Progress and Poverty
by Henry George
1879, reprinted 1987, Robert Schalkenbach Foundation
Written by Darrell Anderson.
Table of Contents
The social philosopher Henry George died in 1897, but his best-selling book Progress and Poverty caused much excitement when first printed in 1879. More than 120 years later people still discuss George’s controversial effort.
George declared that “the association of poverty with progress is the great enigma of our times” [p. 10]. There can be little doubt that like many writers of the 19th century, George was sincere in his effort to resolve the apparent riddle that the “Sphinx of Fate” placed before humanity. Why, when humanity was progressing materially forward and generally improving the overall health and increasing the overall wealth of all people, did poverty remain? What was the cause of industrial depressions? Why were laborers often idle? Why did the working classes suffer? [pp. 5–6] Those seemingly simple questions are still asked today and George believed there must be a common cause behind those questions.
The easy answer to explain George’s enigma is ignorance — the inability of humans to fully understand the complex universe in which they live. Add to that ignorance a general desire by all humans to pursue happiness with as little effort as possible and the doors open to many processes that might explain the enigma. George hoped to identify those doors.
In the 19th century the industrial depression was a relatively new phenomenon in human history. Although hunger and devastation were possible by natural causes, depressions (and recessions) previously were unknown in a human world where people lived in self-sufficient communities and at subsistence levels. What changed to introduce that phenomenon after the Industrial Age was in full throttle? What caused those notorious booms and busts despite tremendous material progress?
Understanding the enigma of poverty amidst much material progress is impossible without understanding basic energy flows. Indeed, understanding the flow of wealth is nothing more than understanding the flow of energy. To sustain life all living creatures must sustain energy flows. Energy is the capacity to perform work and work is the process of applying physical force to move objects. For humans, converting energy into work is called labor. Through that process humans create and produce.
Based upon the observable natural principles described by physics and chemistry, sustaining energy flows and satisfying human wants requires continual work because no energy conversion process is perfectly efficient. Thus, a desire to create perpetual motion is the ultimate dream of sustaining energy flows without further input. The human desire to obtain something for nothing is the key to George’s enigma. George recognized that key [p. 203].
George’s enigma can be studied fully only when recognizing all the various avenues humans seek to sustain those energy flows. Unfortunately, as explained by the Second Law of Thermodynamics, scientific discovery reveals that perpetual motion is impossible. Thus, humans must seek other ways of trying to sustain energy flows with as little effort as possible. Sadly, humans generally seek to maintain energy flows by controlling and capturing the labor of other people, either directly or indirectly. Direct and indirect slavery often is an expedient path for bypassing the rigid barrier described by the Second Law.
Did George correctly understand the problem and offer an appropriate remedy? What follows is a short summary of the major sections of his book, followed by an exhaustive analysis.
Book I Wages and Capital
George believed that as material progress increased, wages tended to decrease [p. 17]. In his day, the traditional explanation was that wages were derived from capital, and as more wealth is recycled back into production as capital, less wealth is available for wages.
George disputed that theory. In several explanations George dismissed the traditional theory and argued that wages are a product of labor, not capital.
To refute that traditional theory George exerted much effort defining terms. As he demonstrated, how words are used is important, otherwise subsequent discussions and debates are superfluous.
The traditional factors of production are land, labor, and capital [p. 38]. George explained and demonstrated the distinction among the three factors.
He also defined wealth as “natural products that have been secured, moved, combined, separated, or in other ways modified by human exertion, so as to fit them for gratification of human desires” [pp. 41–42].
Although George provided no symbolic method describing the production of wealth, the following symbolic expressions will be useful for some of his later discussions.
Definition of wealth with respect to land and labor:
Land + Labor = Wealth (Produce)
Expression for the traditional factors of production:
Land + Labor + Capital = Wealth (Produce)
Book II Population and Subsistence
George assessed the then-prevailing theory of wages and capital only to eliminate that theory as an explanation for why he thought wages tended to decrease amidst material progress. Similarly, George then evaluated Thomas Malthus’ theory of population dynamics. Malthus argued that population growth always would pressure the human ability to sustain that population. Malthus argued that population would grow geometrically and food supplies arithmetically.
George argued that Malthus’ geometric/arithmetic presumptions were flawed and supported by no evidence. Additionally, simple observations such as the division of labor and improved production efficiencies counter much of Malthus’ presumptions.
George argued against Malthus’ theory as a reason to explain the enigma of poverty despite material progress. This opened the door for George to explore other reasons to explain the poverty enigma. By arguing those two theories as flawed, George hoped that nobody would use those arguments as a foundation to explain the coexistence of poverty with material progress.
Book III The Laws of Distribution
In the third section of his book George provided the foundations for his general theory. He began by examining what are considered the traditional means for distributing wealth: rent, wages, and interest.
In the real world, wealth is produced for the sole purpose of being consumed. Some consumption is immediate (food), and some consumption is long-term (a house). Some wealth is consumed in the nature of capital (tools). Additionally, all wealth is subject to decay and must be replaced even when not directly consumed.
Within the field of economics, the phrase distribution of wealth is not used to mean delivery, transportation, or consumption. The phrase means the way wealth is shared with the people who help produce wealth. Often this phrase is confusing because in normal usage the word distribution includes delivery and consumption.
George defined and distinguished the terms [p. 156]:
He symbolically demonstrated the relationship of the three terms by writing:
Produce (wealth) = Rent + Wages + Interest
George emphasized that the terms are necessarily exclusive. He did not want readers mixing and matching the terms. This is especially true with the term rent because in common usage the word includes a variety of costs all bundled into one periodic payment [p. 165]. George distinguished between rent as the word is used commonly and the concept of economic rent, which refers only to land. For example, although the monthly payment to a property owner will not distinguish between the two terms, leasing an empty building to operate a printing shop will include lease payments of both rent (for using the land) and interest (for using capital — the building).
George also argued how economic theorists had confused their terms by explaining the inappropriate use of the term profit [pp. 156–159]. Profit has no rightful place in the discussion of aggregate wealth production, distribution, and consumption. The word profit has meaning only in context to an individual and has no meaning with respect to the aggregate flow of wealth. Profit means excess — that amount of wealth remaining after accounting for costs and expenses. In the aggregate there is no such thing as profit, but only a contiguous flow of wealth.
After carefully defining his terms George declared a relationship among the terms of rent, wages, and interest [p. 160]. With a constant production of wealth, if one method of distribution increases then collectively the other two methods of distribution must decrease. His thesis was that regardless of which term changes, the collective effect on the remaining terms is always the opposite.
George argued against the then prevailing theories to describe the concept of interest [pp. 173–188]. Some people have argued that interest is compensation for risk [p. 173] or that the capital owner is rewarded with interest for having abstained from using that capital. George argued that interest arose as compensation for the lack of increase that capital usually provides [pp. 181–182]. Capital is wealth devoted to further producing wealth. Thus, not having access to capital necessarily implies not producing at the same capacity possible when using that capital in production. Therefore, interest is compensation for lost time [p. 184] — the difference between not using that capital and the increase one could have had. Interest is compensation for the lack of increase one normally expects to receive by using that capital in production.
George must be commended at this point. If he had ended his book with the first chapter of this section, he would have shown that economics theorists had failed to properly define and distinguish their terms, and thereby introduced much confusion into their field of study.
George spends the remainder of this section refining his thoughts about the relationship of rent, wages, and interest. The idea of economic rent is foundational to the rest of George’s thesis. Economic rent is not just the return for leasing land, but the difference that various parcels of land can command as distinguished from the parcel that commands no rent at all [pp. 205–207].
Book IV Effect of Material Progress Upon the Distribution of Wealth
George discussed three points that he believed affected the distribution of wealth:
Book V The Problem Solved
George concluded his previous discussions by declaring that the cause of poverty is land monopoly, specifically the concept of private property in land.
Book VI The Remedy
George evaluated several proposed remedies for eliminating poverty and offered his opinions why he thought those remedies must fail. He then proposed his remedy: to declare all land as common property.
Book VII Justice of the Remedy
From this point on George provided little theoretical discussion and was mostly expository to defend his theory and proposal. In this section George argued what he thought was injustice in the concept of private property in land. Essentially he called for abolishing the concept of private property in land. That proposal is where many people lay the foundation for accusing George of being a socialist or Marxist.
He discussed the concept of compensating current titleholders through a process of converting all land to common ownership. George also discussed some historical background why he thought the concept of common ownership of land was justified.
Book VIII Application of the Remedy
George introduced his idea of taxing land values and abolishing all other forms of taxation. George believed that all other forms of taxation were taxes on productive labor and consequently dishonest.
Book IX Effects of the Remedy
George provided his arguments for how his single tax plan would function and how that tax would affect the distribution of wealth, social classes, and social organization.
Book X The Law of Human Progress
In this section George waxed philosophically, attempting to describe how he believed humans materially, socially, and philosophically progress; and attempted to derive a “law of human progress.”
Summary: George proposed and discussed two serious problems — imbalanced aggregate wealth distribution and land monopoly. He thought the former was caused directly by the latter. He concluded that such a monopoly plays an important role in his enigma of poverty amid material prosperity, but he arrived at his conclusion through a flawed analysis. He also failed to realize that other elements contribute to his enigma. George’s thesis falls short by focusing on only one element of a complex system. His effort was in the correct direction, but incomplete.
Progress and Poverty — A Detailed Analysis
Before reading George’s book, a reader would do well to ask some preliminary questions:
George never defined poverty and never quantified the amount of poverty he believed existed. Without such foundations he established no boundaries for meaningful dialogue and exchange of ideas. This seems odd considering his exhaustive effort to define so many economic terms and also considering his entire book is based upon solving the enigma of poverty. His Introduction provided some personal subjective opinions, not a developed theory or quantitative analysis of poverty.
By what standard did George declare poverty? If comparing the living standards of laborers in his time to those of a hundred years prior, where all but a handful of people lived at subsistence levels, then one might be perplexed at why George thought he saw poverty. If George compared the living standards of laborers in his time to those of the few people who capitalized much of the 19th century Industrial Age, then all but a handful of people were poor, including George. In George’s time many laborers worked 12 hours a day, six days a week; but 100 years prior many laborers worked 18 hours a day, seven days a week. Compared to laborers of 100 years prior, people were living better and with less labor. George lightly acknowledged that question in a footnote [pp. 8–9], but never elaborated or validated his thesis.
Although unknowable, what would George think with respect to modern times? Would he consider laborers poor despite their possessing televisions, stereos, cars, furniture, clothing, groceries, and microwave ovens, only because they do not have the same standard of living as a handful of “rich” people?
This is not to reject George’s theory that there are general problems with aggregate wealth distribution, only that without an objective definition nobody truly knows what the word poverty exactly describes.
George began his discourse asking the seemingly simple question:
Why, in spite of increase in productive power, do wages tend to a minimum, which will give but a bare living?
Unfortunately, George provided no evidentiary support for his question. He merely presumed his question was correct. In his Introduction he rhetorically described the general enigma of material progress and poverty coexisting, but he never laid a proper foundation or provided data that aggregate wages were decreasing with respect to material progress. He therefore made the same mistake for which he chastised Malthus — baseless presumptions. Presumptions are not a problem when presented with some evidentiary support or preliminary data. Furthermore, George never refuted Malthus, but only discredited the presumptions. However, one could thumb through the 600 pages of George’s discussion and never know whether his question is credible. George never established a reference point from which to evaluate aggregate wages. Thus, to declare wages were falling despite material progress is an empty statement. There is an old adage that the quality of an answer is directly related to the quality of the question.
Although not discussing the point, similar to his discussion about the word profit George hinted at a related challenge with the word income [p. 162]. At an individual level income might be derived from rent, wages, or interest, or any combination thereof. Like the word profit, income has meaning only with respect to individuals, and has no meaning in context to the aggregate flow of wealth.
Although not intended by George, by loosely referring to income he indirectly distinguished between aggregate flows of wealth and individual usage. For example, interest is the return an individual receives for leasing capital, but within the aggregate flow of wealth nobody can determine from where capital is derived. Only a specific individual can decide if the wealth received was derived through rent, wages, or interest. Likewise, only an individual can decide when to create capital and recycle that wealth back into production. At an individual level, once wealth is received the terms rent, wages, and interest have little meaning. Had George emphasized this distinction between the individual and the aggregate he might have avoided some flaws in his analysis.
George described capital as a form of stored labor [p. 164]. Although not critical to George’s overall discussion, a clarification is necessary to better understand the overall wealth-energy flow process.
Labor is a process of converting energy into work. Wealth is what human labor produces and wealth is a form of stored energy. The Law of Conservation of Energy teaches that energy can be neither created nor destroyed but only converted into one form or another. Matter is merely another form of energy. Strictly speaking then, humans do not produce, consume, or create, but only convert energy from one form into another.
Comparing a process (labor) to the results of that process (wealth) is comparing apples and oranges. Capital is wealth devoted to further producing wealth and therefore also is a form of stored energy. Processes cannot be stored but are descriptive only. Labor is a process always occurring in real-time. Unlike energy itself, labor — a process — cannot be stored. Labor is something humans do, not possess or own. The energy stored in the human body is not labor; the word labor merely describes the process of converting that energy into work.
From where does George possibly derive his statement that capital is a form of stored labor? Consider that all raw materials are derived from land, from which future wealth is created. Therefore, rent — the return for leasing land, is actually the return from future labor. Because labor can be performed only in real-time, wages are the return from present labor. Payment by contract for future labor is a loan, not wages, although that loan must be repaid from the products of future labor.
Capital is a subset of wealth and all wealth is created from past labor; that is, capital stores the effects of past labor, not the process of labor. Wealth — stored energy — is what is returned, not labor. George can’t have both definitions.
By addressing terminology problems and incorrect theories about wages, capital, and population dynamics, George asserted that the cause of his enigma cannot be with the production side of wealth. By elimination, he argued, the cause must be found in the distribution of wealth [p. 154]. His basis is that land is inanimate and cannot be a prime mover as humans can, capital is a subset of wealth and does not exist until humans produce wealth, and labor is a process of converting resources and wealth into more wealth.
Initially George’s claim appears correct. However, George wandered astray by declaring he need focus only on the distribution side of the flow of wealth. He erred because complex systems must be analyzed in totality. Evaluating individual system elements provides an understanding of the characteristics of each element, but provides a limited analysis about the overall relationships of all the elements with respect to the entire system.
George was hoping to find his proverbial needle in a haystack by focusing on each element of that complex system. He expected to use a process of elimination (reductionism) to arrive at the cause of his enigma. By doing so he violated the principles of systems theory. Granted, systems theory did not exist in George’s day and today can be used only to show where George erred. Thus, George cannot be blamed for conducting his research within the boundaries of the knowledge of his day and focusing on individual elements. However, such an approach helps people today understand where George’s analysis went wrong.
Solving George’s enigma from a system perspective is important because of a system attribute known as feedback. Feedback is a process of partially returning output back into a system. As George observed, to help produce additional wealth some wealth is often recycled back into production as capital. By definition therefore, capital is a feedback mechanism and anything that affects the nature of capital necessarily affects the production side of wealth. Because capital is intended to produce further wealth, capital provides positive feedback to increase system output (material wealth). That means the production side of wealth cannot be isolated from the distribution side. This is the nature of studying complex systems.
Some people might argue that George thought that humans could produce wealth without capital [p. 164]. George’s observation might therefore tend to negate the argument about capital being a feedback mechanism. However, without capital humans would survive in fewer numbers and only at a hunter-gatherer or herder condition. Without capital humans could not exist at a primitive agrarian level because even at such subsistence levels some wealth must be converted into capital — seed is necessary for next year’s crop. One does not easily mine coal without capital — a pick axe, shovel, and wheelbarrow. Capital is what helps promote humanity into a higher condition of material progress. Thus, capital as a feedback mechanism cannot be ignored.
Despite his admirable effort in properly defining terms and addressing some theoretical flaws of his day, from a systems theory perspective George’s analysis is flawed from the beginning. That his foundation is flawed does not mean he might not correctly identify some of the causes of his enigma, but does mean that his analytical process is open to criticism.
George observed that all produced wealth is distributed in the form of rent, wages, and interest. He defined produce (wealth) as the sum of rent, wages, and interest. He wrote that:
Produce (wealth) = Rent + Wages + Interest
From this symbolic description George wanted to demonstrate how wealth is distributed with respect to the traditional factors of production: land, labor, and capital. That distribution is only an aggregate description, and provides no basis to determine how any specific individual will use wealth.
Similarly, George’s symbolic system description provides no clues about the characteristics of the elements of distribution. George correctly noticed a relationship among the terms, but he could not determine the magnitude of that relationship based upon this symbolic description.
Without recognizing capital as a feedback mechanism, neither can George correlate various distribution effects on production.
Additionally, George erred by converting his simple system identity into a mathematical equation.
Although symbolically looking similar, system identities are not equivalent to mathematical equations. Both often use the same mathematical symbols to describe a process, but the “equals” sign in a system identity merely depicts a general relationship of system elements, not mathematical equality. A system identity is only a symbolic mechanism for describing system relationships and shows generic relationships only.
Mathematical equations provide variable magnitudes, which might be linear, non-linear, proportional, exponential, or might be dependent upon the time domain. Unlike a mathematical equation, a system identity cannot address questions of linearity, exact proportionality, magnitudes, exponential effects, or time dependency.
System identities are useful only for playing relative comparison “arrow games” (this term increases therefore that term decreases, etc.). Even if the terms in a system identity are linear and proportional, without terms, units, or coefficients nobody knows the actual mathematical relationship but only the relative relationship. Most importantly, unlike mathematical equations where terms can be mathematically transposed to either side of the “equals” sign and the equation remains valid, if the terms of a system identity are moved to the opposite side of the “equals” sign, then by definition a new system is created and new system relational rules apply. Thus, two symbolic expressions that appear equivalent if viewed as mathematical equations are not at all equivalent in the world of systems.
George changed the system identity of:
Wealth (Produce) = Rent + Wages + Interest
Wealth (Produce) − Rent = Wages + Interest
When George moved the rent term to the left of the “equals” sign he automatically created a new system. The relational rules between rent and the other terms changed, and his effort to use that new identity as an algebraic equation introduced flaws into his discussion. To notice the effects, interchange the word Produce and Wealth. Recall that George is describing the distribution of wealth with respect to production. By moving the rent term George is describing a different system where rent is actually part of wealth, not the distribution of wealth. In a system identity, where terms are located with respect to that equals sign is important.
Problems arise if one treats the “equals” sign as a mathematical symbol rather than as a system identity symbol. The left side of the system identity represents wealth and the right side of the “equals” sign represents distribution. The entire identity is not a mathematical equation but a symbolic way of understanding the complex system of wealth and distribution. The identity represents system relationships, not mathematical relationships. To better see the relationships, replace the “equals” signs with an arrow:
Wealth (Produce) → Rent + Wages + Interest
With respect to system identities, the symbolic use of an equals sign represents a relationship, but only with respect to the collection of terms on each side of the equals sign. With respect to George’s system identity describing a process of distribution, an arrow symbol is more useful. The arrow symbol more appropriately describes a flow process. Notice that when an arrow is used, one cannot move the terms of the system relationship to the opposite side of the arrow.
Consider a corollary example from chemistry. Chemical “equations” are not mathematical equations but symbolic representations of chemical processes. Moving a term of such an “equation” from the right side to the left side creates an entirely different process being described. Likewise with system identities and the distribution of wealth. The terms cannot be moved arbitrarily.
This discussion about systems theory does not negate George’s original observation that the three terms — Rent + Wages + Interest — are related in the sense that if one term increases with no change in production then collectively the other two terms must change. Notice, however, that the magnitude and even the direction of changes in the other two terms are indeterminate. Regardless, this discussion shows George’s flawed foundations for his arguments.
George admirably wanted a simple one-for-one relationship for the terms of production and distribution, and wanted to use a process of elimination to find the cause of his enigma, Unfortunately for George’s theory the complex real world of the flow of wealth does not function that way. Additional problems arise because George’s system identity cannot clarify system element characteristics that would disclose the exact magnitude and direction of any assumed changes.
George’s thesis about poverty is based upon material progress increasing. Yet, in his system identity he mysteriously affixed wealth as a constant when discussing the distribution of wealth. He should have assumed that wealth (produce) was continually increasing. He assumed that rent always would increase by the same 1:1 magnitude that wealth increases. Such a presumption is unsupportable.
If wealth is increasing, then all elements being relatively proportional means all three elements should increase to one degree or another. His system identity cannot disclose the magnitude or direction of those changes, although a generic assumption is that all three elements will change. Only by knowing the characteristics of each element is a more definitive statement possible about how the elements change with respect to an increase in wealth or rent. That simple observation seems to halt much of George’s overall thesis that aggregate wages tend to decrease with an increase in material wealth.
As mentioned previously, George never provided evidence that aggregate wages tend to decrease during times of material progress, nor did he provide data why that presumed phenomenon is harmful. Thus, his assertion that rent always increases with the same magnitude as production is an unsupported declaration that tends only to support his original unsupported contention.
Additionally, producing wealth using land, labor and capital is not a 100% efficient process. Throughout the entire production, distribution, and consumption stages of the flow of wealth there are energy losses known as entropy. Those losses are unrecoverable. Wealth also must be replaced because of decay and waste. Thus, George cannot have a perfect one-for-one relationship simply because of the Second Law of Thermodynamics. There is no such thing as a perfectly efficient energy conversion. That is another reason why his system identity is useful only for a general understanding of the relationships among the elements.
The terms of George’s system identity are defined as the means in which aggregate wealth is distributed. Properly identified from a systems perspective, however, rent, wages, and interest are only costs of production. Costs of production are only one way in which humans can use wealth. Wealth can be used in one of five ways:
Thus, by focusing only on the costs of production, George limited his discussion to those elements. In the field of logic, limiting the number of options is called a false dilemma.
If viewing the flow of wealth from an aggregate perspective, then the three means for distributing wealth are merely transitional steps toward final consumption. All wealth is intended to be consumed, either directly or indirectly. Capital assets such as tools are a common example of indirect wealth consumption.
All wealth is subject to decay and eventually must be replaced. Decay cannot be ignored. The bag of seed that is capital for planting next year’s crop can decay. Tools wear out.
Nor can consumption be dismissed because consumption is the reason humans produce. There also is unintended consumption (waste). Mice could eat that same bag of seed. Tools can rust.
Capital is a form of wealth that is recycled back into producing additional wealth. Even at subsistence levels some wealth must be converted into capital. Seed, for example, is necessary for next year’s crop. By ignoring the effects of these other elements, George limited his discussion and hence, his conclusions.
Understanding the entire system of the flow of wealth is impossible using only a simple system identity as George used. To symbolically understand that process a graphical representation is necessary. Notice the symbolic identity below:
Land + Labor + Capital → Wealth → Rent + Wages + Interest
This system identity is incomplete. Missing are the terms of consumption, waste, and decay:
Land + Labor + Capital → Wealth → [Rent + Wages + Interest] → Consumption + Waste + Decay
Notice the grouping of rent, wages, and interest to indicate distribution. They are not separate elements but a collection of elements within one aspect of the entire system.
Yet, this system identity also is incomplete. After receiving various forms of wealth, humans often tend to trade and exchange that wealth for other forms of wealth:
Land + Labor + Capital → Wealth → Distribution → Exchange → Consumption + Waste + Decay
Moreover, this identity is incomplete. Capital is a subset of wealth, meaning wealth must be created before deciding to use that wealth as capital. Therefore, although a factor of production, capital should be identified as appearing after the distribution of wealth. Symbolically, capital should be derived from both Distribution and Exchange, but this textual symbolic gesture lacks a convenient way to show that concurrent relationship or to show capital as a feedback mechanism back to the production side of the identity:
[Land + Labor] → Wealth → Distribution → [Exchange ↔ Capital] → Direct Consumption + Waste + Decay
The best that might be hoped for is something like this:
[Land + Labor + (Capital↓)] → Wealth → Distribution → [Exchange ↔ Capital(↑)] → Direct Consumption + Waste + Decay
Only a chart adequately describes all these relationships:
George manipulated his system identity for sincere reasons. He argued that capital does not exist without labor, and discussing labor is rather meaningless without the resources derived from land. Thus, according to George, everything begins with the land [p. 272]. Therefore, the first cost of production or distribution of wealth always is toward using land. If rent increases then less remains to cover wages and interest.
Yet, as shown in the previous expanded system identity and chart, rent is only one element of a complex system. George cannot change his system identity as he did — he created a new system. Additionally, all wealth production and distribution must be viewed as a complete energy flow system. Distributing wealth in the form of rent is only one way wealth is distributed. Furthermore, all elements influence the other elements. Only if wealth production remains constant and rent increases does that mean there might be less to distribute to the other elements.
George committed the same errors that he observed from Malthus — faulty presumptions. The division of labor and increased efficiencies will tend to increase wealth production. That means there is more wealth to distribute. Thus, even if rent increases that does not mean the other elements decrease. More than likely they increase too.
George’s theory is based partially upon David Ricardo’s theory of rent. Ricardo was a British economist who lived in the late 1700s and early 1800s during the beginning of the Industrial Age.
Ricardo declared that differences in land fertility would produce differences in farm production, and those differences in production would produce differences in the amount of rent the land owner could command. At one end of the spectrum was highly fertile land that produced a more abundant yield of crops, and could command a high rent. At the other end was land so infertile that the land might not produce anything, and could command no rent at all.
George defined the Law of Rent as:
The rent of land is determined by the excess of its produce over that which the same application can secure from the least productive land in use.
Based upon his system identity for the distribution of wealth, George argued that if people pay no rent for the use of land, then all wealth gets distributed to wages and interest, and people will not pay rent as long as land is freely available. Once all land is monopolized and titled, then people are forced to pay rent because basic supply and demand will create a market for choice locations of land.
George then rearranged his system identity to argue that wages and interest are dependent upon rent, and not directly dependent upon labor and capital:
Wealth (Produce) − Rent = Wages + Interest
Despite incorrectly manipulating a system identity, however, that transformation does not impede his general argument about what happens if land is monopolized. He could have continued that argument without manipulating the system identity. Regardless, based upon his rearranged but flawed system identity he declared:
Thus wages and interest do not depend upon the produce of labor and capital, but upon what is left after rent is taken out; or, upon the produce which they could obtain without paying rent — that is, from the poorest land. And hence, no matter what be the increase in productive power, if the increase in rent keeps pace with it, neither wages nor interest can increase.
The moment this simple relation is recognized, a flood of light streams in upon what was before inexplicable, and seemingly discordant facts [ar]range themselves under an obvious law. The increase of rent that goes on in progressive countries is at once seen to be the key that explains why wages and interest fail to increase with increase in productive power. . . .[pp. 171–172]
George’s declaration contains several presumptions:
George could have argued that if wages or interest rise in direct proportion with respect to the increase of wealth that rent never would rise. His assumed 1:1 wealth-to-rent increase established only a presumed limit that wages and interest must work against, never proving an actual real world or natural limit.
Although George sincerely tried to address the problem of imbalanced wealth distribution, he focused only on the element of land. He assumed that rent always regulates wages and interest rather than only influence those elements. Yet, consider a thought experiment to show the flaw in his thinking. Suppose people organize a labor union and refuse to work for less than a certain percentage of the wealth they help produce. Wages remain fixed in such an environment with respect to the wealth produced. George’s system identity cannot predict human action and this simple thought experiment demonstrates that rent does not necessarily regulate wages and interest although rent certainly influences the other terms.
Additionally, as already mentioned, George ignored the production of wealth and the feedback mechanism of capital, which affects the distribution of wealth.
If one is to presume anything, the safest presumption is that with an increase in the production of wealth, all three distribution elements will tend to increase. However, a system identity cannot reveal the magnitude of those assumed increases.
George continually argued that the difference between the least and most productive parcels of land would go to rent. Thus, he believed wages are regulated by rent. Although the principle is generally true that humans desire the greatest return for the least effort, the principle is not a fixed human or natural law as George argued [p. 218]. The observation is only a guiding principle.
Consider a hunger strike, an act that defies George’s observation and the fundamental hierarchy of needs. Acts of charity and all unselfish behaviors defy George’s so-called law. All voluntary exchanges of wealth are negotiable and guided by the subjective values of the enjoined parties; thus, there is no guarantee that the higher returns of more productive land always must be rendered as rent.
The ideas of profit-sharing plans and labor unions destroy George’s presumption that the difference always goes to rent. Lastly, there are natural limits to how many people can be employed within any parcel of land. Thus, competition will tend to bid up wages as an incentive to work elsewhere — meaning less for land rent. These observations all defy George’s presumption that rent, wages, and interest all are dependent upon Ricardo’s vague idea called the “margin of cultivation.”
George assumed that wages would be regulated by the returns of the least productive land [pp. 205–207]. He argued that the best “quality” land generally would be settled first [p. 233]. Unfortunately, he did not define quality or recognize that quality is a subjective process other than using the word with respect to soil condition and “productive points” [p. 230]. The latter element is another way of describing utility [p. 242].
George continually assumed that his “margin of cultivation” or utility plays the major role in determining land rent [p. 234]. He continually presumed that all land is used solely for producing wealth. Both of those presumptions are challenged by observation. Today, farmers routinely replenish “poorer” soils with chemical fertilization, rendering moot the discussion about “margin of cultivation.” Technology has dramatically increased and improved the productive carrying capacity of many “marginal” soils.
Additionally, farming efficiencies have progressed far beyond anything that even George might have envisioned. Approximately 5% of the people now feed all of humanity.
Because of these shifts in supplying subsistence needs, many parcels of land today are maintained solely as residences, and play no role in determining any level of cultivation or productive utility. Observing the growth of suburbia indicates that productive utility for residential land is a minor issue, if any at all. Thus, the idea of quality with respect to productive points or utility is rendered moot. Land values are derived primarily from subjective desires. Utility plays a role, but only in a secondary capacity with respect to producing wealth.
George believed that all land must be put “to use,” yet he never directly defined what he meant by “use.” Of course, his entire book indicates that George meant farming, mining, manufacturing, etc. — anything directly providing material progress. George thought that all land should be put to such use for the most “profitable” purposes [p. 437]. Yet, based upon George’s own discussion of the term profit, George’s subjective definition of “profitable” is open to debate. He seemed to believe that idle land was a great evil, similar to the old adage that “idle hands are the devil’s workshop.”
George’s land value tax likely would cause much grief to homeowners who find themselves in an area where land values increase dramatically. This is a common complaint from people who study George’s proposed land value tax. George himself declared that taxing the value of land effectively places all land up for auction “to whosoever would pay the highest rent to the state” [p. 437]. George’s land value tax forces people into a continuous bidding game in order to hold a parcel of land. Such a tax forces continual material production and is enslaving.
Within his assertion that wages are derived from labor and not from capital, George could have helped his cause had he better emphasized the time domain. Part of this confusion results from the misconception that currency is wealth and that all exchanges of wealth are instantaneous.
George possibly understood the concept of money better than most people did and that the physical token (currency) used to represent the concept of money was not wealth but a token claim on the general wealth of the community [pp. 28–29]. Thus, George probably would have had no debate with the following definitions:
Wealth: anything tangible derived from labor that satisfies individual happiness. A form of usable stored energy.
Debt: an unfinished exchange of wealth. Debt arises when one party in an exchange does not immediately receive wealth in an exchange for wealth.
Currency: the physical thing that circulates commonly as a medium of exchange to represent the concept of money. Currency is a token symbol representing an unfinished exchange of wealth (debt), not wealth.
George seemed to understand that wealth and currency were not the same [pp. 61–62]. Yet, with respect to the flow of wealth, in his entire book George avoided currency.
For several years a ship builder pays wages in currency while building a ship. According to George’s definitions, the ship builder is not paying wages from capital, but from the future products of labor later derived from using the ship. Therefore, the currency being used to pay current wages represents future capital — future wealth. Typically with large-scale capital projects, that currency is borrowed and must be repaid from the products of future labor.
Ignoring the time domain tends to mask what actually occurs, but once the time delays are recognized one can see that from the perspective of the laborer wages are derived from labor and not capital. Capital, being a form of wealth, is an inanimate thing, and thus has no ability to produce anything. Only labor can produce. A loan of currency that eventually helps create capital only shifts the time line and wages are still derived from labor. Thus, any venture that is capitalized from borrowed capital is merely shifting into the future the act of rewarding labor with wages.
However, George’s claim that labor is paid from wages and not capital is only an argument of perspective. Suppose a farmer agrees to hire a laborer to dig irrigation ditches. The farmer and laborer agree that payment will be in the form of salt-pork. Is the salt-pork capital or wages? By George’s definition, capital is wealth that is used to create additional wealth. Those irrigation ditches will be used to produce further wealth and the salt-pork is being used as a means to produce those ditches. Is the farmer capitalizing that ditch digging by using the salt-pork or is the farmer merely paying the ditch digger wages?
The boundaries for the argument become fuzzier when introducing currency into the discussion. Does the currency the farmer possesses represent capital or wages? Is the farmer capitalizing the ditch digging or merely exchanging wealth through the medium of currency? The ditch digger always sees the salt-pork and the currency as wages, but the farmer can declare the currency and salt-pork as either capital or wages. Much like the discussion about profit or income where the perspectives change between individuals and the aggregate, perspectives also change between individuals.
Conceding George’s argument about labor always being paid by wages is worthy, merely changing perspective changes the boundaries of the argument. This is the nature of systems theory.
Although George was careful to strictly define rent as what one pays to use land, in the real world “rent” commonly includes several payments. Other than people such as farmers and miners, few people rent only land. Most people pay to use the dwellings and structures on land, and often pay for various included labor services. Thus, what is commonly called “rent” is actually a combined payment of rent, wages, and interest. By carefully defining rent George recognized this potential confusion, but he did not apply that same logic to the rest of his discussion. This is evident because George ignored the monetary exchange system.
Throughout most of Progress and Poverty, George avoided discussing the monetary exchange system. All of his discussions are from the simpler perspective of wealth being directly exchanged for wealth. By focusing on a genuine wealth-for-wealth perspective (barter and trade), he focused on discussing foundational principles. That approach is an excellent introductory teaching method, but also an incomplete method for analyzing complex systems.
Unfortunately, by ignoring monetary exchange systems George did not have to worry about how a monetary system might change the parameters of his discussion. In his discussion George described interest as the reward for using capital and included compensation for risking that capital [p. 173]. He kept those discussions limited to direct wealth-for-wealth exchanges. Yet, problems arise when introducing a monetary exchange system into the process.
With respect to time, humans produce, distribute, and consume wealth in a linear manner. Humans are constrained by the time domain and are limited to performing all acts sequentially. Humans can do only one thing at a time. Regardless of potential production efficiencies, humans nonetheless produce and consume only linearly.
In the real world where monetary currency is used, interest is not linear or paid in kind directly from the products of labor, but is compounded, and such a system element characteristic cannot be known, discovered, or derived from George’s simple system identity. Thus, George could not, within his system boundaries, derive real world system relational rules.
George tried to keep his discussion restricted to the theoretical world. To provide a credible argument George introduced carefully selected real world parameters into his system elements while unfortunately avoiding other elements that are important. Compound interest is calculated exponentially and that one change dramatically transforms George’s simple identity. The exponential characteristic of compound interest distorts George’s entire assumed process of the flow of wealth. Because interest is compounded exponentially, the terms rent, wages, and interest are not proportionally or linearly related.
This is especially important when realizing that often in today’s world, capitalizing any production venture often is done through the banking and monetary system. George did not address how humans capitalized their ventures. If people had to capitalize using barter, trade, and simple IOUs — genuine exchanges of wealth-for-wealth, then the Industrial Age might have progressed at a much slower pace. However, all of the Industrialists of the 19th century capitalized their ventures with a monetary currency.
In a direct wealth-for-wealth exchange system, currency would enter into circulation only when there is an unfinished exchange of wealth. In such a system currency is basically an IOU. In the Industrial Age currency does not necessarily enter circulation through normal exchanges of wealth, but often is introduced into circulation through the political privileges provided to bankers. Thus, from the beginning a select few people — those who did not become general laborers — would possess the power to promote material progress. By inherent design the monetary exchange process contributed greatly to the social imbalance George thought he observed, not solely a land monopoly.
Although George embraced interest payments as a normal outgrowth of human interaction [p. 188], he did not distinguish between simple and compound interest. Unlike simple interest that is a straightforward linear fee, exponential compound interest requires many years of overproduction to satisfy “legal” contractual debts. That overproduction necessarily requires overconsumption to satisfy the contiguous flow of wealth. Therefore, compound interest grossly unbalances George’s simple system identity. Land rents do indeed rise because of population dynamics, thereby somewhat influencing wages, but compound interest has a more profound affect on the distribution of wealth because of the exponential basis.
George never acknowledged the tremendous leverage that is possible from a politicized monetary exchange system where capitalization is possible not by first producing capital wealth but through creating currency by monetizing debt. Compound interest forces people into prolonged indentured servitude and overproduction. That aggregate overproduction requires aggregate overconsumption.
Recall that all wealth is a form of stored energy. By definition currency is a token claim on future wealth — a token claim on future energy. All wealth is subject to decay, but with respect to expected human life spans, currency is not subject to decay and is easily replaced. Using a common circulating currency creates tremendous appeal as a means of storing claims on future wealth. The ability to create new currency is a tremendous political tool to provide access to that future energy and wealth.
During his time George witnessed great pockets of instant capitalization, but failed to acknowledge that progress to the politicization of currency.
Because capital is a feedback mechanism affecting the overall flow of wealth, compound interest aberrantly changes the relationship of the various system elements — at both the distribution and production sides. Consider that land and capital often is made available through these bank loans clouded by compound interest. Thus, payments of rent and interest are not linear terms but are affected by the exponential effects of compound interest.
Further distorting George’s system identity, the collected compound interest is paid to third parties who operate this monetary exchange system solely by political privilege, and those interest payments are not distributed to the people who directly participate in producing wealth. Thus, unlike George’s theoretical wealth-for-wealth descriptions where interest is a linear and direct return for leasing capital, George’s system identity is completely changed because that interest is no longer being distributed to those people who create wealth. George’s symbolic identity cannot reveal such system variances and cannot reveal to whom wealth is distributed or when or why.
Bankers operate by political privilege and siphon huge proportions of the distribution process for basically a clerical participation in wealth production. That political privilege is an effective wealth redistribution mechanism that does not appear in George’s original symbolic picture of wealth distribution. All commercial bankers create new circulating currency through political privilege, and typically do not risk venturing their own capital or currency.
If one is to expect an increase in production by employing capital, one must wonder why George never saw or challenged the problem of compound interest. Even when capital helps create an increase in production, the labor used to create that increase always is linear, not exponential. At best, the lender of capital should receive only a portion of the increase and should receive nothing if a venture fails, or at most an equivalent return of the original capital (that is the risk of lending capital). If actual physical capital is lent, and not currency, the interest received is limited by the physical increase in production. When currency is used that natural limit is bypassed because of compound interest, and forces the borrower into an extreme situation of overproducing.
George recognized the distortions introduced by political privilege [pp. 191–193], but failed to recognize the tremendous political privilege granted to bankers. George rightly recognized the problems arising from capital accumulation and concentration, but failed to see that such problems arise from the monetary system, not land monopoly.
George recognized the distortion that would be caused in an Indian tribe if the local weapon maker demanded payment of six of every seven buffaloes that were killed from a bow and arrows he made for others [p. 196]. Yet, the entire banking industry and compound interest operates in the same manner.
The effects of the modern monetary exchange system do not end with compound interest. George never accounted for the fact that unlike historical agrarian societies, in the Industrial Age wealth is exchanged primarily through monetary currencies. Overwhelmingly people exchange wealth through common mediums of exchange, not directly with wealth-for-wealth exchanges. Unfortunately, politicians and special interests routinely debase those currencies, thereby eroding the future wealth exchange power of that currency. They erode that exchange power by inflating the common circulating currency; that is, introducing new currency into circulation without a corresponding production of wealth.
Because currency is used to facilitate exchanges of wealth, currency inflation (and deflation) necessarily distorts the future exchange power represented by currency, which distorts both the production and distribution sides of the flow of wealth. That erosion is another effective wealth redistribution mechanism that does not appear in George’s original symbolic picture of wealth distribution. The problem of currency inflation and loss of expected exchange power encourages people to desire immediate consumption rather than moderate consumption.
George lived during a time when commodity currencies were widely circulated and although modern hindsight recognizes that commodity currencies are just as easily manipulated as fiat currencies, the problem is less acute than with a fiat paper currency. Nonetheless, George’s land value tax reform would not resolve the problem of currency inflation, and his remedy would do nothing about the unnatural process of collecting compound interest.
Additionally, George’s system identity failed to address what happens to the flow of wealth when wealth is coercively redistributed, such as with taxation. George’s simplified system identity rapidly loses significance.
George argued that as the value of land increases, rent increases, and necessarily implies that wages and interest must decrease [p. 223]. However, rent, wages, and interest all influence each other. Add direct consumption, recycling wealth as capital, and decay and the relationships all change. Throw in the complexity of exponential compound interest and currency inflation and that new system looks nothing like what George discussed.
From his flawed discussion, George composed a law of interest [p. 203] and a law of wages [p. 213]. Yet, those so-called laws disintegrate in light of the real-world complications.
Throughout his discussions George assumed population would increase. Yet, an increase in population is a direct result of increasing wealth and production efficiencies. Technological improvements play an important role. A primitive hunter-gatherer or agrarian community does not witness large increases in population because like wild animals, population tends to remain constant with respect to the land’s carrying capacity. Only with technological innovations and improved efficiencies does the carrying capacity of land increase, and only then might population increase. Again, however, George missed the point that those capitalization processes are helped through a monetary exchange system. Only through a monetary system is rapid progress possible.
When introducing monetary systems into human social systems, a huge shift occurs in how humans exchange wealth. Because currency is a token symbol of debt and not wealth, and represents an unfinished exchange of wealth, currency therefore represents virtual wealth — wealth not yet owned.
A loan of currency is not a loan of genuine capital — wealth, but is merely a mechanism for creating that capital. Capital is a form of wealth and currency is a claim on future wealth — virtual wealth. Thus, although modern ventures are “capitalized” through loans of currency, the word is being misused. However, producing new currency through political privilege possesses the mystical power of creating capital and does so by placing production of capital into the future time domain, not in the past. That ability dramatically changes the flow of wealth, a process George did not discuss.
George argued that the battle is not between labor and capital, but he did not seem to recognize that in the Industrial Age capital is created by creating currency, currency that is introduced by political privilege through bankers, and that bankers charge compound interest for creating that currency.
Accumulating massive amounts of currency changes the energy flows inherent in wealth exchange systems because currency represents future leverage. Thus, George erred by declaring that labor-saving devices will increase the demand for land [p. 245] — accumulating currency also creates that demand. He assumed labor-saving devices would increase rent without increasing wages or interest [p. 246]. Such a declaration might carry weight in a genuine wealth-for-wealth exchange system, but when currency is used the aggregate demand increases primarily in a desire for currency, not land. Compound interest exponentially multiplies that desire and those claims on future wealth. The energy flow process changes from a desire for land to a desire for currency. The desire is to “move money to make money.” Land becomes a secondary factor.
George wondered why a more minute division of land ownership fails to increase prosperity [pp. 321–327]. Perhaps the reason is the way new ventures are capitalized in the Industrial Age — by the instant creation of currency through the political privilege of banking. Bankers do not loan to just anybody, but only to people who reasonably demonstrate an ability to overproduce. That overproduction must be sufficient to satisfy the “legal” obligation of compound interest as well as maintain other needs and wants of the borrower. Thus, small-scale landowners and tenants likely are to remain poor or middle class if they lack sufficient knowledge and ability to produce beyond subsistence levels. George again seemed not to recognize what happens to a wealth exchange system when an entire society becomes thoroughly dependent upon currency.
A monetary system emphasizing exponential compound interest and erosive currency inflation — and not mere wealth exchanges — necessarily must greatly modify George’s thesis and conclusion.
George thought that material progress was not eliminating poverty. He thought that under current processes, imbalances in wealth distribution would continue to exist. George believed the poverty enigma was caused by a land title distribution problem.
He believed that the rental value of land was not a product of human labor but a result of aggregate demand for land. As access to land became more limited and population increased, land rental values would tend to rise. To encourage a more equitable distribution of land titles and reduce poverty, George concluded that a tax should be levied on all land titleholders and the tax should be based upon the subjective rental value of the land. All structures and dwellings on land would be exempt from taxation, and he thought no other tax would be necessary to finance commonly used goods and services.
George argued that all other forms of taxation are forms of slavery and theft because those taxes deprive people of the wealth they produce from labor [pp. 408–414]. Somehow George thought his land tax an exception. George believed that the rents a land titleholder received were not the result of labor and exchange but simply a result of aggregate demand for land, therefore taxing the value of that rent was not a tax on labor. The primary reason George wanted to levy a land value tax was his belief that those rents were “unearned.”
Ricardo noticed in his theory of rent that landlords provided no labor to produce their rental revenues. Basically, if they owned fertile soil they did well, and if not then they received little in rent. This reflection that landlords provided no labor of their own causes observers to declare that the rents received are “unearned.”
Like George, Ricardo suffered from not evaluating all elements of the system, and failed to study the problem with respect to time. What is missing from Ricardo’s observations is how land titles were originally distributed long before Ricardo was a twinkle in his parents’ eyes. The effects of Ricardo’s theory of rent are more easily described by recognizing that people use political processes to secure control of land, thereby creating artificial scarcity in land. That artificial scarcity greatly influences Ricardo’s theory of rent. Add the ancient problem that all modern land titles are traceable to conquest and a flawed doctrine known as the “right of discovery,” and one then can see why there is a land title distribution problem and why Ricardo’s theory of rent works as described. Ricardo’s theory of rent is incorrectly based upon fertility of land and should be based upon the political monopoly of artificially controlling land titles.
George recognized that land title distribution was a result of political processes and hoped his proposed land value tax could offset the damage done. However, without studying human action as a process of sustaining energy flows, George did not seem to recognize that Ricardo’s economic law is not a result of market forces, but primarily of political control. All land titles are a result of human social and legal systems. When humans use fiat political privilege to intervene with normal human interaction, land title distribution and the theory of rent are easily manipulated.
Calculations reveal there is plenty of land available for all humans, including the current population of 6 billion. Of course, should all arable land be truly occupied, then real problems arise. Yet, the problem partially identified by George is not a physical land shortage, but an artificially created title distribution problem.
For the past several hundred years, land titles have been distributed through conquest and political privilege. This is most noticeable in Europe, rooted in the flawed doctrines of the divine right of kings, the right of discovery, and feudalism. American colonists had hoped to escape those flawed doctrines, but history shows that political privilege eventually prevailed. Railroad expansion, instant capitalization, and the normal desire to receive something for nothing (that is, producing a large amount of wealth for a minimal expenditure of energy) accelerated that process. This political process remains fundamentally unchanged from centuries ago — consider the doctrine of eminent domain, for example.
George correctly noticed the problems caused by railroad expansion and the related land speculation [pp. 274–275]. Yet, he never focused on political privilege and instant capitalization as the prime mover of those problems. Land monopoly certainly will impede aggregate production, but without political privilege and instant capitalization that process is self-regulating.
The problem is not land monopoly but political privilege. Much of the land in the United States was originally distributed by political privilege. Certainly all titles are now maintained by political privilege — fail to pay property taxes and that privilege is belligerently revoked — at the point of a gun if necessary.
George hoped his proposed land value tax would remedy the problem of inequitable distribution of land. Despite straightforward calculations that reveal plenty of arable land available, most of the land is improperly titled to various levels of the political system. In the United States approximately 40% of the land is titled to various political entities (legal fictions). Much of that land is idle, contributing to the problem of artificial scarcity and the imbalanced distribution of wealth. Artificial scarcity created through statism is the immediate problem, not land title distribution.
George argued that the antagonism causing his enigma of poverty was not between labor and capital [p. 227], but simply due to the increase in land rent. Yet, the problems introduced by compound interest, currency inflation and numerous artificial scarcities caused by political manipulations, necessarily introduce tension between labor and capital. Although the output from labor can be linear or exponential the process of labor itself always is linear, whereas modern capitalization almost always is an exponential process.
George’s entire description — which adequately described land values with respect to population dynamics — failed to address that land titles often are manipulated politically. Land values do rise because of subjective values and population dynamics, but also rise when scarcity is artificially manipulated and created through political processes.
George’s remedy of a land value tax arguably would provide some relief, but never would provide full remedy because political systems still would exist and so would political privilege.
George described how wealth and fortunes increase when humans congregate and work together [pp. 235–243]. In such an environment he noticed that land takes on a different perceived value from food production because various artisans, manufacturers, storekeepers, and professionals will want to strategically locate within such a community. This is the essence of utility. Yet, not once does George recognize or discuss how a monetary system influences that growth and demand. A primitive agrarian community can easily subsist through direct wealth-for-wealth exchanges, but such exchanges become more difficult when that latter group of specialists move into the community.
George assumed that when a farmer sells land because the return is greater than the return from growing crops, that farmer essentially sees his house being built by the land buyer [p. 240]. Yet, such a process likely would not propagate if the land buyer had to provide genuine goods and services rather than offer currency. Without a currency, the land buyer would have to contract and indenture himself to the land owner, and would have to split time between his own endeavors and those of the indenturing master. George’s observations become shallow without introducing the real-world effects of a monetary system. Capitalization is a slow and clunky process without a monetary system.
George began his discussion about rent by noticing that “If one man owned all the land accessible to any community, he could, of course, demand any price or condition for its use he saw fit; and, as long as his ownership was acknowledged, the other members of the community would have but death or emigration as the alternative to submission to his terms” [p. 167].
This observation is George’s springboard to his debate about collecting land rents. First, George never challenged how such an individual came to possess title to all the land in that community. Second, mysteriously, he expected corruptible politicians and bureaucrats to collect and distribute this land value rent tax. His observation is no different than how a conqueror or politician views land titles. Fail to pay the modern property tax and one quickly finds out who “claims” to own the land. The titleholder learns that title is in fee simple, not allodial, and that a modern land title grants a license and usage rights only.
Within the statist environment, George’s land value tax would function no differently. In fact, the problem could be worse because his tax would operate under a social presumption that all land is held in common.
The concept that all land is held in common raises an interesting question. Why are titles to land different from the titles to products created directly from labor? The entire concept of property is a human invention, an abstract construct. To realize this point, ask any corn farmer what the local deer think about the farmer’s so-called land rights in the corn.
Recognizing as property all products created directly from labor is nothing but a social and legal convention. If a bear roams into your campground and decides to eat your food, you do not discuss property rights. The bear has no ability to articulate or understand abstract constructs. The bear has no concept of the amount of your labor expended in creating your food products and even less concern.
Products of labor are no different than land titles. Both forms of property are human social and legal conventions. There is no valid reason to assume that products of labor are a unique form of property and land titles are not. If humans wanted to survive according to jungle law, recognizing title to the products of labor would make no more sense than titles in land. To distinguish between the two types of property is to establish a false foundation for a social system.
The return argument to that observation is humans cannot begin to create products of labor if they have no access to land. True, physically they cannot, but that does not change the argument about the concept of property. All objects that are considered “property” are human conventions only. Thus, title to land is no different than title to products of labor.
The root problem is that land titles are typically created by political privilege. No ground rent tax will change that. Additionally, many products of labor also are created by political privilege. Any time an individual seeks political protections through the legal fiction of incorporation, that person is seeking political privileges and sanctions for various products created by labor.
What is the difference between “private property in land,” and land held in common but titled in such a manner that still provides a right to exclude? There is no practical difference, only philosophical. George based his theory of common ownership upon a presumption that every human possesses a right to self [p. 334]. Yet, this presumption is a social convention and not a natural law. The rest of nature neither “knows” nor “obeys” any such convention — nature merely is.
To distinguish between property in land and property from labor is to create mountains out of nonexistent molehills. That is not to declare that private property in land is justified or unjustified, only that George’s arguments fail to distinguish a difference.
George argued that historically land was held in common. Thus, the concept of private property in land is relatively new. Although in many past societies George’s observation is true, his statement is only partially correct. For many previous centuries land was “owned” by monarchs, and the monarch provided only fee simple title to other people. That title could be revoked at any time. Thus, under any monarchy the land was not considered common property.
Additionally, in ancient societies, the fundamental unit of society was the family, not the individual. Thus, land could not have been owned in any other manner other than in common. Co-ownership or joint ownership was the norm, not the exception. Only with the concept of individuality could land begin to be possessed in any other manner.
Lastly, such an historical observation is largely irrelevant. In many past societies, humans possessed no technological ability to disperse and populate all the land. For survival, most humans were dependent upon small communalistic family and kinship relationships. Until the Industrial Age humans possessed no ability to encourage and promote population scattering and individualistic perspectives. Thus, that in many past societies land was held in common provides no basis to argue that land must be held in common today.
That land was held in common in past societies is simply an observation of circumstances and nothing else.
George was correct in noticing a land title distribution problem. He was partially correct in deciding that overcoming poverty would be difficult as long as land titles were monopolized. Although George’s book should not be ignored or considered inconsequential, George made the mistake of identifying and focusing on only one element of a complex system. Human social systems are complex and focusing only on one element will tend to create a limited perspective and conclusion for remedy. Monetary exchange systems, political systems, social customs, legal customs, and land shortages all contribute to George’s observed enigma. No single element of the puzzle is an independent variable. Every element influences the other elements.
Is there a problem with land title distribution? Yes. Is the problem with land title distribution one of monopoly? Yes. Is land title monopoly the sole cause of inadequate wealth distribution? No. Several other elements were previously discussed: 1) currency inflation, 2) compound interest, and 3) political privilege. All of these elements affect both the production and distribution of wealth.
A contemporary of George, Karl Marx, provided another theory about the social ills of the 19th century. Whereas George focused solely on the distribution side of wealth, Karl Marx declared that the problems facing people in the Industrial Age was a lack of controlling the means of production. The means of production is an ambiguous term, but if one focuses on the idea that the traditional factors of production are land, labor, and capital, then Marx’s phrase takes on more substance.
Like George, Marx did not resolve the modern industrial economic problem because he focused only on the production side. A systems approach looks at production, distribution, and consumption of wealth.
Although both men correctly identified land title distribution as a contributing problem to poverty, the root problem is caused by more than that one element. The root problem is how people tend to use various social and legal processes to sustain energy flows by political privilege. Humans primarily usurp natural processes through political systems.
Marx wanted to use the mechanisms of statism to destroy statism, and there is no doubt George wanted to use his ground rent tax as a means of political reform. Coerced taxation always has been one method of intimidating people into specific actions. Thus, although a proponent of free markets, George nonetheless believed a ground rent tax would resolve his enigma of inadequate land title distribution because human labor is not involved in producing land. Because George adopted Herbert Spencer’s principle of equal access to land (Social Statics, first published in 1851), George believed a ground rent tax was an equitable remedy to encourage that equal access.
That labor is shut off from nature (land) [p. 271] is not the sole result of land monopoly, but the result of combined causes. Land monopoly is merely a symptom of political privilege. Unfortunately, George’s ground rent tax idea empowers corruptible politicians and bureaucrats to collect and distribute the proceeds of that tax. Thus, one of the charges against George’s ground rent tax idea is how easily assessors and aggressive title seekers would manipulate land values and thereby discourage titleholders from wanting to maintain that title. George was on the right track to seek reforms, but did not attack the root cause: human nature trying to sidestep the natural laws of energy flows. Political systems always provide avenues for social imbalance. Imbalanced land title distribution is only one symptom of that process.
Karl Marx focused on production while George focused on distribution. Both men correctly had their fingers on the pulse of land. The real problem with land is how title is originally distributed, not who collects the rent. Land always will command a rent in any densely populated area of people, and less so in sparsely populated areas.
All usage fees, including the usage fee known as economic rent, arise from the economic principle of scarcity. Regardless of the source for that usage fee — land, labor, or capital — create a shortage and usage fees will rise. That would be true even in a purely voluntary contractual community. However, if the distribution of titles is by privilege, then the privileged few can charge whatever rent the market will bear, and with impunity. When titles are by privilege, and all available land is artificially titled through that privilege, then an artificial scarcity exists. No ground rent tax will resolve that problem because as politicians and special interests are so apt to do, exemptions will be written into statutes to bypass or modify those rents. Such exemptions already are a normal part of the modern property tax.
Unlike George, Marx thought capital was part of the problem, but like George Marx failed to recognize how wealth is produced and distributed from an energy flows perspective. By adopting that approach Marx might have noticed that once the political control mechanisms of currency inflation and compound interest are introduced, that the elements of rent and interest are greatly distorted. The problem is not capital but how that feedback mechanism is politicized.
Yet, currency inflation, compound interest, and land monopoly are not the only elements causing social ills. Consider how politicians and the powers-that-be use the political process to create numerous artificial scarcities in labor, using mechanisms such as occupational licensing, minimum wages, affirmative action laws, coerced unions and closed shops, or trade restraints. Such actions directly affect the production side of the flow of wealth and those artificial scarcities distort the distribution side in artificially higher wages for specific classes of people.
Consider, too, how politicians and the powers-that-be create artificial supply and demand and false legal protections using legal fictions such as patents, unlimited statutory copyrights, and incorporation.
Consider how production, distribution, and consumption are directly affected by coerced taxation. Taxation is a coerced levy — a taking — of wealth. That coerced taking is done solely to redistribute wealth at various stages of the flow of wealth. Taxes on land and the capital built on land affect production. All taxes affect the distribution of wealth. Taxes affect consumption decisions and the hidden embedded costs of taxation affects everybody at all stages of the flow.
George rightly recognized a land monopoly problem. That monopoly not only affects land rent on the distribution side of the flow of wealth, but distorts production too. When politicians and other powers-that-be create an artificial scarcity in land, one of the factors of production is affected because there is less land available for production. There are natural limits in aggregate production and artificially limiting the availability of land necessarily affects production, which affects how much wealth can be produced. George incorrectly declared that production was not an issue.
Politicians and bureaucrats provide no direct production of wealth; they act only as redistributors. George’s system identity cannot reveal those distortions.
Another challenge with George’s proposal is idle land should be heavily taxed to encourage (material) productive use of that land. George believed that unproductive land was held only for speculative purposes. Certainly speculation is one reason people hold title to idle land, but hardly the only reason. Much like the many free rider myths, George fell prey to seeing only one aspect of the land title distribution problem.
Speculation cannot be stopped because speculation is a normal and natural human attribute. Speculation is normal and natural because humans are not omniscient and cannot predict the future with total certainty. Additionally, land values are a result of subjective desires. Speculation is an integral component of those desires. The entire futures (commodities) market is based upon the concept of speculation. Speculation is a process through which people naturally try to reduce risk.
George acknowledged possible contributing elements [p. 263], including fluctuating currencies, but relegated them all to minor and unimportant status. He believed speculative land values to be the prime cause of land monopoly and poverty [p. 264].
Although normal and natural, speculation is additionally fueled by currency inflation — the dwindling of future exchange power. Several times during his own lifetime George witnessed currency inflation, despite using a commodity currency. George argued that wages increased dramatically in 1849 and 1852 with the California and Australian gold rushes [p. 292]. He attributed those rises to the local availability of untitled land. However, the increase was caused primarily by an increase in exchange power. Gold was a commodity, but also served as a medium of exchange. Gold miners would realize the effects of having more in their pockets, and as they exchanged that gold in local communities, local merchants also would see a rise in effective wages and wealth. Land availability was only a partial contributor to the local increases of wealth distribution.
Similarly, George witnessed corresponding contractions of the monetary supply (deflation). Speculations in land values still would exist with a stable monetary exchange system, but without those dramatic fluctuations in the quantity of circulating currency those speculations would not have been as volatile. Instant capitalization through political privilege and currency inflation necessarily must always help fuel speculative impulses, not vice-versa.
Because of this artificial scarcity in land, zealous speculation is a normal reaction to the extreme demands of overproduction required to pay exponential compound interest.
Although land title distribution by political privilege is a fundamental problem, land value speculation is caused primarily by using a monetary exchange system. Currency inflation and compound interest grossly imbalance normal and natural desires and the exchanges of wealth.
George recognized the influence of war [p. 266], but did not elaborate those effects. The American War Among the States was financed largely through a fiat paper currency. Wars cause much destruction of wealth and life and when a war ends the fiat currency financing that war remains circulating without a corresponding backing of wealth. The effect can be nothing but inflationary and the bidding up of prices. The end of any war provides an environment of high spirits and emotions, and the previous currency inflation grossly fuels the desires for speculation.
George argued that the “real trouble must be that supply is somehow prevented from satisfying demand, that somehow there is an obstacle which prevents labor from producing the things the laborer wants” [pp. 270–271]. His statement carries weight, but George did not seem to recognize the inherent tensions that must necessarily arise with a high division of labor and that high division is influenced by the unnatural processes of currency inflation and compound interest.
George recognized that much titled land was uninhabited and that is why he wanted a land title tax to discourage holding title to large tracts of land. This problem was most noticeable with Congress awarding huge land tract titles to railroad company owners as a means to encourage railroad expansion. The root cause in that problem was not holding title to large tracts of land, but the political process being manipulated to initially title those lands. Thus, there was not a land distribution problem, but an artificial scarcity created by the people using the political system.
Within the modern statist political landscape, George’s proposed ground rent tax probably would encourage some of the reforms he envisioned. However, his tax would provide no remedy to the problems of compound interest, currency inflation, or other artificial scarcities created through political privilege. His remedy would not resolve the problems of political faction that disrupts natural energy flows by coercively redistributing wealth in various forms.
A remaining challenge for George’s ground rent tax is the most acute: humans cannot live without access to land. By adopting Spencer’s principle of equal access, George certainly recognized that principle. Because all land is titled, equal access is essentially denied and an artificial remedy is necessary to offset the problem. George believed his ground rent tax would provide that remedy.
George wrote, “Our boasted freedom necessarily involves slavery so long as we recognize private property in land. Until that is abolished, Declarations of Independence and Acts of Emancipation are in vain” [p. 357].
The problem is not private property in land, but private property created through political privilege and conquest. As long as untitled arable land remains available, then no tax or ground rent is justified. However, one also must add that as long as politicians and bureaucrats maintain an artificial scarcity in land titles, then no ground rent is justified then either. The root problem is the political process, not private property in land titles. George recognized that many land titles are derived from conquest [p. 342], but nonetheless mysteriously proposed a ground rent tax on all titleholders.
George argued that “It was not nobility that gave land, but the possession of land that gave nobility” [p. 351]. Such a statement is confusing. The concept of nobility arises from political privilege, and historically land title distribution arose from that same source. Thus, nobility and land possession are derived from political privilege.
Political privilege is the problem. Land speculation never could have accelerated at the pace witnessed by George without title being distributed by political privilege. That privilege created artificial scarcity, primarily through land grants to railroad company owners. Those men created vital transportation links between otherwise isolated communities. After being granted title to millions of acres, those men experienced tremendous leverage in selling that land. The same thing happens when politicians and bureaucrats use eminent domain to forcibly transfer land titles.
Thus, George’s tax essentially enslaves all humans. He argued that private property in land enslaves the non-title holding masses [pp. 347–357]. Yet, his ground rent tax would enslave all land titleholders. What is the difference?
There are many people who prefer to produce at non-peak capacities, people who prefer a more balanced approach with respect to all that might be enjoyed in life. A ground rent tax on all land necessarily forces all titleholders into continual material production — enslavement. In that respect George’s ground rent tax is no different from the modern property tax. Like the modern property tax, George’s ground rent tax leaves corrupt politicians and bureaucrats in control, and that control undoubtedly would mean tax foreclosures just like today’s tyrannical property tax.
Within the existing narrow focus of statism, George’s ground rent tax is a plausible remedy. The root problem, however, is statism. To call George a socialist would be incorrect. George was a statist and today he would be called a minarchist or a proponent of “limited government.” For example, George believed that ground rents should be paid to “the State or municipality” instead of to private titleholders. However, George seemed not to recognize that there is no such thing as “the State or municipality.” Those words are merely convenient ways of describing a collection of individuals. Somebody still would collect rents. George’s remedy is based upon blind and complete acceptance of the philosophy of statism. He assumes statism is legitimate and assumes something called “public revenues” must be raised [p. 422].
As a statist, George simply was looking for the least offensive way to maintain statism and in the process provide a more palatable distribution of wealth. Imbalanced land title distribution is a symptom of statism. Thus, George was patching the symptom rather than attacking the root cause.
George argued that only land and labor could be taxed [p. 408]. Such a statement is incorrect because only humans can be taxed. Land has no ability to understand concepts and labor is a process. In George’s remedy, only those people recognized as titleholders of land could be taxed. To pay a tax a human must produce. Thus, all taxation, regardless of form or name, is a tax on production. George’s ground rent tax is no different. The recognized titleholder must pay the ground rent tax and must continually produce to pay that coerced taking.
George also argued that a ground rent tax, in his opinion being based upon the “unearned” subjective rental value of land, would not add to prices. Yet, again, only humans can pay taxes, and only the recognized titleholder of land can pay a ground rent tax. Thus, that titleholder must materially produce to pay the tax. All titleholders then would naturally pass the cost of that tax to customers. There is no way to avoid that conclusion because only humans can be taxed.
All coerced taxation is theft, including a Georgist ground rent tax implemented under any statist process. Thus, the debate over such a tax must remain within the narrow focus of current restraints and conditions. As long as people accept the illusions of statism, then the debate revolves around what types of taxation are least harmful. Remove the facade of statism and the basis for any coerced ground rent tax disappears. The only remaining justification for such a tax is within voluntary contractual communities, and then the payment is no longer a tax but an association fee.
George never answered the question of what happens to the titleholder who fails to pay this coerced ground rent tax. There can be only one conclusion: that title will be confiscated and awarded to whomever chooses to pay the tax. The effect is a homeowner is kicked out of house and home. Yet, according to George’s own theory about the products of labor, the house was built with the homeowner’s own labor and thus, is the homeowner’s rightful property. The challenge with this eviction process is although the homeowner can be kicked off the land, he cannot take his home with him. How will he be compensated? If there is no compensation then theft occurs under the color of law and George’s tax is statism at its worst, just like a modern property tax “foreclosure.” George’s ground rent tax proposal is merely eminent domain cloaked under a different name.
Despite a flawed analytical process, George nonetheless correctly discussed one element to explain his enigma. There is indeed a land title distribution problem. However, several other elements contribute to George’s enigma. George’s system identity for the distribution of wealth is incapable of recognizing those other elements. Recognizing other problems is possible only by charting the flow of wealth and providing details about the characteristics of those elements.
Unfortunately for George’s focused discussion, his system identity describing the distribution of wealth cannot reveal various system element characteristics. Those characteristics affect how the system elements relate to one another. Thus, George incorrectly focused on land title distribution and proposed a ground rent tax to discourage speculation and holdings of large tracts of land.
Although George denied being a socialist [pp. 320–321], he nonetheless proposed a remedy that, like his contemporary Karl Marx, used the fox to guard the hen house. Marx wanted to use the political process to destroy the political process. Likewise, George proposed a statist tax to encourage change.
A ground rent tax changes how various system elements interact, but does not redesign the system. A tax is a coerced and forced levy of wealth. Politicians and bureaucrats would collect the levy. Politicians and bureaucrats are no different from other humans and are susceptible to corruption, especially if that corruption benefits them directly. No meaningful remedy is possible without understanding basic human nature to sustain energy flows with as little effort as possible.
George claimed that wages were falling despite material progress. He then pursued a wild goose looking for a cause. By happenstance more than astute evaluation and study, he tripped upon the problem of artificial scarcity in land as a contributing cause. Yet, George completely ignored the effects of other elements.
Although George did not delve deeply into an analysis of his theory that wages were falling (he merely presumed his statement was correct), he more than likely was correct. But he did not need an exhaustive book chasing wild geese to explain why. There is a much less uncomplicated reason why wages were falling with respect to the rate of growth of material progress.
Many historical economists agree that aggregate prices were continually falling during the last quarter of the 19th century. The reason is perhaps straightforward: a commodity currency was used and the quantity of that commodity was continually decreasing with respect to the increasing need for a circulating currency. Hence, all the fights, conflicts, and scuffles of the latter 19th century with respect to the concepts of exchange and money.
Increased material progress meant increased desire and increased availability of products. However, less currency in circulation, and hence, reduced velocity of circulation, meant that aggregate supply exceeded demand. Add improved technologies and manufacturing techniques to reduce production costs, and prices had to fall.
Including the price of labor — otherwise known as wages.
Only with the introduction of the cyanide extraction process did gold begin to circulate more freely. As gold circulated more freely, demand eventually exceeded supply. Aggregate prices begin to rise, including the price of labor. Several years later, long after George died, nefarious legislators introduced the Federal Reserve System, and the race was on to permanently erode exchange power. Wages, along with other prices, began to rise proportionally. Improved technology and manufacturing process would continually lower prices fro many products, but never enough to outpace exchange power erosion. That erosion of exchange power would forever mask the actual lowering of prices.
A difficult question to answer is in an authentic environment of free association and voluntary exchange, how would land titles be distributed or recognized without the coerced processes found within statism? How, for example, does a farmer properly rotate crops or seasonably allow fields to lie fallow in order to rejuvenate the soil without fear of squatters and homesteaders? Should land titles be perpetual or should titles be tied to usage and usufruct? How does a land settler prevent another individual from building a house ten feet away from his own house? If all humans are created equal with the right to survive and that right to survive includes access to land, then how is that equal access protected?
These questions are not answered easily. If land titles were based upon usage, then many titleholders would find themselves in a continual condition of proving their usage. That would force all titleholders into continual material production in order to prove usage — enslavement. Regardless of the means in which property disputes were resolved, titleholders would find such processes costly.
On the other hand, if titles were based only upon general consensus recognition by all neighbors, then essentially all land titleholders are bound by some sort of contractual relationship. In that case, any ground rent tax simply becomes an association fee. Any titleholder who refused to pay that fee would not necessarily be kicked off the land as would happen under a statist property tax, but would be relegated to the role of continually proving usage. The titleholder might be able to do that, especially homeowners using small plots of land. The larger the plot, however, the more challenging such proof of usage becomes. Thus, an association fee might be the least expensive route to maintain a land title.
The great flaw with the modern land title distribution system is that people generally believe that politicians possess some sort of mysterious power to issue and control land titles.
What is critical to successfully promoting a Georgist ground rent tax is the concept of consent and contract. The current property tax is coercively collected under the illusion of a so-called unwritten social contract. If the Georgist ground rent tax is collected under a true and explicit contract, then the tax is nothing but an association fee or user fee.
George admitted his proposal was theory only [p. 287]. Considering the flaws of George’s analysis, why does his book remain popular? Simply because George’s hypothesis is correct: there is a land monopoly problem. Unfortunately, George expended much flawed energy to focus on only one element of a complex system, and focused on symptoms rather than root causes.
George analyzed the flow of wealth from a theoretical position of physical wealth flows. George ignored the system changes introduced when currency is used in that process. He ignored the aberrant affects of compound interest and currency inflation. He ignored the artificial mechanisms and manipulations that occur when politicians and special interests coercively redirect the flow of wealth.
Acknowledging those political manipulations damages George’s analysis. Based upon his simple system identity, George never could determine or articulate all of these interferences. That is why George’s analysis fails. Yet, his flawed analysis does not negate his original hypothesis that there is a land problem. He simply fell short of understanding the huge complexity of a global social system that is easily manipulated through political processes.
George was no dummy and history seems to indicate he was a sincere and honest man. He wanted social justice. Had he lived today, with the benefit of 100 years of experience, improved knowledge, and hindsight, his book undoubtedly would look much different. What would not be different is the popularity of such a book. The common laborer is not stupid either. Common laborers might not have the ability to intellectually analyze various social challenges, but they know something stinks. They know this today, and knew the same in George’s day; and that explains George’s popularity both then and now. George’s heart should not be questioned, but his analysis must fail on the merits.