Political Economy is a study of the natural laws governing the production and distribution of wealth. It refers to the "economy" of a community, a larger geographical unit, or a nation-state- in contrast to the "economy" of an individual or a household. Founded by the French Physiocrats; see Physiocrats and the Impot Unique; major contributors to classical political economy included Adam Smith, Ricardo, Malthus, Mill and Marx. The classical analysis was being subverted toward the latter part of the 19th Century by the marginal utility, historical and neo-classical approach represented by, among others; Jevons, Bohm-Bawerk, J B Clark, Marshall, , etc. By the 1930's, the Keynesian approach had pretty much swept the field. The abbreviated primer below explores the earlier tradition.
courtesy Duke University Economics Dept
Shown above is the 19th Century political economist and social reformer, Henry George. His work represented the culmination of classical political economy which has been pretty generally obscured by a conspiracy amongst the academics and "scholars" to downplay his contributions to the discipline.
His most important writings include;
PROGRESS AND POVERTY An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth, 1879SOCIAL PROBLEMS, 1883
PROTECTION OR FREE TRADE, 1886
A PERPLEXED PHILOSOPHER, 1892
THE SCIENCE OF POLITICAL ECONOMY, 1897
Although he continued in the tradition of giants, the radical nature of Henry George's remedy has earned him little more than a footnote in contemporary economic literature. The synopsis below is based upon the natural laws of the production and distribution of wealth.
Axioms of Political Economy
Understanding the laws of political economy begins with a clear definition of terms. The simple table below will help.
Factors of Production________Distributed as
LAND----------------------------------------RENT
LABOR--------------------------------------WAGES
CAPITAL------------------------------------INTEREST
The terms used in political economy are precise as well as functional.Some additional analysis of the above definitions.
Labor is all human effort engaged in the production of wealth. Whether employed, self-employed, or not employed is irrelevant. Only the activity which consists in adapting or transforming "natural materials" or making tangible products capable of satisfying human desires and having exchange value is labor. Thus, the many useful "services" provided by doctors, lawyers, teachers, entertainers, etc., should be distinguished from labor.
Capital and Wealth are the least understood terms in political economy. Labor produces, maintains and renews capital. It's difficult to conceive of any production taking place without the use of capital. Perhaps a simple example of labor applied to land without the use of capital would be picking wild berries off trees by hand and immediately consuming them. The important thing to remember is that capital is wealth in transition rather than its end use. Nothing can be capital which is not in the category of wealth.
Wealth is the key term of political economy which deals with the laws of its production and distribution. What might be considered wealth for an individual or family is not necessarily part of the wealth of nations or communities. Consider money, stocks, bonds, promissory notes, mortgages which are assets to an individual. They could all be burned without one iota of the real wealth being reduced. In fact, this real wealth is constantly depreciating (see note on value below). Keeping in mind the precise and functional definitions used here, wealth is a) tangible b) a product of human effort c) directly satisfies a desire and d) has exchange value. Land is not a product of human effort and is therefore not wealth but the source of all wealth. The assets mentioned above do not directly satisfy desires. They are claims on wealth.
Some specific examples in applying the definition of terms above follow;
oil in the ground is included in land, oil at the refinery is wealth used as capital, oil in your car is just wealth
fish in the ocean, wild animals, trees in a virgin forest are alike part of land; fish in a seafood market, lumber in a lumber yard, a farmer's crops or cattle readied for market are capital
fish or other food on your dinner table, wood in your personal residence or your furniture is wealth reaching the consumer
wealth consists of everything from paper clips to skyscrapers; homes, office buildings, shopping centers, food, clothing, automobiles, furniture, television sets, computers, books, instruments of every description are included in the category of wealth
Toward the end of the 19th Century and continuing to the present, the neo-classical economists muddied the waters by either failing to precisely define wealth or by abandoning the effort. Additionally, they tended to equate land with capital. There is ample evidence that land is not capital.
THE MARGIN OF PRODUCTION
I shall conclude this very long chapter with observing that every improvement in the circumstances of the society tends either directly or indirectly to raise the real rent of land, to increase the real wealth of the landlord, his power of purchasing the labour, or the produce of the labour of other people. from Book I, Chapter ll, Wealth of Nations, Adam Smith
Rent=2 Rent=1 Rent=0
10 units Wealth production 9 units Wealth production 8 units Wealth production Wages + Interest=8 Wages + Interest=8 Wages + Interest=8
The Margin of Production is the least productive land in use. In the above example, it would be the 8 unit land. This no-rent or zero rent land establishes the combined yield for labor and capital (wages + interest) as well as the rent of land for each increment of more productive land. If all production had taken place on 10 unit land then rent would=0 and wages + interest=10.
Rent=8 | Rent=6 | Rent=4 | Rent=2 | Rent=0 |
---|---|---|---|---|
20 units of Wealth production | 18 units of Wealth production | 16 units of Wealth production | 14 units of Wealth production | 12 units of Wealth production |
Wages + Interest=12 | Wages + Interest=12 | Wages + Interest=12 | Wages + Interest=12 | Wages + Interest=12 |
In the #2 example, production is assumed to have doubled on every increment of land in use. Thus, rent as well as wages plus interest have increased as absolute quantities. But rent has increased as a proportion from one-ninth to one-quarter of the wealth produced while the share to wages and interest declined from eight-ninth to three-quarters. Of course, these figures are arbitrary and are only to demonstrate the fact that as societies become more productive there is a lowering of the margin of production and an increase in rent.
As Adam Smith put it in Chapter 1, the first paragraph of THE WEALTH OF NATIONS
The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.
Chapter 3, Book I is an analysis of how the division of labour is limited by the extent of the market. These markets necessarily imply a substantial population. Thus, both population and production are necessary for ground rent*.
Rent=18 | Rent=15 | Rent=0 | Rent=0 | Rent=6 | Rent=3 | Rent=0 |
---|---|---|---|---|---|---|
Units of Wealth Production=30 | Units of Wealth Production=27 | Units of Wealth Production=0 | Units of Wealth Production=0 | Units of Wealth Production=18 | Units of Wealth Production=15 | Units of Wealth Production=12 |
Wages + Interest=12 | Wages + Interest=12 | Wages + Interest=0 | Wages + Interest=0 | Wages + Interest=12 | Wages + Interest=12 | Wages + Interest=12 |
In the #3 example, production is assumed to have tripled on the land in use further forcing down the margin of production. Anticipating the expansion of production, a considerable portion of better or more desirable land is held out of use (shown as 0 production in the third and fourth cells above). This land speculation causes labor and capital to be employed less productively than it would have been with no land speculation forcing down wages and interest. In example #3, rent has increased to about 40% of total production while wages and interest have remained the same total as in example #2 but declined in proportion to the wealth produced.
The intent of the above examples is to illustrate the natural laws; the law of rent, the law of wages and the law of capital. Actually, there are an almost infinite number of examples which could be used factoring in changes in productivity, increases in population, amount of land speculation, etc. Rather than discrete grades of land, there is a gradual shading from more desirable to less desirable land parcels. Generally, location of land is the prime consideration as land in the heart of the market is much more productive than land on the fringes of a community. Many amenities go to make up either the productivity or desirability of sites either for business or for living. But it is a universal truth that some sites will be favored over others meaning that there will always be ground rent or the economic rent of land.
*Rent, Ground Rent, or Economic Rent are used here as synonymous terms. Preference is given to the term Ground Rent since it sets off the difference in the meaning of rent in the popular sense of payment for the use of a house, office, automobile, furniture or other items of wealth. In the politico-economic sense, rent or ground rent is the return (or anticipated return) for the use of land exclusive of any or all improvements.
Wages vs Interest. Labor and Capital are complementary in the production process. As defined above, there is no necessary conflict between them. Market processes and competition determine the relative portion of the wealth as wages or interest. But Ground Rent comes first (or off the top) as payment for the use of superior or more productive sites.
As emphasized above , ground rent is a natural phenomenon existing wherever there is a differential in two more sites as to productivity or desirability. In contemporary developed societies, enormous ground rents can be observed at the heart of the market; whether Tokyo, London, New York, or commercial arteries in major cities throughout the world. A few front feet strategically located in these large population centers can literally be worth a king's ransom. Oil and mineral deposits discovered underground can also yield large ground rents. The spectrum is currently being pursued by ground rent seekers. Ground rent is also involved in many other efforts to monopolize natural opportunities.
Land value or the price of land is capitalized ground rent.The amount capitalized can be any combination of actual and speculative rent to an individual owner or title holder. Let's assume an actual annual ground rent for a particular site of $1000. With a going interest rate of 5% (not to be confused with Interest as the portion of wealth to Capital discussed above), the land or site value would be $20000. If the state or a community were to siphon off say 40% or $400 of the annual ground rent, it would leave the individual owner $600 and other things being equal would reduce the land value to $12000. Hike the community collection of the ground rent to 90% and under the same circumstances the land value would drop to $2000. In contemporary societies considerable ground rent includes a speculative premium. An individual site owner, receiving little or no actual ground rent (vacant sites as an example) speculating that the future potential is perhaps $2000 annual rent might ask $40000 for his land assuming the same 5% rate. Thus, land value or the price of land grows out of a rather complex set of factors including a) population growth b) the level of production c) site specific aspects such as terrain, roads and highways, proximity to markets, amenities and infrastructure d) the going capitalization rate e) anticipation of taxes or levies in a particular area, etc. Multiply the figures above by 10 or even 100 and you will have some idea of the magnitude of land value all stemming from capitalized ground rent. In major cities, land selling for hundreds of thousands and millions of dollars (translate to pounds, yen, marks, francs, etc) is commonplace.
In many jurisdictions there is some state or community collection of ground rent perhaps varying from 10 to 30% (often referred to as land value taxation). Most of these jurisdictions combine the assessment or levy on land with that on the improvements to land whether houses, office buildings, shopping centers- lumping both land and improvements together as real estate. As emphasized above, the levy on improvements is a levy on capital or wealth.
Theoretically, full collection of ground rent (100%) by a public or community organization would result in no land value or selling price for land. Practically, anything close such as 80 or 90% collection would leave only nominal land values and be the "death knell" of land speculation. Much less than 50% collection would make the state or public body minority partners with individual landowners. Land speculation would continue with its concomitants of urban sprawl, less efficient production and a deduction from the real earnings or yield of labor and capital.
On Value, Exchange Value & Surplus Value
In his comparison of water and diamonds, Adam Smith remarked that water has considerable use value with slight exchange value while diamonds are just the reverse. The controversy over the meaning of value has continued ever since. Following is the significant passage from Para 2, Chapter V, Book I of The Wealth of Nations relating price or value to labor;
The real price of everything, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. What is bought with money or with goods is purchased by labour, as much as what we acquire by the toil of our own body. That money or those goods indeed save us this toil. They contain the value of a certain quantity of labour which we exchange for what is supposed at the time to contain the value of an equal quantity. Labour was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased; and its value, to those who possess it, and who want to exchange it for some new productions, is precisely equal to the quantity of labour which it can enable them to purchase or command.
Marx, taking his cue from part of Ricardo's analysis, developed his surplus value theory in which the capitalist is alleged to exploit labor by extracting surplus labor time from the body of workers. In its finalized form, value for Marx is based upon the socially necessary labor time involved in production. But Land, which is not produced by labor and has no cost of production had considerable value both in Marx's time as well as our own. And it has value only because the individual landowner or title holder can capitalize the ground rent saving "toil and trouble" (labor saved) and imposing it on someone else. Toward the end of Capital, Vol. 3 Marx went into great detail on the various forms and aspects of ground rent. But he will always be remembered for his "capitalist exploitation of labor" views.
Henry George's Science of Political Economy is worth the perusal of any serious student of political economy. Chapters IX thru XV contain, without doubt, the most definitive analysis ever written on the meaning, nature and sources of value. Going far beyond the confusing and often contradictory statements of Adam Smith, he demonstrated that "VALUE DOES NOT COME FROM EXCHANGEABILITY, BUT EXCHANGEABILITY FROM VALUE, WHICH IS AN EXPRESSION OF THE SAVING OF LABOR INVOLVED IN POSSESSION." (subheading of Chapter XII) And, in concluding Chapter XII;
Value in exchange, or value in the economic sense, is worth in exertion. It is a quality attaching to the ownership of things, of dispensing with the exertion necessary to secure the satisfaction of desire, by inducing others to take it. Things are valuable in proportion to the amount of exertion which they will command in exchange, and will exchange with each other in that proportion.The value of a thing in any given time and place is the largest amount of exertion that any one will render in exchange for it. But as men always seek to gratify their desires with the least exertion, this is the lowest amount for which a thing can otherwise be obtained.
But while value always means the same quality-that of dispensing with exertion in the satisfaction of desire-yet there are various sources from which this quality originates. These may be broadly divided into two-that which originates in the toil and trouble involved in production, and that which originates in obligation to undergo toil and trouble for the benefit of another. The failure to note this difference in the sources of value is the cause of great perplexity.
In Chapters XIV and XV, Henry George brought out the crucial distinction between value from production which is wealth in political economy and value from obligation which is not wealth and is generally much more long-lasting than wealth which tends to depreciate over time.
To sum up this discussion of value, the real surplus value , which was recognized by the illustrious Frenchmen known as the Physiocrats more than two centuries ago, is ground rent. At all times and places, ground rent is a surplus value dependent upon population and production which can be capitalized into land value in societies with a system of land tenure which encourage high selling prices for land.
ON LAND TITLES, PROPERTY & THE STATE
Trace the origin of land titles back through the centuries and you will invariably find them based upon force or fraud. While not able to articulate ground rent or the law of rent, sovereigns and would-be rulers recognized ownership of land as the source of wealth and power. As the German sociologist, Franz Oppenheimer, put it so well in his opus THE STATE, they were engaged in the political means for obtaining wealth rather than the economic means.
John Locke recognized the distinction between property in land and property in the product of labor. In the Second Treatise on Civil Government he wrote;
Though the earth and all inferior creatures be common to all men, yet every man has property in his own person; this nobody has any right to but himself. The labor of his body and the work of his hands we may say are properly his. Whatsoever, then, he removes out of the state that nature hath provided and left it in, he hath mixed his labor with, and joined to it something which is his own, and thereby makes it his property. It being by him removed from the common state nature placed it in, it hath by this labor something annexed to it that excludes the common right of other men. For this labor being the unquestionable property of the laborer, no man but he can have a right to what that is once joined to, at least where there is enough, and as good left in common for others.
Locke was correct in recognizing a natural right of property in the product of labor but fell into confusion because he did not understand the genesis of ground rent.
The institution of private property in land (which includes land beneath improvements as well as unused land) differs essentially from private property in labor and capital. Or, in terms of the yield, private property in ground rent as distinguished from private property in wages or interest. The sovereign or ruler must provide some sort of title deed or recognition of ownership for the former. No such state authorization is needed for recognition that the fruits of production belong to the producers. To the extent that the state levies or taxes labor or capital or the wealth produced, to that extent it is stealing just as surely as any private thief. Yes-TAXATION IS THEFT. Community collection of ground rent, on the other hand, is merely a collection of that value which is created by the community. It is just as well as expedient.
The desire for any particular item of wealth is generally motivated by wanting to possess and use that item. (a possible trivial exception being collectables such as rare paintings, coins, antiques, etc.) The desire for land has a two-fold motivation. First is possession and use. This security of tenure is necessary so that producers can enjoy the fruits of their production. Second is the potential gain from merely holding title to land. Land speculation may not always be profitable to the individual but the net effects are always harmful to the society.
In Chapter 2, Book VI of Progress and Poverty, following an exhaustive analysis of the production and distribution of wealth, Henry George spelled out the true remedy;
This, then, is the remedy for the unjust and unequal distribution of wealth apparent in modern civilization, and for all the evils which flow from it:We must make land common property.
We have reached this conclusion by an examination in which every step has been proved and secured. In the chain of reasoning no link is wanting and no link is weak. Deduction and induction have brought us to the same truth-that the unequal ownership of land necessitates the unequal distribution of wealth. And as in the nature of things unequal ownership of land is inseparable from the recognition of individual property in land, it necessarily follows that the only remedy for the unjust distribution of wealth is in making land common property.
SUMMARY AND CONCLUSIONS
Political economy is not a set of dogmas but the relationship of a set of facts. Unlike contemporary economics, which could well be considered an arcane discipline, the laws of the production and distribution of wealth are readily understandable. Land, Labor and Capital are the factors of production. Combined they produce all the Wealth of the world with the primary avenue of distribution as Rent, Wages and Interest respectively. Land is the passive factor of production access to which is essential if any production of Wealth is to take place.
An individual can wear one, two or all three hats- landowner, laborer and capitalist. But the landowner qua landowner is essentially a parasite on production.
It can be demonstrated that a tax on Capital can be shifted and ultimately is a tax on Labor. Collection of Ground Rent cannot be shifted and must be borne by the landowner. In the final analysis necessary public revenue must come from either Land or Labor.
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