In-Depth Essay

Earned vs. Unearned Income

by Peter Barnes

Part One

Not long ago a West Coast bank president mentioned to me that a piece of land he had purchased near San Francisco, situated alongside a new state highway had risen in value by about $100,000 in a few years. Several miles away was a low-income Chicano neighborhood, and naturally the new highway cut right through it, forcing residents to give up their homes and seek, probably without much success, equivalent low-cost housing elsewhere in the area. The bank president noted a certain irony in the fact that the same public investment could cause hardship to low-income families and simultaneously bestow a $100,000 windfall upon a man who scarcely needed it. But, he added, he would keep the money.

The bank president's windfall is an example of what John Stuart Mill called the "unearned increment" the increase in land value brought about by general progress. The increment is unearned because the beneficiary has done nothing - other than buy land and wait-that might entitle him to be rewarded.

The question of what is earned and unearned becomes more complex when one considers ownership of capital rather than land. If a man invests his savings in, let us say, a new brick factory, he is surely entitled to a return on his investment. Society needs bricks; anyone who builds a brick factory is performing a socially useful task and should be rewarded. But the potential for unearned gain is present. If the brick factory happens to be located in a community that, for one reason or another, begins to thrive and grow, the factory appreciates in value. Some of the increased value will be attributable to the factory owner, and some to the efforts of others, but the factory owner will reap it all.

Suppose that the factory owner gradually buys out all other brick manufacturers in the area. Now he will be in a position to reap even more spectacular gains. The value of all of his factories will go up, as will his operating profits. That portion of his newly acquired wealth which is attributable to monopoly is clearly unearned. The factory owner, as monopolist, adds nothing to the general wellbeing. He is not producing more bricks than the individual factories, separately owned, once produced. He is probably producing fewer bricks and charging higher prices for each.

This essay is part of a series written by Peter Barnes for The New Republic magazine in 1971-72. We think you'll be pleased -- and perhaps shocked -- to see how timely and insightful the essays are for today. Each essay will be republished, in installments, by The Progress Report.