but unfortunately, this is not possible. That's why you Britons went all over the world and established colonies. The US had its own territorial expansion, of course. If we could expand land, there would be no need for conquest.

It is important to be clear on the economic meaning of land. Clearing space of trees or rocks or replacing water with solid material does not change the extent of the space, but just changes the materials in the space. The economic meaning of land is not soil, but all the natural elements, and space always remains the natural resource created when the earth was formed in its present size.

Because space is fixed, we can use land rent for public revenue with no excess burden or deadweight loss. This is the Georgist economic argument for basing public finance on rent rather than arbitrarily taxing labor and capital.

Some American libertarians say taxation is theft and reject all taxation. They are at least logically consistent. There remains, however, the moral question of who should own the land rent if the state ceases to exist, since in that case, land titles would no longer be given state recognition. At any rate, an anarchist world would be more Georgist than the current world, because taxes on labor and capital would be eliminated, and so the landowners would have to finance public works from the rent they receive rather than being subsidized as they now are under the current system.

The Georgist argument more relevant to reform in our time is with alleged libertarians who explicitly favor the taxation of income or consumption. Such libertarians want to both violate our self-ownership rights, and also to impose an unnecessary excess burden on the economy. I really don't understand why a free-marketeer would favor such as policy.

Another missing element in the conventional libertarian treatment of land use is the concept of the capitalization of externalities. Economics recognizes that when the local infrastructure is developed or improved, this increases site rents and land values. When these are financed by taxing labor and capital, the typical worker or business owners pays twice for the public works. They pay first in the form of higher rentals and land prices. They pay again with taxes. The typical worker-tenant is double billed for the public works, while landowners receive an implicit externality subsidy. This constitutes an implicit forced redistribution of wealth from workers and owners of capital to landowners.

This capitalization effect has profound implications for land-use planning. With today's tax system, government enriches the landowners. This redistribution and subsidy is intensified when government arbitrarily restricts development, creating an artificial reduction in developable land, which increases land rents and land values even more. Landowners therefore have an incentive to rent seek, to influence government to have zoning that excludes new entrants, just as they also have an incentive to shift development costs to higher levels of government or to taxes on goods and labor rather than on site values.

Libertarians and free-marketeers who wish to have the market allocate land use and development should therefore be very interested in removing this rent-seeking motive. If we can shift taxation off of labor, goods, and capital goods such as buildings, and place it on land rent, the motive to seek higher rents by limiting development would be gone. Moreover, the motive to rent seek by getting government to provide more public works to pump up land values would also disappear. As a bonus, the double billing of workers and tenants would also disappear.

There are many other arguments in favor of the Georgist tax shift, which libertarians should logically favor. For example, income taxation is intrusive, invading financial privacy. A tax on land rent or land value avoids audits and the record keeping required by income taxes as well as value added and sales taxes.

So libertarians who wish to have a less intrusive and less wasteful government should favor the Georgist shift of taxation from labor and capital to land value. It not only avoids the forced redistribution of wealth from workers and entrepreneurs, but also facilitates a transition from government planning to private and contractual market-based development.

Now let me shift the focus to why Georgists should favor private communities and market-based planning. Georgists tend to think of the state as collecting the site rent, but they should be favorably inclined to private communities collecting the rentals as well or even instead.

The main reason why Georgists should favor private communities is because they in fact operate along Georgist lines. Consider a hotel. When you get a hotel room, the management does not inquire as to your income, nor does it impose a surcharge on goods sold by the hotel or the shops in the hotel. Hotels also don't charge for the use of the elevators or the hotel lobby. They charge a rental for your room, and the rental pays for all the facilities offered by the hotel. This is precisely the Georgist single tax on rentals.

Likewise, a condominium or residential association charges the members an assessment reflecting the value of the services of the site. In such private communities, the residents are not double billed. They pay once for the services with a charge based on the site rental.

Georgists have been attempting for 120 years to get government to shift taxation to site values, with some successes, but mostly rejection. The vested real-estate interests are powerful, and the public is ignorant about economics. Another avenue towards reaching the objective could be to promote the privatization of communities and local government. This would inherently shift the financing of development and the on-going costs of public works to privately collected assessments based on site rentals rather than the taxation of labor and capital.

A more fundamental reason for Georgists to favor private, contractual, market-based development and land use is that Georgism is fundamentally not about taxing land, but about free trade. Henry George himself wrote that liberty and justice were the object, the end goal, and the shift of taxation is but a means. To have true and complete free trade, we need to eliminate not just all tax surcharges on income, value added, and produced wealth, but also all arbitrary restrictions on enterprise and choice.

Public-finance economists recognize that regulations are a substitute for taxation. They impose costs just like taxation. They are taxation in substance if not in form. So the Georgist single tax on land rent must also sweep away all arbitrary land-use controls, zoning, and government planning and controls whether centralized or localized. Georgist true free trade requires unregulated as well as untaxed markets, so long as folks are not coercively harming others.

So in conclusion, libertarians should be Georgists and Georgists should be libertarians. In other words, we should all be geo-libertarians. Each by itself is incomplete, and together, they form a more coherent libertarianism and also a more effective plan for reform in our time. We both favor free trade and free markets. As a geo-libertarian, I hope my presentation today has brought our two sibling movements closer together or at least achieved a greater understanding of one another's principles.