The Economist’s newest issue is dedicated to urban land and space. The most widely accepted critique of Piketty is based on the importance of land in inequality. Henry George is proposed as a solution to Silicon Valley’s housing woes.
The common thread to these ideas is, well, Henry George. George is a figure who is very difficult to describe in modern terms. He was a combination of JK Rowling, Milton Friedman, and Ralph Nader; JK Rowling because his book, Progress and Poverty, was the most read book second only to the bible, Milton Friedman, because he founded an intellectual movement, Ralph Nader because he entered politics as an outsider, coming in second running for governor of New York City.
Even this combination fails to do justice to George. His book was a dense treatise on political economy, hardly a bestseller today. And while Friedman was the public face of libertarianism, the movement came with a rich history and many other scholars. Further, George’s influence was so high that several communities were founded on his principles.
Looking back, the man who George most resembles in terms of influence is Karl Marx. Both wrote hugely influential treatises on political economy, inspiring both political movements and actual communities. The difference is, George’s influence waned sharply after his death, to the extent he is largely a footnote today. People have forgotten the immense cultural influence he once was.
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Unfortunately today George is only remembered for his idea of a land tax. He was also a staunch advocate of free trade. According to Tyler Cowen, one of his books, “Protection or Free Trade remains perhaps the best-argued tract on free trade to this day.” In fact, both Frank Chodorov and Albert J. Nock, now integrated into the libertarian tradition, were both heavily influenced by George.
George is coming back into the foreground primarily because of the increase in housing prices over the last few decades. After decades of land falling in importance compared to other factors of production, it is making a comeback. The rise of the knowledge economy has coincided with a rise in the importance of networks. As in person meetings are valuable for networks the land on which those networks exist rose in value as well.
The rise of property values is not the only factor sparking an interest in George. With crypto-currencies and the sharing economy income is becoming harder to track. Such factors raise the marginal cost of taxing income forcing governments to look for alternatives. As land is easy to appraise and tax, as well as necessary to live, expect governments to tax land to make up for lost revenue from taxing income.
As others have taken up the mantle for free trade, George’s legacy remains land. George argued for taxing only the unimproved vale of land, not the value of a building or agriculture on the land, only the land itself. His arguments for a land tax are relatively straightforward and can be split into economic and moral arguments.
In economic terms, land is inelastic. While taxing labor decreases the supply of labor, and taxing capital decreases the supply of capital, taxing land leaves the supply of land unchanged. His moral argument is that ownership of land is unjust because land is not created. If people own what they mix their labor with, they cannot own land as land exists independently of whether humans mix their labor.
George’s economic arguments have found a degree of popularity among well-known economists. Milton Friedman called the land tax the least bad tax. Joseph Stiglitz showed spending on public goods could increase the value of the land by the same amount as the spending itself. Even Adam Smith wrote sympathetically.
Ground-rents are a still more proper subject of taxation than the rent of houses. A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground. More or less can be got for it according as the competitors happen to be richer or poorer, or can afford to gratify their fancy for a particular spot of ground at a greater or smaller expense. In every country the greatest number of rich competitors is in the capital, and it is there accordingly that the highest ground-rents are always to be found. As the wealth of those competitors would in no respect be increased by a tax upon ground-rents, they would not probably be disposed to pay more for the use of the ground. Whether the tax was to be advanced by the inhabitant, or by the owner of the ground, would be of little importance. The more the inhabitant was obliged to pay for the tax, the less he would incline to pay for the ground; so that the final payment of the tax would fall altogether upon the owner of the ground-rent.
Now, before continuing it is worth noting some of the flaws of George. He did not believe he was advocating for a more efficient form of taxation. He thought a land tax would stop business cycles and end poverty, a rather tall order. Further, a land tax is second to a pigouvian tax in efficiency terms. A pigouvian tax limits negative externalities, optimizing the level of production.
Granted, knowing the ideal level to impose a pigouvian tax is virtually impossible. Being able to differentiate between the value of a building and the value of the land on which the building is constructed is done every day by insurance companies.
The difficulty in implementing a land tax is that it is inherently redistributive. Landowners lose and renters win. As landowners typically have stronger roots in the communities they also tend to have more political power, ensuring their ability to block taxes which primarily burden them.
Land taxes would also not solve the primary problem of expensive housing, which is regulations. Nimbyism leads to onerous building codes, raising the price of housing several fold, 800% in London and 300% in Paris and Milan. The Economist reports “lifting all the barriers to urban growth in America could raise the country’s GDP by between 6.5% and 13.5%, or by about $1 trillion-2 trillion.”
The other problem that a land tax fails to solve is public choice. Even if a land tax is more efficient at generating revenue, governments rarely spend their money wisely. Spencer Heath, a follower of George, realized this. Turning Georgism on its head, Heath argued for proprietary communities, where a single owner would provide public goods. A shopping mall is a prime example of a proprietary community, providing security, lighting, public spaces, and other public goods.
The broader argument for proprietary communities is Disney World, arguably the best run city in the US. With tens of millions of annual visitors, it manages to remain clean, safe, and fun. I doubt there is major metropolitan area in the US with no dangerous parts.
Of course, Disney World is a resort, but the logic applies more broadly. Disney does a very good job taking care of Disney World because their profit depends on it. If someone is hurt or has a bad experience, Disney loses customers. The link between actions by the governing body and outcomes is much more direct than in most city governance structures.
A proprietary city would be able to gain revenue by enacting policies which increased the value of its land. While not necessarily desirable in the US, a proprietary city would likely be able to outperform many third world cities. I lived in Tegucigalpa Honduras the last five months so I will use the dysfunction there as an example, though it is hardly unique.
Tegucigalpa had several very nice bike lanes on major roads. Except they were not bike lanes, they were bus lanes. However, the buses the city had bought were too big to fit in the lanes, so the lanes were taken over by bicyclists and pedestrians. A large minority of the cars were also missing license plates. Apparently the budget for license plates ran out a few years ago and now new cars come with a letter which is stored in the glove compartment and gives the car permission to use the roads. Public schools are also atrocious, some are controlled by gangs and the leaders of several student protests were recently murdered.
Ultimately, the real problem in Honduras is the security. It remains the murder capital of the world. Having your phone stolen is an expected occurrence. Some people do not buy smartphones for this reason. Single murders are barely reported any more, there have to be two or more dead. And many people fear the police more than they do the gang members.
It is important to keep in mind the reasons above when considering proprietary cities. They do not need to be better than the first world, merely better than the competition, which in many countries is not a very high bar.
Security can be used as the most basic example. It is simple to imagine a proprietary city offering far better security than exists in Honduras today. First of all, private security tends to be more trustworthy than government police. If a private security guard is corrupt, they can be easily fired. Second, carefully monitoring the entrance and exit, as is done in all hotels and apartments already, ensures anyone committing a crime can be easily caught.
Of course, this remains speculation for now. No land developers I know of are creating open access privately administered cities on the scale I am considering. However, given the history of George’s influence. It is not unreasonable to think that a version of his ideas is revived and used to improve the living conditions in the third world.