The Entrepreneurship of Putting Land to its Best Use
by Fred E. Foldvary, Senior Editor, 22 April 2013Some “free market” critics of PRC (public revenue from land rent) claim that land-value taxation penalizes land entrepreneurship. These critics are homestead libertarians, those who believe that the conquest of land provides complete moral rights to the possession and rent of land when the original inhabitants and their heirs have all been murdered. Most of these critics of geoism believe in an incoherent minarchism, a government that can impose order without a source of reliable public revenue.
However confused may be their overall social philosophy, the claim that PRC would penalize the entrepreneurship of land needs to be confronted. A land entrepreneur creates or discovers a more productive use of land, relative to the current use. He buys the plot and changes the land use. That creates a higher rental and site value. But then, they say, land-value taxation takes away this entrepreneurial profit, and so it allegedly penalizes entrepreneurship, and also prevents other potential entrepreneurs from bringing land to a more productive use. So contrary to the claims of geoists that PRC is better than neutral, making the economy more productive than its absence, PRC imposes a loss on the economy.
As Leo Tolstoy remarked, "People do not argue with the teaching of George, they simply do not know it. And it is impossible to do otherwise with his teaching, for he who becomes acquainted with it cannot but agree. If [such] people refer to this teaching they do so either in attributing to it that which it does not say, or in reasserting that which has been refuted by George.” (“A Great Iniquity” in the London Times, August 1, and The Public (Louis F. Post, ed.), August 19, 1905, p. 314).
Thus do those who make that claim -- that Henry George’s single-tax on land values impedes entrepreneurship -- attribute to this concept “that which it does not say”. The concept is to collect, either for public revenue or for equal distribution, the rent of land. In economics, “land” means natural resources. “Natural” means apart from human action. When entrepreneurs build on land, the building is a capital good, not a natural resource. If they clear, level, or drain a site, that alteration and value added is a capital good. When they explore the site for material resources, and discover gold or oil, that investment too is a capital good, not part of the original natural resource. One cannot develop “land,” because the development is a capital good.
If, as a result of their actions, the site now has a greater rental value, the added value is not due to nature, and is therefore a capital yield, the yield due to capital goods. The foundation of a building is attached to the ground it sits on, but its value can be separated from the value or rent of the ground. When the property is sold or leased, the new buyer or tenant may make a payment for the whole property, but that single payment does not imply that the capital goods have become naturalized.
In a proper system of public revenue from rent, the assessors exclude, from the land value and land rent, the rental that is due to labor and capital goods. So a developer of a shopping center or residential community may increase the rental values of the site, but that added value is a capital yield, not land rent.
Of course it is possible that a system of land-value taxation would not be properly implemented, and the assessors would increase the assessed value the tax is based on. But that is a problem of improper implementation rather than of the concept of public revenue from land rent.
The discovery of a better use of land, or of material resources not previously known, has an effect similar to that of patents for inventions. If another person can copy a new invention and sell it, that reduces the profits of the inventor or the entrepreneur hired to market the new invention. So although the concept of patents has its critics, there is some economic rationale for granting patents for the exclusive sale of new inventions.
However, current law grants monopoly patents for only a limited time, nowadays 20 years Why not forever? Because monopoly imposes a social cost. The monopolist reduces the quantity produced in order to maximize profit. Competitive production provides a greater quantity at a lower price. The monopoly imposes a deadweight loss similar to that of taxing goods. Therefore, society allows a monopoly for a limited time to reward innovation, but not forever. When the patent expires, the idea goes into the public domain.
The concept of limited monopoly gains can be applied to the discovery of natural materials or the creation of better uses for land. The discovery or invention can be provided with a site-value patent. For a limited time, the entrepreneur would keep the extra rental from the site, or the capital gains from selling the property. But eventually, such as after 20 years, the community would collect the full rental value of the site.
The essence of Georgism or geoism is to let labor and capital fully keep its earnings, while tapping for public revenue only the surplus that is land rent. Those who believe that geoism stifles entrepreneurship are not arguing with the teaching of Henry George. As Tolstoy said, these critics simply do not understand geoism. But why don’t they understand it? They have an ideological opposition, which they justify by a superficial reading of Georgist literature and with an uncharitable interpretation.
These free-market critics in effect believe in market failure. If a landowner had title to a large tract of land, and the entrepreneurs leased land from him, and the landowner raised the rental payments when the entrepreneurs discovered or created a more productive use of the land, this stifling would be a market failure. The public collection of land rent that excludes, at least for some duration, this added value, prevents such failure. So ironically, these allodial libertarian critics of public revenue from land rent are believers in market failure and opponents of the prevention of market failure.
-- Fred Foldvary
Copyright 2010 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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