A true economics (book excerpt)
REconomy’s history is rooted in the ’environmental’ movements related to climate change, peak oil and many other forms of environmental degradation. For many of us ‘greens’ economics is a foreign language that we are having to learn rapidly. For those wanting a good overview of the roots of the existing economic theory this is a useful read. Mark Braund has kindly allowed us to reproduce this except from Chapter 9 of his book “The Possibility of Progress”.
Mark summarises the classic economic thinking, that underpins our current economy, from Adam Smith, Henry George and David Ricardo and others. He introduces economic factors such as the accumulation of rent, market speculation, international economic inequalities, patents, migration and more.
The excerpt ends by discussing our modern times and modern thinkers such as Jeremy Refkin and George Mombiot and by reflecting back on the classic economic texts and stating that “few understand why we are still unable to make practical progress in respect of the economic question. Even worse, many economists fail even to realise that there is an explanation. It is buried, not especially deeply, in the texts of Adam Smith, David Ricardo and the other philosopher-economists of the Enlightenment. Although many of their books are still in print, the fundamental truths contained within them are ignored by mainstream neo-classical economics, and by the politicians who follow its prescriptions in the formulation of social and economic policy.
Classical economic theory makes it absolutely clear that there is no solution to the problem of poverty, and the exclusion of many millions of people from the economy, until the effects of the accumulation of rent are addressed.”
Mark also writes for the Guardian and has long been a proponent of Land Value Taxation and other macro and policy level changes to our economy.
I’m not suggesting that you buy the book from Amazon (if you want to buy it please find a independent, local and/or ethical retailer) but if you want to check out the book reviews please see here. Other modern economists for whom land and resource rents are pivotal include Michael Hudson, Herman Daly and Fred Harrison.
For more background and learnings in economics you may like to take a look at our Economics the basics section of this site. Also, Josef Davies Coates from United Diversity recently put together a “REconomy resource pack”. Take a look at the section on Land Value Tax to find out more about this issue and a UK focus on the progress and related resources.
A final comment before leading into the chapter from Mark’s book. The question that we often ask; What does this all mean to me? Based on a better understanding of economics, what should I be doing, if anything, within my community? I’ve mused about this in more detail at the bottom of this article. I’d be curious to know Mark’s thoughts on Transition, REconomy and the general ground up shift in community ownership of land and property.
A True Economics
By Mark Braund. Chapter 9 of “The Possibility of Progress” (Shepheard-Walwyn, 2005)
In recent times our moral aspirations – what we want for the world – have progressed at a rate far in excess of our ability to transform those aspirations into reality. This is why we struggle to make sense of the world and why it frequently disappoints us. We fail to understand it because we fail to grasp the complex web of causes and consequences that colour human social relations. We dream of a better world and we know what it is about the current order that we dislike, but we remain unable to take collective action to bring about a new inclusive social order, or even to set the process in motion.
Our successes, though considerable, remain piecemeal. They are reactions to legitimate but isolated moral concerns; they are not part of an overall strategy for social change, and they are not driven by reference to universal moral principles. Such islands of progress may one day form part of a comprehensive strategy for change, but they do not indicate that any such strategy yet exists.
The central thesis of my book The Possibility of Progress is that progressive social change requires not only the internalization of universal moral principles by many people, but also that they behave in accordance with those principles, and find the collective strength to overcome the many obstacles to change. Thus far, too few people have succeeded in this difficult task; and those that have, finding themselves in the minority, have struggled to convert their convictions into real progress. Society is never static, and in terms of the measurable experience of people’s lives it can move in only two directions: towards greater inclusion, or towards greater polarization. The challenge for the twenty-first century is to determine how we reconcile growing moral aspirations for greater inclusion with the reality of a world which is being torn steadily further apart.
We have never been better equipped to tackle the problem of social injustice and the growing threat to our planet’s capacity to support life. There is no biological impediment to many more people attaining the psychological maturity and moral awareness necessary to generate the commitment to work for a better world. If the obstacles to progress are principally a consequence of cultural advance, and if culture is the aggregate of the attitudes, perceptions and behaviours of all individuals, and the power relations which mediate their impact, then none of them are necessarily immune to resolution through conscious cultural intervention.
Globalization provides a great opportunity. For the first time, a single economic philosophy is being imposed or adopted in virtually every country of the world, its attendant value system squeezing out more inclusive values which for centuries have been the only thing uniting otherwise disparate cultures. It matters little whether the globalization project is a conscious plan by a wealthy elite to safeguard their privilege, or the result of the misguided efforts of otherwise honourable people to spread the benefits of wealth creation more widely; globalization demonstrates how quickly and easily changes to social institutions and economic arrangements can be introduced. And this with a system which delivers few improvements to the disenfranchised, which visibly exacerbates the plight of many of the worse off, and which makes no reference to the democratic wishes of the majority of those whose lives it affects.
Most of the supposed obstacles to progress are erected by people with an interest in keeping things as they are. Although they represent a tiny minority of the global population, their disproportionate power can only be neutralized if many millions find the moral motivation, courage and determination to oppose them. Substantive change to the social order will require a political movement which recognizes the central importance of economics, and is aware of the way in which politicians and economists encourage the false belief that immutable economic laws constrain our capacity to tackle poverty and inequality; and how, in the process, they have allowed the balance of wealth and power to be skewed in favour of a small minority.
In the following we shall discover that the current order is based on a false understanding of economic laws, and that this false understanding is responsible for our failure to extend the benefits of economic advance more widely. We shall learn of a true reading of economics which supports the possibility of a more inclusive world; an economics which reveals the causes of our lack of progress, and offers a prescription for change which demands neither revolution nor the dismantling of prevailing political structures; a new understanding which indicates a solution to the problems of the creation and distribution of wealth, which promises fair shares for equal effort, and which provides opportunities for all who wish to work; an economics which brings the ideals of the socialist within range, but allows us to retain and build on those aspects of capitalism which have helped transform society and have delivered immense material benefits to some.
Although the period after 1945 gives clear indications of the potential for collective moral action in the example of a generation’s determination to avoid a repeat of the circumstances which led to war, it offers little assistance on the economic front. The requirement to rebuild the economies of western Europe, almost from scratch, and the emergence, virtually unscathed, of an economic powerhouse in the United States, created conditions for a period of sustained economic growth. This, aided by an international economic framework to which all western nations signed up, led to improved living standards for millions.
After the post-war consensus was dismantled in the 1970s and the western nations suffered deep recession, the 1980s brought a right-wing backlash which saw national economies re-formulated on a model of deregulated free markets, uncontrolled capital flows, the privatization of public assets, and a tightening of public expenditure on services such as health, education and transport. Whilst these measures helped put western nations back onto the path of steady growth, they had other consequences: the distribution of wealth was further skewed in favour of the already wealthy, permanently raised levels of unemployment became the norm, economic security was reduced across the board, and the promise of universal access to essential services was undermined.
In the 1990s, with this extreme economic liberalism failing to meet aspirations for a more inclusive society, and with a growing perception of a deterioration in the quality of life, left-leaning governments were elected, promising a third way of organising society and the economy. Under this approach, the benefits of additional wealth arising from deregulated markets and conditions designed to enhance the productivity of private enterprise were to be distributed among the wider population through careful economic management, well-judged investment in public services, sensitively levied taxes, and the use of public money to underwrite private investment in infrastructure projects. Nearly a decade on, the third way project appears to have failed. More than at any time in recent history, politicians are distrusted, and faith in democracy as the defender of majority interests has largely disappeared.
Elsewhere, most of the United Nations’ development goals for reducing poverty, which were set at the turn of the millennium, are already well off-course; in some cases things are getting measurably worse. World Bank President, James Wolfensohn, and British Finance Minister, Gordon Brown, wrote in early 2004 that ‘we must act, not only because it is morally right, but because it is now essential for stability and security. It is only by tackling poverty that we can shape the better world we want our children to inhabit.’ I am prepared to give Wolfensohn and Brown the benefit of the doubt. I think they genuinely desire a more inclusive world in which the problems which follow in the wake of poverty are mitigated. They are unusual among people of power and influence in seeing a moral dimension to the economics of wealth and poverty, but they appear to believe that a solution is possible without a wholesale revision of our understanding of economics, and the policies that flow from it. They still cling to the belief that, simply by creating the conditions for steady economic growth, the additional wealth generated will filter down to all levels of society, relieving poverty and creating economic opportunities for all. This will not and cannot happen. There are, indeed, immutable laws of economics which prevent it, but these laws do not prevent equity under all conditions, only under the conditions which we have created and allow to prevail.
Although a growing number of academic economists and journalists are beginning to reject the current ‘autistic’ state of the discipline, political leaders appear deaf to calls for a new understanding of economics. This being so, the only way forward is for a critical mass of people committed to progressive change to engage seriously with the economic question as the basis for a popular movement. Only when large numbers have a clear understanding of economic realities will it become possible, through the ballot box and other mechanisms of a vibrant democracy, to make a difference.
Let us be clear: neither current economic arrangements, nor any minor variation in them, can bring progress towards improved social justice or ecological sustainability. We have been reasonably successful at promoting growth, but these gains are mainly confined to the richer nations; they generally prove unsustainable in newly industrialized countries, and they make little or no difference in the poorest parts of the world, where most people live. As a strategy for tackling poverty and social injustice, growth on its own does not work. Of course, an alternative form of economy which did address these issues would still require growth in economic activity and output, at least to the point at which all people were sufficiently engaged in productive activities to provide for their basic needs. This requirement frames the fundamental question we must ask of economics: can it offer a model which enables us to order the economy to meet the needs of all people, which involves the productive effort of all who wish to work, which promotes the equitable distribution of the wealth so produced, and which ensures the life-sustaining capacity of the planet is preserved for future generations?
There are two forms of economics which must be considered here: both are academic disciplines which demand a great deal of attentive study. Both, ostensibly, have the same raison d’etre: to help the rest of us understand what it is about the way we exploit the natural resources at our disposal that determines who gets what share of the goods produced, and how changes to the rules and conditions we impose on economic activity affect the creation of wealth and its distribution over time. Both forms of the discipline assume there are fixed laws which govern wealth creation. One of these disciplines, which has come to be known as neo-classical economics, is an outgrowth of the other, classical economics.
Neo-classical economics emerged in the mid-nineteenth century when the motivation of many economists changed. No longer were they concerned with identifying the principles which govern the creation and distribution of wealth; instead, they turned their efforts to promoting and justifying the greater efficiency of the new industrial techniques, ignoring the issue of distribution, and implying that the poverty of the majority was somehow due to the scarcity of the resources of nature.
This new breed of economist made a single assumption which appears to have set the parameters of the discipline ever since: that an industrial economy driven by capital accumulation, the private ownership of all economic resources, including land, and the determining of prices and output by the market mechanism, was the only viable economic model. They developed a ‘scientific’ version of economics by introducing complex mathematical techniques which caused its practitioners to forget its origins as the worldly philosophy, and encouraged the conclusion, among ordinary people, that there was no alternative to this ‘scientific’ model to which economists now devoted all their energies. Only by referring back to the ideas of their predecessors, the great classical economist philosophers of the Enlightenment, will we discover that there is indeed an alternative, one that promises a solution to social injustice, and suggests mechanisms to safeguard the environment.
Perhaps best known among the classical economists is Adam Smith. Smith is especially interesting because his name has been appropriated by modern day neo-classical economics in defence of its claims. But the neo-classical position is based on a very partial reading of Smith’s rigorous thought. For Smith, the objectives of political economy were: ‘First, to provide a plentiful revenue of subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; secondly, to supply the state or commonwealth with a revenue sufficient for public services. It proposes to enrich both the people and the sovereign.’
Smith’s classic work, The Wealth of Nations, published in 1776, reveals much about his motivation which sets him apart from his modern-day counterparts. As a moral philosopher first, and an economist second, his primary aim was to identify principles of economics which would promote the equitable distribution of wealth among the population. Smith believed in economic justice for all, and sought out economic laws which he hoped would encourage the view not only that economic justice is morally desirable, but also that it is quite achievable, given the resources of nature and the creativity and ingenuity of humankind. Although he did not describe the challenge of equitable distribution in terms of a class struggle, he wanted to discover why the economy was failing to provide for the needs of so many. He recognised that the plight of the poorest in society had deep moral implications, and went as far to say that, ‘Civil government, in so far as it is instituted for the security of property is, in reality, instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all.’As we shall discover, it is the ownership of one particular type of property, land, and the natural resources to which it gives access, that largely determines the distribution of wealth among the population.
Smith is best known for his assertion that only through the free play of markets will the wealth generated through economic activity be maximized. Less well known is his belief that the free market has dual objectives: to maximize wealth creation, certainly, but also to address the problem of its inequitable distribution. Through constantly adjusting prices, he suggested, the market mechanism could balance the supply of, and demand for, goods and services, so that all members of society could satisfy their needs by exchanging the product of their own economic activity for that of others. The idea of the market as a self-adjusting regulator of supply and demand is extremely persuasive. It is quite true, as Richard Bronk says, that ‘central planning appears incapable, no matter how big the civil service, of allocating resources with anything like the efficiency of Adam Smith’s invisible hand’.
It is clear from Smith’s writing that the efficient functioning of the market mechanism requires a certain self-discipline on the part of individuals. He believed the market could only fulfil the objectives he set for it if certain rules were observed and certain standards adhered to, although he was rather vague about what those standards were. This is at odds with the modern conception of Smith’s achievement. As Bronk points out, today it is widely assumed that Smith had ‘demonstrated the possibility of a morally acceptable economic outcome without the need for moral motives’, and described a ‘mechanism for delivering human progress without the requirement for the moral perfection of man as a precursor to the establishment of a better world.’ Not only have loose interpretations of Smith’s ideas encouraged the view that the free market permits us to dispense with ethics, but they also suggest we can do without rational thought. As Bronk continues, ‘Gone too was the requirement that human reason should be able to plot and plan the way forward and develop a perfect system of government capable of promoting the public interest.’ It is unlikely that Adam Smith, the accomplished moral philosopher, believed in the possibility of a positive and moral economic outcome without recourse to either ethics or reason on the part of individuals, but that appears to be his legacy.
Today, it is widely believed that Smith’s conception of a market economy enables the reconciliation of the self-interested pursuit of individual ends with the greater good of all; but there is a clear difference between self-interest and unrestrained greed. The first is legitimately pursued by anyone wishing to achieve economic security for herself and her family. The second generally implies the seeking, by an individual, of economic benefits far in excess of his basic needs in a fashion which denies the opportunity to secure basic needs to others. Smith wished to discover economic laws which facilitated the legitimate self-interested pursuit of economic benefits by all members of society without impeding the same pursuit by others. He did not suggest that the unrestrained pursuit of wealth by some would necessarily lead, thanks to the magic of the market, to a general improvement in welfare – although many contemporary peddlers of free-market ideology appear to make this claim in Smith’s name. As we shall discover, an equity-promoting model of economy more in keeping with Smith’s intentions does exist, but creating the conditions in which it can function successfully requires a grasp of classical economic theory not possessed by most of today’s neo-classical economists.
Smith was clear that progress, which he rather vaguely defined as an improvement in living conditions for the whole population, depended on increasing the wealth-creating capacity of the economy. He saw the market mechanism as a means to increasing efficiency, maximising wealth generation, and, in promoting the equitable distribution of wealth, reducing prevailing inequalities in well-being. He was among the first to point out that economic expansion required increasing specialization among the workforce. He was also aware that this ongoing process of the division of labour required constant increases in opportunities for market exchange, and that this, in turn, required free trade between regions and nations. He attacked the protectionist policies that framed the mercantile system of his day, and which, in denying many people the freedom to apply their labour as they would like, amounted to the formally sanctioned restraint of trade. The effect of these policies, like many of the time – and like many pursued today – was to rig the market in favour of the already wealthy minority, and deny society the equity-promoting benefits of a free-market economy.
In part, subsequent developments have proved Smith right; his model has certainly delivered the goods in terms of economic growth, but it has failed badly in respect of his hope that it would narrow the gap between the richest and poorest in society. In order to explain this failure, and to discover why, even today, we are no more able to crack the nut of equitable distribution, we must examine further the theory of classical economics, as bequeathed us by Smith and his contemporaries.
Under classical theory, economic activity draws on three ‘factors of production’. First, land, which can be thought of as everything not man-made. Today we include in ‘land’ all the resources of the natural environment, including those which had not been discovered in Adam Smith’s time, such as the spectrum of radio waves. The second factor of production is labour, which comprises the physical and mental effort expended by human beings in their pursuit of economic goals. In this context, labour includes the effort, expertise and experience of the entrepreneur as well as those he employs. The third factor is capital, the product of previous economic activity, which generally includes the tools, plant and machinery, buildings, technology, and even such things as secret recipes which, when combined with human effort, make economic exploitation of the natural environment more productive and efficient.
There is no overlap between the three factors; they are mutually exclusive. Each of the elements applied in economic activity counts as land, labour or capital, but only one of these. In classical theory there is nothing which can be contributed to economic activity which is not land, labour or capital. Cash is not capital, it is merely a means of exchange through which the various factors of production can be valued relative to one another, and traded. Cash can be used to acquire capital, as in the hiring of a crane for the duration of a building project, but it can also be used to employ labour, and to secure land, or raw materials extracted from it, which are required to furnish an enterprise.
For its contribution, each of the three factors of production receives a return. The whole product or output of the enterprise is divided up among the owners of the land and capital contributed, and the labour applied. In the language of classical theory, the landowner is rewarded with rent, the supplier of capital is rewarded with profit (sometimes called interest), and the labourer is rewarded with wages. As David Ricardo pointed out in the preface to his Principles of Political Economy and Taxation, published in 1817, at ‘different stages of society, the proportions of the whole produce of the earth which will be allotted to these three classes will be essentially different; depending mainly on the actual fertility of the soil, on the accumulation of capital and population, and on the skill, ingenuity, and instruments employed in agriculture’. That Ricardo writes of an agriculture-based economy does not alter the validity of classical theory for the modern world. The object of economics has not changed in two centuries. As Ricardo put it, ‘to determine the laws which regulate the distribution of wealth, is the principal problem of Political Economy.’
Following the enclosure of land in Britain from the sixteenth century on, and with changes in economic activity driven by the industrial revolution, it became clear that the distribution of wealth was altering rapidly, with the poorer majority losing ground to the wealthy minority. Smith had identified the means to increase the size of the pot of wealth, but not a solution to the problem of its distribution. The significance of Ricardo’s work was not appreciated at the time. But if he failed to provide an explicit solution to the problem, he did at least give an explanation as to how, with economic advance, the distribution of wealth is skewed in favour of one particular class, the owner of land, and against the providers of capital and labour.
Ricardo’s law of rent is little considered by practitioners of the neoclassical economics which holds sway today. Perhaps modern-day economists find it too difficult to get to grips with; or perhaps they prefer to sacrifice their intellectual integrity, rather than confront an essential law of economics, the implications of which are profound and far-reaching, directly threatening the balance of wealth and power in the world. The law of rent is not difficult to understand, but it is essential to understanding how the economy works, for it precisely explains why the free market consistently fails to distribute wealth equitably as Adam Smith had hoped it would.
Before we examine the implications of Ricardo’s discovery for the modern world, it will be helpful to consider the problem of rent in the agricultural terms which applied in his time. Let us imagine an uninhabited island, the land of which comprises four different grades or qualities, three of which are suitable for agricultural use, the fourth of which is not. Sea-faring migrants happen upon this land and, noting its economic potential, decide to settle it. At the outset, the population is confined to a few hundred people and there is more than enough firstgrade land available to provide for the needs of all.
In this early condition, each individual or family farms their own plot with the few basic tools they brought with them on their voyage. Although there is plenty of land to go round, in order that everyone knows which produce is the result of which farmer’s sewing, hedgerows are planted to separate plots. Given the plentiful nature of high-quality land, de facto ownership of each plot is assumed by those who occupy it. As the first harvest is gathered, the farmers begin to make advance payments, in the form of food and clothing, to a group of specialist toolmakers among their number who have knowledge of extracting iron from ore to manufacture tools. This ore is easily mined from caves in the mountainous region of the island which is unsuitable for agricultural use. These advance payments tide over the toolmakers while they manufacture the first batch of much-demanded new tools. Here we see the first signs of the specialisation of labour, and movement from an original condition in which each person is responsible for producing his own food, to a more advanced form of economy, in which mutually beneficial market exchange is practised.
As well as the application of labour in the form of farming, mining and toolmaking, we already see the presence of capital at work, both in the basic tools that the settlers brought with them, and in the application of manufacturing techniques passed down by previous generations of toolmakers. Under these very simple economic arrangements, most of the product of economic activity is distributed to labour as wages, but a portion is counted as profit payable to capital, both for the extra output generated by the application of the old tools, and the capital investment made by the toolmakers as they set up their enterprises. The distribution of wealth between farmers and toolmakers is determined by the market mechanism, and will depend on the supply of tools for sale, and the amount of their surplus output that farmers are prepared to exchange for the promise of improved yields next season, should they invest in new tools. Once a farmer ‘buys’ a new tool, although it remains the product of the toolmaker’s labour, it becomes part of the farmer’s capital. Indeed, in classical theory, all capital derives from the combination of labour with land. It is a durable form of value, but one which is subject to a reduction in its value over time; all capital depreciates.
While working on the first year’s crops, all the settlers live in makeshift accommodation constructed from materials found on the island. Fortunately, the surplus provided by the first harvest is sufficient to provide for a sizeable team to work full-time on the construction of more robust dwellings. Capital, in the form of equipment provided by toolmakers to construction workers, along with their inherited knowledge of house-building techniques, is once again at work.
We already see evidence of the key requirements for the successful division of labour: trust and cooperation. Without them, there is no possibility of economic development. All members of society realize that their common interests are served by making advance payments to toolmakers and house-builders. They hand over a proportion of the food they produce because they can see that such cooperation will lead to an increase in wealth creation and collective well-being. It is only because people recognize that cooperation is key to collective improvement as society becomes more complex, that the market mechanism is able to work its magic. Here, recognising the preference of islanders for better homes and access to new tools, it allocates a part of this year’s produce to enable future work which will benefit the entire community. Without such a spirit of cooperation, nobody would give up farming and enter a specialized trade for fear of not being able to feed himself.
Over the long term, the market will work to determine an optimal ratio of farmers, toolmakers and house-builders so that the desires of all for adequate food and shelter are met. By giving equal value to the preferences of all economic agents, or members of society, the market determines the relative prices of various agricultural products and manufactured tools, and the amount of labour which can be freed up for home-building. In subsequent years, farmers will place more advance orders for the tools they think they will need. If the original toolmakers cannot meet this demand alone, then others, who had supposed themselves farmers, will opt to be apprenticed as toolmakers, lured by the promise of higher wages. Once the optimal ratio of farmers to toolmakers is established, seasonal adjustments in the demand for tools will be reflected by changes in their price. Likewise, if agricultural output in the second year is sufficient to accelerate the rate of house-building, more will enter the construction trade.
It is important to remember that the market brings no assumption of value to its task; it is morally neutral. It simply provides a means, in the price mechanism, through which the preferences of all those active in the economy can be reconciled. As long as the strength of these preferences, as indicated by the relative wealth, or purchasing power, underlying them is reasonably equal, then the market will distribute economic benefits equitably. If, however, the strength of these competing preferences becomes unequal, if some individuals secure exclusive access to certain economic resources, for example, then the market will no longer work in favour of equity.
At this point in our island society’s development, with sufficient first-grade land to meet the needs and ambitions of all, and where the resources necessary to manufacture tools and build houses are freely available, the market divides up the product of economic activity equitably among the entire population. Equity does not imply equality; it means a fair reward for the effort and application of each individual, and that everyone who is prepared to work has access to opportunities through which they can provide for their basic needs. It may be an oversimplified example, but it shows that, where populations arise or choose to settle, at the outset at least there is no reason in economics why all should not be able to satisfy their basic needs. The market mechanism works in favour of equity, but it also provides incentives to people to improve their skills, or learn a new trade: it helps to drive the economy forward.
In time, as farmers learn that the fertile land will produce several harvests each year if crops are rotated, they realize that there is little point in buying tools with crop-specific uses which are only employed for three months of the year. Far better to hire tools for short periods when they are needed. The toolmakers are so busy trying to meet demand that they have no time to manage a tool-hire business – all except one, who decides to sell his foundry to a competitor and use the proceeds to buy a large stock of tools to hire out. This new entrepreneurial capitalist still applies his own labour to his tool-broking business, but his labour is a lesser proportion of the factors applied, the bulk being the capital in his stock of tools which he has acquired in exchange for the land he originally settled, and the capital he had built up in his foundry business.
This tool-broker has changed from being a producer of goods to the provider of a service, and is a capitalist in the sense that we might understand it today. But, other things remaining equal, there is no reason why his entrepreneurial zeal should compromise the ability of those who continue to labour as toolmakers, builders or farmers to make a living. His income may be higher than others’, but all are welcome to try their hands at tool-broking and secure a part of the additional wealth this new specialism affords. The market will determine how many tool-brokers the economy can support. If one too many ambitious individuals sets up as a tool-broker, his business will fail and his wage will fall below that which he could earn as a farmer, toolmaker or builder. He will return to his original occupation, little the worse for his experience. If newly qualified toolmakers turn out to be more successful than those who trained them, then the original toolmakers might also opt for a change of trade.
Now this is really interesting. Those who blame free-market capitalism for poverty and social injustice usually argue that it is the accumulation of capital by self-interested individuals and the pure functioning of the free market which keeps so many in poverty. But our example appears to demonstrate that the emergence of pure capitalists, people who do little ‘labour’ in the traditional sense, has no discernible impact on the capacity of the entire population to secure adequate economic opportunities. In fact, the addition of capital to the process of production increases the wealth-generating capacity of the economy in a way that may benefit all.
The tool-broker is not the only capitalist entrepreneur, and shopkeeper, to emerge on the island. Several other specialist businesses become established including a bakery, two dairies, a butcher, a tanner, a blacksmith and a tailor. Initially, they each operate from their original plots of land, but this does not make them especially accessible to their customers, so in time each exchanges his large plot of agricultural land on the periphery for a smaller, but more centrally located, plot. They now occupy less land, but the land they do occupy is a far more valuable asset to their newly established businesses. Thus, a small town quickly becomes established; it provides a focal point through which agricultural produce is more efficiently traded, and from where all who set up in business can more profitably ply their various trades. Location has become an important factor in the emerging economy.
Let us fast-forward a few generations. The population has grown and new settlers have arrived on the island so that the population is now ten times that of the original settlement. There is no longer sufficient firstgrade agricultural land to meet everyone’s needs so many people have no choice but to occupy the second-grade land. Not only is this land less fertile, therefore producing lower yields, but it is also quite a distance from the town. It takes farmers in this part of the island a day to get their produce to market – and a day spent on the road is a day lost working the land. On the second-grade land it is more difficult to make ends meet. By contrast, the descendents of the original settlers, all of whom are farming inherited first-grade land close to the main town and its busy market, are doing extremely well. They have the best land, highest yields and lowest market access costs, and are therefore able to generate the most revenue to invest in new tools and equipment, further reinforcing their advantage.
It is population pressure that has forced people to settle on secondgrade land, but it is the fact that land varies in fertility or locational advantage which is the important economic factor. Those on less favourable land will either have to work harder to compensate for the disadvantage of their site, or accept a lower income. The advantage enjoyed by those on the better sites is not of their own making: it is the increase in population which has made the variable productive capacity of land significant. Were the settlers on the second-grade land to depart, there would no longer be any advantage in having first-grade land, and the community would be poorer for their departure. Once land of varying productive capacity is brought into production, the economy changes fundamentally.
This process describes the effects of the law of rent in operation. In purely agricultural terms, the law of rent states that, where two plots of land of identical size but differing fertility are each subject to the same application of capital and labour, then the difference between the yield from each constitutes the rent on the more productive plot. The rent of a plot of land is the additional amount of output, or wealth, that can be extracted from it, given the same inputs, compared with other plots of land of the same size but of differing quality. If all land was of the same quality, yields would be identical given the same inputs, and the product of each plot would be divided between the labour and capital applied to it: there would be no rent. It is only the fact of the variable productive capacity of land, and that land of differing productive capacities is brought into production by the growth of population, which gives rise to rent.
At the outset of our island economy, when there was ample first-grade land to go around, the land attracted no rent. But once population pressure forced second-grade land into use, the first-grade land began to command rent at an amount equal to the difference in yields obtained from the two grades of land when subject to the same application of labour and capital. The key point is that rent is solely a function of the differing productive capacity of land; it has nothing to do with the quantity of capital or the quality of labour applied to land.
The law of rent assumes greater importance as society and the economy develop, as population grows, and as the division of labour intensifies. Its effect is steadily to increase the proportion of the reward from economic activity which goes, as rent, to the owners of land. The wealth earned by labour and capital is not necessarily reduced in absolute terms, but its proportion compared with that of rent steadily declines as the claim of land to rent increases.
The fact of the variable quality of land coupled with the inevitability of population growth, is the first factor which determines levels of rent. But, as economic development proceeds, a second factor, location, becomes as, and ultimately more, important. Whereas the rent earned by plots of agricultural land is determined by its natural endowment, rent arising from the preferential location of one site over another is a function of cultural and economic advance. The early entrepreneurs on our island soon realised that running a business from their own plots of land did not make for easy access to customers. A commercial centre was quickly established as they each exchanged their prime agricultural plots for land in what soon became the island’s first town.
The emergence of towns has nothing do with a desire on the part of individuals to live cheek by jowl with their neighbours, it is a function of economic advance. The costs of trading agricultural goods and the products of manufacturing businesses are greatly reduced if that trading all occurs in one place. Land in these commercial centres soon takes on a considerable rent-earning potential, because it promises conditions which make for a more profitable business. The creation of a commercial centre as the focus for trade and manufacture takes the economy to a new level of complexity and efficiency; it enables the generation of more wealth. But, in the very process, because of the operation of the law of rent, the proportion of the product that goes as rent, rather than wages and profit, will increase to the landowner’s benefit, even if he has contributed nothing to the process of wealth creation.
On our island, the rent earned by a tiny plot of land near the market square will become greater than that earned by a much larger parcel of high-quality farming land. As rent increases, the proportion remaining to be divided between labour and capital is reduced. In the modern economy, where agriculture contributes only a small share of total economic output, location is the principal factor in determining rent. The more successful the economy, the greater the share of wealth that goes in rent. Society gets richer, but if most of the best land is owned by a small minority, few people feel the benefit.
Our island society, which afforded equal economic opportunities to all citizens while there was sufficient first-grade land to go around, now sees the population divided into more and less wealthy. Those who were fortunate enough to inherit first-grade land now claim exclusive rights over it. In time, the island’s parliament decides that, if the trading of land is to be transparent and fair, legislation is required. Under these new laws, the established occupants of land are able formally to register their claim for ownership, and title is granted to claimants with full entitlement to farm, rent or sell the land, and to keep the proceeds. With land formally under private ownership, the market gets to work reconciling its fixed supply with steadily growing demand, through the price mechanism. The most expensive land is that in the town, where most of the entrepreneurial specialists find themselves able to generate incomes far in excess of that they would have earned had they continued farming the best land. Then comes the first-grade agricultural land, followed by the second-grade land, which is most cheaply priced, and all of which is now occupied.
Although society is becoming stratified into richer and poorer, everyone still enjoys a degree of choice. The fortunate owners of first-grade land can expand their operations by buying more land, or use their relative wealth to buy shop premises and start up specialized businesses. Poorer people also have a choice, albeit a more restricted one. They can work as farmers, where even the second-grade land is good enough to provide them a reasonable living, or they can take up an apprenticeship in one of the specialized businesses, although this means renting a small room on the edge of town, some distance from the shops and factories. Life is becoming more of a struggle for the poorer members of society, and their comparatively poor quality of life is a direct consequence of their not having access to the best land.
Another few generations on, and the population has grown to such an extent that all of the third-grade land has been brought into use. This land is considerably less fertile and crop yields are very poor. Many people have no choice but to farm these poor lands, even though yields are insufficient to fund investment in the tools and fertilizers they require to improve output. The third-grade land earns no rent because it is only just possible to extract from it sufficient produce to feed those who work it; it generates no surplus whatsoever. The absence of any further land to bring into production, and the fact that population pressure continues to increase, means that second-grade land now earns rent, as represented by the difference between its yield and that of the thirdgrade land, given the same application of labour and capital. The rent earned by the first-grade land also increases by the same amount, as it retains its productive advantage over the second-grade land. The rent earned by a plot of land in the town is now so great that only the really wealthy can afford to live there, or to acquire preferentially located business premises.
The law of rent operates progressively as population grows, with the effect of increasing the disparity in wealth enjoyed by the occupiers of the best and worst land. Again, this is not because of any special effort or expertise on the part of the occupier of the best land; it is simply a consequence of his fortuitous occupation of the best land, and the fact of population growth.
A situation of competition now exists between the capitalist and the wage-labourer for whatever wealth is left after the landowner has taken his inflated share in rent. Once all cultivable land is brought into production, the landless wage-labourer no longer has the option of subsistence farming; his earning potential is determined entirely by the labour market. During the course of the development of the island’s economy, many have already become wage-labourers, working for toolmakercapitalists, or the various tradespeople who have started businesses. Historically, those who chose such employment could demand a fair wage for their effort because they always had the option of returning to the land, and providing for their own subsistence. But now, with growing numbers denied any such choice, wages are forced down to whatever level that desperate, competing, landless labourers will accept, even if that level drops below the requirements of subsistence.
Although the rent enjoyed by landowners also reduces the return to capital, the supplier of capital benefits in other ways. With all land now enclosed and under private ownership, the capitalist assumes great power over the labourer whose level of wages he can dictate. This position of relative power is not of his own making, but one which he is nevertheless able to exploit. His situation may not be as advantageous as that of the landowner, but he is much better placed than the poor wage-labourer.
The market mechanism is still functioning, but it now produces an inequitable outcome. Those with plots on third-grade land have to work the longest hours simply to ensure their families are fed, and the landless wage-labourers have no choice but to work for minimal wages in whatever conditions their employers deem suitable. Where the ownership of land and the right to its rent are enjoyed by only a small number or people, it is inevitable that these people will get richer, simply as a consequence of their ownership of land, and regardless of how hard they work. At the other end of the economy, those without land, or with access only to marginal land, will get poorer, again regardless of how hard they work.
In the early days of our island society, when there was still plenty of first-grade land, nobody among the original settlers had any particular advantage. There was no call for competition because there was no perception of scarcity. It was clear to all that the best way to drive forward economic advance was mutual cooperation. Only through cooperation could the division of labour take economic activity beyond the purely agricultural, and promote social and economic progress, the benefits of which would be shared by all, according to their contribution. Nobody starved because he had no access to land, or was too poor to pay for food in the market. However, once population pressure brings land of varying quality into production, and ownership of the best land becomes concentrated into the hands of a minority, there comes a point past which economic advance actively discourages cooperation and destroys the bonds of trust which had previously held the community together. When certain individuals obtain exclusive access to a key economic resource like land, they quickly discover that their own position of wealth and privilege is best protected, not by cooperating with others, but rather by exploiting their labour as cheaply as they can.
With economic advance and the inevitable polarization that follows when an increasing proportion of economic output accrues as rent to landowners, an artificial scarcity is created which makes the consequences of losing out in a competitive economy very serious for those with no access to land. Under such conditions, people have no choice but to compete or starve, and the pitting against each other of opposing human interests becomes an inherent feature of the market economy. The beneficial effects of allowing the market to allocate wealth among the population are reversed: it becomes the mechanism through which an ever-widening gap between rich and poor is effected.
To sum up: rent arises as soon as land of differing quality comes under cultivation. Once increases in population force all viable agricultural land into production, the variable quality of land causes rent to arise on all but the most marginal. With economic advance and the division of labour, specialist tradespeople emerge, and, quite rapidly, a commercial centre is established from which businesses are more profitably run. Ultimately, proximity to centres of economic activity, that is to say location, takes over from the variable quality of agricultural land as the principal determinant of rent. As the proportion of the return on economic activity going to rent increases, so the rewards to capital and labour are reduced. Battle is joined between the capitalist and the landless wage-labourer for whatever wealth remains after rent has been paid. Denied any land to farm for himself, the desperate wage-labourer has no option but to take whatever paid work he can find, in the process undercutting the wages of other landless labourers, and so forcing the general level of wages down. The capitalist employer is quite happy to exploit this situation, and thus achieves an absolute advantage over the labour he employs.
Ricardo explained how and why, with economic advance and the growth of population, rent arises and inevitably assumes a growing proportion of the wealth produced. He also recognised that, as a consequence, the share of wealth remaining for wages and profit inevitably diminishes. This persuaded him to accept the view of Thomas Malthus, who argued that population growth ultimately exceeds the capacity of the land to feed all the people. For Malthus, the only solutions were birth control, or for nature to take its course and for those excluded from the agricultural economy to starve to death until the population stabilized at a level which could be supported by the land. We now know that Malthus was wrong. Today, thanks to technological advance, we produce more than enough food for six billion people; yet millions still go hungry. But Ricardo’s pessimism left Adam Smith’s hope that the free market would address the problem of inequitable distribution quite forlorn.
It was left to an American named Henry George to point out that the implications of the law of rent were not necessarily as negative as Ricardo had thought them to be. In the latter half of the nineteenth century, George became curious as to how, with rapid economic development in the United States, the extent of poverty seemed only to worsen. He set out to determine why, and in 1879 published his conclusions in a book entitled Progress and Poverty. As he observed in his introduction, ‘Where the conditions to which material progress everywhere tends are most fully realized – that is to say where population is densest, wealth greatest, and the machinery of production and exchange most highly developed – we find the deepest poverty, the sharpest struggle for existence, and the most of enforced idleness.’
Like Smith and Ricardo, George believed free markets and free trade were essential to sustained economic expansion and the creation of conditions in which individual freedom could flourish. Like them, he sought an understanding of economics which would allow the reconciliation of the requirement for individual freedom with the moral imperative for universal access to the economy. In six hundred pages of closely argued analysis, George showed that, although the law of rent always operates, and although its effect accelerates with economic development, it is not inevitable that economic advance leads to extremes of wealth and poverty.
George explained that, as the share of wealth which goes to rent inevitably increases with economic advance, it is commercially advantageous, for those in a position to do so, to enclose or otherwise assert ownership over as much of the land as they can; not necessarily to use it for themselves, but to ensure they enjoy the benefits of the rent it earns and, in the process, to create a pool of landless labour and so drive wages down. In Britain, this process of land enclosure took place over several centuries, but in the United States it happened much more quickly. The emergence of trade unions and collective bargaining had a mitigating effect, but it did not alter the fundamental imbalance. If a relatively small number of individuals are permitted to own most of the land, and if ownership of land confers the right to treat rent as private income, then the operation of market forces inevitably makes already wealthy landowners richer; and means that, among landowners, those who own the most favourably located land become richest of all.
Under these circumstances, the introduction of new technologies which facilitate great increases in productive efficiency and output, and generate increased general prosperity, has little impact on poverty. As the economy advances, the wealth-creating benefits of the introduction of new technology serve principally to increase rent with the inevitable result that the rich get richer at the expense of the poor.
For George, the key point was that the reward, in rent, to the owner of land is not the result of his work, but is a consequence solely of his ownership. It is a completely unearned income. Should the owners of land be entitled to the unearned share they receive in rent? They are certainly entitled to any profits and wages they might earn as a result of their application of capital or their own labour to their land, but the rent they enjoy is neither a consequence of any work they have done, nor any risk taken. The land and the natural resources it contains existed long before human beings came along; ownership of land is not won on merit, and there is certainly no basis in ethics for some individuals being bestowed land while others are not, or for the gross inequality in land ownership we see today. The distribution of land is a consequence of cumulative cultural, political and economic developments, many of which involved violence and brutality.
If landowners are allowed to treat rent as private income, they can use this unearned wealth to secure further land, and they can use the inflated value of their landholdings as collateral to borrow capital which further enhances their position of dominance. Given the limited extent of land and the tendency for population to increase with economic advance, it is inevitable that, once land is enclosed and rights to private ownership are enshrined in law, the more successful the economy is in terms of wealth creation, the greater will be the gap between rich and poor, and the deeper will be the poverty into which the poorest fall. This being so, there is a compelling moral case for suggesting that all land and natural resources should belong, in common, to the entire population. No one can survive without access to land or the resources contained within it. Why should we allow a tiny minority of people to own and control the right to use them?
George showed that the problem of free-market capitalism is neither the accumulation of capital into few hands, nor private ownership over the means of production, distribution and exchange; it is the concentration of land ownership, and the effect of Ricardo’s law of rent under such conditions. By the same token, the cause of poverty is not that the population grows beyond the capacity of the land to support it, as Malthus suggested; it is that, as the ownership of land becomes concentrated (initially as a consequence of enclosure, and subsequently as a result of a tax regime which encourages landowners to expand their ownership of land), not only is access to natural resources restricted, but also an increasing proportion of the wealth generated by the combination of labour and capital with land goes to rent and is reflected in rising land values.
Poverty is not caused by scarcity, or because some people are intrinsically less capable of earning a living: it arises because, under such conditions, so much of the wealth generated through economic activity goes to rent. The free market has been transformed from a tool to promote economic growth and distributive equity into a mechanism which generates only moderate growth and sends most of the wealth created into the bank accounts of the already wealthy. It can only work in favour of greater equity, as Adam Smith hoped it would, if we can find a way of addressing the issue of rent as private income.
Henry George believed that the role of capital in the economy was to enhance the efficiency of labour. The addition of capital – tools, machines and other such products of the efforts of earlier labour – enables the output achieved by a given quantity of labour effort to be increased. The development of the pneumatic drill, for example, dramatically increased the quantity of coal a miner could extract from underground seams. The miner’s new tool is capital: it represents the earlier labour effort both of its inventor and the factory workers who produced the drills, and the miners who extracted the metal ore from which the drills are made. The application of capital is essential to economic development: without the help of tools, machines, buildings, transport infrastructure, methods and techniques, which are the legacy of the labour of others, human effort cannot drive the economy forward. Capital makes its contribution to the economy through its ability to improve the productivity of labour. Labour makes use of capital to enhance its productive capability. However, labour benefits from economic advance only when it controls machines and determines the uses to which they are put. Under such conditions of equity, capital would be the servant of labour.
Under present conditions, instead of capital serving labour, the situation is reversed: labour becomes the servant of capital. Instead of capital enhancing the efficiency of labour, and enabling all members of society to generate more wealth for themselves and their families, as rent consumes a growing proportion of the output of the economy, wages are forced down and the capitalist entrepreneur is able to employ labour at a lower cost to his enterprise. He puts this cheap supply of labour to work increasing his share of the output. In these circumstances, a greater proportion of the wealth generated by the effort of labour is retained by the owner of capital as profit. Labour has become the servant of capital, and employers dictate the terms under which the majority are forced to work, and the uses to which capital is put.
If capital exists to enhance the productivity of labour, but labour is denied this facility, then the only remaining function of capital is to increase the wealth of those who own it. Labour, in combination with land, can generate some wealth without the aid of capital, but capital without labour is useless. The natural and just relationship between the two is for capital to serve labour, but just as concentrated land ownership has become a device through which the landowning minority consolidate their position of wealth, so capital becomes another means by which the wealthy protect their advantage. In the process, the poor wage labourer is turned into an economic resource to be exploited by capitalists in their pursuit of additional riches.
A hierarchy of economic power has emerged: those who own land are best placed; those who own capital are well placed, but those who have only their labour to sell can only expect minimal reward, possibly below that required to survive. In its very workings, the economic system protects the interests of the minority who own land, and works against the interests of the majority who do not. This completely ignores the equality of interests which is the basis of universalism [see The Possibility of Progress for more on Universalism]. Until a mechanism is found to counter the effects of the accumulation of rent in private hands, and return capital to its rightful place as the servant of labour, economic advance will do nothing for the disenfranchised majority.
The impact of the law of rent is all too visible today. Traditional agricultural land use may contribute only a small portion of the output of modern industrial economies, but all enterprise requires land or makes use of the resources of nature. In recent decades, with the deregulation of markets and the sale into private hands of state-owned assets, the consequences of economic advance have come to reflect George’s description more than at any time since the industrial revolution. Output grows steadily, spectacularly in some cases, but poverty deepens, and the social fabric is stretched to breaking point. The economy fails so many people because no attention is paid to the rent question, and state intervention in the free functioning of the market mechanism, intended to ameliorate market failures, only undermines economic efficiency. Rich and poor both feel the consequences of inefficient markets, but the position of the rich is protected by their assumed right to appropriate rent. An inefficient, interfered-with market still distributes a disproportionate share of whatever wealth is created to landowners.
The principal way in which the accumulation of rent in private hands is manifest in the modern economy is the steady increase in the value of land. Whenever there is a sustained period of economic growth, it is the value of land which increases at the fastest rate, just as the law of rent predicts it will. And land which is preferentially located, and therefore most highly valued, necessarily increases in value the most as the economy grows. If you doubt that the law of rent accurately describes the market distribution of wealth among the three factors of production, you only need compare increases in land values with declining real wages and the complaints of entrepreneurs that their activities are too often constrained by a shortage of investment capital.
It is through increasing land values, and their impact on the price of residential property, that the growing gap between haves and have-nots among ordinary people is most tangibly realised. A home has two elements in terms of economic theory: it has a capital element and a land element. Every home is built on land which generally appreciates in value with economic advance because of the operation of the law of rent. The house itself constitutes capital, and the value of the capital element depreciates over time. The capital value of a home can be maintained if additional labour and capital are applied to it by way of maintenance, and can be enhanced through the building of an extension, for example, but generally it reduces over time. The increase in the value of residential property which is a feature of all modern industrial economies is a consequence of increasing land values, not increases in the value of houses themselves. Other factors do influence house prices. The supply of houses of a particular style, or in a certain location, affects prices, as do planning regulations which limit the building of new houses. But each of these factors affects house prices by altering the value of the land they occupy, not the value of the building. The additional wealth enjoyed by the homeowner who sees the price of her house increase, is an addition of rent, not an additional of capital.
In Britain today, there are insufficient homes to meet demand. Millions of people do not have secure housing, and cannot afford to get on the property ladder. Fewer houses are being built than at any time since 1945, and, with the gap between rich and poor steadily widening, the prices of all homes are pulled inexorably upwards and beyond the reach of the least well off. House prices in London have risen to such an extent that the Government is offering subsidies to teachers and nurses who cannot afford to live within commuting distance of their workplaces. Most of the houses that are being built are expensive executive homes on greenfield sites, from which property developers know they can turn a handsome profit. Very few affordable homes are built on brownfield sites, close to employment opportunities, because they are not profitable. Such homes are usually only built when the government offers financial incentives to property developers in the form of state subsidies. The benefits of a free market, which would otherwise distribute wealth so that sufficient investment capital was made available to fund the construction of housing affordable by ordinary people, will not sanction the building of such homes even where great demand exists, because there are other more lucrative opportunities available to developers.
The better-off do very well out of this situation. Many use the unearned wealth in the inflated values of their homes as collateral to borrow money to finance second homes in the country, or abroad, which they use at weekends or for holidays. The impact on the population of rural villages which are the target of such investments is to force up prices to the extent that local people can no longer afford to buy a home. Local shops, pubs, post offices and churches are forced to close, and communities which had survived hundreds of years disappear. There is nothing inherently wrong in owning a second home, as long as it does not prevent other people from owning a home at all. In an equitable economy, where all had access to adequate housing, some may still choose to build or acquire second homes, but this would not affect the ability of others to enjoy this most fundamental of basic needs. Under current conditions, the aspirations of the better-off for second homes only serve to widen the gap between the included and the excluded.
The effects of the accumulation of rent extend beyond the housing market: in London, the construction of an extension to the Jubilee Line on the underground system has provided much-needed improvements in transport infrastructure, especially in deprived areas of east London. The project was funded with public money drawn from the taxes paid by wage-earners and enterprises all over Britain. Its effect on the city’s economy has been positive, but much of the additional wealth generated has gone straight into the pockets of individuals and companies which happen to own land and buildings along the route of the new line. A recent study commissioned by Transport for London concluded that land values in the vicinity of just two stations along the new line had risen by £2.8 billion as a consequence of the investment. The total cost of the entire extension amounted to only £3.5 billion. The fortunate beneficiaries of this uplift in land values made no special contribution to the original investment – it was funded entirely from the public purse; yet their assets now command a grossly inflated rental and resale value, merely because of their location.
The rent problem also reduces the attractiveness of many inner-city areas as places to live and work. In cities around the world, perfectly viable land just beyond the boundaries of the established central business district lies derelict and unused, while less than a mile away tiny parcels of ‘prime’, but otherwise identical, land are acquired for vast sums for the construction of skyscrapers. The distorting effects of rent mean that the ambitious property developer will pay a huge amount for a couple of acres on which he can construct fifty stories, despite the immense cost, because he knows this tiny parcel of land will earn a huge rent for years to come. Location has become so important a factor today that the benefits of wealth creation are concentrated on a relatively small portion of the physical geography of society. Brownfield sites, sometimes in prime locations, are left undeveloped, either because the owner is ignorant of the land’s value, or because he his speculating on a future increase in its value. In rich countries such sites are an eyesore; elsewhere they become shanty homes to thousands of poor, all desperately competing for a chance to shine the shoes, or otherwise catch the crumbs of those who ride the elevators of these great, rent-dripping, glass towers.
In an economy in which the accumulation of rent promotes a widening gap between the richest and the poorest, other scarce economic assets take on a wealth-generating capacity of their own. Stocks, shares, government bonds and various other financial devices are stores of wealth. They may be limited in supply but, unlike land, their limited supply is not determined by nature, it is determined by the human beings who control the issue of such assets. Nonetheless, just as landownership enables a fortunate minority to sit back and watch their wealth increase with no effort whatsoever, so the speculative trading of surplus wealth enables others to enjoy the same benefits of unearned income. The speculative returns from such trading arise as a consequence of extremes of wealth and poverty, which, in turn, arise from the accumulation of rent in private hands. It follows, therefore, that, if a mechanism was found to share rent more equitably among the population, then ultimately the conditions which encourage the speculative trading of surplus wealth would disappear.
Today, money flies around the world for no other purpose than to make more money on the basis of fluctuations in exchange values. This money is not invested in productive enterprise, but it extracts a large slice of the returns on genuine investments simply through playing the markets in stocks and shares, currencies, precious metals and other commodities. In 1970, 90 per cent of capital flows were used to finance trade or long-term investment and only 10 per cent was speculative. By 1998, 95 per cent was purely speculative. Much of this trade is in financial futures: it is a form of gambling whereby investors take a bet on the likely price of a certain commodity three or six months hence. It has nothing to do with the real economy, the provision of goods and services on which people depend for survival. It is a requirement of the economic system only in so far as those with surplus wealth make it available for productive investment as long as most of the time they can use it to play the casino of global capitalism. In the financial markets, when one set of players wins, another set loses. The winners, generally, are the big-money gamblers of western economies; the losers, generally, the people of economically weaker countries, the currencies and economies of which become prey to speculators.
The gains from speculative investment, like those from rent, are completely unearned. A key aspect of the ethic of universalism is that every individual should have the opportunity to make an economic contribution in return for his or her basic needs. The right to work, and the right to a fair return for the labour effort expended, is fundamental. Conversely, nobody who is able to work, but chooses not to, is entitled to any of the product of the efforts of others. The unearned gains of speculative investment, like the unearned rent enjoyed by landowners, clearly breaches these natural, commonsense rules of equity and justice. This is not to imply that, in an equitable economy, those with surplus wealth should not receive a return for making that wealth available to others for use in tangible economic activities. Why would anybody choose to risk their surplus wealth without the promise of some return? But this is quite different from placing surplus wealth into financial markets, in expectation of a speculative return, when the conditions for successful speculative investment only arise because the economy is already so polarised, and market speculation actively contributes to the further impoverishment of the already poor.
As well as supervising the distribution of wealth among the factors of production, the market mechanism plays an important role in identifying to which, among competing economic opportunities, the available factors of production are applied. This function of the market is also compromised by the effects of the accumulation of rent in private hands. Under conditions of equitable access to land and the resources of nature, where capital serves labour, opportunities for investment would be selected according to their potential for maximising the return to capital and labour in quantities which reflected their relative contributions. Under such circumstances, capital would have to compete for the labour it required by offering wages at a level high enough to persuade sufficient quantity and quality of labour to choose a particular opportunity over any alternative. The profit earned by the supplier of capital would be that which remains once the competitive wages of labour have been paid.
In today’s economy, where labour serves capital, and the interests of ordinary people are valued way below those of the owners of land and capital, opportunities for investment are selected by quite different criteria: the likely return to the capitalist, and the speed with which that return will be realised. As a consequence, opportunities to develop genetically modified foods, which guarantee profits for large American enterprises but do little to solve the problem of world hunger, are selected for investment. Opportunities to develop drugs to treat ailments such as heart disease, which result from the sedentary lifestyles of people in rich countries, are selected, rather than the licensing of affordable generic versions of anti-AIDS drugs which might double the life expectancy of a twenty-year-old African. Opportunities to develop clever, but ultimately useless, new electronic gadgets are selected rather than initiatives to build affordable housing for the thousands of families without their own homes. Human well-being, universal needs provision, and improving the prospects of children to live past five years old, are not criteria to which the process of selecting investment opportunities pays any attention whatsoever.
The market fails to select economic opportunities which would improve the well-being of the least well-off precisely because it can only respond to the relative strength of the preferences presented to it by all economic players. Those who control land and capital also control the greater part of the purchasing power in the economy. Those with no land or capital tend to have much less purchasing power. After centuries in which the effects of the law of rent have steadily worked their polarising effect, and the ownership of capital has become concentrated in the hands of a small minority, it is inevitable that a market-driven economy will direct its efforts at satisfying the whims of the privileged few, and largely ignore the basic needs of the many.
Much the current inequality between nations has its root in historical inequities. The economic effect of the slave trade, for example, set Africa’s development back centuries. Just as a population explosion in Europe was creating conditions for the industrial revolution, population growth in Africa was put on hold. It would not begin to grow again until the slave trade was ended, by which time Africa’s place as the poor relation in the global economy was decided. But all such historical inequities, be they the consequence of the unjust outcomes of tribal conflict or civil war, or the legacy of imperial conquest and domination, have been reinforced by the cumulative, polarising effects of the accumulation of rent in private hands. Today, with rent-ignorant, western-style development aggressively trailed as the only solution for the poor world, the direct link between economic advance and growing poverty is in evidence wherever you look.
Classical economic theory advocates free trade as an extension of free-market principles. Free trade opens up new markets and therefore additional opportunities for mutually beneficial market exchange. The beneficial effects of free trade are described by the law of comparative advantage, according to which countries find themselves particularly well suited to the production of certain goods. By each country focusing on production of that which it can most efficiently produce, all nations, through trade, are able to benefit from exchange access to the most cost effectively produced goods of all types. However, as David Ricardo pointed out, the law of comparative advantage only works under conditions of capital immobility between nations. If citizens or firms of one country are permitted to employ their capital in the economies of other countries, then free trade equilibrium is upset, and stronger countries can quickly attain a position of absolute advantage over weaker ones. Just as the rent problem undermines the equity-promoting function of the market, so capital mobility compromises the capacity of free trade to ensure equity in international exchange.
Under conditions of international economic equity, where the accumulation of rent was mitigated and the market was able to distribute wealth equitably, however, the export of capital would not necessarily be problematic. Much of the capital exported today is used to acquire land, or the right to exploit the resources contained within it – rent-earning assets which further enhance the wealth of capital-holders in rich countries. The problem is exacerbated by political relations which dictate that poorer countries regularly cede control over land and natural resources to foreign interests at prices well below their true value. This compounds pre-existing inequity and ensures the continued underdevelopment of poor-country economies. It does not necessarily mean we need to limit capital mobility, but it does strengthen the argument that we should dispense with national borders as economic boundaries. Given the volume of global trade and capital movement today, they are already quite arbitrary; their abolition would facilitate the implementation of economic arrangements which address the rent problem and bring the law of comparative advantage back into play. The benefits of free trade could then be enjoyed by the citizens of all countries.
Many jobs are now being exported to countries like China and India where wage levels are much lower. With globalization, for the first time a global labour market is being created with the effect that wages in the richer countries are pushed down, whilst incomes for people in traditionally poorer countries begin to rise. As these poor-country economies develop, and as more of the land which has traditionally been used for subsistence farming comes under the ownership of powerful individuals or big corporations, it is likely that rising wage levels in these countries will eventually stabilise, but at levels considerable below those enjoyed by workers in the established industrial economies. As jobs continue to be lost in the rich countries, in order that the standard of living to which many people in the West have become accustomed is sustained, ways of preventing the loss of jobs overseas have to be found. As Kevin Watkins explains, rich-country governments are quick to intervene when the free workings of the global labour market prove unfavourable to their economies: ‘Developing countries exporting to the industrialized world today face trade barriers four times higher than those applied by rich countries to each other. Bangladesh pays the United States $314 million annually in import taxes, about the same as France.’ The United States and Europe subsidize their agricultural sectors to the tune of $1 billion a day, six times what they provide in aid. The United States is planning to increase farm subsidies by $18 billion a year over the next ten years.
George Monbiot reveals just how cynical rich-country attitudes to trade are. He points out that some of Europe’s biggest corporations were founded in Switzerland between 1850 and 1907, and the Netherlands between 1869 and 1912, when neither country recognized patents. ‘In both countries the situation appears to have contributed to massive economic growth and innovation’, he says. Many of the descendants of these firms now lead calls for patent laws to be strengthened. Companies which owe their success to the absence of patent laws for substantial periods now argue that such regulations should be imposed to protect their position and deny the opportunity for economic progress in poorer countries. If western countries can no longer secure the markets, resources and labour they require for global dominance through military might, then they turn to other more subtle but equally unjust mechanisms. As Monbiot concludes, ‘When it suits the rich countries to impose free trade they do so. When it suits them to impose protectionism they argue that it is the only path to development.’ Kevin Watkins concurs: ‘Europe and the US developed their economies by pursuing policies that are being outlawed in developing countries.’ He also points out that ‘poor countries are hindered from closing the technology gap at the heart of global inequalities by the fact that northern based companies account for 90 per cent of world patents’.
Under prevailing arrangements, there is no chance of creating the level economic playing field which poor-country development demands. The immense political and economic power of the rich countries, coupled with the effect of capital mobility, the law of rent working within and across national boundaries, and the hypocrisy of rich nations in loading the dice of international trade so heavily in their favour, means that, as we exhaust new market opportunities under a system which excludes growing numbers of people from the economy, the economic security of most people in rich and poor countries alike will be steadily eroded.
The global economic playing field is currently tilted so far in favour of the rich nations that any process of change towards a more equitable economy would require a transitional period in which poor countries’ economies are protected until they are able to recover from their initial disadvantage. But, once the playing field has been levelled, free trade is essential, not only to a dynamic economy, but also to variety and diversity. We may not be able to travel to experience the wonders of all other cultures in situ but we can certainly enjoy their exported products in our own countries. Britain may no longer import butter from New Zealand once, thanks to sensible political and economic arrangements, it is able to produce equally good butter at a competitive cost. But all those things which can only be produced in certain places will be traded fairly and to everyone’s benefit, both economic and cultural.
We have the tools at our disposal to reverse and remedy cumulative historical inequities for all time, to make the most of the huge opportunities offered by free and fair trade between nations, and to create a genuinely level economic playing field which allows poorer countries to take responsibility for their own economic development and their political and cultural regeneration. If we do nothing, we face a future of increasingly uncontrollable migration, growing unemployment, and a divide between rich and poor – within and between nations – which will stretch the social fabric to breaking point, and could bring on the collapse of civilization.
Migration is already a hot political issue. While the focus of debate centres on how best to identify true asylum seekers from purely economic migrants, the reality is that growing numbers are seeking economic opportunities in other countries because of the lack of opportunities at home, and because powerful media images suggest that a better life awaits them elsewhere. With wages at the lower end being driven relentlessly downwards, and the effect of technological displacement, many of the worst-paid jobs in cities like London and Paris are taken up exclusively by immigrant labour. Some of these in-comers work legally; many do not. There is little doubt that migrant labour provides much of the foundation effort upon which the rest of the economy is built. The requirement for a steady supply of people prepared to work at miserable jobs, in dreadful conditions and for poor pay, is a key feature of the contemporary economy.
Without migrant labour, these jobs would not be filled. Our hotel beds would go unmade, our airport lavatories uncleaned; the shellfish which go into our seafood salads would remain unpicked. As long as economic opportunities in poorer countries are restricted by huge global economic imbalances, then even jobs which do not pay a living wage in Frankfurt or Amsterdam will attract desperate in-comers. Most economic migrants are not brazen opportunists; they simply see the life chances available to many people in rich countries, contrast them with their own, and conclude that they have nothing to lose. If people with the courage, determination and ingenuity of many such migrants were given genuine opportunities to participate constructively in their home economies, they would do so with enthusiasm and success.
One thing rich and poor countries have very much in common is the problem of unemployment and underemployment. According to a report by Alliance Capital Management in early 2004, those without sufficient work opportunities now number one billion worldwide, up from 800 million in 1995. The manufacturing sector is losing jobs at a frightening rate. In just six years, the United Kingdom has lost 12 per cent of factory jobs, the US economy 10 per cent. China, among the fastest growing of the emerging economic powers, lost 15 per cent of its manufacturing jobs in the same period. Within the next 50 years, another 150 million manufacturing jobs may well be lost. Many of these jobs disappear as technology is developed to replace human labour. It is anticipated that many white-collar jobs will also be lost; machines to handle information and crunch numbers are just as easily and cheaply developed as machines to build cars or package food.
In his analysis of these frightening statistics, Jeremy Rifkin ignores the contributory role of the rent issue; nonetheless he says, “ If dramatic advances in productivity can replace more and more human labour, resulting in more workers being let go from the workforce, where will the consumer demand come from to buy all the potential new products and services? We are being forced to face up to an inherent contradiction at the heart of our market economy that has been present since the very beginning, but is only now becoming irreconcilable.”
It is the accumulation of rent in private hands, conspiring with capital in the form of continuous technological innovation, which is threatening the long-term capacity of the economy to provide for the majority of the population. Before long, the small minority who control economic assets, or possess knowledge and experience which sets them apart from others, will be the only group for which the economy does provide. There are already signs of a fundamental restructuring in the distribution of wealth in society, with the most successful among middle-class professionals succeeding, mainly through the increasing value of their homes, in keeping up with the most wealthy, while the bulk of the middle class are, in terms of their economic power, pushed down towards the situation of the traditional working class. It seems possible that this emerging one-third, two-third split could become a permanent fixture of rich-country economies. If it does, we will have a serious problem: a minority of economically active individuals cannot possibly support a majority of inactive ones.
We can slow down this process of polarisation by tinkering with the market and forcing a degree of social equity through policies of redistribution. But, until we recognize that, as long as we allow the private appropriation of rent, the only possible outcome is growing economic inequity; there can be no reduction in poverty or improvement in social justice.
The Enlightenment teachings of classical economics provide a clear explanation for our ongoing failure to solve the problem of social and economic injustice. Henry George used these teachings to explain why, a century later, despite immense technology-inspired economic advance, and an exponential increase in the ability of human beings to generate wealth from the resources of nature, we were no closer to ending poverty. A century further on from George, many more people share his moral ambition, but few understand why we are still unable to make practical progress in respect of the economic question. Even worse, many economists fail even to realise that there is an explanation. It is buried, not especially deeply, in the texts of Adam Smith, David Ricardo and the other philosopher-economists of the Enlightenment. Although many of their books are still in print, the fundamental truths contained within them are ignored by mainstream neo-classical economics, and by the politicians who follow its prescriptions in the formulation of social and economic policy.
Classical economic theory makes it absolutely clear that there is no solution to the problem of poverty, and the exclusion of many millions of people from the economy, until the effects of the accumulation of rent are addressed. More positively, it also makes clear that, if we can successfully address the rent problem, we have at our disposal an understanding of economic laws which not only promises an inclusive, equitable and dynamic economy, but also a form of social organisation which holds out the promise of reconciling the two great competing fundamental human values: individual freedom and social justice.
A personal comment on Transition, REconomy and the ground up shift (no pun intended) in land ownership models – Shane Hughes
Mark’s thinking has a lot of logic and one of the common responses to such good logic is often the question; what do macro solutions like Land Value Tax mean to me? With all this new information, what should I do differently in my local community? What does this mean to Transition and Transitioners? Should we do things differently, should we engage in political campaigning for example?
Just at the time of posting this article I was engaged in a separate email debate with a REconomy member and supporter Simon Carter. I’ve edited that discussion here as I think it is relevant.
There is a really important philosophical discussion around the national/international versus the local. The two levels of approach aren’t mutually exclusive but it's sometimes difficult to see how our small local acts (which are often felt to be insignificant) can be connected to the macro economics and national politics type scale. And I often hear it said that Transition should be doing more on a national, international and coordinated scale. Acting rather like a single entity rather than a swarm of smaller entities. This is a debate that’s relevant to the whole movement and one that is going on often internally and possibly subconsciously in the minds of many.
Over the last few years I’ve learnt a little bit about how Transition works and where it strength lies. As i understand it, Transition operates like a swam rather than being one large entity itself. Garden share is a great example of how the swam works and is actually very relevant to the theme of land and economics. I remember when Garden Share was just a few people in Totnes sharing gardens. I also remember when it started to get copied up and down the country and when Hugh Fearnley-Whittingstall (a friend and constant supporter of Transition Town Totnes) upped the ante with his website Landshare, which now has >70,000 members and the largest land owners in the country (National Trust, The Church, British Rail, possibly Prince Charles and other Royals) all started to share land many of them engaging directly with Landshare and others through their own channels.
We could say that 10 years ago our collective/national perspectives on land ownership were far more ‘traditional’. At some point the centre of gravity started to shift. We can’t attribute this shift to Garden Share or Land Share -- these initiatives are just visible manifestations of an idea that had met it’s time and captured an essence. However, since the inception of these local projects, community ownership of land has just exploded with loads of different legal structures and 10′s, if not 100′s of different approaches. Now 0.5 million acres in Scotland is in community hands. This is a very significant. Its a portion of land the size of West Yorkshire and the tendency is towards more community ownership. There’s even at least one Scottish island (community) where the community have bought up their entire island. This could be seen as an interesting microcosm of an entire country or an entire world. There are so many examples that support this new tendency in land ownership e.g. when the government tried the opposite route i.e. to sell off British forests allowing the possibility of commercial buyers. They were forced to make the biggest U-turn and now the opposite has happened with plans for greater and more guaranteed community access to forests and less control from central government etc etc etc.
Mark is far more intelligent than I and pin points land ownership as being one of the initial or primary causes of our economic problems. Mark's championing of Land Value Tax looks to me to be a very positive top down national solution but I think we should never underestimate the importance of the slow but steady bottom up erosion of traditional problem models as seen through the new wave of community ownership. This bottom up transformation will not be able to change the land ownership profiles of the whole country or entire planet, particularly given vested interests, but in my mind it will redefine the playing field. It will shift the centre of gravity and should also help inform any top down national and international polices, strategies and approaches. So in response to my initial question ‘what do macro solutions like Land Value Tax mean to me?’. I have to flip it on it’s head and say how should all this ground up activity inform national policies like Land Value Tax?
I think Transitioners are right to focus on the local and small initiatives – this is our strength. But it’s when a bottom up ideas and projects reaches national proportion that I think Transitioners up and down the country need to come together as a kind of entity and have a national level debate and a national level position e.g. on land value taxes and other policies and strategies. Now that we have the grass roots foundations I think we can augment a national shift change. Now that on the ground changes are strong I think we have to start to interact with the strategists like Mark and ask questions about national policy. How would our actions inform such policies and how would such policies change or impact our actions? Is there something far more revolutionary on the cusp?
I would love to know Mark’s views on Transition within the context of his chapter posted above….