Our Unconscious Economic Theories
Economic Misconceptions
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Why have the economic views commonly known as Georgism or geoism not become more popular? Perhaps, says author Ian Lambert, people in our civilization hold unconscious assumptions about economics that preclude, or make it difficult to understand, the Georgist viewpoint. We are reprinting Lambert's important presentation on this subject in weekly installments. |
PART FIVE
(Part One) (Part Two) (Part Three) (Part Four)
by Ian Lambert
9. The Just PriceThe idea of the "just price" dates at least from the Middle Ages. It provides that there are moral criteria by reference to which the price of any given thing, whether or not freely negotiated between the transacting parties, can be said to be moral or just. The concept of the just price has been used (or abused) for centuries to justify interference with the free market. Indeed, much of Adam Smith's and the Physiocrats' work can be seen as a concerted attempt to refute the idea of the just price and thereby justify the operation of the free market.
We may consider it rather quaint and amusing now to think of prices as being "just" or "unjust", but the idea of the just price still persists in certain areas, perhaps most notably in the phrases "fair wage" and "fair rent". These phrases imply that there may be unfairness or injustice in paying a market wage or demanding a market rent. The fields of employment law and landlord and tenant law have in this century (certainly in Britain) been the subject of extensive interference with the free market and what one might term "freedom of contract" principles. In fact, the two problems are opposite sides of the same coin. It is the inexorable rise of the economic rent of land that acts with the competition of labor for work to crush wages to the lowest acceptable in a particular community - what Ricardo termed the "iron law of wages".
Attempts to regulate wages, for example by introducing minimum wage laws, are an attempt to interfere with the natural laws of distribution and, as we have seen, interference with distribution inevitably results in reduced production. For as long as people are not compelled to employ labor, attempts to increase wages above their natural market rate will only result in less labor being employed.
Rent controls act slightly differently. This is because of a misapprehension concerning economic rent. Lawyers and politicians think of rent solely as what is paid by the tenant to the landlord; if nothing is paid there is no rent. Georgists know differently. Rent is a naturally occurring fund. It is the potential return arising solely from use of a particular site. Anyone who has use of that site has access to that rent. It cannot be abolished by Act of Parliament; it cannot be destroyed by agreements between landlord and tenant. The most that can happen in either case is that such potential is never tapped, in which case the whole community is the loser.
This fact means that a just apportionment of rent cannot be made as between the individual parties, and all attempts historically to cure the "land problem" by the courts on a case by case basis have always failed for this reason. The landlord and the tenant are usually the only parties involved; the court has to apportion between them; the claims of each may be equally just or unjust, particularly where there have been windfall benefits accruing to the land due to the actions of neither landlord nor tenant. Such cases are like actions between highwaymen in partnership disputing the ownership of their ill-gotten gains; the court is being asked to apportion property (rent) between two people neither of whom have any superior claim to it.
Henry George's response to the theory of the just price can best be put like this. Provided the subject matter of a contract (e.g. goods sold or services performed) be not immoral, how can a freely negotiated contract between parties of full capacity, where there is no misrepresentation and no duress, be immoral? That price or rate for a thing is moral where it is the natural or market price or rate prevailing in a market where there is genuinely free competition.
The only reason why the ideas of the "fair wage" and the "fair rent" persist is because in neither case is there a genuinely free market. Land monopolization means that the laborer must compete with others for employment, and does not have the option of access to land for self-employment at a true rent. Land speculation similarly distorts rents charged, because the supply of land is fixed and cannot be increased, land being withheld from production thereby forcing market prices above their true rates.
George does not seek to pass moral judgement on the theory of the just price, merely to show that it fails properly to analyze the problem.
(One final respect in which the theory of the just price continues to hold appeal, and justifiably so, relates to the position where people accept goods or services, pursuant to a contract, but prior to the price having been agreed. In such circumstances, it may not be possible to return the goods (still less the services), if having heard how much they cost we decide we do not want them after all; but we feel obliged to pay. In common parlance we may feel we have been "ripped off". However, the law has a simple answer to this problem: where no price has been agreed, the buyer must pay the seller a reasonable price. Invariably, this means a market price. If the transaction is of a standard type which the seller customarily enters into, then the buyer may be forced to pay his standard prices, even if these can be said to be above the overall market; but this is on the basis that the parties implicitly agreed this; (if the "standard" prices are truly outrageous it is possible that the court would hold that the buyer had not implicitly agreed to pay them). On the other hand, if the transaction is novel to both parties, the court will hear evidence as to what the market price for such goods or services is, by specific reference to market conditions. In such cases, the just price is the market price.)
10. The Abolition of Rent
There has been no cause which was dearer to the hearts of oppressed tenants in the nineteenth century than the communists' promise that in a communist state rent would be abolished. But, as we have seen, this is based on a total misapprehension. Rent cannot be abolished; it can be justly apportioned or misappropriated; or it may be left untapped, either by legislative interference or by agreement. The latter happens when, for example, planning and development controls prevent a site from being used to its full potential. In such circumstances, we may talk loosely of rent being abolished, but in truth it has only been suppressed. The community as a whole is the loser and the only moral justification can be that everyone suffers equally; but this is never the case, for development restrictions on one site always render neighboring sites which have no such restrictions more valuable - so that (in part) the rent is not so much misappropriated as misdirected. Moreover, it is noticeable that it is precisely the owners of such neighboring sites who are the most vociferous in objecting to the lifting of development controls and the granting of planning permission. It is a great mistake to think we all suffer equally.
(It was David Ricardo who first clearly formulated the law of rent, which derives from the advantages of one site over another. It is truly ironic in our relativistic age that we should fail to understand the relative nature of rent - the one thing in political economy that is fundamentally relative. Rent cannot be abolished until the advantages of any one site over another are abolished.)
END OF PART FIVE
Part Six
(Part One) (Part Two) (Part Three (Part Four)
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Ian Lambert is a globetrotting man of many talents. This presentation was originally made at the 10th Annual Conference Of The Council Of Georgist Organizations, Santa Fe, New Mexico, July, 1990.
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