Herman Daly and Henry George
Edward J. Dodson
[Comments posted in response to an article by Herman
Daly titled, "Modernizing Henry George." Center for the
Advancement of the Steady State Economy; 19 July 2010]
Herman Daly:
Economists have traditionally considered nature to be infinite
relative to the economy, and therefore not scarce, and therefore
properly priced at zero.
Ed Dodson:
While this observation can be found in the writings of some
economists, the number of economists who embrace public policies that
would achieve this result is quite small. I am reminded of what the
economics professor Harry Gunnison Brown wrote at the beginning of his
textbook on economics published during the 1940s and 1950s. He titled
this first chapter, "Prejudice Versus Science," and the
reader could not be misconstrue his meaning:
"Economics is concerned with the
problem of 'getting a living.' It deals, therefore, with an important
phase of the 'struggle for existence.' Unfortunately, this fact
operates to prevent unprejudiced investigation of its laws and of the
effects of various economic policies. An examination that would would
show the effects of various policies from which a part of the public
was benefiting, to be injurious to the remainder, might not be an
examination which those who were profiting by the policies in question
would desire to have made. And if such an examination were made,
acceptance of its inevitable logical conclusions would probably be
vigorously opposed.
Economic theories are, in effect, voted on,
when policies involving them are adopted or rejected. But the bias
which economics has to face, so far as it is not merely the inertia of
ignorance, is a bias of special and class interest and of political
affiliation, rather than of theological outlook."
Brown is certainly not the only member of his profession to express
frustration over the undue influence of vested interest over the
objective pursuit of scientific knowledge; but, teaching the history
of economic thought, I find his perspective very instructive.
***
Herman Daly:
biodiversity decline is a salient index of the increasing
scarcity of nature, as is involuntary resettlement of people to make
way for dams, mines, soybeans, and cattle; and of course increasing
depletion and pollution.
Ed Dodson:
Is this real or contrived scarcity? Our footprint is so heavy on the
earth's life-support systems in large part because we are spread out
over the globe. Our pattern of resource extraction is wasteful and
unncessarily destructive because government's subsidize short-run
profit-maximizing methods of exploitation. What if we constructed our
own communities at densities similar to that of the Netherlands and
not permitted population and infrastructure to sprawl across the
landscape?
***
Herman Daly:
Sacrifice of nature's scarce services constitutes an increasing
opportunity cost of growth, and that in turn means that nature must be
priced, either explicitly or implicitly.
Ed Dodson:
Is it "nature" that must be price, or "access to
nature"? This may not seem like an important distinction, but
because this distinction has been lost (since Locke argued its
importance) our system of law has sanctioned the private ownership of
nature (i.e., of the commons) rather than provide for a competitive
leasehold system such as proposed by Henry George before settling on
the taxation of rent as a substitute approach.
***
Herman Daly:
From the point of view of efficiency it does not
matter who receives the price, as long as it is counted and paid by
the users. But from the point of view of equity it matters a great
deal who receives the price for nature's increasingly scarce services.
Such payment is the ideal source of funds with which to finance public
goods, and to redistribute to the poor. Ed Dodson: Efficiency actually
suffers quite considerably, as users of nature under current
conditions are forced to pay both the owners of land for access, then
must pay taxes to government to provide for public goods and services.
The landed also pay taxes but do so out of the rents they have
privatized.
***
Herman Daly:
These "payments to nature" should be the focus of
redistributive efforts.
Ed Dodson:
Consider a different definition of rent, as society's rightful claim
on the physical wealth produced by labor with the assistance of
capital goods. By this definition, the private appropriation of rent
is redistributive (i.e., from producers to nonproducers). The rightful
distribution of rent, then, is to all members of a community or
society.
***
Herman Daly:
Rent is unearned income to the recipient, but allocative efficiency
requires that it be paid by the user of the resource. Taxation of
value added by labor and capital is certainly legitimate. But it is
both more legitimate and less necessary after we have, as much as
possible, captured natural resource rents for public revenue.
Ed Dodson:
We can agree that rent, when privatized, is unearned to its
recipient. And, so long as the holder of a deed is able to charge
others for access under a leasehold arrangement, the landowner
collects the rent payment from the tenant. However, there is no
economic value added by the landowner as landowner.
***
Herman Daly:
The above seems to be the basic insight of early American economist
Henry George (1839-1897) who applied it specifically to rent on the
scarcity of desirable locations of land rather than to rents on
natural resource scarcity in general. Could we not extend Henry
George's logic to resources in general?
Ed Dodson:
Henry George had a pretty solid handle on resource rents and wrote
extensively on the need for allocation of resource-laden lands by
competitive bidding to recoup the full amount of rents for the public.
He knew that many of his predecessors and contempories also grasped
these principles but had ignored the dynamics of urban land markets,
so this is where he focused a good deal of his efforts.
***
Herman Daly:
For resources the necessary supply price is the cost of extraction -
so any payment above cost of extraction is rent. Since land has no
cost of extraction all payment for land is rent. If no rent is paid,
land does not cease to exist. Neoclassical economists accept this
definition of rent but resist Henry George's ethical emphasis on rent
as unearned income.
Ed Dodson:
I believe it is clearer to say there is a zero cost of production for
nature in terms of labor and capital goods. Extraction of minerals,
timber and other natural resources does have a cost - in terms of
labor and capital goods. If we assume public control over all such
locations, access to which is awarded under leaseholds acquired by
competitive bidding, then the rents obtained will represent what the
most efficient resource extractor will bid based on the cost of
extraction as against market prices for the commodities produced.
***
Herman Daly:
The modern form of the Georgist insight is to tax the rent from land,
and by extension from natural resources and services of nature, and to
use these funds for fighting poverty and for financing public goods.
Or we could simply create a trust fund from these rents, and disburse
the earnings from it to all citizens, as in the Alaska Permanent Fund.
Ed Dodson:
I may be mistaken, but I believe the contributions to the Alaska
Permanent Fund are not determined by calculating rents but by charging
a royalty on the value of oil taken.
***
Herman Daly:
Our present practice of taxing away a lot of the value added by
individuals from applying their own labor and capital creates
resentment, and discourages the supply of labor and capital. Taxing
away value that no one added, scarcity rents on nature's contribution,
does not create as much resentment, and the resentment it does cause
is less justified. In fact, failing to tax away the scarcity rents to
nature and letting them accrue as unearned income to a landlord class
has long been a primary source of resentment and social conflict.
Ed Dodson:
In the United States, at least, the opportunity to become wealthy by
speculating in and hoarding land has a long and cherished history.
Despite the volatility of land markets and the periodic crashes that
(as is happening now) result in deep economic and social dislocations,
the potential to acquire a residential property that will "appreciate"
in value over time is sought after as a major source of net worth and
income for retirement. Thus, despite the powerful ethical and
efficiency arguments to support a shift to the taxation of location
rental values, exempting property improvement values, local
governments have tended to turn to this approach only when their
economies are in disarray and there is no other option for raising
enough revenue to provide basic public goods and services. In these
instances, the landowners who often end up with the increased tax
bills are absentee corporate owners who have abandoned their
facilities. There have been exceptions (e.g., Sydney, Australia) but
the U.S. experience in cities with relatively strong economies is that
landed interests prevail when property tax reform is attempted.
***
Herman Daly:
Furthermore, taxing land and resource rent does not diminish their
quantity. Soviet communists tried for a while to abolish the category
of rent because it represented unearned income - a part of "surplus
value" like profit and interest. They jumped to the conclusion
that therefore resources and land must be free. But that makes it
impossible to allocate resources efficiently. Better to follow Henry
George and retain rent as a necessary price for measuring opportunity
cost, but to then tax it away as unearned income to the landlords. The
more we tax away rent the less we have to tax the value added by human
labor and capital.
Ed Dodson:
Some of us tried to make the "Henry George case" with
Russian officials back in the 1990s. In a paper I delivered before the
Russian Duma in 1996, I argued that Russia was in the unique position
of avoiding the speculation-driven boom-to-bust property markets
experienced here in the West by retaining public ownership of land but
offering it to private interests under leaseholds awarded by
competitive bidding. More powerful voices than mine (e.g., Mason
Gaffney of the University of California and Nic Tideman of Virginia
Tech) tried to make the case but influential Russians were already
hard at work creating their own landed class.
***
Herman Daly:
If we could directly limit population and per capita resource use
(scale of the macro-economy) to a level that nature could easily
sustain, then nature's services could remain free. But if we insist
that population and per capita consumption must be free to grow, then
the rising cost of natural resources must indirectly limit growth, and
the question of who receives the increasing rent (who owns nature)
will become ever more pressing, and Henry George's thinking ever more
relevant. Alternatively, our increasing takeover of nature will,
beyond some point, render moot the question of distribution of rents
by eliminating all potential claimants! When an overloaded ship sinks
all aboard drown - even if the overload is justly distributed and
efficiently allocated!
Ed Dodson:
Although Henry George argued there was no direct relation between
population size and poverty, he recognized that without many changes
in our socio-political arrangements and institutions poverty would
continue to plague humanity, as it has. What he tried to warn us is
that absent the public collection of rent all of the other measures we
might employ would fail. The final chapter of his book 'Protection or
Free Trade' discusses this point with respect to the outcome of
removing all barriers to trade.
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