Foreword - land ownership

Warren J. Samuels

THE TREATMENT OF the institution of land ownership is one of the underground chapters in the history of economic thought. The theory of rent--rent in the Ricardian sense--is much more conspicuous but is by no means fully comprehended. The theory and practice of land taxation, especially of unimproved land, is extremely controversial, yet derives from one of the oldest established theories in economics, that of Ricardian rent.

The ownership of land has historically conveyed not only social and economic power but also political power; the term "landlords" is instructive. Government has often, albeit to varying degrees and in varying ways, been controlled by the owners of real property. Such has been an institutional remnant of feudal and post-feudal societies in Europe and comparably in other continents. The distribution of property, largely in the form of land, with which the modern economy commenced, the lasting vestige of earlier social forms, has channeled the organization, operation and performance of capitalist and other modern economic systems. And, not surprisingly, the control of government by landed interests and classes has influenced not only the form which modern law--e.g., business law--has taken but also taxation, especially of land. Moreover, inasmuch as land has been so economically, socially and politically important, land ownership has a transcendental if not sacral status in the minds of both landowning and non- landowning people, one frequent consequence of which is common attitudes adverse to land taxation.

David Ricardo and others developed the theory of rent in the early nineteenth century. For some time before, it had been understood by sophisticated writers that the high price/rent of land does not cause the high price of food, but the high price of food, driven by growing population and the correlative demand for food, generated the high price/rent of land. Ricardo's theory helped ground and systematize that understanding.

For Ricardo, first, rent was the return to the owner of a factor of production, land, in permanent inelastic supply; changes in the price of land generally could not increase the aggregate supply of land, and each piece of land was nonreproducible.

Second, Ricardo argued that, as between lands of differential fertility and differential location, the latter in relation to markets, rent is differential in amount. The owners of more fertile land and better situated land receive higher rent per unit of land. Ricardo explicated the phenomenon of differential fertility in terms of increasing costs, along both intensive and extensive margins. As increasing demand for food, driven by population growth, led to increasing food prices and resort to more costly levels of production on both individual pieces of land (intensive margin) and less fertile pieces of land (extensive margin), the resulting rent to levels of production and pieces of land undertaken at lower unit cost, would both increase and be differential in amounts.

Technically speaking, therefore, rent in the Ricardian sense was the sum of the supramarginal returns. The questions then were, what drove the level of rent and who would get it, and why/how.

The level of rent (and thereby its capitalization in the value of land) was driven by the demand for food, which was in turn driven by the growth of population, i.e., of society. In other words, given the return to the landowners' investment in clearing and farming the land, which took the form of implicit interest and profit, rent was due to a source having nothing directly to do with the efforts of the landowners. Rent was, in this context, an unearned increment. Furthermore, rent was, generally speaking, a residual derivative of levels of production under increasing costs of production on both intensive and extensive margins. This being the case, how the rent was distributed would have no effect on the level of rent.

The foregoing has to do with Ricardian rent, the sum of the supramarginal returns. Rent as paid to landowners includes, it should be clear, Ricardian rent plus interest and profit on investment and enterprise.

Ricardian rent as the sum of supramarginal returns can be distributed in different ways as a matter of custom and institutions, including law. Different systems of land tenure, renters' rights, tithes, feudal dues, and taxation serve to distribute Ricardian rent to different established claimants. Actual payments designated "rent" are rarely, if ever, equal to and exhaustive of Ricardian rent, even aside from implicit interest and profit.

The understandings (1) that Ricardian rent was residual, and therefore taxation would have minimal if any disincentive effects, and (2) that Ricardian rent was generated by the growth of society, and therefore not directly related to the efforts and enterprise of landowners, led to the conclusion that such rent was both unearned and a proper subject of taxation. The conclusion applied in principle to both unimproved land and to the land component of improved land. This is the conclusion derived from Ricardo's theory of rent and advanced by Henry George as the so-called "single tax."

Needless to say, the attempt to levy or to increase any tax is unpopular with the owners of the object of taxation. This has been particularly and acutely the case with landowners confronted with Georgist efforts to tax land values (the capitalization of rent). Such taxation was seen to be an attack on the institution of private property in general and landed property in particular. It was seen by some as a "taking" of the productivity of the land belonging to the landowner. It was construed by others as a challenge to the institution of land markets understood as a lottery, a mode of betting on the results of future population growth.

The history of economic thought has been to no small degree a history of struggle over the institutional bases of the distributions of income and wealth. The history of the reception and treatment of Ricardian and Georgist ideas on rent and the taxation of land values has been a part of these developments. Economists, on the one hand seeking a safe and secure status in the pantheon of intellectual disciplines, and on the other, notably in England, often employed by universities and worshipping in churches which received no small amount of their income in the form of rent (and tithes), often if not typically reacted with disdain if not horror to Georgist tax-policy proposals. Yet the aforementioned conclusion as to the suitability of land taxation follows as a matter of logic from a well-established corpus of theory, one which is not only well-established but has no substantial competitor in the explication of the origin and nature of rent.

Establishing the suitability of land values for taxation nonetheless requires an additional normative premise if such taxation is to be pursued. Thomas Robert Malthus, another original theorist of rent, added to the theory of rent a premise postulating the desirability of maintaining a ruling landed aristocracy and on that basis supported the Corn Laws which restricted the importation of food into England, thereby keeping rents high. Ricardo himself interpreted the Corn Laws from the perspective of the interests of workers and employers, thereby using the theory of rent to oppose the Corn Laws. Taxing land values on the basis of the theory of rent rejects all claims for protecting rental interests against the ideas that rent is due to the growth of society and is a residual largely immune from disincentive effect, and affirms the impropriety of unearned income while seeking to minimize the disincentive effects of taxes on earned income. The Ricardo-George analysis is compelling: the increase in land values i s due to the growth of society and is a fit object for taxation.

The taxation of land value has been undertaken around the world on both Georgist and non-Georgist grounds. At the very least, land is a ready target of taxation, if only because it is immobile and taxation can be correlated with land registry.

This work edited by Robert V. Andelson does several things: It surveys the systems of land-value taxation around the world. It indicates the enormous variety of land-value tax systems to be found. And it indicates the variety of problems which emerge in instrumenting and administering such taxes, problems which are due to (1) the nature of the tax, (2) the institutions and cultures in which the tax is levied, and (3) the level of economic growth of the economy in which it is levied. In all cases, the equity and financial case for land-value taxation must be juxtaposed to other considerations, however compelling the logic of Ricardian rent theory, and it is very compelling indeed.

This book is heartily recommended for anyone interested in understanding the present-day status of land-value taxation.

Professor Samuels (economics, Michigan State University) recently accepted emeritus status, having taught at Michigan State since 1968. His Ph.D. was earned at the University of Wisconsin. He is a past president of the History of Economics Society and of the Association for Social Economics, and a distinguished fellow of the former. His awards include the Veblen-Commons Award from the Association of Evolutionary Economics, the Thomas Divine Award from the Association for Social Economics, and the Distinguished Faculty Award from Michigan State University. Among his many books are The Classical Theory of Economic Policy (1966), Pareto on Policy (1974), and, with S. G. Medema and A. A. Schmid, The Economy as a Process of Valuation (1997). A five-volume collection of his work was published by Macmillan and New York University Press (1992). He wrote the Foreword to the present book.

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