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IEET > Security > Eco-gov > Rights > Economic > Former > Edward Miller

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We Can Have It All: The Beauty of Value Capture


Edward Miller
By Edward Miller
Embrace Unity

Posted: Jan 25, 2012

As anyone familiar with classical political economy knows, true property rights are rooted in self-ownership. You own yourself, and by extension you own what you make through labor or voluntary transactions thereof. Land, however, is not a fruit of labor.

One might reasonably suppose that land, being unlike other things that are called property, would have special economic characteristics. Classical economists recognized this to be the case, and spoke at length about the implications of it. Neoclassicals and their Austrian copycats insisted on lumping everything together under the solitary label of “property,” which served to obscure these implications. They simply bicker about how best to achieve equilibrium and Pareto efficiency, given “value-free” analysis of the system that exists. Some might call that dispassionate analysis; others might call that bean-counting for elites.

Unlike the priesthood of the status quo, who have internalized its values under the false pretense of cold rationality, I am interested in making moral judgments about the system we live under. I am not talking about a revenue model. I’m talking about a revolution: a revolution of liberty, of prosperity, of human relationships, of ecological relationships.

We can eliminate taxes and debt, poverty and special privilege. Contrary to the dour pronouncements from the curators of the dismal science, we can have it all.


The Basic Properties of Land

In terms of political economy, “land” refers to access rights over everything that was here before us humans. When you buy land, what you are really buying is a bundle of rights, be they air rights, mineral rights, drilling rights, surface rights, spectrum rights, right of way, you name it. Such rights are necessary for all production, and even life itself.

Supposing the entire habitable globe to be so enclosed, it follows that if the landowners have a valid right to its surface, all who are not landowners, have no right at all to its surface. Hence, such can exist on the earth by sufferance only. They are all trespassers.

- Herbert Spencer, Social Statics

That is a simple illustration of the absurdity of the current system, when taken to its logical conclusion. Indeed, we aren’t far from that.

When land is made into a commodity, the progress of society, be it in terms of productivity, philanthropy, or the rule of law, tends to be encapsulated in land values.

…every improvement in the circumstances of the society tends either directly or indirectly to raise the real rent of land, to increase the real wealth of the landlord, his power of purchasing the labour, or the produce of the labour of other people.

- Adam Smith, Wealth of Nations

So the community as a whole is what generates all this value, and yet the windfall gains accrue only to the holders of these access rights. In fact, under feudalism land titles were the root of noble privilege, and although we have left behind the aesthetic trappings of feudalism, we have yet to be rid of the core component.

That means in practice the payments which can be demanded for these access rights are not like other sorts of payments.

Moreover, wages and interest, when there is no rent, are regulated strictly by free competition; but rent is a monopoly-charge, and hence is always “all the traffic will bear.”

- Albert Jay Nock, Henry George: Unorthodox American

Essentially, when private individuals get to levy a charge on others for the mere privilege of existing on the planet, this creates an endemic state of poverty for large masses of people. Just as land titles are the essence of noble privilege, so is landlessness the essence of serfdom.

It is through this logic that David Ricardo debunked Thomas Malthus’s “Iron Law of Wages.” He developed his own “Law of Rent” to show that when the produce obtainable on the best available rent-free land (the margin of production) is high, wages will also be high since everyone’s next best alternative to wage labor is improved.

When Malthus and Ricardo were debating, the Old World was all built up and many people were living in Dickensian squalor. Yet, the New World of America had lots of free land, and it witnessed growth rates comparable to those of China today. Unemployment wasn’t even part of the vocabulary. True, many homesteaders did not have an easy life, but everyone who was willing and able to work could simply go work. Why is that no longer possible?

The Remedy


The commodification of land itself is not the issue. The issue is who gets the benefits of the access rights. Anything less than an equal share is a violation of the Law of Equal Liberty, for any exclusive claim over natural opportunities necessarily reduces the opportunities available for everyone else. There is only one way to ensure equality of opportunity: for the community to recapture the value of land.

It is for these reasons that virtually all the notable classical liberal political economists supported the idea of the community recapturing the land values, using the discourse of taxation.

A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground.

- Adam Smith, Wealth of Nations

A tax on rent would affect rent only; it would fall wholly on landlords, and could not be shifted to any class of consumers. The landlord could not raise his rent, because he would leave unaltered the difference between the produce obtained from the least productive land in cultivation, and that obtained from land of every quality.

- David Ricardo, On the Principles of Political Economy and Taxation

When you impose costs on man-made objects, you see a reduction in supply. The supply of land, on the other hand, is fixed.

Income taxes discourage production, sales taxes discourage consumption (which drives production), tariffs discourage trade (which is really a form of production), but value capture only discourages the unproductive holding of land.

Instead of hampering production, it would boost it. Think of every vacant lot or surface level parking lot in a city, every abandoned building, every single-story fast food franchise amidst skyscrapers. Those are all examples of the waste and underdevelopment of the current system. These things occur simply because it is cheaper to sit on the land and hope others put in the work necessary to make it valuable, compared to the expense of undertaking a risky entrepreneurial venture.

Taxes? What Taxes? We Don’t Need No Stinking Taxes!

Landholding ought not be seen as a no-strings-attached sovereignty. A true libertarian position recognizes that landholding comes with obligations: obligations to internalize negative externalities, and obligations to respect the Law of Equal Liberty. Sure both of those things may be difficult to do, and may not be accomplished perfectly, yet we must try to achieve them one way or another.

My goal is not to say exactly how the land value should be recaptured. Whether this is done by a municipality, a nation-state, or a Charter City is not the topic of this paper. I only aim to spread a general recognition that it is an essential prerequisite for a just and sustainable socioeconomic order.

Value Capture is most commonly advocated as “Land Value Taxation.” However, it is a tax only in the sense that Pigovian “Taxes” are. It is not a tax on production, and thus there is nothing objectionable about it from the perspective of classical liberalism. Indeed, I’d argue that without it, classical liberalism is a cruel joke. Value capture is simply a reconceptualization of who owns the value of the access rights over the Earth.

Rent is not a tax. It is payment for the use of a location, determined by the higgling and haggling of the market, and it makes no difference to the land user whether he pays rent to the city fathers or to a private owner.

- Frank Chodorov, Out of Step

Under the current system, rent is like an extractive force upon laborers and capitalists, and that can only be fixed by preventing the private appropriation of land rent. I care not whether the person pocketing the rent is an ideal Lockean homesteader or Donald Trump, it is unjust either way, just as it would be unjust for either of them to unaccountably create negative externalities.

The land value must be recaptured to the fullest extent possible, not simply as a means for funding essential services. If the government is limited enough and well-managed enough to not require all of the land rent, it should still recapture all of it and distribute the surplus as a flat Citizen’s Dividend, since that value truly does belong equally to all. This dividend would not only be essential for justice, but would provide a strong incentive for all parties to keep public services lean and efficient.

That which makes public services more efficient would be of direct interest to citizens. That which makes land values higher, would be of direct interest to bureaucrats, which means their incentive would be to create value for the community, rather than to take from productive activity. The incentives between individuals and their community are aligned.

Steady Growth

The ideal of steady growth is completely feasible. Monetary policy is not the root cause of the business cycle. Borrowing fuels speculation, but it isn’t the ability to borrow which creates the business cycle. That merely amplifies it. You have to ask why they are borrowing. If the borrowing were for normal productive purposes, the borrowing wouldn’t be inflationary.

No, the root cause of the cycles isn’t borrowing, it’s when we leave for the taking a giant pile of community-generated wealth. We shouldn’t find it unusual that people should want to pocket unearned wealth. Or even that they should want to undertake bouts of debt-fueled speculation. “Safe” unearned income sure beats working. Who wouldn’t want that? It is the system which is corrupt.

Land shouldn’t be seen as this “safe” investment, which grows over time with the progress of civilization. No other asset works like that. It ought not even be seen as an investment; if anything, it should be seen as a liability. That we have obligations when we take on the duty of landholding might come as a shock to some, but it is the only position consistent with liberty, and key to our success.

Though it isn’t calculated in official statistics like the CPI, rent is what drives much of the increase in living expenses, and why the working classes often never see a piece of their increased productivity during booms. What good is it that the GDP has risen if the general level of wages do not rise as well? That is not the sort of steady growth I’m interested in.

Unemployment during busts is a result of the market correcting for the inflated cost of production resulting from land speculation and other rent-taking. Remember, land is necessary for all production, and life itself. I don’t care if your business is all Internet-based, you and your employees still require access rights to the Earth, as do all the producers of the capital goods you consume. Conversely, if people have access to land, there can be no unemployment.

Really Smart Growth

Another cruel joke of the current system is the notion of Smart Growth. We cannot possibly curb sprawl as long as land speculation occurs. Let’s say a really nice community is developing. Businesses are sprouting up. This increases the land values. Before you know it, the land values exceed the ability for many people to pay. Even though the transportation infrastructure isn’t anywhere near capacity, and density living is far more ecologically efficient, people begin to go elsewhere in search of a place to live. It is simply too expensive in town.

They buy up land outside of town. Yet, before you know it, the new settlement is getting built up, the community is generating lots of value, and they begin construction on new infrastructure, and again before you know it the land values exceed the ability for people to pay. How could anyone believe that people would make different decisions simply because a few do-gooders built pedestrian friendly development? It is absurd to believe this process of sprawl can be halted through zoning, light rail projects, philanthropy, or any sort of central planning. It can only be halted through systemic change.

Land is artificially scarce under the current system of land tenure. We’ve already discussed the issue of vacant lots, abandoned buildings, and underdevelopment. Those are just the most visible signs. What about the things we don’t see?

For instance, think about our industrialized agriculture system. It is probably the most land-intensive production there is. Wasteful production practices are essentially subsidized by this system. Why aren’t we moving towards more high-tech and efficient forms of production? You may have heard about the concept of vertical farming. People often ask why it isn’t common practice, and the answer given is that it is “not economically viable.” A primary reason why it isn’t viable is that holding lots of land is under our system is very cheap, and even profitable.

This insanity isn’t just contained domestically either. All the waste of the current system creates this compulsion to expand abroad, to continue fueling the land speculation Ponzi schemes. This creates international resource conflicts, and may even trigger war. It is no wonder that the Old World, where all the land was parceled out and the Commons long-enclosed, became the aggressors in the Scramble for Africa. Of course, eventually they gobbled up all of Africa, and finally turned inward on themselves in the form of the First World War.

What does this mean in practical terms?

You don’t have to be a political economist to see the common sense truth of the matter. Some people just care about practical or personal concerns, and value capture is just as relevant from this perspective. Through it we can replace income taxation with a straightforward, efficient, and non-invasive revenue source.

It doesn’t require teams of IRS auditors to snoop into every transaction you’ve ever made. You can’t hide your land in a Costa Rican bank account. The current “property tax” system in the United States isn’t even that different from a methodological perspective; it would only need to change in two ways. It would need to stop including improvements as part of the taxable value of real estate, and it must raise the rates up to near the full annual rental value of the location.

The one thing basically all economists agree on is that “incentives matter.” The shift in incentives under value capture would cause dramatic and positive changes in the relationship between citizens and their community.

Well, then, since natural, resource values are purely social in their origin, created by the community, should not rent go to the community rather than to the Individual? Why tax industry and enterprise at all–why not just charge rent?

- Albert Jay Nock, Henry George: Unorthodox American

Our current system has very perverse incentives. Want to go build a restaurant? Pay up. Want to buy up a prime location and hold it out of production? We’ve done everything in our power to make sure you get to keep the full value of your precious title. Want to build a community center to help the poor? Congratulations, you’ve just raised the rents for all the landless people in the area, and may have just “helped” them right out of a home.

As a landless person you have essentially no stake in your community. I walked through a poor neighborhood once and was shocked to find a big pile of garbage sitting out in the open in a vacant lot. I then saw one of the local residents walk by and chuck yet more garbage into it. I was puzzled by why anyone would do such a thing, but it makes perfect sense now. Even caring for the cleanliness of one’s community is of little benefit to the landless. Cleanliness raises rents, and littering lowers them.

You can see the same thing with the contentious issue of gentrification. Have you ever wondered why gentrification is so despised? Why should people hate that their community is improving? They should be rejoicing! Right?

Well, they would be under any sensible economic arrangement, but now it merely causes displacement and hardship. Wouldn’t it be great if improving the community actually… you know… improved the community. What a thought!

Inequality

I do not claim that George’s remedy is a panacea that will cure by itself all our ailments. But I do claim that we cannot get rid of our basic troubles without it.

- John Dewey, Steps to Economic Recovery

Given the fundamental nature of land, and access rights over it, unless the land question is taken into account, one of the primary consequences of any otherwise-positive economic reform, including the repeal of other special privileges, will be an increase in rent to landlords.

What has destroyed every previous civilization has been the tendency to the unequal distribution of wealth and power.

- Henry George, Progress and Poverty

Inequality is dangerous to liberty, and can enable vicious feedback loops of rent-seeking, which sets the stage for corporatism on one hand and state socialist counter-reactions on the other. Vast fortunes should not be worshipped by those who love liberty. They should be looked at skeptically, and seen as a red flag that something is amiss. Most great fortunes are not the result of voluntary interactions in the market, but by direct or indirect state intervention on behalf of the powerful. The mother of all those privileges is land speculation.

It’s time we heed the actual words of the classical liberals, so that we may create a system that works for everyone. No more compromises between prosperity and equality, freedom and justice. We can have it all.


Edward Miller, a former intern of the IEET, is the Chief Information Officer of the Network for Open Scientific Innovation. He is a passionate advocate of Open Source development models. His blog, EmbraceUnity, deals with democracy, humanism, and sustainable development.
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