Why We Produce Goods and Provide Services

Harry Pollard

[Reprinted from a Faculty-Lounge discussion, 24 January, 2009]

MIKE CURTIS: I thought Rent was an avenue of distribution. I thought that any portion of a product that is claimed because of the ownership of land is called RENT. And I thought that was without moral judgements. I was told that any portion of the product that is taken by the people who make it, is called Wages. If buildings, tools or inventories are used in making a product, whatever portion of the product is taken by the owners of those buildings, tools or inventories used in making the product, is called Interest. Was I wrong?

You are doing what economists do -- looking down on the ants and describing their relationships.

I think that we should concentrate on the reason for production - all production.

And, of course, the stimulus to produce is Wages. Wages are at the heart of all production.

Labor produces Wealth. However we omit all the less important things such as picking an apple and eating it, or Labor making a table for his home. Instead, we begin political economy with production where time is a factor - where a product of exertion moves through the production process.

So, Labor initially produces Capital. It remains Capital until it reaches the consumer. I define Capital slightly differently but it's really the same. All Labor products that are part of the process of production are Capital. This includes tools, buildings and the product on its way towards the consumer. In InterStudent, I include stored Capital too. Essentially, if its not in the hands of the consumer labor's product is Capital.

Wealth I reserve for the final result of production When the product is in the hands of the consumer, I call it Wealth. This because I prefer to use separate names for the two categories rather than "Wealth that is . . . " and "Wealth that isn't . . ."

Along the way Labor uses Land and Capital. Part of his production goes in Rent to a landholder, part goes as Interest to the owner of Capital (which could be him).

Both the Rent and Interest he pays are worth their cost. Whatever he pays in Rent is returned to him as an advantage to his production. He loses nothing.

Any interest he pays provides him with multiplied production - increased Wages - that can be huge.

So, Labor does pretty well and poverty is non-existent.

Except that the Rent exaction is not a price mechanism controlled payment. The landholder is offering a limited supply to an intense demand so prices rise to a ceiling. The ceiling is when any greater demand will stop production. When demand does go through the ceiling, production cannot take place - hence vacant and underused sites.

Where does this extra payment to the landholder come from?

From the only place it can - from Wages. The advantage of Capital, and the advantage of worthy exertion disappears into the hands of the person who has control of production. I call this return to monopoly "rack-rent" - as you know. The only person who approved of this - and ecstatically - was Britain's Rana Roy. Others apparently don't like the idea. I fear that this is because Georgists want high revenue from land that will pay for everything. So, they want this exorbitant monopoly return to be Rent, available to pay all public costs and even to provide a CD for the fortunate citizens.

Georgist theory suggests that Rents will increase until the lowest group of producers - the General Level - will be at subsistence level. This is the ceiling for rack-rent.

If this is true as I and Georgist theory say it is true, then rack-rent values are taken from wages. In other words, Georgists intend to tax Wages and call it Rent!

The power of monopoly lies in its power to hold goods from the market - holding back until every last cent can be extracted from the buyer. If you have a "good" that is absolutely essential to buyers, your monopoly is complete. Land is in this category. People must have it, but the landholder doesn't have to rent or sell.

The characteristic of production is throughput. Goods must move through the production process. The producer finds the Market Clearing Price and "clears his shelves" so they can be filled again.

The landholder has no throughput. Once you sell your acres, it's over.

Also true in the past and perhaps still true, is the certain panache that clings to land ownership. The local landholder may not be as wealthy as the local factory owner, but he is treated differently. For some reason he gets more respect.

Once he has sold his land, he becomes just like everyone else, so there is a certain pressure against selling. Such reluctance is aided and abetted by favorable tax treatment and the knowledge that if he sells next year, he'll get more than he would if he sold today.

This disinclination to supply a desperate market causes land prices (and Rents) to soar.

But what if the reluctance disappeared?

This is what full community Rent collection does - ends the reluctance. Unused and underused land pours on to the market, and prices plummet, as do Rents. They will finally stabilize at the actual Rent value, that is at the value "created" by the surrounding community. They will be held there by the hunting action of the price mechanism.

How much will this rent in toto be?

Unfortunately we won't know until we collect it. (Sorry about that!)

But, I doubt that urban location values will be able to do more than pay for the city's infrastructure. Once the pressures of the market do their work in the newly Georgist city and clear the existing mess, there may be something to spare. Perhaps we should put that into contingency against unexpected events like earthquakes in the west, or tornadoes in the east.

That's the picture as I see it.