Review of the Book:

Unjust Deserts: How the Rich
are Taking our Common Inheritance
by Gar Alperovitz

H. William Batt

[A review of Gar Alperovitz's and Lew Daly's book, published in New York by The New Press, October, 2008. This review was written in December, 2008]

The distinction between earned and unearned income goes back to the beginnings of economics. It constitutes a central element in the thought of Henry George -- what he and his disciples call the "unearned increment." In recent years, however, the significance of the distinction seems to have been lost, in as much as tax designers have elected to levy similar rates on both such forms of income. But those who look carefully know the return on such wealth secured by the well positioned as the "free lunch," and many point out that such income in recent years explains the widened income disparity in America between the large majority and the top few percent.

Gar Alperovitz and Lew Daly together make the case for taxing unearned income at rates far higher than at present. The book argues that the preponderance of the wealth captured by most high-income people really stems from the payback of past intellectual capital which falls to them almost by accident. They further note that there is no grounds for the argument that high rates of taxation hinder capitalization -- in fact infrastructure investment largely financed by taxes is likely to have greater payback than tax income forgone and left in private hands. It follows that it is the public sector that is today being deprived of adequate finance, yet investment in and by the public sector creates most of our public and private wealth.

The book is divided into two sections, the first deals with how the accumulated corpus of knowledge accounts for most invention breakthroughs. The authors point out that most advances in technology resulting in stupendous yields in wealth dividends likely would have come about in any case given cumulating bodies of knowledge. They argue that transforming technical achievements are in almost every instance due to marginal investments, made by applying existing information by fortuitously situated agents. This cumulative body of information is part of what has been known classically as "the Commons," and allowing individuals to reap the full gains from what is essentially socially-created wealth calls for a rethinking of society's financial rewards system.

The book is replete with examples of how misleading it is to identify certain individuals as inventors of technologies that are really explained by a whole history of past steps -- in this sense, Nobel prizes themselves are misrepresentations. Arguably Bill Gates' wealth should be shared with any number of identifiable creators of breakthroughs and techniques as well as others that are not identifiable. Gates himself has admitted as much. But to take a more interesting but less well known case, Alexander Graham Bell is identified as the "inventor of the telephone" only by virtue of the fact that rival Elisha Gray arrived at the patent office with his design a few hours later the same day. One could also note the competition between Darwin and Wallace, and between the winning Watson-Crick team and Linus Pawling who was also very close to getting the "double helix" design. This book itself is successful in good part because of the examples it is able to rely upon, taken from Harold Evans' They Made America, and economic historian Joel Mokyr's The Lever of Riches: Technological Creativity and the Knowledge Economy and his later Gifts from Athena: Historical Origins of the Knowledge Economy.

Part two of the book traces the intellectual and historical analysis of unearned income, especially in treatments by Smith, Ricardo, Mill, George, and Veblen. Then, in relying upon contemporary thinkers, discussion moves to a recognition of the "knowledge commons" and its importance for success in fostering further technical and economic progress. By placing the locus of intellectual resources in society, a moral claim is made for the recapture of the wealth that stems from its ongoing applications. The authors quote Nobelist Joseph Stiglitz in this regard, that "Just as the importance of land in production changed dramatically as the economy moved from agriculture to industry, so too does the movement to a knowledge economy necessitate a rethinking of economic fundamentals." (p.139) The implication is that our collective commons of knowledge is today more significant than classical economists' appreciation of land as a factor. One might quibble about the extent to which contemporary wealth, both social and individual, is explained by the growth in knowledge any more than it is, for example, by the intensive use of fossil fuel energy sources. One might further argue that the knowledge base that rightly ought to be regarded as common is being locked up in patents that inflate their value and restrict and channel their use. But in the main, the points addressed concerning the relationship between knowledge and wealth are on target. Yet to claim that the growth of the knowledge commons lessens the importance of land requires further discussion.

The authors are undoubtedly right that the fortunes made by entrepreneurs able to combine information with insights is unduly rewarded. But apart from a general defense of the commons, public sector enterprises, and of taxing unearned income, there is no explicit discussion of the mechanisms by which such "unjust deserts" should be reclaimed. Presumably, by inference, taxes would somehow be imposed on the returns generated by investments and royalties from knowledge resources. Or perhaps again by raising the marginal rates on personal income. The moral grounds are convincing, but the mechanisms remain unexplored. Here the Georgist philosophy can offer insights that demonstrate its relevance today. Far from having been superseded by the shift from agricultural and manufacturing economies, the knowledge economy still arguably depends upon resource rents with an inelastic supply -- namely "land." Knowledge packets flow through the sites of market exchange just as always. Spectrum use, geo-spatial nodes, and other means of access long understood continue to have site value just as do mineral and energy resources -- in this sense "land" in all its forms remains no less important.

Professor Mason Gaffney's venerable acronym ATCOR -- all taxes come out of rent -- continues to be relevant; regardless where and what the locus of taxes are, they ultimately translate to flows of rent. It remains true that by taxing the bases where rents exist, all the economic inefficiencies and distortions that otherwise obtain are thereby avoided. But it also remains to be demonstrated how much knowledge bases harbor rents. The challenge of the Georgist movement is to identify and quantify those flows of rent so that the unjust deserts, of which Alperovitz and Daly so eloquently speak, can be recaptured and returned for their proper application.