Swatting Down Wendy McElroy’s Refutation of Georgism

At The Daily Anarchist, principal contributor Wendy McElroy has published a two piece series that aims to first define Georgism and then refute it. The first part, the definition, is here. The refutation that follows is here.

As a defender of Georgism, I have published a number of posts on this blog knocking down these type of critiques that intermittently pop up. My principle argument is not that Georgism is the only position on land that is consistent with libertarianism but rather that Georgism is not inconsistent with libertarianism. In particular this usually means debunking the purported equivalency of Georgism with land collectivism, an oft-repeated refrain that simply isn’t accurate. This bogus equivalence lies at the heart of McElroy’s definitional critique. So once more, for the record, let me state unequivocally that:

the proposition of the right of equal access to land (p) DOES NOT EQUAL collective ownership(q)

p is neither a sufficient nor necessary condition for q. Hence, there is no logical relationship between the two propositions. The Georgist position is that the proposition (p) establishes the exclusionary use of land(=ownership) as a privilege that bears the market price of the opportunity cost of the use of the resource. Simple. As I sometimes put it, you are more or less buying your way out of “land collectivism” at the price of its opportunity cost. This contrasts with other enforcement models of private property that purport to be “private” while empirically demonstrating a thorough intertwining with collectivist enforcement.

Now some Georgists may emphasize the moral principle behind the enforcement model. However, I tend to emphasize the agency and “rent-seeking” problems it addresses. After all, Henry George didn’t divine his principle from the bowels of moral and theological introspection(of course, just to note, the concept of “ground rents” long preceded Henry George). No, he derived his principle from the observation of inequality and privilege that often seemed to be a product of matured governments(specifically compared to the less mature ones out West at the time). He was addressing an empirical problem regarding economic rents.

McElroy commits a potential logical fallacy by claiming that the empirical modern absence of Georgism is evidence of its illegitimacy. I would contend that’s a rather peculiar argument for a libertarian to make because the same argument can be used to discredit libertarianism itself given its own empirical problem: namely, where is it? Historically, its nonexistent, sans a belated reference to medieval Iceland. I would be careful about wielding that tool.

Given that I methodologically adhere in large part to the old French liberal class conflict model–the ancient and modern(liberal) notions of liberty are in conflict and this conflict is defined by the struggle between rooting economic life in the polis(the ancient version) vs modern (liberal) view of the State as artificial and a compliance mechanism only(but not the source of compliance)–I would expect Georgism to be buried as the ancient version progresses in influence. In the modern parlance, we would recast this conflict in terms of the public choice rent-seeking model. Contra McElroy, it is the absence of Georgism(or ground rents as the fiscal source of government) that gives credence to the class theory method. If, instead, we saw that governments derived their fiscal source(and public financing) from ground rents, then the French liberal class model would clearly be an invalid method. So from my methodological framework, the absence of Georgism is a source of confirmation.

Now McElroy, who from my understanding, dismisses the class theory method–or at least used to–apparently applies a different method. Of course, she has to resolve how government and public institutions can select the correct private property enforcement model while nonetheless driving us relentlessly toward a total collectivist outcome. This tells me either: (1) Lockean property rights are a foundation of the Total State or (2) they provide no effective constraint mechanism against the Agency of the State.

Refuting the Refutation

Now let us consider McElroy’s 3-point refutation:

(i)As a matter of principle, you cannot claim a right to something you do not own – land – simply because you mix it with something you do own – your labor.
“If this is true, then it proves more than I believe Georgists wish to accept.”

Unfortunately, I expect more out of a scholar such as McElroy. Most libertarians today recognize the weakness of Locke’s arguments from the Second Treatise. Reference, for example, de Jsasy or Nozick. Indeed, it was Nozick who gave us the revised “Lockean Proviso” which makes a clear case that legitimate recognition of agent claims to property or labor are constrained by a condition that the private property regime makes no one worse off relative to the absence of such a regime. Indeed, it is this revised proviso which I identify as the “libertarian principle.” The dreaded conclusion that McElroy warns against is what I consider to be the foundation of any libertarian social order.

Now, to be fair, McElroy later contends in her first point that “the libertarian principle”(although she doesn’t refer to it by that identity) would emerge naturally and spontaneously from a free market in property. Frankly, it’s not my objective to argue this point. I will only point out that empirically this doesn’t occur. Of course, it may have something to do with the fact that a spontaneous market in property is not our only agency. There is that pesky agency known as “the State” that keeps intruding on our hypothetical models. The positive fact is that if we show the State, we show libertarian violations in the Lockean property model. Period…

But the point remains that natural resources belong equally to everyone.
“Again, I doubt that Georgists wish to follow this argument to its logically conclusion”

I have already discussed this. McElroy is engaging in a straw man argument. There is no logical relationship between the proposition of the right of equal access to land and collective ownership. Hence, there is no logical argument to follow to its conclusion.

Justice requires there to be an authority to distribute the ‘unfair’ advantages enjoyed by those who use and occupy land.
“Who is to decide whether it is to be prairie value or market value? Whether a land tax is to be permanent or be liable to increase?”

This is the argument, borrowing apparently from Auberon Herbert, that warns against the Real Estate Appraiser becoming the total source of Statism. Really, a bit of a vacuous argument. Real estate appraisal methods have emerged as a product of convention and are not an arbitrary thing. If I were to compose a list of the foundational threats of total Statism, the modest real estate appraiser would come in low on the list, somewhere next to the dreaded landscapers. Humor aside, the obvious flaw with Herbert’s argument is that the Real estate appraiser and the tax assessor already exist as long-standing staples in the Lockean scheme. To aim your guns at this agency is also to shoot at your own foot.

What is Required to Refute Georgism

I’ve grown tired of the recycled arguments against Georgism that usually derive from the same flawed method of argument: Georgism leads to a contradiction in my moral foundations regarding property. That’s not a method of rational argument. It’s a characteristic of a religious argument. If you want to refute Georgism you are going to have to do it rationally. The rational method has to demonstrate that land rents are quasi economic rents. This is going to be a bit difficult to demonstrate because of the many counter-factual examples that demonstrate ground rents closely approximate a shift of producer surplus to public surplus without any deadweight loss or loss of consumer surplus. Your theory is essentially going to have to encapsulate a Quantum Theory of Economic Rents, meaning institutional apparati determine the observed behavior of rents. Of course, in many ways I do hold to a quantum theory of economic rents. It’s just that there is yet to be sufficient evidence that ground rents demonstrate quantum properties(which, of course, is ultimately a statement on our institutions).

Caplan’s Entrepreneurial Critique of Georgism

It’s fair to say that I ascribe to a different microeconomic foundation to political economy than Bryan Caplan. The primary difference between our approaches was discussed in a previous post, The Irrationality of Politics. Caplan roots the problem of liberal reform in the low cost of irrationality vis a vis voting which incentivizes a class of pandering politicians who otherwise would act more rationally in terms of public policy. In short, the politicans are slaves to the voters. I, on the other hand, root the problem of liberal reform in a bias that is product of a political economy moral framework that arises from rent-seeking agents seeking legal recognition via political means. In short, voters are slaves to the politicians, or more accurately, the political/economic system. Both of us would cite the empirical discrepencies in the classic public choice model(Tullock,Buchanan) to support our positions.

My little blog, “liberal and libertarian,” is more or less an exercise in a libertarian deconstruction of the failure of the liberal model. By liberal, of course, I mean the political-philosophic defintion and not the modern partisan one. However, I am a liberal, both philosophically and sentimentally. My critique of it is not its ends, but rather its (actual) means. Specifically, my critique, as tersely summarized above, is grounded in economic rents secured and protected by political means. But it’s not a utilitarian objection. That is, it’s not based on a calculation of the social waste that results from rent dissipation in political competiton. On the contrary, it’s derived from observation that rent dissipation is not the empirical equilibrium model for political competition. This lends itself to a class analysis of the State which, of course, is a model of the State as protector of artificial rents.

To me, it is clear the fundamental role economic rents play in liberal political economy. This is why I do identify as a Georgist. A regime whose fiscal source is georgist rent is likely to exhibit stark differences from one that bids out Tullock rents. I can’t say that Georgism is a necessary or sufficient condition to avoid “liberal violations,” but I would suggest it is one means to potentially avoid the catastrophic failures of political competition.

This leads me back to Caplan. Caplan and a co-author have published a new working paper that proposes an entrepreneurial critique against Georgism. Caplan denotes this criticism as a “Search-Theoretic Critique,” meaning that georgist rents disincentivize entrepreneurial discovery for more valuable uses of land. A less academic treatment was posted at his blog. Caplan summarizes the argument:

I can explain our argument with a simple example. Clever Georgists propose a regime where property owners self-assess the value of their property, subject to the constraint that owners must sell their property to anyone who offers that self-assessed value. Now suppose you own a vacant lot with oil underneath; the present value of the oil minus the cost of extraction equals $1M. How will you self-assess? As long as the value of your land is public information, you cannot safely self-assess at anything less than its full value of $1M. So you self-assess at $1M, pay the Georgist tax (say 99%), and pump the oil anyway, right?

There’s just one problem: While the Georgist tax has no effect on the incentive to pump discovered oil, it has a devastating effect on the incentive to discover oil in the first place. Suppose you could find a $1M well by spending $900k on exploration. With a 99% Georgist tax, your expected profits are negative $890k. (.01*$1M-$900k=-$890k)

What Caplan is actually arguing in his working paper is that there is no such thing as land rents. Land rents are only quasi-rents. Therefore, georgist rent(or “land tax”) is distortionary. Now, indeed, if there is no such thing as land rent, then I would have to concede Caplan’s critique. Georgist rent is more or less a tax on the opportunity cost use of land. If land indeed were identical to capital, then taxing the use of a resource at 100% of it’s opportunity cost use would simply result in deadweight loss(the minimum of the worst result). Of course, the classical treatment of land distinguishes it from capital as a factor of production because of the inelasticity of supply. It’s a simple exercise in textbook economics to graphically verify that that taxes on these types of goods simply shifts producer surplus to public(or government) surplus without any deadweight loss or loss of consumer surplus. In the classical paradigm, the privilege of exclusive use of these type of goods/resources is supposed to be the fiscal source of government.

Caplan dismisses the classical paradigm and more or less extends the neoclassical treatment that casts land rent to be no different from interest(or dividends on stocks, etc). Land, like capital goods, has to produced. In Caplan’s paper, production means “discovery of best use” via an entrepreneurial process modeled on expectations of returns as a function of search. So Caplan will write something like:

E(V)=E(I)-P

and

V= E[I(S)] – E[C(S)] – P

which simply means the expected value of land is the expected income from the property minus the current price. The value of land is the expected income from a search minus the expected cost of the search minus the current price. The boundary conditions of the model are defined by four partial differential constraints which would be typical for a neoclassical model, regarding marginal cost and marginal revenue, if we think of “Search” being the quantity produced(S=Q). So competitive equilibrium can be written along the familiar model of marginal revenue =marginal cost,except now a “Search good” will be produced until the marginal increase in expected income of the Search equals the marginal cost of the “Search good.”

Now that Caplan has a “Search good” that acts roughly familiar to a standard capital good, he is able to demonstrate that a “tax” discourages and distorts the production of the Search good in the same way as a tax against a capital good. Indeed, the Georgist 100% tax results in no production of “Search goods.”

The Rebuttal

There is an obvious empirical problem with Caplan’s model. Frankly it’s particularly disingenuous and an example of piss poor scholarship–only mitigated by the fact it is a working paper–to use the example of Idi Amin as a positive demonstration of the model’s prediction. I have no idea what Idi Amin has to do with Georgism but there are are plenty of historical examples, each with varying degrees of success, that provide a counter-factual to the model. And really, all you need is one. For example, you are not going to find any counter-factual in all of human history of a 100% tax on capital goods not producing disastrous distortionary results regarding production output. However, you can easily cite examples of relative degrees of success regarding georgist implementations. For example, here. The empirical evidence alone discredits any model that attempts to concoct some “Search good” equivalence with “capital goods” in terms of expected use of land.

The conceptual problem resides in a normative modeling of what is “rational.” Algebraic manipulation doesn’t necessarily predict the rational behavior we should end up with. For example, the contention that the landowner, in order to obtain quasi-rents, must engage in productive activity. Well, my experience informs me that quite a bit of this “Searching” goes on in City Hall and in the corridors of Washington, DC. Indeed, you can almost define local government as a joint private-public conspiracy between local real estate developers and corrupt city boards. Nationally, we have an unprecedented banking oligopoly contrived from a failed financial paradigm that specialized in sucking economic rents from subsidized home ownership. To me, its form of reality denial to make a claim that there is no such thing as “land rent.”

Another problem for Caplan is his tendency to subtly shift back and forth between quite divergent microeconomic foundations, depending on context. For example, in his anticipation of “Georgist Responses,” he claims that the problem of transaction costs of current occupation(current use) against entrepreneurial search goods for “new and improved” use can be remedied by “changing the laws.” But that’s waiving the magic wand and pulling a rabbit out of the hat. We should recall that Caplan’s thesis of “rational irrationality” is an attempt to explain why we empirically never see “rational political reform.” All of a sudden, we can expect rational political reform in this context. Of course, this then would be the counter-factual that disproves his “rational irrationality” foundation.

Caplan executes the subtle microeconomic foundation shift again at the end of his blog post when he rhetorically ponders:

The big puzzle for me: Why do tax economists spend so much time discussing mere curiosities like lump-sum taxation, excess profit taxation, and land taxation, when the completely realistic option of taxes on negative externalities is right in front of their noses?

In terms of political economy, that statement makes little sense. Taxes on negative externalities would serve a purpose of correcting the injustice of the externality, of internalizing the externality. These types of taxes are not the source of public good financing. Frankly, it is the conflation of public good rationales with ubiquitous arguments of the social costs of human activity that I would pin at the foundation of his “rational irrationality” thesis. But there he is, postulating away, as if he has succumbed to his own fit of irrational bias. When he wakes up, he can the explain how a public goods rationale for taxes on negative externalities would fare under a supposedly biased electorate whose individual members can purchase their own negative externality rationale for government at the low, low price of the opportunity cost of a vote.

Defending Georgism, Once Again

Wendy McElroy invokes 19th century British Voluntaryist Auberon Herbert’s critique against Georgism as “the best and most complete refutation of Georgism and the single-tax that she has have ever read.” I admit, I’ve never previously read Herbert’s critique. But now I have. And I remain unconvinced. And, frankly, I’ve read better critiques.

Let’s summarize his critique by a series of bullet-point summations:

“The open market is the only true and impartial distribution of property–the only distributor that does not employ favor and force.”

Georgism is an open market process for the impartial distribution of private real property. In fact, Georgism, both conceptually and empirically, is meaningless without an open market. The ground rents(frankly, calling such a tax is a misnomer) are determined by the free market.

“But if in order to turn a natural object into a useful object it is necessary to mix human labour with it, then it is reasonable to believe (I won’t now put the case more strongly) that the object in question must be capable of being owned by the owner of the labour; otherwise you would create this curious position that a man must give his labour, whilst the profit of the labour–at least, that is to say, a part of it–would go to somebody else;”

Labor is not a necessary condition to turn land into a useful object. Empirically demonstrated by the case of land speculation. And, once again, Georgist rent is applied against the “unimproved value of land,” not the improved value.

“I am sure my friend wishes to be consistent. He must remember that everything is in part a gift of nature. If his proposition is true about gifts of nature, why should one gift of nature belong to everybody. and another gift belong to the individual? The soil belongs to everybody, says my friend, because it is the gift of nature. But so also the apple tree at the bottom of my garden is in part (the largest part) a gift of nature. “Oh, but you have mixed your labour with it” he may reply. True. But then, as he has just shewn us very clearly mixing what is your own with what is not, you cannot enlarge your rights. The apple tree then clearly cannot be wholly mine–being in part a gift of nature; and if I wholly appropriate it without allowing any passers-by to pluck two-thirds of its fruits, I am nothing but a robber stealing from the public. So it is with every single thing you can name. If we cannot rightly appropriate gifts of nature, my friend is a robber as regard the coat he wears, the the loaf he eats. At every moment of his life he is defrauding the public. And here I should ask all readers to consider the awful, indescribable complications arising out of my friend’s dogma. Every article grown in every part of the world ought to be divided in parts between the grower and the rest of the world.”

Quite simply, Herbert conflates “equal distribution” with “equal access” in trying to create a moral dilemma for a position that treats land as part of commons. “The Commons” means “equal access to,” not “equal distribution of.” Treating land as part of commons is often conflated with “land collectivization.” But let us be clear: starting with a position of land as part of commons means everyone has equal access to land and for one to have exclusive use of land is an abridgment of another’s liberty, indeed, inalienable right, for their own use of such land. The privilege of exclusionary use of such land is a monopolization of resource that creates rent. This is Georgist rent.

I’ve read Benjamin Tucker’s critique of Georgism; I’ve read Murray Rothbard’s critique; I’ve read Roderick Long’s critique. I’m not convinced. The fact is, land or ground rents were a well established concept in classical economics. With the advent of the marginalist revolution and neoclassical economics, land would be lumped in with capital goods as an identical factor of production, which from a political economy standpoint, is a bad development in terms of assessing economic rent. From a marginalist standpoint, a compelling case can be made that Georgist rents are vital to an accurate reflection of opportunity costs that enforce the most efficient use of scarce resources in a free market. And that in an efficient free market where there are no Tullock economic rents derived from land ownership, there is no so-called “public goods problem.” Georgist rents flowing to a some sort of governing institutions or redistributed back to the general populace as a dividend constitute neither a wealth transfer nor a deadweight loss. From an institutional standpoint, I have yet to be convinced by any compelling counter-arguments.

Reposting A Dismissal of Brad Spangler’s Dismissal of Georgism

Back in May, Brad Spangler published a quick dismissal of Georgism which I criticized in a follow-up post. Spangler never responded to the criticism of his position, which I believe is rooted in a flawed understanding of Georgist rents. There was a good discussion at Freedom Democrats with one libertarian blogger, Kurt Horner, taking the standard Lockean position. I don’t think Horner got the best of it in that discussion.

Below is my original reply to Spangler.

A Dismissal of a Dismissal

Brad Spangler recently published a quick dismissal of Georgism which I found to be particularly uncompelling. Occasionally, brevity is a virtue, but in this case, I think it’s going to take a bit more effort and insight by Spangler to make the case. Writes Spangler:

Proximity is a two-way relationship but Georgists attempt to use it to justify a one-way transfer of wealth. Real estate prices are, indeed, largely a matter of location — but there’s no way to argue that one’s proximity to the rest of the community creates an obligation to reimburse the community, since the community also derives value from people (such as one’s self) being in proximity to it.

Me being close to you necessarily implies that you, likewise, are close to me. There’s no getting around that for Georgists. Sorry.

Frankly, not convincing.  Let’s review what “Georgist rent” actually is. Georgist rents are ground rents paid not for any privilege for the use of the land, but rather to exclude anyone else from the use of the same land. “Georgist rents” are applied against the “non-improved” value of the land, not the improved value. In the Georgist scheme, ground rents should more or less equal the unimproved value of the land, so there is, in effect, no wealth in holding land. The effective price of unimproved land should be zero, whether in the middle of the boondocks, the outskirts of Detroit(where it actually is more or less zero now), or in a vibrant, highly-coordinated community. However, the rents are are not applied against the improved value, so the rent is not a deadweight loss. In the Georgist scheme, we basically have an economic system that enforces “unimproved land as part of the commons,” with the ground rents constituting neither a wealth transfer nor a deadweight loss.

In some quarters, there have been criticisms that the positive externalities of “land improvements” or, say, population inflows, creates an “effective tax” on unimproved land, so Georgist rents end up being a form of deadweight losses. But when I read these criticisms, I’m not sure the critics are getting the point that increased value of the land creates opportunity costs for the use of such land, so, it is actually quite rational that it would cost more in compensation to retain exclusive use of such land. Frankly, this is how it’s supposed to work, to prevent land speculation and free-riding off the labor and investment of others. Remembering, of course,we are talking about rents applied against the “unimproved value” of the land, and a principle that the effective price of unimproved land should be zero, regardless of it’s location(NOTE: THIS DOES NOT MEAN ACTUAL PRICE OF REAL ESTATE/REAL PROPERTY ITSELF IS ZERO!).

I realize that for hard-core Austrians, the Georgist treatment of land may be a bit of an anathema, but I think it’s the height of denial to think that human history hasn’t been riddled with a “land question.” Frankly, I never have been convinced by any Austrian resolution to the land question, to the extent that Austrians even acknowledge a “land question.” Other alternatives, such as the “mutualist” treatment” of land, have their own problems. Georgism is not perfect, and does have some empirical problems to tackle, but conceptually, it offers a compelling paradigm for a more egalitarian free market order that places the costs of governance on those benefit the most, without having to implode/destroy the entirety of the current social order.

Update

Some good commentary at Freedom Democrats.