Surviving In The Market Economy

Edward J. Dodson

[A Primer on Economics and the role Government Should Play / 1992]

Our Socio-Political Heritage

Some ten thousand years ago humankind discovered the secrets of horticulture and embarked on a settled way of life. Our distant forefathers cultivated the soil with new hybrid plants and nurtured animals for the meat and other goods they provided. Our dependency on nature remains absolute despite industrialization, and how we organize ourselves within societal structures has always played a decisive role in our ability to produce enough food and other agricultural products to provide adequate nourishment for growing populations.

Hunting and gathering provided a subsistence lifestyle for all members of tribal communities. These people generally shared what they produced because of kinship relationships. Agriculture and settlement in fixed communities stimulated what political economists of the eighteenth century called the division of labor and specialization. Out of this gradual change in societal organization came enough production to feed everyone and to allow for storage of surpluses to be used in times of drought and other natural disasters.

Also arising out of this process of change were new leadership hierarchies that, unfortunately, eventually left the actual producers at the mercy of warrior-chieftains. In many societies leadership became hereditary, producing aristocratic traditions and hereditary privilege. These societies went through another evolutionary phase, during which coercion and oppression displaced the feudal responsibilities of aristocracy. New systems of land tenure and property ownership turned communal producers into serfs and the nobility into landlords. From this point on, all that was produced belonged by law to the landlord. Actual producers were seldom permitted to keep enough of what they produced to sustain themselves and their families in anything but a miserable existence. When, during the seventeenth and eighteenth centuries, the last vestiges of feudalism were replaced by private titles in land, the landlords began to lease their lands to the highest bidders, collecting rents from producers for the privilege of becoming tenant farmers. At first, rents were paid out of goods produced. Eventually, the introduction of coined money was substituted, and tenant farmers sent their produce to market in order to obtain the money necessary to pay the landlord.

Following the introduction of large-scale sheep and cattle grazing, fewer and fewer peasant farmers were needed. Large numbers of people were forced to migrate to urban communities where they competed with one another for low wage jobs in factories, were jammed into disease-ridden ghettos, or somehow made their way across Europe and to the Americas. In the eighteenth and early nineteenth centuries, a majority of these migrants found in North America not only a high degree of political liberty but also enough free or cheap land to farm and prosper. By the late nineteenth century, however, many new arrivals found themselves thrust into urban ghettos remarkably similar to those they left in the Old World. Individuals concerned with the expanding experience of poverty in the United States mobilized in an effort to mitigate the condition of those in need.

These were the conditions that fueled widespread revolt in Russia, taking the form of Bolshevism and state ownership of all land -- and man-made property -- under the Soviet system. Elsewhere in Europe less dramatic upheavals in property systems brought programs that broke up large landed estates for distribution of titles to actual farmers. These programs and others were advanced by radical and moderate socialists within the framework of existing socio-political institutions. Across the Atlantic Ocean, American reformers known as Progressives attacked the evils of the urban ghetto and industrial monopoly; however, nearly 90 percent of the nation's population lived on land they owned and farmed.

Thus, at the time when millions of Old World people were being forced from the land and driven from the continent, the Americas were just beginning to experience some of the same pressures but under a very different type of political system. Whereas the Old World could be described as a land where most people were have nots and only a privileged few were haves, the reverse was more or less true in the United States and Canada. In the societies of Central and South America, where the aristocratic privileges of the Old World were transplanted virtually unchanged, the indigenous populations suffered in much the same manner as the propertyless of the Old World.

The American System

A promise of the Bolshevik-led uprising was to put the land back into the hands of those who labored and produced the nation's food and other agricultural goods. Instead, as the Soviet state emerged under Lenin and his successors, the central government assumed both ownership and control. In effect, the old pattern of landlordism was replaced by one equally as insensitive to the reasons why people work hard and produce; namely, to enjoy of fruits of their labor. Under the system of state control, the individual's natural incentive to produce was thwarted by coercion and the absence of any relationship between productivity and reward.

The twentieth century has, on the whole, been far kinder to agricultural producers in the United States. Settlement of the frontier during the nineteenth century turned vast amounts of acreage over to millions of independent farmers who cleared the land, planted crops and sold what they produced into an ever-expanding market. To be sure, many failed because of bad weather, periodic economic depressions or the use of inappropriate farming techniques on marginal lands. The United States government sold millions of acres of land to land companies who had no intention of using land themselves; rather, they were in the business of land speculation and promoted (often falsely) the virtues of their landholdings to land-hungry people living in the crowded cities of the east coast of the United States or in the Old World. Despite these very considerable problems, however, the widespread ownership of good to excellent agricultural land across the North American continent gave the population of the United States a ready supply of food at affordable prices.

The arrival of tens of millions of immigrants from all over the Old World dramatically increased the number of have nots, but still there seemed almost unlimited opportunity to improve one's life through hard work and sacrifice, if not for oneself, then for one's children. Then, in the 1930s came the Great Depression. In the United States millions of families were forced from the land when food prices fell well below the expenses of planting. Prolonged drought in parts of the country also contributed to the exodus. Large sections of the nation's agricultural areas were abandoned as families migrated to the cities in search of work. Many suffered, a small number of people even starved. Yet, nothing that occurred in the United States approached the suffering imposed on the people living under the rule of the Soviet regime. In fact, the United States government responded with subsidies and other programs designed to mitigate the worst effects of the depression.

What really put America back to work, it must be acknowledged, were the demands coming from the Old World for instruments of war. When the actual fighting broke out, the United States became not only the arsenal for the nations allied against the German, Japanese and Italian regimes, but also provided large quantities of agricultural products that could not be grown under wartime conditions in other countries. Even after the end of the Second World War, American producers expanded the area of land under cultivation to meet the demand for food throughout a devastated Eurasian continent. There was a price paid, however, that few anticipated and which, in the end, has seriously threatened the very existence of the small and moderate- sized family-owned farm.

Global demand for American agricultural products also drove up the demand for farmland, as individual farmers and corporate agribusinesses sought to expand their operations. Consistent with the opeation of markets, when demand increases but the supply of any commodity is relatively stable (what economists call inelastic), the exchange value, or price, of that commodity will increase. Not only is the supply of land ultimately fixed, the supply of excellent agricultural land tends to decrease with the use of land, particularly when subjected to monoculture and high-intensity agricultural methods. Maintaining yields then requires ever greater use of costly chemical fertilizers. Also, during this period of rapid expansion, financial institutions were encouraged by the United States government to make loans to farmers, facilitating expansion, but also fueling tremendous speculation in farmland that drove the price up and up.

Market Externalities

Disaster struck when the wars between the Israeli and Arab states combined with the formation of O.P.E.C. to drive up the cost of fossil fuels (and, as a result, fertilizers and other chemical products). By this time, agribusinesses and farmers in many other countries were exporting agricultural products in competition with producers in the United States. The need for foreign reserves to maintain interest payments on loans pushed even the poorer countries to export large portions of their agricultural production, even when large numbers of their own populations were undernourished or even starving. A secondary result was to force marginal lands into production, the results of which we see all around the globe in the devastation of rain forests and other fragile environments.

The combination of record production and a global reduction in purchasing power caused the prices of agricultural products to fall, and those farmers in the United States (and elsewhere) who had borrowed heavily to acquire additional acreage began to default on their loans. What many farmers, the bankers and government officials failed to understand was that the rapid increases in land prices was a clear sign that the market conditions were dangerously out of balance. A correction in the land market was certain to occur; and, as commodity prices fell so did land prices. With the collapse of the land market, the farmers' equity in their farms disappeared, and the bankers became fearful of providing new loans or restructuring old ones. Thousands of highly-leveraged farmers were forced into bankruptcy, their farms taken by the banks and resold (often to corporate agribusinesses). As a consequence, not only has the United States lost countless small and medium size farmers but the rural communities they supported have disappeared. There is a growing fear that the nation's food supply is becoming dependent on a smaller and smaller number of producers. The other side of the problem is the migration of ex-farmers into the cities in search of employment at a time when employment opportunities generally are declining.

Land speculation, fueled by credit tied to land values, has caused this decline in the number of small and medium sized farms in the United States. In the past, critics of the boom-to-bust economic cycles experienced in the United States and other social-democracies have advocated the nationalization of land by the government or other redistribution schemes to stem the tide of concentrated land ownership. Experience has taught us that State control breeds widespread corruption, misuse of natural resources and operates against efficiencies associated with competitive agricultural markets. At the same time, however, the social- democracies have also failed to prevent the gradual monopolization of landed resources by a small number of very large agribusinesses. In the United States, for example, nearly 95% of all privately-owned land is held by just 3% of the population (either directly or as stockholders of corporations with vast land holdings). There is a remarkably straightforward solution to these complex problems, if only public officials in Russia, the United States and elsewhere were pressured by the citizenry to adopt a common sense tax policy.

Taxing Privilege Rather Than Production

Tax policy is a powerful tool (or a destructive weapon) in the hands of government. In Russia under the Soviet regime, the officials of the State dictated wages and prices to a very large degree. This was a system that incorporated hidden taxation, meaning that the exchange value of what an individual produced had little or no relation to what was received. Income was, in effect, an after-tax distribution. To mitigate the low purchasing power provided to most producers, the State was then forced to subsidize the cost of the goods and services people needed in order to live. As already observed, this system provided only a minimum level of goods and services to everyone because of the very real disincentives for people to produce more than they absolutely had to. None of the social-democracies are free of this problem, but there has been a better balance between government controls and the opportunity for individuals to keep what they produce.

What too few of the experts and public officials understand is that there are very different consequences associated with tax policies that put claims on production versus privilege. Taxing income derived from the labor of individuals or the use of capital goods (in farming this would include domesticated animals, machinery, seed, barns and other buildings) adds to the cost of operating a farm; and, when profits are marginal, can put a farmer out of business for good. Moreover, from a moral standpoint, what one produces is one's legitimate private property, the taxation of which is really confiscation. Note that I have not included land in this definition of private property.

Land (or, nature as a whole) is what political economists recognized to be a distinct factor of production, separate from one's labor and the capital goods produced by labor. The land is our common birthright and owned by us all. Viewed in this way, the sanctioning of private titles to land by government is a mechanism for distributing privilege. There is not enough good land anywhere in any society to achieve an equal distribution of this common birthright. Even if this were possible for the living, titles would have to be constantly redistributed to assure that the newly-born or new arrivals were not left out. This solution is neither practical nor efficient. An easier way to create a just system of land tenture is by recognizing that titles are a privilege. When a society's laws allow for the purchase and sale of titles to land, what people are exchanging is the privilege of exploiting the land with an assurance by government that no one else will interfere. The price paid for this privilege, then, has nothing to do with what the titleholder has contibuted. Therefore, this exchange value legitimately belongs not to any individual but to society as a whole.

Another way of looking at the difference between land and production is that land has a zero production cost. All this means is that land, in its natural state, exists independent of human labor. When a farmer drains a swamp, diverts a stream, clears a field or adds fertilizers, these are improvements to nature. To the extent these actions increase the exchange value of the farm, society has no legitimate claim on this added value (i.e., the farmer's private property).

Justice demands, then, that government not tax the wealth produced by individuals. The individual owes to society only the value of the privilege the market attaches to titles in land. This is best expressed in market economies by applying a rate of taxation to its exchange value (i.e., selling price) that approaches what a user would be willing to pay in rent on an annual basis for exclusive use of the land. In Russia, where private titles have not been granted for many decades, leases could be awarded to farmers under an auction system. Because the value of the ruble continues to fall, the rent paid by farmers should be a fixed quantity of agricultural produce. In this way, farmland will be allocated to those farmers who (based on their knowledge of the fertility of the land and other factors) express a willingness to reimburse society for the privilege they receive under the lease terms.

Another important aspect of the auction system is that the cost of any government regulations will be taken into consideration by the farmer before bidding. If, for example, environmental protection legislation requires that certain herbicides or pesticides cannot be used, and alternative solutions for controlling insects and weeks are more expensive, the farmer will not bid as high for the land. In the United States and many other countries, farmers are faced with many other regulations associated with land use that, under either the land tax approach or the leasehold rental system, would even out because of the downward pressure on land values or rents.

What the above changes to traditional market-oriented systems of land tenure and taxation do is encourage the farmer to put land to its highest and best use. Above the annual rental payment to society for the privilege of access to land, the value of all that is produced is left untaxed and in the hands of the producer. At the same time, the rental payment discourages anyone from investing (i.e., speculating) in land ownership or control. The annual tax or rental payment places a high carrying cost on land holding, so that only those who plan to use land will bid for it. For the farmer, the individual who wishes to earn a living from producing agricultural products, limiting government revenue to the annual rental value of the land assures widespread access to land and the promise of earning a livelihood based on the farmer's ability to make the land produce.