Describing the World as It Is

Harry Pollard

[A response to H. William Batt's questions, 26 April 2015]

Bill Batt:

Harry, your most recent post in Groundswell that I've just gotten around to reading is a real mind-boggler. It's taking me awhile to work through it.

At one point you posit that "the amount of economic rent remains constant," even though it "may move around." I've been pondering this for about four years, ever since I got into the *Henry George Theorem.* It has even been argued that economic rent as a factor equilibrates with labor and capital in all economic systems, regardless of place and time. That is, each factor, rent as well, is typically put at about one third.

Now I can't deal with Stiglitz's mathematics, but I sense that you and others arrive at this conclusion by logic -- leaving aside your concept of contract rent or rack rent. I wish I could see this explained by supply and demand curves; but I don't know if we can do that either. Right now, both the verbal explanations and the mathematical formulas are escaping me.

Got any answers for me?

A major problem confronting the neo-classicals - and some Georgists too for that matter - it's to accept the world as it is and work from there. This means that their analyses are based not on causes, but on consequences. They could if they wished strip off the consequences and find the causes, but all too often they don't.

In pursuit of mathematical confirmation that neo-classical economics is a science, economists have been known to use a basic approach, notably in the case of the market. They assume a perfect market, then concentrate on its imperfections. This allows them to spend thousands of pages discussing market imperfection and market failure.

Needless to say, the real market is never "perfect". It is often messy, with participants without full information making inadequate decisions. Yet, the action of the free market is continually to move toward higher quality goods at a cheaper price. (The left often make the point that this also applies to labor and wages and they are quite correct.)

The land market, or more properly the contemporary land location market, is a very flawed market, but because of Fetter and others, the neos don't appear to notice it. (Unfortunately, some Georgists miss the point too.)

Let's approach it this way. We'll assume that the full economic rent is being collected by the community. I don't care how much is collected. You'll recall my remark "Better to collect rent and chuck it in the sea than not collect it all." Much more important are the economic effects of full collection. Rack-rent will disappear and economic rent will be controlled by the free market.

The most usual criticism of economic rent collection is that economic rent cannot be measured. When we are collecting full economic rent the values that attach to locations are susceptible to the free market. With modern computers, assessors can keep a close eye on day-to-day changes and can adjust their computers accordingly. However, if they are a bit wrong it doesn't matter. It is likely they will be wrong for everybody.

The Chief Valuer or Denmark told me that after a general valuation 2% of the taxpayers will have questions. If more than 2% question the assessment it has been a little heavier than usual. If fewer than 2% question the assessment it has been a little light.

That was before computers.

However, if the assessment is little light, it doesn't matter. It isn't necessary to have 100% collection to get the economic effects we want. The percentage of full collection will work if it is high enough. We will know it's enough when holders of vacant and underused land are unloading. This will actually begin well before we reach full collection when they see the writing on the wall. However we should pursue the objective of getting as close to 100% as possible.

What would be the result of this?

Well, we must look at the classical division of production, but from a Georgist point of view. The total reason for production is wages. No wages mean no production, rather than the reverse which is the modern interpretation. The idiots cry out for more demand when they should be finding why production isn't occurring. Sorry for being nasty, but the result of their failures are millions of unemployed, more millions working but barely surviving and policies of welfare that accept this disastrous situation while offering inadequate hand-outs.

Labor does not get his 'share' of production. He is the reason for production. He has two costs. One is interest for any capital he may use, the other is rent for an appropriate location. The idea that these are three equal parts is way off.

Labor uses capital because it multiplies his production. He would be silly not to take the enormous advantage that capital provides. The cost of capital - interest - is small, perhaps tiny. The common error is to treat the advantage that capital provides labor as a separate return. In fact, it is wages. Labor produces (say) $2 an hour working without capital - $20 an hour working with capital. There is no return to capital as such - merely an increase in wages to the laborer who uses it.

The other expense to labor is rent for a location on which to work. When full economic rent is collected there will be no rack-rent. This means that the economic rent that labor pays is equal to the advantage he gains from the location. Nothing comes from his wages. Nothing comes from his production. The suggestion that rent takes the third of production just isn't valid.

Obviously, I haven't directly answered "the amount of economic rent remains constant". What I actually said was "for a given community size and well-being, the amount of economic rent remains constant."

There have been questions about my limiting the creation of economic rent just to the community size and well-being. A major error is believing (say) that a new building on a vacant location would raise the rent of the location. In fact, building follows rent. If the rent is sufficient that will be worth erecting a building on that location. This is particularly noticeable with so-called "gentrification". The existing rundown building is not taking advantage of its actual economic rent, so they greatly improve the structure and then are able to collect most of the rent.

If a great new entertainment center is built downtown and people are attracted from the suburbs to the center, rents will increase around the entertainment center, but they will decrease in the areas from which the people came. So total economic rent will remain the same. It has simply "moved around" the city.

Often, improved infrastructure and suchlike are said to increase economic rent, but I would say they are simply reflections of the size and well-being of the community.