and "Economic Education"
Harry Gunnison Brown
[Reprinted from the American Journal of Economics
Vol. 17, No. 2 (January, 1958), pp. 145-155]
RECENTLY I RECEIVED from the American Economic Foundation, 295
Madison Avenue, New York 17, an illustrated folder by Fred G. Clark
and Richard Stanton Rimanoczy entitled "What Are Tools?" The
authors state that "any piece of mechanical equipment is a tool
of production." Then they go on to include among such tools not
only the roof over the equipment, the walls around it and the floor
under it, but also "the land under the floor." And then they
add: "A coal mine, an oil well, a forest, an ore deposit, or any
other natural resource becomes a tool of production to the men who
extract from nature the raw materials which go into manufacturing."
By thus putting all land and, in general, all natural resources into
the category of "tools," the authors turn the reader away
from considering a very fundamental question. This fundamental
question is whether an income derived from man-made equipment that
cannot come into existence at all unless there is both labor and
saving, is on no stronger an ethical and social utility basis than is
an income one can receive just because others must pay him for his
permission to work on and to live on the earth, in those locations
made productive and desirable because of geological forces and
community development, and for his permission to withdraw fuels and
minerals from the earth's subsoil deposits.
Lest this statement seem to some readers not entirely clear, we may
illustrate by reference to the case of New York City.
New York is situated on a great natural harbor. If there were none to
use the harbor except a few pioneer farmers on Manhattan Island
trading their surplus produce for the textiles and other goods of
Europe, landing space for a very few boats or perhaps for a single one
would be all that would be needed. But as the rich interior of the
North American continent was settled, with its mines of iron ore,
copper and coal, its prairie and river-bottom wheat and corn land, and
its other resources, more and more goods were produced to be poured
through the port of New York into foreign countries. And, of course,
more and more foreign goods were wanted in exchange, which could most
advantageously pass through the same port. Today there is needed in
New York City a large population to meet the requirements of this
great tributary country.
If all the present population of New York were whisked away
overnight, the land of New York would still have great value because
of the need for millions of men and women on it to serve the commerce
of the back country. A new population would move in and take up the
important work for the rest of us which can be done nowhere else so
well. Those who own that part of the earth's surface would be in a
position to make this new population pay handsomely for the privilege
of working for us there and of living where we need to have them live
in order that this work may be effectively done. In short, the
newcomers would have to pay for permission to work and to live on that
part of the earth.
The demand of the tributary country for this service makes a demand
for the use of the land by the people who must live and work there in
order to render the service. Incidentally, too, it makes necessary a
tremendous demand-and correspondingly high rents and values -- for the
use of especially well-situated lots for the location of department
stores, lunch rooms, banks, lawyers' offices, etc. Such sites and
buildings are needed to shelter those who supply near at hand the
requirements of those who must live there to serve the non-sea-coast
Surely, the rent of land is in a very peculiar sense socially
produced rather than individually earned, and ought to be sharply
distinguished in thought from interest on capital produced by men's
labor and saving. And if there is any kind of return which is
peculiarly fitted to be a source of public revenue, it is the rent of
In this connection we must remember that fertility elements put into
the soil-including fertility elements maintained through constant
renewal -- by a farmer, are, in the economic sense, capital rather
than land. In the city we construct capital mostly on the land. In the
country we often put it, largely, into the land. The investment in
such fertilizing of the land is capital as truly as the buildings,
drainage systems, terracing, planted fruit trees, machinery and
No one can deny, of course, that the building of roads and railroads
and the way in which population is distributed near or about a given
piece of land affect the usefulness of that land for production and so
affect its value. Such value is community-produced and is not produced
by the owner of the land. An individual or a comparatively small group
of individuals may produce or reproduce a house, a machine, a factory
or a locomotive. But no group that does not approximate a hundred
million or more in numbers can produce, or reproduce, the situation
advantages of Manhattan Island. Such situation advantages are, in the
main, by-products of activities not directed to the end of producing
these advantages. When all superficial resemblances are allowed for
and all qualifications made, it remains true that there is, in
general, a most significant distinction between land and capital, a
distinction of the greatest importance for public policy.
If facts like these were noted in the Clark-Rimanoczy pamphlet or
folder, there might be readers who would wonder whether an income
received from being able thus to charge others for permission to work
on and live on the earth, should not be taxed more heavily than income
derived from capital brought into existence by work and saving.
Instead the authors hurry their readers on to the statement that "profit"
is collected from customers "on behalf of the people who supply
the tools of the business," that "profit is the key to tools
and tools are the key to prosperity."
Without a hint that the earth with its subsoil deposits and other
resources was not made by men and that its existence is not the result
of "profit," they hurry along to the statement: "No
profits, no tools-no tools, no prosperity."
Then, finally, comes the authors' peroration:
When and if the American people ever become convinced that profit is
evil and that suppliers of the tools do not deserve a reward, America
will have reached the beginning of the end.
Thus is the incautious and gullible reader tricked into applying a
perfectly logical defense of income from the tools one's work and
saving have brought into existence, to the utterly different case of
income derived from giving others permission to work on and to live on
the earth, in those locations made productive and reasonably livable
by geological forces and community development.
BUT LET US TURN to another "Foundation," this time the
Foundation for Economic Education, Inc. (FEE), Irvington-on-Hudson, N.
Y. Let's inquire whether the "economic education" it purveys
helps those who read -- or "study" -- its literature, to get
some comprehension of the distinction between income from man-made
capital and income that stems from title deeds to valuable parts of
In this organization's monthly publication appears a short
article, "Help Wanted," by F. A. Harper, staff member of the
Foundation and formerly a teacher of economics at Cornell University.
The article pictures the case of a man who reads an advertisement in
his evening paper, offering $22,705 a week for an "experienced
tool operator" who must, however, provide his own machine. In the
morning he telephones, makes an appointment and applies for the job,
assuming that whatever the machine may be, he can get one easily
enough from Sears, Roebuck and Company or some other establishment. He
is dumbfounded to learn that the "machine" required weighs
over ten thousand tons and costs several million dollars.
This introduction gives Dr. Harper an enticing lead for his argument
that "tools" come "from prior sacrifice in the form of
savings," that the mere wage earner gains greatly from having "tools"
to aid him and that it is "foolish" for him to refuse to
operate tools unless he receives, also, some of the income "required
to induce savers to save."
It is true, of course, that capital cannot be produced unless there
is saving. How, for example, can men who do not have independent means
spend their entire time building a factory or a ship or tunneling
under city streets and (perhaps) under a river for a subway, unless
somewhere there are others through whose saving they can receive the
food, clothing, fuel, etc., without which they and their families
could not live? If they were not so provided for, would it not be
necessary for them to spend much or most of their own time catching
fish, picking fruit, digging potatoes, hunting game, baking bread,
making themselves clothing, etc.?
This relationship between saving and investment and the production of
capital is one I constantly stress. To that extent I go along with Dr.
Harper. But it is precisely because of this relationship that I favor
a tax policy which bears more lightly on the capital that really does
depend on saving for its coming into existence, than on
community-produced land value. There is, however, nothing in Dr.
Harper's article which even remotely suggests that he would favor such
a tax policy -- i.e., that he would favor taxing community-produced
land value at any higher rate than the capital men make. Let me recall
the argument for doing so.
The land-value tax has two advantages -- even for the propertyless
worker -- over the income tax. The first is that it makes unprofitable
the speculative holding of good land out of use, and thus enables the
worker to be better supplied with land and thereby to produce more
and, therefore, to be worth more.
The second advantage is that the land-value tax leaves to those who
save, the full natural reward of this saving, in the added
productiveness of industry made possible by the additional capital.
They truly own their capital instead of having it, as now, largely
owned, in practical effect, by the taxing government which takes a
large part of the income it yields. Therefore, capital would-and some
highly significant but as yet little publicized Australian data show
that it does-flow into and increase in such a community or state or
nation, and its workers would be better provided with capital as well
as better provided with land. Thus, again, the workers would be able
to produce more and could command higher wages.
The clear logic of the matter indicates not only that to relieve
capital from taxation, so far as we can, by drawing heavily on the
annual rental value of land, tends definitely to the strengthening of
the free private enterprise system. The same logic indicates that to
follow the opposite policy, i.e., to abolish the tax on land and take
by taxation practically all the yield of capital, must lead to the
management of all or practically all industry by the State, with
saving thereafter compulsory.
Do we honestly believe the private enterprise system to be preferable
to socialism, and do we want to keep it for ourselves and successfully
"sell" it to countries now susceptible to socialist
propaganda? If we do, what can be more important in our teaching of
economics than that our students should come to understand why the
second of these two divergent tax systems is so threateningly
different in its to-be-expected consequences from the first?
To the best of my knowledge and belief, the Foundation for Economic
Education has never published anything, anywhere, to indicate the
slightest sympathy for the tiniest movement in that direction, e.g.,
for the graded tax system' of Pittsburgh (and Scranton), Pennsylvania.
Nor has the Foundation given its clients any "economic education"
on the sharply contrasting effects of local land-value taxation versus
local taxation of all property, in the many Australian cities and
districts that have the one system and the other. The staff of the
Foundation have certainly had adequate opportunity to familiarize
themselves with the facts. But their publications seem never to have
revealed to their readers any of the results of what is perhaps as
closely analogous to a laboratory experiment as we can usually hope to
have in economics or, probably, ever have had in the economics of
divergent tax policies.
The Foundation for Economic Education has issued recently, however,
as part of its "Special Essay Series," an article by Murray
N. Rothbard, who is described on the title page as an "economic
consultant, writer, and part-time member of the staff" of the
Foundation. This essay, which is in typewritten form, is said to be "offered
in response to inquiry" from those asking the Foundation "to
consider or appraise or explain various aspects of the single tax
theory." The article is entitled: "The Single Tax: Economic
and Moral Implications." It has not yet been printed in whole or
in part in
The Freeman and, presumably, goes only to inquirers.
Mr. Rothbard's discussion, also, makes no reference to the
statistical data from Australia, or to any experience with land-value
taxation in Denmark, New Zealand or South Africa. The statistical
studies in Australia, particularly, are sufficiently complete and
point so consistently in one direction, that it might have been
difficult for the author, had he presented the relevant data, to
convince his readers of the malign effects of substituting land-value
taxation for taxation of man-made capital. Apparently the author was
concerned only with the "single tax" theory, as such. But
let's consider some of his statements about it.
"A 100 per cent tax on rent," he says, "would cause
the capital value of all land to fall promptly to zero. Since owners
could not obtain any net rent, the sites would become valueless on the
market. From that point on, sites, in short, would be free. Further,
since all rent would be siphoned off to the government, there would be
no incentive for owners to charge any rent at all. Rent would be zero
as well, and rentals would thus be free.
"The first consequence of the single tax, then, is that no
revenue would accrue from it. Far from supplying all the revenue of
government, the single tax would yield no revenue at all! For if rents
are zero, a 100 per cent tax on rents will also yield nothing."
Here we are proffered the statement, under the aegis of a foundation
for "Economic Education," that if "the single tax"
took all of the rent for government, rent "would be zero"
and so government would receive "no revenue at all."
Is it here presumed that if a landowner refuses to collect rent from
a building owner whose building occupies his land, and thus the
landowner is relieved (supposedly!) of paying the tax, government will
not collect the tax -- or rent -- from the tenant but will permit him
to use the land for nothing? Is it presumed that all landowners own
nothing -- whether buildings, planted fruit trees or other
improvements -- in or on their land? And is it assumed that no owners
of buildings and other improvements have title to any of the land on
which their improvements rest? Or is it presumed that landowners who
do own improvements on their land, which improvements, under "the
single tax," would not be taxed at all, would refuse to pay the
tax levied on the land and thus blithely lose title to it and no
longer be permitted to keep their buildings -- skyscrapers, for
example -- and other improvements, on it? Just what is the presumption
on the basis of which Mr. Rothbard makes his pronouncements?
But Mr. Rothbard contends further that "a 100 per cent tax means
that land sites pass from individual ownership into a state of no-ownership
as their price is forced to zero. Since no income can be earned from
the sites, people will treat the sites as if they were free -- as if
they were superabundant. But we know they are not superabundant; they
are highly scarce. The result is to introduce complete chaos in land
"Specifically, the very scarce locations-those in high demand --
will no longer command a higher price than the poorer sites.
Therefore, the market will no longer be able to insure that these
locations will go to the most efficient bidders. Instead, everyone
will rush to grab the best locations. A wild stampede will ensue for
the choice downtown urban locations, which will now be no more
expensive than lots in the most dilapidated suburbs."
Here we find Mr. Rothbard contending that "a 100 per cent tax on
rent" would make all sites "valueless on the market,"
that sites "would be free," that rent, too, "would be
zero," and that there would be "a state of no- ownership"
of sites. Yet at the same time he contends that "everyone will
rush to grab the best locations" which, presumably, if there is
really "no-ownership," others can in turn "grab"
That a 100 per cent tax on the annual rental value of land would
ordinarily leave no inducement to the holding of title to land by a
person who has and intends to have no improvements or other capital in
or on it and who has no intention of using it productively, is of
course true. So what? It is indeed difficult to see what advantage
such ownership could have for the rest of society. Ownership of land
under our existing tax system, by those who merely hold it vacant in
the hope of gaining by their "foresight," is generally
disadvantageous to others. Foresight, purely as such, deserves nothing
whatever. The man who, foreseeing a rise in certain land values from a
probable increase in or shift of population, puts himself into a
strategic position to profit by it, is not thereby rendering any
service to those from whom he derives return. Foresight used to give a
service may, indeed, earn remuneration. Foresight used to get
something for nothing is not deserving of any reward.
In this connection we may note the fact that the "foresight"
of land speculators not merely is a frequent means of getting
something for nothing but that it may also decrease productive
efficiency through holding good land out of use. Then the remaining
land must be used more intensively and resort must be had to poorer
land. Thus is the productivity (marginal product) of labor reduced,
land rendered artificially scarce and dear and the rent of land
raised. Thus are fostered congested slums. Thus is made inevitable the
waste of extending electric light and telephone wires, gas and water
mains, street car and bus service past hundreds of vacant lots, that
those may be served whom land speculation has driven far from the
center of their city. Wherever men would go to engage in commerce or
industry, to establish homes or even to enjoy, near woods and water, a
vacation season, there they find land speculators ahead of them.
BUT PERHAPS one's criticism of writers on economics outside of
strictly academic circles should be tempered by consideration of the
extent to which academic economists have blurred the distinction or,
even, ignored or denied the distinction between capital and land and
the distinction between income from the one and the other. Some
textbooks do not even have the word "land" or the word "rent"
in the index, and not a few omit all reference to land-value taxation.
Among the economists of the latter part of the nineteenth century and
the earlier part of the twentieth, whose influence was the greatest in
leading other economists to blur the distinction between capital and
land, we ought certainly to include John Bates Clark. In his book on
The Distribution of Wealth," "land" is
included in "capital" and the income from either or from
both together is "interest." The only other income is, in
Clark's analysis, "wages," except that, in a "dynamic"
state there may be "profits." The following passage from
this book, in which Professor Clark discussed the contention that
capital differs from land because the former can be increased by men,
is especially relevant.
Let us, then, compare all land with all other capital goods; let us
take all society into the field of view. In every group and sub-group
there is land, and in every one there is capital in the form of
artificial instruments. Neither the one agent nor the other can be
increased in the aggregate at will. At any one time the amount of
artificial capital in existence is as fixed as is the amount of land.
Within any short time it is impossible to increase the general fund of
artificial capital enough to make a perceptible difference in the
conditions of social industry. At any one time we have to deal with a
definite quantity of land, in combination with a definite amount of
capital in artificial forms. Moreover, the distinction between land
and other capital-goods, based on the notion that land cannot be
increased and that other things can be, has obviously no validity in a
static study; for the static assumption itself precludes all increase
Here Clark is saying that one reason for classing capital and land
together is that, even though we regard land as fixed in amount, yet "artificial
capital," too, is "fixed" in amount at "any one
time" and cannot be increased enough "to make a perceptible
difference," etc., within "any short time" and that,
anyway, if we assume a "static state," then artificial
capital, like land, cannot be increased at all!
Here is the essence, in Clark's own words, of his viewpoint on the
distinction between interest and rent:
What, then, is interest? Is it not a fraction of itself
that a permanent fund of wealth annually earns? . . . Does a
building, or an engine, or a ship literally earn in a year a
fraction of itself ? .. . The capital that is embodied in the
buildings, the engines and the ships of the world does enlarge
itself in this way. It earns interest; but what the concrete
instruments earn is not interest, but rent.
A popular and accurate use of the term rent makes it describe the
amount that any concrete instrument earns.... In a use of terms
which harmonizes with practical thought and which, as we undertake
to prove, is entirely scientific, rent and interest describe the
same income in two different ways. Rent is the aggregate of the lump
sums earned by capital goods; while interest is the fraction of
itself that is earned by the permanent fund of capital ....
Science has proposed a different distinction between rent and
interest. It has tried to confine the former to the product of
land-and that, too, without taking account of changes in the value
of land-defining it as what a tenant pays to his landlord for the
use of the "original and indestructible" properties of the
soil. This usage probably would never have grown up if the science
of political economy had originated in America, where land has
always been a commercial article, and where the man who buys a piece
of it reckons whether he can get as good interest on his investment
in that form as he can in any other.
It is true that the return on land and the return from capital can be
stated, either of them, as a percentage or as a lump sum.
Superficially, then, the return from land and that from capital may
seem much alike. But this is only superficially. For the return from
capital is naturally reckoned as a percentage and ought to be so
reckoned-a per cent on the cost of the capital. What we are interested
in knowing in the case of the return from capital, is how much more we
gain by following a roundabout process than a direct process of
production, and how much the extra product amounts to in comparison
with what the product would be had immediately consumable goods
(present goods) been produced instead. In other words, we are
concerned with knowing the per cent of the excess gain from roundabout
production to what would be or would have been secured by direct
production. In short, we are concerned with the fact that capital
normally yields, during its lifetime, more than its cost of production
(measured in the present-or consumable-goods and services that might
be or might have been produced instead); and we are naturally and
properly interested in knowing how large this gain is in relation to
the cost of producing the capital which makes it possible.
But the value of land is not measured by any "cost" of "producing"
the land. Hence it is essentially meaningless to inquire as to the per
cent yield on cost.
It may be said, however, that Clark and the other economists who
follow him do not refer to a per cent of cost of production but to a
per cent of value. And, it may be asked, why is not the per cent of
the value of land a matter of significance just as is the per cent
gain on the value-and so the cost -- of capital.
The answer is that the value of land depends on the expected future
yield and on the per cent at which this expected yield is capitalized
into a present value. The -market rate of interest used in such a
process of capitalizing, itself depends largely on and tends to be
equal to the rate of net marginal yield of capital on the cost of
production of capital. Knowing the cost of capital in terms of present
consumable goods and services, and knowing the rate of net marginal
yield on this cost, we know the per cent interest rate which should be
used in capitalizing the anticipated future rent of land into a
present sale value. Thus, the sale value of land has no independent
significance but is merely a derivation from the anticipated rent of
land and from an interest rate which is a function of the productivity
of capital. To talk about the rent of land as a per cent on its value
is, therefore, to emphasize as if it were important, a per cent of a
value which itself can be arrived at only by knowing that per cent in
The rent of land, then, is logically and properly expressed as a lump
sum-in dollars; while the interest on capital is logically and
properly expressed as a per cent on cost.
One wonders how many of the numerous neo-classical and other
contemporary economists who have followed Clark in his analysis have
plumed themselves, like Clark, on having seen more deeply into the
problem of land rent than did Ricardo and other economists of the
earlier (i.e., not "neo") classical school; whereas actually
they have seen less deeply into it.
One wonders, too, whether there have not been a number of neo-
classicals of conservative bent who, confronted with the contention of
Henry George that the rent of land is the most ideal source of public
revenue, and reacting antagonistically to this contention but in doubt
as to just how to meet it, have been relieved at the thought that land
rent is really a per cent just like interest on capital; and have felt
that now, indeed, they could confound the land-value-taxers and
discredit their philosophy!
But possibly the day has finally passed of easy victories over the
land-value-tax philosophy, for conservative economists who have too
easily accepted, and used in their propaganda, various
superficialities and half truths and outright fallacies.
FOOTNOTES AND REFERENCES
- The following five paragraphs
are taken, with only slight changes, from my Basic Principles
of Economics, 3rd edition, Columbia, Mo. (Lucas Brothers),
1955, vol. I, pp. 490-1.
- The Freeman,
Irvington-on-Hudson, N. Y., March, 1957.
- "Academic Freedom and the
Defense of Capitalism," Am. J. Econ. Sociol., 15
(January, 1956), pp. 175 and 179-80. Cf. my Basic Principles
of Economics, op. cit., vol. II, p. 136.
- Loc. cit., p. 4.
- Ibid., p. 5.
- Basic Principles of
Economics, op. cit., vol. I, pp. 439-40.
- New York, Macmillan, 1899.
- Ibid., pp. 339-40.
- Ibid., pp. 123-4 and 137.
- See, for further analysis
here, my article, "An Off-Line Switch in the Theory of Value
and Distribution," Am. J. Econ. Sociol. (July, 1944).
This article was reprinted in 1950 as Chapter 4 of Some
Disturbing Inhibitions and Fallacies in Current Academic Economics,
New York, Schalkenbach. See, also, my Basic Principles of
Economics, op. cit., vol. I, chaps. XII and XIII.