Proper Sovereignty Manifesto, Part 2: Georgism

Time has not treated Henry George well.

He was the most famous economist in the world. In 1906, his books were more well known than Shakespeare’s plays, even among the members of the British Parliament. It goes without saying that he was the best-selling American writer of his era. About 200,000 people attended his funeral.

When I first discovered Georgism, it led to a chain of epiphanies, and my political views were permanently and almost immediately altered. Suddenly, all of the puzzle pieces clicked together. Things that did not make intuitive sense started to come into place.

First, a disclaimer, targeted at die-hard Georgists (of which there are few today). This post is not a comprehensive overview of George’s writings. Nor are all of the ideas expressed here even necessarily his. This post is about the chain of epiphanies that I had shortly after I discovered Georgism. Additionally, Henry George had many other great ideas and accomplishments besides what I will be drawing from.

I would like to begin by returning to my criteria of legitimate ownership from part 1:

People should own what they create, or are given by the previous owner (in a recursive chain back the original creator).

In your life, has land ever struck you as fundamentally… “different” than other goods? Think about it for a minute.

Right off the bat, I can give you a property that so distinguishes land that it rocks the world.

No one created land.

Land is not created nor destroyed.

It should be noted that the economics definition of land is different than the common definition. Land is any naturally occurring resource. A lake is land, and so are mineral deposits. In economic terms, landfills merely transform one type of land (water) to another type of land (earth). Also, the economics definitions of “capital” and “profit” are different than the accounting definitions of “capital” and “profit,” but that’s not very relevant.

According to economics, there are four factors of production. They are: land, labor, capital, and entrepreneurship. On labor, you collect wages. On capital, you collect interest. On entrepreneurship, you collect profits. On land, you collect rent.

George approves of wages, interest, and profit. But rent is another animal. You did not create land. Nor did you buy it from someone who created it. Nor did the previous owner procure it from its creator, and so on. Land was created by the Earth. We inherit it from nature. So, on what basis can anyone collect rent from it?

Typically, income requires some sort of effort, creativity, or value demonstration on your part. To drive a truck, write a book, or do calculation, for example. This is the way we want income to be, because it creates appropriate incentives. Even trading stocks requires forecasting skill. But what value do you create by owning land?

None intrinsically. Rent is “passive income.” That is, you collect rent while producing no value. This is where we get the “rent seeking,” a term which means extracting revenue in excess of the value you create.

If you recall that land cannot be created, this creates an unfortunate dynamic. The ownership of a particular location can be monopolized. There may be other parcels on the market, but if I want your parcel, I have to come to you.

You would be able to argue any good has this trait. There are many copies of a book for sale, but if I want a particular copy, I need to go to that copy’s owner. But land is unique. Every parcel of land is different, by dint of location. “Location” here means “how it relates spatially to other land.” Every parcel of land has a unique location. And some locations are more valuable than others.

Land is the only good with this property: land can simultaneously have many owners, but also every owner has their own mini monopoly.

That is why the term “rent-seeking” expanded to encompass any value extracted by way of unfair monopoly. For example, taking advantage of regulatory capture to dominate an industry. Later, the term expanded to encompass any economic parasitism.

Some parcels of land contain scarce resources. What if I own all of the platinum mines in the world. Now I have a monopoly on platinum! I can create an air tight barrier to entering the market by refusing to sell even a single platinum mine! This runs contrary to the selling-point of the free market: choice and competition.

Suppose I want a pencil. I can purchase one from a factory that makes thousands of pencil copies. Suppose I want machinery (economic capital). I can take out a loan, and use that loan to contract someone to manufacture it. Now suppose I want to buy land. Can I manufacture it? No. I only have two choices: find someone who is willing to part with it, or take it by force. Land is zero-sum. This is why wars have been fought over land, and not so much ordinary goods or machinery.

With normal competitive goods, a rise in demand is associated with more firms entering the market. This acts as a corrective mechanism to force sellers on their toes. This is not the case for land, because land is fixed-supply. The supply curve is perfectly inelastic and unshifting. This is why real estate can appreciate in price despite no value being added to it. The price of your land is influenced, for better of for worse, by factors outside your control, as Henry George put it:

Take now… some hard-headed business man, who has no theories, but knows how to make money. Say to him: “Here is a little village; in ten years it will be a great city—in ten years the railroad will have taken the place of the stage coach, the electric light of the candle; it will abound with all the machinery and improvements that so enormously multiply the effective power of labor. Will in ten years, interest be any higher?” He will tell you, “No!” “Will the wages of the common labor be any higher…?” He will tell you, “No the wages of common labor will not be any higher…” “What, then, will be higher?” “Rent, the value of land. Go, get yourself a piece of ground, and hold possession.” And if, under such circumstances, you take his advice, you need do nothing more. You may sit down and smoke your pipe; you may lie around like the lazzaroni of Naples or the leperos of Mexico; you may go up in a balloon or down a hole in the ground; and without doing one stroke of work, without adding one iota of wealth to the community, in ten years you will be rich! In the new city you may have a luxurious mansion, but among its public buildings will be an almshouse.

Terms like “real estate” and “housing” are propagandistic euphemisms designed to obfuscate the fixed-supply nature of land. Buildings are not investments. Buildings degrade over time and require repair. When you buy a home, the only thing that actually appreciates in value is the land beneath it. So why do we call it “housing” instead of “land?”

It is important to emphasize, George was not stupid enough to promote confiscating land on a large scale for collective ownership. In practice, attempts to socialize and redistribute land result in absolute disaster. This is because it is hard to divorce land from the property on top of the land. Private ownership is a useful tool to incentivize efficient cultivation and maintenance of land.

No, George had a much better solution. A land value tax, a tax on the unimproved value of land. The tax is levied on the price the land would demand if it had never been developed on, calculated as a function of space and location. Libertarian economist Milton Friedman admitted that this is the most efficient tax.

land.png
The tax only captures producer surplus, not consumer surplus as shown here

To understand why it is so efficient, we have to understand incentives. Taxes naturally disincentivize certain activities. Income taxes disincentivize labor. Capital gains taxes disincentivize investing. Land value taxes disincentivize… what? Land is not created nor destroyed.

Is that the whole point of this post? A new tax program? Hang in, I’m going to move on to some of my own inferences. This rabbit hole goes deep.

If you took economics 101, you probably learned about the concept of the “public good.” Here’s a handy chart:

publci good.jpg

“Excludable” means that you can prevent people from consuming the good or service. “Rival” means that more people consuming the service in some way degrades the service.

For example, a loaf of bread would be considered a private good, in the top-left quadrant. You can prevent other people from eating bread that you own (excludable), and when someone eats a loaf of bread, other people cannot (rival).

There’s just one problem. The rest of this graph is bullshit. I am arguing that a concept that is taught at every major university is wrong.

First of all, the goods they list in the top right quadrant are manifestly not non-excludable. All reasonable economists would agree that it is possible for mines and forests to be privately owned. Even fisheries can be controlled by governments, which limit access through permits. That is exclusion.

Admittedly, mines and fisheries are not excluded in their initial state before property rights are enforce. But is always possible to exclude them. The chart would be more accurate it it was labeled “initially excluded,” rather than “excludable.

Moving on to the bottom right column, part 3 of this manifesto will deal explicitly with the “news” classification, so I will not belabor it here. That leaves us with sunshine and air. What distinguishes these goods is that they are not scarce. And “scarce” is a much more useful term than “excludable,” if that is all the excludability designation has been whittled down to.

The final remaining quadrant is the bottom-left. I put cable TV and cinemas in the same category as news, and I will discuss these all in part 3. But private parks do not belong in that quadrant. Visitors can indeed degrade a park experience. Ever heard of crowdedness? And regardless of what I think, whoever the owner of the private park is, they must see a utility in keeping people out of their park. Otherwise, they wouldn’t be keeping it private, would they? So it is definitionally rivalrous.

“Public good” is an utterly empty term. But even entertaining the term for a minute, roads cannot be, as they are often claimed, “public goods.” Traffic is obvious evidence of rivalry. Beyond that, roads are excludable. Ever heard of toll roads? You may argue that, in practice, most roads are not excludable. But that is a choice of politicians, not a property inherent to roads. Or is it?

While I do not agree that roads are inherently excludable, I do agree that is is most efficient to run them as if they are not excludable. I will devote much of what’s left in this post to explaining why. But I’m getting ahead of myself.

In Anarcho-Capitalist circles, a much-ridiculed question they are asked is, “who will build the roads?” They scoff at this question because of the frequency and perhaps naivety in which it is addressed to them. “Easy,” they say, “the private sector will build the roads. “

I think I know why they receive this question so much. Most people intuit a gut level reaction that the provided answer is unsatisfactory. This is not a question that can be shrugged off.

To be fair, the question, as posed, is a straw man. No one challenges that private companies have the technical proficiency to build the roads. Private contractors already do. No, in economics, there is a difference between productive and allocative efficiency. Which is to say, although the free market can build the roads, I argue that the free market cannot efficiently own and run the roads. Or, to put the argument in a more reductionist form, “what about the roads?”

Consider, for a moment, the reductio ad absurdum of this question. If a private company could simply buy up and monopolize the major roads, could you imagine what they could do?

Hell, a billionaire could build a literal wall around a major city, and charge inordinate fares to cross through the gates. I understand there are practical issues with this (air travel, rivers, etc.) But it is cause for problems, trains and boats notwithstanding.

The admittedly over-the-top example in this thought experiment is the pinnacle of rent-seeking. The wall adds no value, yet extracts revenue for the owner. The wall doesn’t just exist to keep people out, but more so to keep people in. And despite these facts, there is nothing in part 1 of this manifesto, or indeed in a strict adherence to the NAP, that prohibits the private-wall-scheme. The wall is the owner’s property, after all, and the owner has the right to restrict trespass.

What I will say next may sound counterintuitive. A road (or any strip of land for that matter), can also functions as a wall does, given strict enough anti-trespass enforcement.

I will explain the diagram below:

Screen Shot 2019-06-10 at 6.52.48 PM.png

The green road is owned by the green company, while the red road is owned by the separate, red company. The question is: who owns the intersection?

If the red company owns the intersection (case A), the green company is unable to function. If the green company owns the intersection (case B), the red company is unable to function. You think cut-throat businesses won’t restrict access to rival companies?

The companies could negotiation some sort of scheme where they both control the intersection (case C). But that is collusion, and generally frowned upon for its economically undesirable effects. The final possibility is that one company owns both roads. But, to use the language of the market, that answer repeated enough times results in monopoly.

Control of the intersection is called “right of way.” I can’t find a word for this problem concerning right of way, so I term it the “intersection problem.”

You may be asking yourself what this has to do with Georgism. I will explain below how problems related to route-access stem from the nature of land.

Screen Shot 2019-06-10 at 6.57.39 PM.png

Above is a simple grid, like a chess grid, to represent parcels of land. There is point A and point B.

Suppose point A is your current location, and point B is your destination. How do you get from A to B? This is the fastest way:

Screen Shot 2019-06-10 at 6.59.14 PM.png

The route above is the fastest path. There is only one such fastest route. That is a fact which follows from the third fundamental postulate of geometry, that was discovered by Euclid around 300 BC:

Postulate 3: Through any two points, there is exactly one line.

And we know what happens when there is exactly one of something. It can be monopolized. In practice, there is almost never a straight route, due to obstacles. It doesn’t matter, the basic problem is still the same.

What about land? Refer back to the diagram. In order to control the route from A to B, you should own land within 7 of the parcels: {D6, E6, F6, G6, H6, I6, J6}. No more, no less. Not 7 arbitrary parcels of land somewhere of equivalent space, no, those 7 specific parcels. This system is ripe for abuse. One person can control one of those parcels, and act as a holdup by charging pass-through fares that are as profitable as they are prohibitively expensive.

Normal competitive pressures do not apply. You might say, “people can just go around.” How tenable is that, to have as many separate lines as there are competitors? Can you imagine 50 competing pipe systems to your home? Or 50 competing sets of electrical wires for each power plant?

More than one route is possible, but limited. In order to get from point A to B, you need to cross column F. And G. And so on. You need to find “crossing space,” with respect to each column, and arranged all adjacently.

The more competitors there are, the farther around you have to goPerfect competition is inconceivable under these conditions.

I chose to represent land as a grid, because a grid is also a graph; that is, “graph” as in network theory, the broader theme of all but the first part of this manifesto.

A road network has network effects, or “network externalities.” If there is a road connecting B to C, then the construction of a road from C to D adds value to the road from A to B (and vice versa).

As a corollary, each additional mile of road highly benefits from the existence of the rest of the road network. The network cannot be doled out in incremental portions. It must have one owner.

And so we are left with the problem of rent-seeking toll-collection, or, “what about the roads?”

It almost justifies, wouldn’t you say, some sort of larger organization? Ideally, an organization that owns and operates all of the roads, and that is itself owned collectively for and by those it serves, to the extent possible? The better answer anarchists give to, “what about the roads?” the more it starts to sound like government.

And it’s not just the roads. It’s transportation infrastructure. Just as we have the term “natural monopoly” to describe industries that operate most efficiency under a single firm, I’ll use the term “natural utility” to describe a natural monopoly that operates most efficiency as a utility. Henry George would list these:

  • roads, walkways, bridges, tunnels
  • railways, other transit
  • water supply pipes, wastewater sewage pipes
  • electric grid
  • canals
  • fiber-optic cables (if George had heard of them)

These are all permeant structures that assist with the transportation of people or materials from point to point. Should these industries be nationalized? Not necessarily. But they should at least have oversight. For example, the reason I support net neutrality is that I list fiber-optic cables as a natural utility.

To some people, this may seem like a “No duh, of course the government should have a hand in the utilities. What’s the big deal?” But when all of this occurred to me, it was a major stitch in my political philosophy. I’d repeated that the state should not have a hand in anything, unless it had a damn good reason to justify it. But prior to discovering Georgism, my search failed to turn up any “damn-good-reason” why the state should have domain over utilities. Despite this, it was instinctively obvious to me that they should. I couldn’t square my deference to capitalism with the knowledge that leaving utilities alone to the market was a problem of square-peg-round-hole.

Whether it was of a more economic bent (public goods, externalities, time horizons), or populist (pro-interventionism, anti-profit motive, information issues), you, reader, probably had some “go-to” explanation for why the state or municipal government should own the roads, bridges, pipes, etc. And if you didn’t think about it, that’s preferable. Because all of the classic explanations do not, in my opinion, hold up to scrutiny. The only satisfactory explanation is the intersection problem, i.e. Georgist route-access and right-of-way issues.

Now I will go on a fun diversion. Some people say that the game “Monopoly” is intentionally bad because it was invented by a Socialist as a critique of Capitalism. These people are wrong. Monopoly, originally called the “Landlord’s Game,” was invented by a self-proclaimed Georgist to criticize unregulated land ownership.

“Monopoly” is aptly named. If you have read this post, you know what importance I place on monopolization.

But I do not believe Monopoly is the best board game to make the case for Georgism. Arguably the best board game for Georgism is this:

pic.jpg

Ticket to Ride is a game where players build rail ways on specific routes. You can get points for connecting up designated destinations with your color. I encourage you to play it; it’s a good game.

Cities that are close together have prospective “routes” that you can fill with your railways. However, there are a limited number of these routes. Some adjacent cities permit only one rail way between them. Some permit two. These get fiercely competitive in games with many players. Players can successfully “block” routes, preventing other players from linking up destinations. The routes are zero-sum. Anyone who has played this game can attest that it can get stressful to watch other players take their turn; they might block your rail lines.

This mirrors transportation networks in real life. There is often only enough commerce to justify one line of infrastructure. Whoever owns that line has a monopoly.

That situation is caused by network effects, which are probably a more substantial issue than even route-access problems.

Interestingly enough, Ticket to Ride is not the only game that is a good argument for Georgism. This is a popular game:

catan.jpg

Catan is just as good of an example because it deals directly with resource extraction. There is even a trading mechanic.

To play, you set up cities and settlements adjacent to tiles to extract resources from those tiles. Cities are required to be a certain distance apart, in other words, a resource tile can only support so many settlements. Especially in games with more players, access to available land is cut throat. To make matters more extreme, a road network can essentially function as a “wall” in certain circumstances, cutting off players from areas of the board.

The board game tangent is over. Let me take a step back.

Part 1 was about mediating and respecting property rights. This second part is about what has the right to constitute property to begin with, and how to mediate situations that are unclear. I address that from the lens of Georgism.

But you may be wondering, if Georgism is so great, and Henry George was so popular in the past, why is he no longer popular? Why hasn’t he stood the test of time? Well, I have a theory.

Who decides what ideologies “stand the test of time?” Schools do. And who controls schools (or better, who controlled schools)?

Three great private fortunes were to dominate early twentieth-century public schooling — Carnegie’s, Rockefeller’s, and Ford’s

The Rockefeller Foundation has been instrumental through the century just passed (along with a few others) in giving us the schools we have … And Rockefeller-financed University of Chicago and Columbia Teachers College have been among the most energetic actors in the lower school tragedy…

By 1917, the major administrative jobs in American schooling were under the control of a group referred to in the press of that day as “the Education Trust.” The first meeting of this trust included representatives of Rockefeller, Carnegie…

…corporate innovators like Carnegie and Morgan denounced competition’s evils…

..soon-to-be-famous academics… energized and financed by major corporate and financial allies like Morgan, Astor, Whitney, Carnegie, and Rockefeller, decided to bend government schooling to the service of business and the political state…

Between 1896 and 1920, a small group of industrialists and financiers, together with their private charitable foundations, subsidized university chairs, university researchers, and school administrators, spent more money on forced schooling than the government itself did. Carnegie and Rockefeller, as late as 1915, were spending more themselves.

There are certain colleges that have sought endowments, and the agent of the Rockefeller Foundation or the General Education Board had gone out and examined the curriculum of these colleges and compelled certain changes….

On the cantilever principle of interlocking directorates pioneered by Morgan interests, scientific school management flowed into other institutional domains of American life, too

— John Taylor Gatto, The Underground History of the American Education

I will remind you that Rockefeller made his fortune by monopolizing the world oil supply. JP Morgan made his money in, among other things: steel, telecommunications, and power. Carnegie made his money in railroads, bridges, oil derricks, and steel.

Do you think the robber barons and their vast fortunes were big fans of Henry George? No. No they were not.

I am arguing there was a conspiracy on the part of the super-wealthy rent-seekers to bury Georgism. And that is why economics departments teach propaganda like “public goods” rather than “right of way” as the driver of natural monopoly.

One final note: land is not the only fixed-supply good. There are also historic and cultural relics. How would you feel if someone bought the Sistine Chapel and bulldozed it to clear the valuable land for a shopping mall? Even if you recreated an exact replica of the Sistine Chapel, it would not be the Sistine Chapel, because it would not have the historical significance. We only have the historic structures that we have inherited our ancestors.

What if someone bought a Picasso painting in an auction, and decided to splatter paint all over it? This would be a tragedy, but there is nothing I said in part 1 that would allow punishment of that owner. Sure, it was their property, but you can’t just manufacture another Picasso painting. There was only one Picasso, you know.

For the most part, this is not a problem we have to worry about. People do not destroy ancient monuments, famous painting, historical relics, and so on. However, the government has the right to fund protections of these things. They are, to some extent, like land, the inheritance of humanity.

Part 3