My Critique of Modern "Georgism"

Harry Pollard

[A series of exchanges on issues relating to political economy, extending over a period of months during 2014 / Part 2 of 2]

HARRY POLLARD

The following exchange took place between Mason Gaffney and myself with regard to Skepticism 4.

I said: I remember dividing us between Georgists and land-value taxers way back in the 1950's in Canada, but at that time I didn't realize its eventual significance (as I see it).

MASON GAFFNEY

Neither did I, nor do I now. You were going to show that modern Georgists (like me, I guess) were pushing to tax wages in the guise of a lvt, but I've seen no more about that. So what's this all about now?

HP: I didn't say or imply there was any "pushing to tax wages in the guise of a LVT". What I said was that present efforts to tax land values are likely to tax only some of the contract rent. Rack-rent would remain, along with its consequences, but some of it would be collected by the tax man.

I pointed out that urban economic rent was the result of the presence and access of the surrounding community. That it was a value that attaches to a land location and was a measure of the advantage given to the location by the community. If labor pays this value to a landholder (or to the community) he loses nothing from his wages. He pays (say) $100 a week for the right to work there: he gets $100 worth of advantage from the location.

This assumes that advantage is measured in a free market. The free market is highly efficient in relating supply and demand. As the community changes in various ways, perhaps increasing in size and well-being, or moving to different parts of the city, so will the free market accurately note the changes. I would think that land-value assessors would have all city locations in their computers and would continually bring them up to date.

The present land location market is not free. For a free market to operate at its optimum efficiency two conditions are necessary. There must be no restriction on production, and no restriction on movement to market.

We cannot increase the number of locations in a city and we cannot move more locations in from outside. The free market does not control location values.

We must have a land location to live. We need a location to work on, to live on, just to have somewhere to stand. Demand is a given.

Supply is another matter. I went into the psychology of a landholder in an earlier "Skepticism". Suffice it to say that he is likely to be reluctant to supply. When supply is short, the price mechanism raises prices. So long as the shortfall continues prices will move up. This extra amount that labor pays has to come from somewhere and it comes from his wages.

This is not economic rent that is being paid, but contract rent (something paid by one to another). (Fred calls it contractual.) Contract rent will increase until it becomes rack-rent, which is defined by me as the highest amount that can be paid while maintaining production. Any higher demand will cause production to stop.

Henry George, less of a panty-waist then me, said grimly, any further exaction would lead to "a cessation of life".

This "syphoning" of wages into rack-rent permeates the whole economy and is the reason why "the poor will always be with us". Economists, politicians, and fair-minded folk promote welfare of various kinds to help the poor. Though the incomes of poor may be raised, inevitably rack-rents remove the benefit. This is why last year's welfare doesn't appear to work this year.

When modern land-value taxers press their case they are essentially asking for some collection of rent. Yet all their land-value tax will do is to skim off some of the rack-rent. As rack-rent is taken from wages, a land-value tax that bites into rack-rent is taxing wages at secondhand.

After the land-value tax, the poor will still be with us, but then haven't they always been?

The land-value tax can work if it's high enough. I won't go into the mechanics of this is its little more complicated than we often assume. Enough must be collected to induce the general unloading of vacant and underused land. The result should be that rack-rent induced land prices will topple and land location prices will return to control of a free market. (To achieve the goal of justice all the economic rent must be collected.)

Once rack rent is gone Labor will be back to paying economic rent and the present heavy weight on production will end. We have become so used to this burden that we no longer think about it. For example, why does it take us 30 years of debt to buy a house? I've seen factory made start-up housing priced at not much more than the good car. Yet we are conditioned into believing that to buy a house takes most of our working life.

One might argue that if we can get a little LVT that will lead to greater things. The problem with doing things gradually is that each step becomes progressively harder as opposition grows. A victory for a small collection of rack-rent may be as far as you get and, remember, that is simply taxing wages!

HARRY POLLARD

Continuing the discussion of the vital difference between economic rent and rack-rent.

DAVID GIESEN

Am I missing something? My understanding of George's intent--it's certainly mine-- is to tax away the potential rent of a location, both rent actual and speculative. So, along with Mason I ask, "So what's this all about?" Are there folks out there asking for any less?

HP: We just want the "rent actual". I don't know of any land-value taxers who are advocating the full collection of economic rent - a necessary condition for a Georgist economy. While they do push the advantages of the land-value tax such as that is not a weight on production as are other taxes, they mostly seem to echo Milton Friedman's comment that it is "the least bad tax". Much of their attention seemed directed to the amount that could be collected, with totals that seem to verge on the fantastic. This because they are based on rack-rents that would disappear with a full collection of economic rent.

The greatest successes in the US are in Pennsylvania with some 22 cities have some degree of land-value taxation. Perhaps the best prospect is in Clairton where their land-value tax finances education as well as their Council activities. If we had proper organization, Henry George classes should have been set up in Clairton to start producing local Georgists who understand the importance of full collection.

DAN SULLIVAN

You are wrong. Incremental shifts to LVT have led to lower rents in the municipalities of Australia and Pennsylvania. There are no rack rents like California rack rents and those are the direct result of curtailing real estate taxes.

In 1911, Pittsburgh had the second-highest rents in the nation (after New York City). As it introduced gradual increases in land value tax from 1913-1925, we had increased construction with flat real estate prices while the rest of the country was seeing increased real estate prices with flat construction. By 1960, we were the most affordable of the 100 largest cities. Pittsburgh lost its LVT in 2000, and rents are rapidly increasing.

HP: I think you were pretty much alone, Dan, in keeping Pittsburgh sensible. A fine example of what can be done by a dedicated individual. It was sheer stupidity mixed with quite a bit of chicanery that threw out the land-value tax and replaced it with other taxes and, among other things, expensive subsidies to construction. Without doubt, a land-value tax produces better results than any of its competitors. It really is the least bad tax. Yet, to be Georgist, the collection of rent must be enough to make speculative land a burden - enough of a burden to cause land to be unloaded onto the market. Then, prices will drop until they reflect economic rent.

I taught classes in Pittsburgh in the early 60s and I recall large occupied buildings in the downtown area. That would never happen with a full collection of economic rent.

An argument can be made that we have to make a start. That we have to collect some rent so later we can collect much more. I think this is unlikely to happen - except perhaps in Clairton. (Maybe Josh can give us more information on what is happening there.)

In any event, present attempts to tax land values appear mostly to take some of the rack-rent. An advantage is that it does teach local politicians that it can be done.

FRED FOLDVARY

Thanks, Harry, I agree.

However, in my analysis, as the rate of LVT rises, rack rent will fall, until when LVT is 100% of economic rent, and then rack rent disappears. The greater the collection of rent, the greater the carrying cost of underused land.

Mason made the good point that an explicit cost in money has a greater punch than the implicit cost of not getting maximum revenue from rentals.

HP: Quite right, Fred! And as is usual, Mason is right. Land-value taxes will bite into rack rent (as would other taxes and other privileges). Important is that the rent collection must be high enough to cause unloading of speculative land. The unloading will begin long before we reach 100%. Probably the first to respond to serious economic rent collection would be large land investment firms that could see the writing on the wall. They will begin to sell and invest elsewhere. Land prices will fall. This will induce small speculators (or as they are called nowadays property investors) somewhat reluctantly to unload. As land prices fall further (as a result of the unloading) they will begin more closely to reflect economic rent rather than rack-rent.

BRET BARKER

In other words, Georgism is dead without a radical dose of collection. (We cannot get to the meat unless we cut lots of fat away.) LVT will not take away the general tradition of getting to 'profit' from land ownership. It must make landholders as landholders queasy.

ALANNA HARTZOK

By any other name, still the same - the land problem must be solved.

HP: Amen!

HARRY POLLARD

My last E-Mail had a reply to Dan Sullivan referring to large occupied buildings in Pittsburgh.

That should have been "unoccupied".

Sorry about that!

I've been asked, are Georgists Left or Right?

I had a radio program some years ago titled "From the Radical Center". I would say we are neither Left nor Right but in the center, but we are also radical - in the sense of applying ourselves to the root of problems.

I oppose the planned economy because it is inefficient and ultimately a failure. Note the condition of semi-planned economies around the world. On the other hand, I would say the "free market" does what the left says it will - send wages to ever lower levels with the bottom tier at subsistence.

The free market is by far the best way to run an economy - but the land problem must first be solved. With an unsolved land problem, the free market fails. This is why "free marketers", when they take power, inevitably lose it again as their economy fails to help labor.

I should stress that though the privilege of taking rack-rent is the fundamental privilege, both Left and Right governments harbor many more privileges.

(Defined as a 'private law' designed to help some at a cost to others.) It is important to convince reformers of all stripes that the spoils of privilege should not be taxed as is offered everywhere as the way to deal with inequality.

Rather, privileges should be abolished - all of them. Get rid of them all,

As I said, Georgists are radicals and not, as George Wallace might have said, pusseyfooting reformers!

I hope our friends in the north-east are surviving the weather.

HARRY POLLARD

Here are a number of replies from top Georgists on the important subject of definitions, the basic language of economics. Henry George managed with seven definitions of basic terms and two assumptions.

I began my critique of our basics with very careful definitions of this terminology.

Perhaps Mase didn't see the early emails.

MASON GAFFNEY

This dialogue might lead somewhere if you would define your terms, especially rent, rackrent, speculation. Otherwise . well, here we are, nowhere.

HP: Bret Barker answered but not completely to Mason's satisfaction who replied:

MASON GAFFNEY

Defining terms is not to make things harder, but easier.

Thanks for trying. A good start, but note that you use the undefined term "speculation" to help define "ec rent" - and that's just one of many problems.

BRET BARKER

Is this better?

Rack Rent: The value that attaches to available locations under modern conditions where much land is held from use for future gain or set aside by government restrictions on use.

Economic Rent: The value that would attach to locations if there were no profit in merely holding valuable land off the market for future gain and unreasonable government restrictions on the use of land were eliminated.

My understanding of Henry George is that he aimed to reduce this Rack Rent to Economic Rent by increasing the annual rate of taxation on assessed values until the profit of merely holding land for future gain was eliminated. The goal was to increase economic opportunity for all with good wages. With Rack Rent eliminated, a continuous fund of Economic Rent would replace taxes on Labor or Capital.

I left out 'speculation,' but included the holding of land for future gain.

ALANNA HARTZOK

Bret - this is nice and clear, yes precisely, ha ha.

HARRY POLLARD

Dan Sullivan doesn't like my use of the word rack-rent.

DAN SULLIVAN

The Oxford English Dictionary defined rack rent as the full market rent, as opposed to the nominal rent that Irish lords had charged.

However, this full market rent existed in the context of vast tracts of land being held out of use through enclosure. I therefore define rack-rent as an artificially high rent produced by land being held back from the market. Natural rent would then be the rent no rent could be held off the market rent-free. This is very similar to Brett's definition below.

In any case, the common usage of the term "rack rent" implies some kind of mechanism for gouging the renter.

HP: The Oxford English Dictionary does not determine how we use words. It reflects common usage, which accounts for some very peculiar words in its pages in modern times. I defined rack-rent as the highest contract rent that can be demanded from a tenant while maintaining production. I also noted Henry George's use of this highest contract rent as any higher would mean a "cessation of life".

Frank Chodorov had something to say about this. This was submitted by Bret Barker. You'll note the "permission to live" price.

FRANK CHODOROV

"The beneficiaries of state power are the privileged classes. The greatest privilege which the state can confer is that of collecting rent from users of the earth. As all production consists of the application of labor to land, the owners of mines, franchises, and other choice spots are in a position to demand a permission-to-live price."

HP: "Highest possible contract rent"- "cessation of life"- "permission to live" seem to be within the meaning of rack-rent as it was originally used.

MASON GAFFNEY

Dan: The Oxford English Dictionary defined rack rent as the full market rent, as opposed to the nominal rent that Irish lords had charged.

DS: Mason: That is, of course, the opposite of Harry's usage.

Dan: However, this full market rent existed in the context of vast tracts of land being held out of use through enclosure.

DS: Mason: Land is always being held out of "full" use, in varying degrees. Ted Turner recently held about a million acres, "because he likes to look at it". Where is the line between partial use and full use?

Dan: I therefore define rack-rent as an artificially high rent produced by land being held back from the market. Natural rent would then be the rent where no rent could be held off the market rent-free.

DS: Mason: and last sentence does not parse. Is that what you really mean?

Dan: This is very similar to Brett's definition.

In any case, the common usage of the term "rack rent" implies some kind of mechanism for gouging the renter.

DS: Mason:"Implies", yes, but that is a connotation, not a denotation. One might also say it this way: "rack rent" is a political pejorative used to stir up a mob (justly or not). You cannot build a science on such unclear and tendentious meanings.

HARRY POLLARD

I think my definition of rack-rent is perfectly clear I said rack-rent was the highest contract rent that can be demanded from a tenant while maintaining production

FRED FOLDVARY

Economic Rent: The value that would attach to locations if there were no profit in merely holding valuable land off the market for future gain and unreasonable government restrictions on the use of land were eliminated.

"Economic rent" is a standard term in economics.

The standard meaning of economic rent is income beyond what is needed to provide a factor in its most productive use.

Since land has no cost of production, by this meaning, all land rent is economic rent. No rent needs to be kept by the title holder in order to provide land.

I think it's best to use standard definitions, whenever possible.

If we want a term for the land rent that would exist with full LVT, I have in a couple of articles used "geo-rent".

HP: The problem with the standard meaning, Fred, is that it applies to all factors. We must either explain our particular use of economic rent (we shouldn't have to), or use another term, as you suggest.

Then Mason chided us for making it seem too easy and he proceeded to make it hard!

MASON GAFFNEY

"rent" is an annualized (or smoothed or levelized) figure, while actual net returns to land come in the form of irregular pulses of costs and revenues.

To levelize these pulses one must first discount them all to the present, making them commensurable. Then when you have made them commensurable you can sum them. Then levelize this sum of present values to its annual equivalent.

Those are mathematical operations requiring you to:

1. forecast all costs and revenues into the infinite future, which no one knows enough to do, and which individuals will do differently and subjectively.
2. Use an interest rate for discounting. Relevant interest rates differ widely among individuals' and groups of them (like corporations and governments) because lenders do not allocate credit by marginal productivity, but by collateral security.
3. Also use an interest rate to levelize the present value to its annual equivalent, which is land rent.
4. In a rising market your levelized land rent > rent derived from the current use alone. You must decide which of those meanings of "rent" you mean.

Generally in this thread so far, writers have apparently assumed there is a smooth and easy equivalence between the net return from the current use and the market value of land, overlooking the important fact that the latter derives from an infinite series of future uses, mostly more lucrative than the extant use.

DAN SULLIVAN

I made no such assumptions. I was thinking of rent in terms of what a user would pay this year or for the length of a lease. Price is indeed a speculative projection of future rents, and, to a lesser degree, so is a long-term lease. The variables that have to be considered in estimating price are important, but do not factor into the definition of rent, economic rent, natural rent or rack rent.

I believe the original intent was how to distinguish rack rent from the natural rent that would exist under a substantial land value tax.

HP: That was indeed the original intent, Dan.

With regard to Mason's analysis of economic rent, it seems to me to be unnecessarily complicated. In a Georgist society a Georgist assessor will use the equivalent of comparable sales among other things.

Urban rents relate to each other. I believe the Danes first used 'street valuations', but I think now it is quite common. In other words, the whole street except the corners have the same valuation. I have even seen on Danish land-value maps entire subdivisions with the same valuation. If sites are changing hands at a premium above the "official" valuation, changes are made in the Assessor's computer.

I fear the process of practically finding economic rent must be left in the hands of the assessor rather than the economist.

And it should not be difficult.

HARRY POLLARD

Mase and I have been friends for almost 50 years though, at times, he's thrown up his hands at some of my antics. He is an economist of amazing scholarship. Not many could in a couple of E-Mails casually toss off a quote from early 19th century William Blake's "Jerusalem" and early 20th century Karel Capek's RUR (Rossum's Universal Roberts). Capek was the inventor of the term Robot.

So, it is with great pleasure for me to take issue with two of his submissions to the definitions discussion.

MASON GAFFNEY

The rent I could get "this year" for my obsolescent, aged, and depreciated avocado grove is about zero. The price I am asking is what our broker recommends based on sales of "comparables" nearby for residential use, which is a lot higher. The same is true in zones of transition from lower to higher uses over vast areas of the U.S.A. and the world. Current annual rent is a fiction, and to derive land price by "capitalizing" "what a user would pay this year" is accordingly fictional.

HP: The economic rent, or natural rent, of your avocado grove is probably about the same as that of other land in the immediate area. The land component of the "comparables" price you are asking is based on contractual rent which is probably rack-rent.

Whatever improvement is on a particular location does not affect the economic rent of that location. So your avocadoes will have no effect on the Rent of your grove.

Real estate agents along with property assessors use contractual rent or the price derived from it, though this is not straight capitalization but rather more than that for reasons I have mentioned in previous emails. Land being held from use assumes all the characteristics of a collectible, of which the most obvious is that the collector's valuation is of the future anticipated value of the collectible.

To this must be added the peculiar nature of land-holding. There is a certain cachet to being a land-holder that sets him apart from the common people in business or production. Once the land is sold he is no different from them, so why should he sell? Then, in an economy that is improving steadily, his land-value is likely to keep pace and as it rises so does his price.

Also, a favorable tax system doesn't hurt!

Meantime, professional land speculators who, you'll recall, are now dubbed "property investors", hold land from use to collect the natural increase in land-value that accompanies an improving economy.

It should be understood that speculation is not bad. It is an important and necessary part of the free market. It helps to flatten out valleys and peaks. But, because of the monopoly aspects of land, speculative land prices soar.

You know my favorite example in the UK.

1. The 13 hectare (32 acres) Battersea Power Station became derelict in 1982.
2. It was purchased by John Broome for £1.5 million pounds in 1987.
3. A "developer" bought it from him for £10 million in 1993.
4. Nothing was to it until the end of 2006 when it was sold for £400 million.

Incidentally, I don't use speculator in a pejorative sense. As Churchill might say, the speculator is simply doing what is legal and according to common usage.

I just want to remove land speculation from the economy, perhaps the most important reason for the full collection of economic rent.

MASON GAFFNEY

To write that other variables "do not factor into the definition of rent" is to overlook the arbitrary nature of definitions. "THE" definition of rent is a nonesuch. I recommend an old comic story by Ellis Parker Butler, "Pigs is pigs". Or any readable book on semantics - I like Stuart Chase, The Tyranny of Words. There is no word-God up there who decrees what words mean. Any word just "means to you what it means to you".

HP: Henry George went to great lengths to ensure that basic economic terms would "mean the same to all of us". Without agreement of the meaning of the words we use, we cannot sensibly talk to each other.

Then comes usage, but, as you know, the subverters of economic thought have succeeded all too well in jumbling usage in economic discourse, leaving us with a Tower of Babel.

I would not recommend taking a term used in Ireland in the 19th Century to describe or analyze conditions today and elsewhere. For one thing, Irish peasants growing potatoes put in few durable buildings or other such improvements. Today, in Wisconsin, to put in a dairy means building a barn, and the owner's house, and other outbuildings. So in Year #1 there is a huge negative rent, to be followed by several years of positive rents. Which of those years would you choose to measure "the" land rent? You have to take whole cycles and annualize them.

HP: The London Times sent an able man to Ireland to investigate the living conditions of the rack-rented Irish before the famine. He was by no means anti-landlord yet his description of the condition of the people was devastating. Families lived in huts with muddy floors on a diet almost entirely of potatoes. The husband would eat 10 pounds a day, the rest of the family lesser amounts. When the potato crop failed, staying alive was difficult or impossible. One horrible thing I remember from his report concern the workhouses. They had a wooden wall that swung open. When somebody died - which was often - they would simply open the flap and push the corpse outside. The landlords were very rarely in Ireland. They were at the Court of St. James while a manager ran their estates, some of which were as large as counties.

Well, of course that sort of thing doesn't happen now. We give welfare to the poor. Imagine what would happen if there were no welfare. I suspect that those at the bottom of the wage pyramid would barely survive - or not survive. Rack-rent exacts everything possible from labor. The sooner we can do away with it the better.

With regard to your Wisconsin dairy farmer, in Year #1 the economic rent wouldn't change, nor would it change in succeeding years - except for outside influences.

MASON GAFFNEY (answering Bret Barker)

Every landholding is "speculative" because land lasts forever, and we cannot know the far future (or even the near future very well, but the farther future you look, the fuzzier is your view).

1. Even to forecast no change is speculative
2. Thus, almost every landowner is a speculator. It you just want shelter, you rent.

HP: In this case, our lives are "speculative" for we cannot know the future. Why restrict this to landholding?

Today, the most common usage of "speculator" as a pejorative is for a person who buys underused land with a view to putting it to a higher use, or a more intensive use. The opposite of H.G.'s usage.

HP: I rather think that putting land to a higher use is not the function of the speculator but the intention of the developer who buys it from the speculator. Here is something via Wyn Achenbaum.

WYN ACHENBAUM

Charles Village: One man won't sell his rental property to a developer who needs the block.

By Scott Calvert
Sun Staff - Originally published August 19, 2004

C. William Struever is one of Baltimore's shrewdest, most successful developers. Daniel F. Jackson Jr. is a Pasadena man who owns a handful of rental properties.

Who has more pull? In this case, it isn't Struever.

That's because Jackson owns a Charles Village rowhouse needed by Struever to develop a key part of the $150 million College Town dorms, shops and condominiums in North Baltimore near the Johns Hopkins University.

But Jackson - unlike others who have made big profits by selling nearly identical rowhouses to Struever for up to $400,000 - has declined to sell, and nobody can make him.

Critics say he is greedy to seek a reported $1.5 million on a block where houses went for $100,000 just four years ago. Jackson insists he wants only a "decent" deal and is unmoved by pleas to sell in time for a planned October groundbreaking.

HP: Who is the speculator and who is the developer?

MASON GAFFNEY

Note that taxing land does not always or necessarily suppress wild speculative behavior. Thus in the boom of the 1920s there was a rash of special improvement districts around growing cities. These districts had tax powers over land. They borrowed megabucks for street improvements, including water supplies and drains. These bonds were secured by their power to tax lands. They overshot the mark and the bubble burst, giving local improvement bonds a bad name for years. Chicago, Detroit, most of NY State and Florida, were heavily involved, along with parts of California.

HP: This is why I point out that some land-value tax doesn't accomplish what we want. It will have some good effects as noted by Dan in Pittsburgh, but it will not end speculation. It is necessary to collect the full economic rent of land, or at least enough to force landholders to abandon their vacant and underused land.

Drastic? Tell that to the 160,000 homeless people in Los Angeles.

HARRY POLLARD

I was a little hard on Mason and he replied appropriately with the theme from "Looney Toons" (I told you he was an economist of amazing scholarship!) However, I will continue to ask awkward questions about our certainties.

I believe that Henry George created a genuine School of Classical Political Economy. He treated it as a science -something modern neoclassicals have failed to do, though they have a dozen different amd conflicting "sciences".

As Mase said "the subverters of economic thought have succeeded all too well in jumbling usage in economic discourse, leaving us with a Tower of Babel."

After his excellent analysis, he perhaps made a mistake in coming up with a simple solution to the problem he uncovered. This took over and the policy of taxing land values overwhelmed the more profound aspects of his thinking.

This is the situation now where most land-value taxers appear to concentrate on what Milton Friedman called "the least bad tax". Yet, George was not advocating a "least bad tax". His target was extreme and lasting poverty and involuntary unemployment.He began "Progress and Poverty" by pointing to the incredible increase in the power to produce and asking why then is it so hard to make a living?

If only modern neo-classical economists would stop meddling with the money and concentrate on answering that question after taking a good look at George's thinking.

MASON GAFFNEY

Oh, the merry-go-round broke down
As we went 'round and 'round
Each time 'twould miss we'd steal a kiss
While the merry-go-round went

Um-pah-pah, um-pah-pah
Um-pah, um-pah, um-pah-pah

Oh, the merry-go-round broke down
It made the darndest sound
The lights went low, we both said "Oh"
And the merry-go-round went

Um-pah-pah, um-pah-pah
Um-pah, um-pah, um-pah-pah

Oh, what fun, a wonderful time
Finding love for only a dime

Oh, the merry-go-round broke down
But you don't see me frown
Ev'rything is fine and now she's mine
'Cause the merry-go-round went

Um-pah-pah, um-pah-pah
Um-pah, um-pah, um-pah-pah
Oh, the merry-go-round broke down

HP: "Th-th-that's all, folks!" (But it isn't!)

HARRY POLLARD (writing to Ed Dodson)

As you know, I don't regard the sales price of land as a simple capitalization of rack-rent. Rather, in addition to capitalization are other influences. I mentioned the peculiar cachet that attaches to a landowner. While the producer wants throughput to keep refilling his empty shelves, once the landowner sells, that's it. He has money but he has lost his station in the community.

Then there is the simple fact that in a growing economy the value of his land is going to keep increasing so why should he sell and invest when he has a "capital gains" income taxed at a lower rate? I put quotes around capital gains because capital doesn't gain. It depreciates with use - it wears out. Or, at least, Georgist capital does. The neoclassicals have messed up the concept of capital. In any event, the capital gains tax actually taxes land so we'll will keep that quiet.

Finally, land is treated as a collectible by its owner and its value to him is never the present market price but rather its anticipated future value.

All this was stimulated by the following from Bill Batt.

BILL BATT

I believe it's to you that we owe the first identification and explanation of *collectibles* as a kind of speculation to distinguish them from the kinds of speculation that we link to natural resource rents. I've just finished reading a review that rivals stories of the great tulip mania, and one that I don't believe has been thought of by our Georgist community. It's the late nineties craze over *beanie babies.*

My wife Karen is a retired pediatrician, and she was given beanie baby gifts by her patients -- or rather their mothers -- and she still has quite a few (for whatever they're worth today!).

I have a request of you: to write up the idea of collectibles in Georgist terms using this episode as an example, so that we all have a clear understanding of your distinction here. I don't think anyone other than you ever explicated this idea, and I think it's a profound one. I think of it somewhat in parallel to the case Dan Sullivan and I discussed several years ago -- see http://www.cooperativeindividualism.org/batt-h-william_are-exceptionally-high-wages-really-rent-2002.htm.

There are some stories that you, and you alone, are credited -- another being the peanut sales story in Weston Ontario, which I have repeated often -- and even used in the appendix of the book that Cliff Cobb and I amended for David Smiley, Crumbling Foundations.

Anyway, we need you to explain these ideas in full -- rather than just in passing. Or at least I do.

HP: Back in the 60's I was having dinner with David Friedman - the son of Milton - and a couple of friends. We got into a discussion, or rather an argument, about value. David wiped the floor with me and as I drove my tattered ideas home, I decided I needed to do a lot more work on value. My present Georgist ideas weren't good enough.

A short time later, I read about a collectible auction. Somebody had bought a Rosalie beer can for $4,000. Later, as he was leaving, someone stopped him and offered him $10,000 for the Rosalie. He refused.

This is a very peculiar market, I thought, and I looked into it further. As I recall there were six Rosalie beer cans in existence in mint condition. Mint condition was important.

I found that collectors hang on to their mint condition collectibles even when common sense would suggest they sold. They kept their eyes on the market but they valued their collectible not at its present market price but at a future anticipated price.

But this described how landholders view their land!

The land market acts like a 'collectible' market. Land is held in the expectation that next week, next month, next year, it will have increased in price. (The psychology of collectors is interesting. Income doesn't matter - future sales price is the only interest.)

Holding land from use parallels holding a 16th century Tiger Maple desk in the bedroom wrapped in plastic. The kids are not allowed to do their homework on it and the costs of holding are minimal.

Land held from use as a collectible is not the subject of serious investment. It is simply fenced and left unused. If property taxes become a nuisance, the location might be blacktopped for a car lot, or a valuable corner might support a gas station.

Such uses were once called "taxpayers".

Should an offer arrive that just can't be refused, the blacktop or the service station can be quickly removed at minimum cost, just as the tiger maple desk can be unwrapped.

Although, wait a minute! Perhaps next month, or next year, a better offer might arrive. Better hang on for that future anticipated value.

Finally, there are "contrived collectibles" - a limited print edition, or first cover, or 'we broke the mold'. This category includes beanie babies which can make some millionaires, while others are left with a garage full of worthless "collectibles".

I suspect that everybody would like to make easy money as a collector, which leads to mad scrambles after anything that looks like a possible collectible including homes, but we know about that.

I did think that economists had left the subject of collectibles alone, but Fred Foldvary sent me a couple of cites.


RETURN TO PART ONE