Progress and Poverty

I’ve finally got round to reading Progress and Poverty by Henry George, a book I’d never heard of until a few years ago. In fact, when I say read I mean that I downloaded it on my Kindle and read some of it but I’ve got through most of it using a free audiobook/podcast which I found good. I generally read in the evenings and it is not the easiest book to read, it needs concentration, there is a lot in it and it is very much a book of its time in terms of style.

Background

Before setting down my thoughts, it is as well to get a couple of things out of the way straight away. The first is that I am not an economist or a social scientist. I studied maths and science and have worked as an accountant for many years, with significant time in construction and a little in property businesses. The second is that I wanted to read the book because I have been interested in the ideas of Henry George since coming across them. I have heard them second hand as it were, so I wanted to read the original writings. I should say more than just interested, I was predisposed to read the book very favourably, I started with a sympathy towards the conclusion I knew it lead towards (the Single Tax, Land Value Tax, capture of economic rent, it is referred to in various terms but is essentially the same thing).

Having now read the book, and enjoyed it very much, I find I am still very sympathetic to the conclusions Henry George reaches and now understand them better. I can’t say that I followed every minor detail of every argument George makes, but I thought it would be good to set out my summarisation and thoughts on the book and also some questions that it threw up for me.

Historical context

The book was written in the nineteenth century in the American West (Henry George was born in Philadelphia but went to sea and ended up in California having visited various countries including India). He was in California in the last knockings of the gold rush and shortly after the railroads were built, and the historical context comes through strongly in the book. His is a world where examples are given of wilderness being settled and civilised with townships developing where industries grow and thrive, and these make very good examples for this theory. Industry is fairly simple and seems a world away from the developed world of today. But he is not blinkered at all, he knows his history, contrasting English and Continental patterns of agriculture and land ownership from hundreds of years before, and is well travelled being familiar with the society of India and China.

Wikipedia tells me that despite being raised an Episcopalean, Henry George was a “Deistic Humanist”. Reading his book I think he reads as a Christian. He is certainly a man who thinks he has discovered something that transcends mere economics and politics, his aim is to point the human race towards something noble.

Henry George and his ideas attracted a large following and almost made it to the big time at the end of the nineteenth and early twentieth century but have fallen back since then. It seems to me that his ideas are receiving a well deserved reairing and this must be good. Especially as we look to recover from Covid the subject of monopolies and how to raise taxes will be front and centre once again and taxes on wealth, rather than activity, must form part of the solution.

Principal arguments and lines of thought

The first few chapters are taken up with arguments countering Malthusian ideas (that shortage is the necessary side effect of growth in population). I agree with him very much here, and I think that’s very much a majority position, but Malthusian concepts pop up time and again even now so I think it’s right he deals with them up front.

It’s worth noting Henry George in his writing adopts a certain style and tone. He goes much further than supposing he is arguing against Malthusian ideas, he leaves us in no doubt that as far as he is concerned he has proved beyond any shadow of doubt that the ideas of Malthus are wrong. This is very characteristic of the book throughout. He defines, demolishes, builds modules of thought and combines them to construct edifices that in his mind are unarguable. It’s very rational, very clear, and is also echoed in the tone adopted by some of the modern day proponents of his ideas. I’m very comfortable in a world of shades of grey rather than black or white and I found his certainty throughout very noticeable. I’ve not read enough economics to know if this is common.

The next few chapters are spent on what I think is probably the foundational idea on which he constructs the whole edifice. I’m not in a position to say whether it is right or wrong, though his conclusions do feel broadly correct to me so I suspect it is right. He sets out that the three factors of production are Labour (which includes what we would call “self employment” and for which the reward is wages), Capital (for which the reward is interest (which includes what we would call “profit”)) and Land (which includes not only land itself but all natural resources, “the gifts of nature”, but does not include improvements such as drainage, buildings for which the reward is rent). I don’t think that’s controversial, but the truth that he sets about demonstrating over a number of chapters is that wages are not drawn from capital. Wages are drawn from the efforts of labour, which also produces capital. There is a lot of discussion on this, which he regards as key, and to be honest I need to listen to this again because there is a lot going on.

Having established that labour and capital are linked, Henry George goes on to demonstrate that in their union the human race has created all the progress we have seen to date and it is further capable of achieving unlimited future progress and human flourishing for all.

So that’s labour and capital, what then of land and rent? The most cursory look at the world shows that wages and profits do grow but is too often accompanied by rising inequality. This is due to the law of rent. Access to land is essential for labour and capital to function and better land enables labour and capital to be more productive. But in fact, the landowner will charge rent that takes wages and profits down to levels that can be produced from the least productive land. So labour and capital do not enjoy the rewards of their work and application, the returns are limited. There is a lot of time spent on this and I will go through this again too.

That’s the diagnosis of the problem of progress and poverty. Labour and capital have boundless potential but rely on the owner of natural resources who can extract all the benefits of their production. By its very nature, natural resources were not produced by anyone and properly belong to nobody individually but are the possession of society as a whole. There was a time when they weren’t owned by individuals, ultimately they have been privatised at some point in time through the use of or threat of violence.

Henry George demonstrates how land acquires value over time through the example of pioneers settling the West: land that was settled originally had zero value but as labour gets to work it produces capital, draws in more labour creating more capital and so on and by and by land increases in value through the work of the people living there. This is a very clear demonstration and shows him as a product of his time and place, he wrote the book while living in California.

Henry George then goes through how this can be rectified: the most obvious solution is to simply stop individuals owning natural resources. Land should be owned by the state with no compensation given to former owners. In that way enterprises could establish themselves and pay a rent to the government which could then use it for the work of government. Henry George quickly dismisses this idea as impractical and unnecessary and comes up with a much neater idea. People can carry on owning land, but in recognition of the fact that it properly belongs to the community they should pay a rent to the community in the form of a tax to the government based on the value of the land. The more valuable the land the more tax paid; the value comes from the effort and enterprise of the community around. Rather than just obtaining the land for society in one stroke, society essentially rents the land to the landlord.

The final chapters in the book consist of a study on what constitutes civilisation, how civilisations rise and fall and how the economic ideas set out in the book lie behind history. Essentially, the law of rent leads to the creation of parasitic elites and the demoralisation of labour and capital. 

Is the theory correct?

My strong hunch is that Henry George’s theory is on to something and that the remedy he proposes offers a really useful tool for producing more progress but with much less poverty. The closest that we get to some sort of mathematical/algebraic demonstration of the theory is the proposition that

Produce = Rent + Wages + Interest, so accordingly

Produce – Rent = Wages + Interest

I understand this and think it is probably uncontroversial (I’ve just started “The Wealth of Nations” by Adam Smith and he refers to this too). As labour and capital combine to increase productive power the law of rent means that a proportion of the increase in productive power accrues to land in the form of rent. But Henry George seems to go further and believe that wages and interest do not increase at all and that all increase is captured by land. This seems unlikely to me, looking at the world now and the economic position of workers and capital it does not seem to me that advance has not benefited Labour or Capital at all. But it’s unnecessary to believe this in order to conclude that the benefits that are captured by land do not properly belong to it and accordingly should be distributed to the community whose labour and capital produced it. 

I think the idea that rents should be taxed before labour and capital is certainly correct and that in not seeing this fundamental truth our modern day debates on tax policy are narrow, partisan and wrong headed. Henry George discards various remedies for righting the wrong of individuals monopolising natural resources; increased government, improved education, thrift, combinations (i.e. trade unionism), cooperation (i.e. working in cooperatives), government direction and interference (i.e. regulation) and better distribution of land are all examined and thought to be not up to the task. I don’t think he believes there is anything wrong with any of these in and of themselves, but they all miss the point and are really distractions. Rents belong to the community, that’s that, and until that’s recognised things won’t improve.

The main questions I am left with that perhaps people can point me towards answers for are as follows:

  1. Most obviously I think, the economy now is much less land based than that described by Henry Heorge. Land is used to describe not just land itself, but also natural resources, but I suspect there are other land-type assets used in our modern day economy. I know that the electromagnetic spectrum is basically land, intellectual property seems a little different but shares some characteristics, what else? The ability of banks to create money when they make a loan seems worth a look. Question: What is the best further reading on this?
  2. Whether, and how much, of the productivity gains produced by labour and capital stay with them: it must be some, the law of rent states that they will only keep what they could earn on the least valuable land, but how is this determined? What factors lead into this? I don’t think Adam Smith and Henry George stand in contradiction to one another but the principles for how this works seem important. Question: how much in practice of the value added by labour and capital is captured land? Is it 100% or less?

Practically speaking, as more people argue for Georgist taxes, where are the practical proposals? Long blogs arguing they are a good idea are one thing, where are the practical proposals with detail on what rates should be charged, how it should be administered, what taxes could be replaced and (most importantly) how it could be best sold politically? Question: how to campaign and implement Henry George’s ideas?

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