Understanding Political Economy:
Defining One's Terms

Harry Pollard

[Reprinted from a Land-Theory online discussion, 2003]

I've made changes to George's original classifications, because I considered they were a little too general for high school purposes where the teaching would be done by professional teachers who were not Georgists. In our basic courses, we need not be so rigorous. I've almost finished setting out my changes in response to John's request, so I'll post that in a day or two.

I taught the old way for decades and changing the words of the master bothers some Georgists, but he adjured us "in nothing trust to me" and "think for yourself" so I am happy to do just that even though it might send some long time Georgists into a tizzy.

The process begins with a concept, a notion. It can be pretty formless. You then define your concept by putting a "fence" around it. Everything that is part of the concept is within the fence, everything that is not part of the concept is outside the fence.

When you have completed the process of defining, you label it - put a name on it.

However, there is no "right" concept or "right" definition or "right" name, though there are certainly better defined concepts and others not so good and perhaps names that are more appropriate, but none of them are the only true ones. Always, the object of the exercise is to make thinking more effective and communication more rewarding.

With regard to the squirrels and the marbles, how you treat them depends on how you define your concepts. If the location of marbles - "Place A" - is included in your defined concept labelled "marbles", then the identical 'marbles' in "Place B" are not marbles, by definition - even though they may be identical in every respect to the marbles in Place A. They have been "fenced out" of the defined concept.

But that's enough analogizing. Too often, the discussion revolves around the analogy rather than the real subject we are considering.

Books in the bookstore are still Capital (George said wealth in the course of exchange - I say a product still in the production process. They are no longer Capital once they are in the hands of the consumer. George said they are Wealth and so do I.

I label as Wealth the product in the hands of the consumer. In other words I don't say there are two kinds of Wealth - Wealth in the course of production and Wealth in the hands of the consumer. In my revision, the product of human exertion is either Capital (while in the course of production) or Wealth (in the hands of the consumer). I think that distinction is clearer.

Your description of Rent is good. I use "Rent" to describe "the extrinsic community created value that attaches to Land (a location with an address)".

Whether you pay back rent to the community that created it, or pay it to a private individual make no difference to you as a producer. You get $100 - you pay $100. You break even. If you sell books, I assume you would want a Rent that indicates lots of community around the location.

The discussion of how Rent is paid is a little unnecessary. It can be paid at the start of production, during production, or at the end of production. It can even be bought by the producer. It is a portion of production, so it could be shoes, or books, or a money equivalent of the product.

In the enormously fertile pre-war Meking Delta, after the harvest the peasant would give 9 sacks to the landholder and keep one sack for himself. The ten sacks are the completed product . In the hands of the landlord, or the peasant, they are Wealth. Until the distribution is completed the Rent, Interest, and Wages are still part of Capital - I would say. George would no doubt say they are the kind of Wealth called Capital.

It is customary now to give the equivalent of the product in money to the Factors. But, it is still the "valuable material product of Labor" that is being distributed. To suggest that when a shoe is produced, perhaps the laces are given as Rent is not very smart. Or, as you mention, the pages of a book.

One point - probably since the beginning of agriculture, exclusive use has been an essential to production. It isn't something special that is necessary to produce Rent.

In fact, if Rent didn't pre-exist, there wouldn't be much point in enclosure. In a Georgist economy, it can be expected that so much land would be unused, it might just pose a problem.


All are based on George's original inspirations, but I've refined and tightened them somewhat to make them easier to teach and to understand.

Following my defined concepts and their names is the way I arrived at them. Also, my reasons for heavy elision of items unnecessary to the main thrust of the science. (They can always be brought back and considered later.)

[I have used a convention in which the human is assumed. For example, Wages are not received by Labor (human exertion) but by the laborer. Rent is not the return to Land but to the landholder. Use context to decide. I'll try to capitalize only where I use a basic term.]

I think that Georgists must win in academe. At the moment, we tend to be viewed as "property tax reformers" even though George set out an economic philosophy that was marvelously ahead of his time. However, we must adopt George's own admonition "in nothing trust to me" and take great care in perusing his thinking.

The Science of Political Economy is the study of the Nature, Production, and Distribution of Wealth. For teaching purposes in the High Schools, I call it the Classical Analysis of Political Economy.

I have changed "having exchange value" to the adjective 'valuable'. This is a new thought, so if you feel it isn't good tell me. It avoids tacking on that phrase - having exchange value.

LAND is the name given to a location with an address.

LABOR is the name given to human exertion - both mental and physical - used to create a valuable material product.

CAPITAL is the name given to any product in the production process.

RENT is the name given to the extrinsic community created value that attaches to Land (a location with an address).

WAGES is the valuable material product of Labor. It is what he gets for his exertion.

INTEREST is compensation to labor for delaying satisfaction of his product. It is paid for time.

WEALTH is the valuable material product of Labor in the hands of the consumer.

(It should be noted that as a product moves through the production process, values can be expected to increase. Whereas, a product in the hands of the consumer can be expected to decrease in value as it is used or consumed.)

As we know, Labor cannot produce without Land. Yet, as the Science begins with exchange, time is always a factor. Time always accompanies Capital on its way through the production process.

Now to elision.

There would be no production without a consumer - either the producer himself, or someone else. So, we can conveniently remove the consumer from the analysis. The consumer is a given.

Along with the consumer, all services to the consumer can be removed from the analysis. Yet, how can that be when services are a large part of every economy? In fact, the more advanced a country's economy, the larger will be its "service sector".

This may be so, but no matter how large is the service sector, it cannot exist without the production of valuable material products. Production can exist without services - not so services without production.

Bacon and eggs have priority over a hair cut.

It should also be noted that services are not included in a science that deals with the "Nature, Production, and Distribution of Wealth".

So, we come to distribution - how the product is divided to the Factors that had a hand in creating it.

I rather think our focus should be on the person who creates Wealth. Land and Capital are subsidiary factors that increase the Wealth that can be produced by Labor.

Good Land and appropriate Capital increase Wages, so one would expect that some portion of the final product will go to those Factors as reward for their contribution. These "distributions" will be Rent and Interest.

If the product is shoes, the landowner and the capitalist will each receive shoes. They will now have Wealth. What they do with them may change their classification, but when they receive them from Labor, they are Wealth.

Although nowadays, distributions are made in monetary terms the procedure is the same. However, the way Rent and Interest are determined is different.

Interest is subject to the control of the market price mechanism. When the rate of interest increases, more Capital will arrive, which has the effect of reducing interest. The market price mechanism is a negative feedback process constantly drawing prices back to equilibrium.

Over many years, the real interest rate for long periods seems to have hovered around 3%. Be that as it may, the interest rate is not connected to the increase in Labor's productive power provided by Capital. Whether Labor by using Capital can double, or triple his production, will not affect the share that goes to Capital. So, long as the increase in productive power is usefully above (say) 3% - Labor will use Capital.

Wages too are subject to the discipline of the price mechanism - returning constantly to equilibrium. How the Wage equilibrium is set and how it tends toward bare subsistence must be the least discussed subject in neo-Classical economics.

Henry George made a serious error, I think, by implying that all the returns to the Factors of Production are determined by the market price mechanism, when the return to Land is not. (If a Georgist scholar can point to where the following is found in George's works, I would appreciate it.)

The price mechanism works properly when there is no restriction on the production or movement of goods to the market place. However, locations are fixed and there aren't any more. If a shortage of available building locations develops in the city, it isn't possible to bring in more locations from the desert.

The price mechanism will raise location prices (Rents) to draw in more locations and will fail - so the price (Rent) will keep increasing and the price mechanism will continue to fail to draw in more locations.

So, while the cost of Capital (Interest) will be somewhat stable, the cost of Land will rise - even though Rent will remain the same (check the description of Rent above).

We need a new name for this Land-cost payment and one has been available through much of history - "Rack-Rent".

RACK-RENT is the highest amount that can be paid for Land from Labor's production that will enable him to survive (and reproduce). Even as new skills and techniques are adopted, and innovative technology is put to work, so will rack-rent rise, swallowing the lion's share of the product.

This was called over the last century "all-devouring Rent". Properly it should be called "all devouring rack-rent".

Cliff Cobb found in Webster that 'rent' and 'rack-rent' were used synonymously. In our current Land tenure system, Rent is never found - only rack-rent. Yet, it will be popularly described as rent.

NOTES

We began with Natural Resources, People, and the Products produced by people.

These three categories covered everything on the planet - actually everything in the universe, but we'll stay on Earth. In any event, the immensity has been reduced to bite-sized chunks - chunks we can handle.

George gave these classes the names - Land, Labor, and Wealth. Now, these names are fine and I used them for some 30 or 40 years. However, they pose some difficulties.

Water is land we say - the Pacific Ocean is Land. So are solar radiation, fog, and the electromagnetic spectrum. But, once we've made the point, we hop back to actual dry land and continue the analysis from there.

As I've mentioned, Natural Resources and Land are synonymous, but while the first is more appropriate, the major advantage of the second is it's single syllable.

LAND AND RENT

Both Land and Natural Resources have the same flaw - they are generalizations. Fine for philosophical abstraction, but not too useful for economic theory or for practical use. Although oilmen get oil from Natural Resources - or Land - the concept is of little use to them. They drill for oil at a particular place - at a specific location. Just as a builder constructs a house on a particular map location, or a retailer chooses a unique corner location.

Real estate people properly say the most important three characteristics of Land are location, location, location. (The High School kids are asked what is the fourth!)

Yet, location is just as broad as Land. A location is of no use without an address to pin it down.

I use the name "Land" as the label for "a location with an address".

The defined concept called Rent follows naturally from this. Rent is a value that attaches to a location.

I describe Rent as "the extrinsic community created value that attaches to a location". A major weapon in our arsenal is our emphasis on community creation of the Rent. We can then claim it is morally right for the community to recapture it from those fortunate enough to enjoy the use of the location.

Rent collection is not a tax. It is more like a user charge. Taxes generally have little connection to the benefit, or otherwise, that flows from them to the citizen. Rent collection is precisely a benefit charge. On the other hand, if you get $1,000 benefit from your location, you pay $1000; should you be lucky enough you get a $1 million benefit - you pay a $1 million.

At times I have found Georgists viewing a high Rent as a disadvantage. We want to "tax Rent", so a higher Rent means higher taxes - an unhappy circumstance liked by no-one.

In fact, a higher Rent means a greater advantage to a good entrepreneur. So, in a Georgist economy, I would expect that very good locations will attract a premium payment from eager people. So, there will be a land market in a Georgist economy - but not for Rent, which will have been collected.

I am opposed to the suggestions made by a few Georgists that Rent for a particular location can be measured by the market. The fact that Trump (say) can pay more for a piece of Land than Sullivan or Pollard is directly connected to his entrepreneurial ability. Trump gets Wages for his entrepreneurial ability. If we use his high bid as a basis for collecting revenue - we are taxing Wages.

However, if the whole area is becoming very attractive to entrepreneurs, it is probable that in the Geocracy Gwartney will be along with his Merry Men to re-appraise a whole area - not specifically Trump's lot.

LABOR AND WAGES

Labor is a good label for human exertion. We consider that human exertion tells us all we are likely to know about the person. That it is the manifestation of the human being - the resultant of everything that is part of the human. In this way, we include everything that is human within the label - Labor.

Labor uses Land to produce something. Food, clothing, shelter and the rest all come from the land. These products are not Land, or Labor (by definition). They are something else.

We call the product Wealth. Wealth production seems to imply completion. If we are making a spade and we stop producing when we have made the handle, the spade is incomplete. We need the blade made and fixed firmly to the handle before we have our intended Wealth. Once we have the completed product in our hands, we will use it. Using, or consuming, a product diminishes it. We feel that a battered, blunt, spade is not so valuable to us as a new, sharp bladed ,creation.

The reason why we exerted (something we don't particularly like) is to get something - in this case the spade. The completed spade is the result of exertion. It is Wealth.

So, what is an incomplete product on its way to Wealth? Here we are introduced to the concept of time. When one picks an apple from a forest tree and eats it, no time is involved. The producer and the consumer are one. To avoid bothering with intra-familial activities, Political Economy begins with the first exchange - perhaps we should say - the first arm's length exchange.

Time is part of all economic production and has economic consequences to Labor. If one has a choice between producing something with the same exertion, but taking a week or 6 weeks, the choice will be the shorter time. Time is a cost to production as is exertion. Labor will take more time only if a reward is available.

Hence Interest as the payment for time.