Copyright © 1998 by Paul F. deLespinasse, Adrian College
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Footnotes are at the end of the chapter.
"What most prevents the realization of the injustice of private property in land is the habit of including all the things that are made the subject of ownership in one category, as property, or, if any distinction is made, drawing the line, according to the unphilosophical distinction of the lawyers, between personal property and real estate, or things movable and immovable. The real and natural distinction is between things which are the produce of labor and things which are the gratuitous offerings of nature.... These two classes of things are in essence and relations widely different, and to class them together as property is to confuse all thought when we come to consider the justice or the injustice, the right and wrong of property."Henry George, Progress and Poverty
There are two basic arguments in favor of economic markets. One argument is political, the other economic. We will begin with the political argument, which is more fundamental: only a market economy is compatible with the rule of law.
A market economy is one where prices are not regulated by government.
A government which employs no pseudolaws cannot regulate prices, because price controls are not general rules of action. A price always exists within an association consisting of two parties, both of whom take at least one action. Jones gives Smith a crate of apples in return for which Smith gives Jones a crate of peaches. The crate of peaches is the price that Smith pays for the apples she receives. The crate of apples is the price that Jones pays for the peaches.
Prices cannot be controlled by law, because a law must be a general rule of action enforceable by sanctions. Smith's action (transferring a crate of peaches to Jones) must be either legal or illegal. If it is illegal, we are not speaking of a regulation of prices at all, for the illegality does not result from how much is received in exchange. If the action is legal, then it cannot be rendered illegal by virtue of how much is received in return, for this would make the illegality of Smith's action contingent on the action of somebody else. It is not due process of law to punish one person because of someone else's action.
We must carefully distinguish the regulation of prices from an apparently similar situation where we might conclude either that what somebody has done is a single "large" action or that it is a set of several "small" actions. In the United States, for example, it is legal to drive a car (assuming proper license, insurance, etc.). And it is legal for adults to drink alcoholic beverages. However it is illegal to drive while drinking or to drink while driving. Thus, two actions each of which is perfectly legal become illegal when taken together. This does not violate the requirements of the rule of law, since both actions are taken by the same person. The two actions can therefore plausibly be regarded as a single "compound" action for purposes of the law.
In sharp contrast, the two actions in the price control context are taken by two different people. They therefore cannot be regarded as a single action for legal purposes, unless the two people are considered to be members of a single organization and the action is considered to be the action of the organization.
A basic principle of law, then, is that voluntary associations are legitimate unless one of the actions being exchanged is illegal. The ratio of the exchange (i.e. the price paid one direction or the other) is absolutely irrelevant. Ultimately, if a person has the right to perform an action at all, he or she must have the right to perform that action for free, i.e. to make someone a gift of it. But if the action can be performed for free, a fortiori it can be performed for a very low price. If Jones owns the apples, he can give a crate of them to Smith for free, or he can exchange them with her for one peach (or even one peppercorn!). The law can have no concern with this. But if very low prices are o.k., so too are very high prices since the crate of apples can equally be considered the price (and a very high one!) Jones pays for the one peach.
Since price controls are not and cannot be laws, they will not exist in an ideal society. But an economy where government does not regulate prices is a market economy. The fundamental argument for a market economy is thus a political one. There are also, however, important economic considerations which call for an economy based on markets.
Because they are not regulated by government, the prices at which things are exchanged in a market economy can be called natural, as distinguished from artificial prices.
"Price" can be an ambiguous word. When somebody has a house for sale, we may say that the price is $189,000. But $189,000 is not the price of the house and there is nothing "natural" about it. It is only the asking price, determined unilaterally by the owner.
If nobody is willing and able to pay the asking price, either the house will not be sold or the seller will have to accept some smaller amount. If the house is finally sold for $165,000, this is the actual price, the exchange price, of the house. This is the price in the most fundamental sense of the term. This price is determined socially, not unilaterally. It reflects relationships not only between the seller and the buyer (expressed by their mutual consent to the sale at $165,000), but also between the seller and all other possible buyers, and between the buyer and all other possible sellers. If even one other person had been willing and able to pay more than $165,000 for this house, then the person who in fact bought for $165,000 would not have been able to do so at that price.
Likewise if some other seller had been willing to sell equivalent houses for $125,000, the seller here would never have found a buyer at the higher figure. Buyers will always prefer to get the same thing for less even though they might be able, and willing if necessary, to pay the higher amount. (The maximum amount that a person is willing and able to pay for something, if necessary, can be called the value that he or she places on the thing in question, as distinguished from its price. The actual price paid will be equal to or less than, but never greater than the value that the buyer places on the thing to be acquired.)
The $165,000 at which the house actually sells may not be the exact natural price. Actual transactions only approximate the natural price, with much depending on the sophistication, patience and haggling skills of buyer and seller. The natural price is that at which things tend to be exchanged in a market economy, not the actual exchange price in any specific transaction.
The basic elements of a market economy can be summarized in a simple table. The table expresses the relationships between the prevailing price at which some specific thing is bought and sold, the quantities of that thing supplied, the quantities demanded, and the relationship between the supply and the demand at each possible prevailing price. (Table 1.1)
Table 1.1: The market for widgets
Price/widget quantity quantity results tendency
supplied demanded of price
$250 1000 units 650 units surplus down
$200 750 units 750 units NATURAL PRICE
$150 700 units 850 units shortage up
$100 500 units 1000 units shortage up
"Quantity demanded" is the amount of some product that people are willing and able to buy at a given price. For example, in table 1.1 people are willing and able to buy 1000 widgets per year if the prevailing price is $100 per widget. "Quantity supplied" is the amount that people are willing and able to produce at a given price. In table 1.1 people are willing and able to produce 500 widgets per year if the prevailing price is $100 per widget.
The table indicates that with a price of $100, there will be a severe shortage of widgets. 500 widgets will be produced but 1000 could have been sold at that price. In these circumstances the producers will naturally tend to raise their asking prices. As long as they do not increase them too much they will still be able to sell all their widgets. As the price of widgets goes up to $150, however, there are two interesting side effects. First, the quantity demanded will decrease. Some people will no longer be willing to buy widgets; they do not value them at $150. Others will no longer be able to buy because they do not have the $150 or their other requirements are more pressing. Second, the quantity supplied will increase. As the price that can be gotten for widgets increases, the number of widgets that people will be willing and able to produce will increase.
As the prevailing price rises, quantity supplied increases and quantity demanded decreases. Starting as we did in table 1.1 with a shortage at the $100 price, as the quantity supplied increases and quantity demanded decreases, at some point they must meet. At some price, the number of widgets produced will become exactly equal to the number people are willing and able to buy. The price at which this happens is called the equilibrium price or the market-clearing price. This is the same thing that I (following Adam Smith) am calling the natural price.
Market pressures and the self-interest of buyers and sellers push prevailing prices which are below the natural level up towards that level. Likewise, these same factors work to depress prevailing prices that are above the natural level down towards that level. In table 1.1, for example, at a prevailing price of $250 per widget, the production is 1000 per year but people are only willing and able to buy 500 units. There is a surplus of widgets. Like the person with the overpriced house, sellers who insist on receiving the full $250 for a widget will find all of the business shifting to sellers who are willing to cut their price. The market exerts a downward pressure on the price. The market thus pushes prices inward towards the natural level both from above and from below.
Remembering that a natural price is natural in the sense that it is unregulated by government, let us now consider what happens when government sets out to regulate a price. It is barely conceivable that the regulated price will be set exactly equal to what the natural price would be in the absence of regulation. Some people, it might be argued, would thereby benefit, because not all people in a market economy actually pay or receive exactly the natural price for something. But the market price is not static. It changes from time to time as conditions change. The natural price can therefore be determined only experimentally, as it were, by letting nature take its course. When the costs of regulation are added to the certainty that regulated prices will only rarely coincide with natural prices, regulations intended merely to guarantee that unsavvy individuals won't get "taken" are clearly a bad idea.
Most efforts to control prices, of course, are intended to force the price down to less than the natural price, or to force it up to more than the natural price. Since the natural price is the only one at which the quantity supplied of something will be equal to the quantity demanded, an inevitable consequence of regulating prices is to cause shortages or surpluses. To return to table 1.1, if the government controls the price of widgets, and sets the price at $150, the quantity supplied will be 700 units per year while the quantity demanded will be 850 units. The natural price would be $200, and at a regulated price of $150 there is an annual shortage of 150 widgets.
Shortages and surpluses can happen even when government is not regulating any prices. Changing circumstances may impact on purchases and/or production very quickly, and it may take time before the appropriate price to be determined experimentally. In the meantime, there will be shortages or surpluses. But these shortages or surpluses will be temporary ones; in due course the market will adjust itself to the new conditions. Prices will rise or fall to the extent necessary to reach the new natural level, and the shortages or surpluses will disappear once prices have found their natural level. Markets are self-correcting. Shortages or surpluses that occur when prices are regulated by government, on the other hand, are not self-correcting.
Regulated prices also produce economic waste. If the price of something is set artificially, it becomes a poor guide as to the extent to which it makes sense to use that resource rather than some other.
In the Soviet Union, for example, the price of bread was set artificially low. It was therefore more profitable to feed bread to farm animals than to buy feed grain, which was not equally underpriced. The price of bread did not even equal the costs of producing it. More labor and natural resources were consumed in feeding a farm animal bread than if normal feed grain was used. But this fact meant little to people who found it cheaper to feed bread to the animals. Recognizing the waste thereby produced, the Soviet government put up signs admonishing: "Don't feed bread to your animals!" (And it cost something to put up the signs, too!) Also, it made using bread for this purpose a criminal act! In a market economy, by contrast, a person who finds it profitable to feed bread to animals (perhaps stale bread that has no other commercial value) will do so, but there are usually cheaper animal foods available.
Regulating prices also produces corruption. One kind of corruption is a black market. A black market is found when people "illegally" buy and sell something at mutually agreeable prices rather than at the controlled price. A second kind of corruption invited by price controls is bribery of the officials in whose hands the power to fix specific prices has been placed.
The Soviet economy during the "mature socialism" of the Brezhnev period was a prime case of the economic chickens coming home to roost. For over half a century virtually all prices had been controlled from the center. The results were exactly what could be expected when prices throughout an economy are artificial rather than natural ones. Shortages and the resulting lines of people waiting to buy things were not just features of the food and household goods sectors of the economy. Automobiles were so underpriced (relative to the natural price) that there was a two year waiting list to buy a car. People could wait ten or fifteen years to get a telephone in their apartment, or to get an apartment itself for that matter.
In the production sector, matters were equally chaotic. Auto factories would claim (quite truthfully!) that they were not receiving the promised supplies of metal, glass, or tires. Tire factories in turn would blame their shortfalls on failure to receive needed rubber and chemicals, etc. If needed materials were actually being produced in the required quantities, they often could not find transportation capacity to get them to where they were needed , or they would get ripped off by thieves during transit.
The Soviet experiment in repudiating and repressing economic markets produced a paradoxical situation. The economy, which was supposed to be a planned one, was a shambles that looked as if it could not have been planned by anyone in their right minds. The paradox of planning is that there is much more order and coordination in an "unplanned," market economy, than there is in a planned, non-market economy. American auto makers do not normally find it impossible to obtain the components and materials needed to produce as many cars as they can hope to sell. But the market economy enjoys the assistance leant to individual and group planning by the existence of natural prices and the social feedback that such prices provide.
The fact that the rule of law categorically forbids direct control of prices does not mean that government must take a completely passive or laissez-faire approach to the economy. Government can do many things to regulate an economy in ways which are fully compatible with the rule of law. Some of these legitimate forms of government action will have consequences for prices one way or the other.
For example, if a sudden shortfall in gasoline supplies develops, government need not rely entirely on the market to eliminate the resulting shortage. Of course if the government took no action at all, the market would take care of the problem. The shortage would drive prices up, which in turn would reduce purchases until they came into equilibrium with the available gasoline at some new natural price. But another alternative would be for the government to introduce gasoline rationing, an approach which is compatible with the rule of law if done in the right way.
Admittedly, historical examples of rationing have usually been arbitrary rather than legal. Some legislature or administrator assumes the power to decide who needs or ought to get more gasoline and who should get less or even get none at all. Coupons are then issued to the various people or institutions proportionately to this arbitrary formula. But the basic purpose of rationing is to limit aggregate demand for gasoline (or whatever), and it is possible to do this in completely non-arbitrary ways. The only decision that is in any way a matter of judgment is what the total number of gallons available to be allocated is going to be. Once that decision has been made, the number of people in the population is divided into it, and each individual is issued an equal number of ration coupons. A law is enacted prohibiting the sale of gasoline without receipt of the corresponding number of coupons. Nobody is singled out for special treatment. Everybody is equally subject to the law, and nobody is placed in the preferred position under that law that would be implied by an unequal distribution of ration coupons. Since the aggregate demand is limited by the number of coupons issued, prices will not need to rise in order to eliminate the shortage that otherwise would have existed. Government has thus had an effect on the price, but it has not regulated the price. Its hands are clean!
Some people might feel that such a rationing scheme would be outrageous. It allocates no coupons at all to important organizations such as factories, farms, or even the transportation industry, which use large quantities of gasoline. It doesn't even allocate any gasoline to the government! And it does assign coupons to people who do not even own cars, including children in grade school and babies in the cradle. Surely these latter people do not need any gasoline! But such criticisms ignore the fact that the basic purpose of rationing is to limit aggregate demand (and therefore indirectly prevent price increases), not to allocate gasoline to the people or organizations who "need" it. As long as people are free to use the coupons themselves or to sell them to other people, whose who "need" the gas will be able to buy all the coupons for which they are willing and able to pay the natural price. Government has no interest in forbidding the buying and selling of ration coupons, for such sales do not affect the aggregate demand for gasoline, but only who will be able to purchase the gasoline that is available. And of course government cannot regulate the price at which ration coupons are exchanged, for it cannot compatibly with the rule of law regulate any price.
Rationing does not actually prevent the price of gasoline from rising as a result of the sudden shortage. The total cost now includes both the price paid for the gas itself and the price paid for the necessary ration coupons. The total price paid for a gallon of gas, namely the natural price of the gas itself plus the natural price of the ration coupon, will be equal to what the natural price of the gasoline alone would be in the absence of rationing. So why bother with rationing, with its considerable transaction costs (the costs of printing, distributing, and exchanging the coupons)? The only conceivable reason would be to prevent a windfall from accruing to the owners of oil wells. But as we will see later in this chapter, in an ideal society such a goal would be quite unnecessary.
Rationing is one way government can influence prices which it cannot legitimately regulate. Other possibiliaties include subsidies, manipulation of technology via government- sponsored research and development projects, and the decisions made by government in its own capacity as a buyer or seller of goods and services. Like all other parties to voluntary associations, government-as-contractor must have complete freedom to agree or to refuse to agree to proposed transactions. Thus like all other parties it participates in the social processes by which natural prices are determined in a market economy.
The rule of law has no difficulty in providing for the exchange of things to which the involved parties have rights. Exchanges can be conducted, according to the rules of contract and property, by the mutual consent of the parties.
For example, my wife and I own a house. We own it because we bought it in 1992 from the previous owner. By virtue of the laws of property and contract, and our mutual consent to the terms of the sale, her house became ours. Of course, before she could transfer the house to us, it had to belong to her. Otherwise, it would not have been hers to transfer.
The previous owner held title because she in turn had bought it from a still earlier owner. And so forth, until ultimately we can trace ownership of the land, long before the house was built, back to its first owner. But here a problem arises: why did the land belong to the first owner? From whom could the first owner have acquired title?
Clearly, transfer of ownership by mutual consent cannot explain how ownership itself originates. Ownership must exist before it can be transferred. Nor can the problem be avoided by assuming, as is usually done, that the original owner was a government, for we must still ask how that government acquired title to the land.
If the government was a universal one we would not have to ask why land belongs to it rather than to some other government. But no such universal government exists. Even if it did the question would still remain: by what logic and premises should ownership of land belong to government at all? As Robert Nozick has pointed out:
"(I)t is not only persons favoring private property who need a theory of how property rights legitimately originate. Those believing in collective property, for example, those believing that a group of persons living in an area jointly own the territory, or its mineral resources, must also provide a theory of how such property rights arise; they must show why the persons living there have rights to determine what is done with the land and resources there that persons living elsewhere don't have (with regard to the same land and resources)." Footnote 1.
And as Justice Johnson noted in Fletcher v. Peck:
"(Although)... the right of jurisdiction is essentially connected to ... the national sovereignty....it is not so with the interests or property of a nation. Its possessions nationally are in no wise necessary to its political existence; they are entirely accidental, and may be parted with, in every respect, similarly to those of the individuals who compose the community." Footnote 2.
The problem with establishing original ownership of land and other natural resources is that it cannot be done by law except in one very special case. A general rule cannot determine specific owners. A rule saying that all land is owned by government is not general since it singles out government for a privileged position.
Government's claim to a monopoly of the right to inflict sanctions also singles government out for a privileged position, but this privilege is inherent in the nature of government. Jurisdiction is the essence of government, that without which there is no government. But as Justice Johnson pointed out, there is nothing inconceivable about a government which owns no land or other natural resources.
Many philosophers have tried, unsuccessfully, to discover a nonarbitrary way to establish the original ownership of land and other natural resources. The approach suggested by John Locke, an early modern English philosopher, was especially influential. According to Locke, a product's value is created by the labor of the person who produced it, and therefore the product itself should be considered the property of its producer. When we "mix" our labor with natural resources, they thereby become our property. Thus does ownership of natural resources, including land, originate.
Locke's approach attracted considerable support in its day. If the results of a person's labor do not belong to that person, then who do they belong to, and why? And little or nothing can be produced by pure labor, that is, without "mixing" or applying that labor to materials of some sort or another. It therefore seems to make sense to recognize a property right in those resources with which one has worked.
However as Locke himself admitted, such a system would work satisfactorily only under conditions of a very small population relative to the available natural resources:
Though the earth and all inferior creatures be common to all men, yet every man has a 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 has provided and left it in, he has mixed labor with, and joined to it 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." (Emphasis added.) Footnote 3.
Since dense populations can exist, Locke's approach is not satisfactory as a general principle, and since dense populations do in fact exist his formula is simply inapplicable to the actual world without considerable modification.
Without denying Locke's premise that every person has the right to his own body and to the labor of that body, the problem is to find a non-arbitrary way to determine who gets to "mix labor" with which specific pieces of nature when nature is finite.
"First come, first served" discriminates on the basis of generation. Those who come first stake out claims to all land and other natural resources and there is none left for latecomers. But the opposite strategy of completely denying property rights and keeping all of nature in one vast "commons" which everyone may freely use whenever they want to is also completely unsatisfactory. True, a "commons" would provide a non-arbitrary answer to the question of rights to land, and would therefore not come into conflict with the requirements of the rule of law. But it would also produce a disaster: the "tragedy of the commons." Footnote 4. In effect, when the price of natural resources becomes 0, as it does when nature is regarded as a commons, the quantity of it demanded becomes infinite and individuals are rewarded for actions which destroy the carrying capacity of the environment. Unlimited right to hunt or fish today will destroy the ability to hunt or fish tomorrow, and this is a general principle which applies to more than deer and salmon.
It is impossible to determine who may use which natural resources by law. The only kind of general rule that might do the job would be similar to the equal distribution of gasoline rationing coupons discussed above. Control over an equal portion of nature would be allocated to every person, just as equal numbers of ration coupons are given to every person. But unlike ration coupons, which have a uniform meaning and are "fungible," natural resources are highly varied. The only fair thing would be to allocate resources of equal value, but the value of given resources depends on technology and therefore is constantly changing. Hence if an allocation of rights over all of nature were originally just and equal, as conditions changed this original allocation would become unequal. Changes in the size of the population would also force constant reallocations of individual rights over natural resources. The constant reevaluation of resources and reallocation to a shifting population would be totally unfeasible from a practical point of view.
Even though it is impossible to determine who may use which natural resources by law, it is not impossible to make this determination by methods which are compatible with law. Ownership of natural resources only becomes a problem when there is more than one claimant. In a hypothetical society consisting of only one solitary individual (known to economists as a "Crusoe Society" in honor of Daniel Defoe's fictional castaway) there is no problem. In such a society there are no conflicting claims or conflicting rights. From every possible point of view, Crusoe's "rights" to land are completely irrelevant. But if it makes him happy to say that he has a "right" to all the land on his island, at least there is nobody who is going to contest his claim.
As soon as one more person is added to this Crusoe society, disputes may arise over who can use which parts of the island. In this changed context, claims that particular land belongs to one person rather than another may have very serious implications.
The only non-arbitrary and therefore lawful way to determine who owns land and other natural resources is to decree the collective equivalent of a Crusoe society, a society in which all natural resources are owned by an all- inclusive (and therefore non-arbitrary) collective body. This collective body--containing every man, woman, and child subject to the jurisdiction of a government, can be called the public. It should be particularly noted that the public and the government are not the same thing. The government is a specific organization made up of specific individuals and having a relationship to the public, but the government is not the public and it is not the owner of all natural resources. In fact, the government is not the owner of any natural resources. Its defining characteristic is jurisdiction, not ownership.
As people have long understood, the ownership of something can be separated from its use. While one person may own the house or the car, another person may (with the permission of the owner) be using them. In a state which respects the rule of law, the public must be considered the sole owner of all natural resources including land, cannot use the resources. But the public as such cannot do anything. It is a collective but unorganized body. It is therefore much in the same position as an infant or incompetent person who happens to own something, perhaps by inheritance. Like the infant heir to the property of deceased parents, the public must have a guardian or trustee to act on its behalf. This job is a duty of government.
Government-as-trustee for the public has the usual fiduciary duties to act prudently to promote the welfare of that public. Since the corpus of the trust must be preserved for the benefit of future generations, which are just as much part of the public as are those currently alive, the trustee may never sell land or other natural resources. Rather, they must lease resources out in suitable parcels for limited periods of time in a way which maximizes the rental income. Each such temporary right to use land or other resources must be auctioned to the highest bidder. Auctions are a non- arbitrary way to determine who can use specific resources and they help determine the current natural prices of various resources. Auctions prevent the trustee from being bribed for favors (since the trustee has no choice but to go with the highest bid), and they serve to maximize the income produced by the resources.
Revenue received for temporary rights to use natural resources must not, of course, be placed in the government treasury. Ownership of the resources resides in the public, not in the government. All of the money must be placed in a trust fund that is entirely separate from the government treasury. None of this money can be spent by the government for any purpose, not even for paying expenses it incurs in acting as trustee for the public. Since acting as trustee for the public is a duty of government, it cannot demand any compensation for performing that duty, and must finance its operations as a trustee out of its own treasury.
Given that the government cannot touch even one penny of the money accumulating in the trust fund, what should be done with that money? Clearly it would make no sense for it simply to accumulate in the bank until the end of eternity.
Back in the late nineteenth century an American philosopher named Henry George gained world-wide attention for his novel ideas about ownership of land and other natural resources (which he quite deliberately included in his definition of "land" in the interests of verbal parsimony). Pointing out that "land" was the gift of God or nature rather than the results of any human being's labor, George argued that no one had any more rights to land than anyone else. He felt that private, inevitably unequal, ownership of land was a huge force for undeserved inequality and accounted for a good deal if not all of the poverty that paradoxically appeared to accompany technological progress.
Rather than abolishing private ownership of land, George proposed that government should deprive its owners of their undeserved advantages by imposing a "single tax" equal to the annual net rental value of each person's land. It is important to note that this net rental value in George's scheme would be virtually identical to the natural prices that people would pay to government-as-trustee for the right to use land and other natural resources as explained above. Henry George felt that the revenues derived from such a tax on natural resource rents would be entirely adequate to support all government operations, and he therefore proposed that all other taxes be abolished. It was in this sense that his proposed tax was to be a "single" tax.
George's ideas got a lot of attention, favorable and unfavorable. Pope Leo XIII even devoted a portion of one of his encyclicals (Rerum Novarum, 1891) to attacking the proposed single tax. Although there is still an active Henry George movement, his ideas never quite caught on. Whether this was due to weaknesses in his proposals, or because he was too far ahead of his time (and maybe is still ahead of our time!) is an interesting question. For present purposes, we should note that George's basic economic analysis was very similar to that being presented here. His sharp distinction between the value created by labor and that created by natural resource scarcities is fully consistent with my own analysis. His proposed capture of the net rental value of all natural resources by government is economically indistinguishable from my proposed auctioning of temporary rights to use natural resources to the highest bidders.
George made a big mistake, however, in assuming that the proceeds of his single tax on land should be consumed collectively, that they should become the sole support of government, and that the total "net rents" would always be exactly equal to the amount of money government ought to be spending. The net rental value of all natural resources is determined by market forces. The amount government should spend is determined (in a democracy) by the electorate's weighing of desired government services against its reluctance to impose taxes on itself. It would be therefore be an incredible coincidence if the aggregate net rents were ever exactly equal to the preferred level of government expenditures. For these two figure to always be equal to each other would be an event that the term "miracle" would be far too weak to convey!
Reversing George's prescription on this one major point, I am proposing that--far from relying on natural resource rents for its own total support--government must be prohibited from using any such rents for its own expenses. In the Metaconstitutional society, government would continue to finance itself through taxes imposed--by laws rather than by pseudolaws!--on the population. Instead of being spent by the government, the income coming into the trust fund would be consumed individually, not collectively. Each member of the public would receive an equal share of the trust fund from time to time, a social dividend.
To say the social dividend must be distributed to each member of the public means that all people, without any exceptions for whatever reasons, and under all circumstances, must receive the dividend. The dividend must be paid to 99 year old pensioners, to one day old babies, to millionaires, to people in prison, even to people on death row awaiting execution. The public in the sense that the word is being used here is absolutely inclusive, bar none. The right to receive the periodic dividend must be inalienable. No one can transfser his or her future right to receive the dividend to anybody in exchange for something which they think they would prefer to have. No one can give their right away. The government may not deprive anybody of the right to receive the dividend even as punishment for the most serious crime.
Since minors and other legally incompetent people must receive the dividend just like everyone else, their dividends may actually be paid out to another trustee, the trustee for the particular child or incompetent adult. And since government sometimes acts as a residual trustee for specific people or groups of people when the primary trustees (say the parents of a small child) fall down on their duties, it is possible that some of the dividend payments will go into other government accounts presided over by government in its quite separate capacity as a trustee for these discrete individuals. It is also possible that a policy decision might be made that there is a public interest in postponing the payment of dividends to all minors until they have come of age.
Any adequate government must avoid encouraging population to grow beyond the capacity of the environment available to support it. The social dividend paid to each individual could be a considerable sum of money. Paid to parents as trustees for their children, it is possible that this money would induce some people to have additional children just in order to get their hands on the money.
Postponing dividend payments until a child comes of age would not allow the government to spend the saved money, and it would not mean an increase in the average dividend paid to adults. Nor would it reduce the flow of purchasing power to the individual who survives childhood. During a person's childhood, his or her dividends would be placed at interest into a separate trust fund. Upon reaching the age of majority, each person would then receive a lump-sum payment representing the accumulated dividends plus interest--a tidy nest egg with which to begin independent life. The money might be used to finance a higher education, buy a house, acquire a business, invest in the stock market, given to charity, or dissipated thoughtlessly in riotous living, depending on the wisdom and tastes of the young adults receiving it.
The basic logic of the proposed social dividend can be summarized quite shortly: land and other natural resources are the functional equivalent of manna from heaven. They were not created by human labor, and no one therefore has any greater claim to enjoy the fruits of their exploitation than anyone else. Equality in distribution of "net rents" of these natural resources is therefore not only appropriate, it is a mandatory element in any fully just society such as the Metaconstitution would strive to achieve and preserve.
A system in which nature is owned by the pubic and the value contributed to production by natural resources is captured and distributed equally to that public via a social dividend will have definite and beneficial consequences. It will increase economic equality without the bad side effects on aggregate production that socialist redistributive schemes always produce.
The "factors" of production consist of "land" (which to economists, as to Henry George, includes "all natural materials, forces, and opportunities. .... the whole material universe outside of man himself"Footnote 5. ), labor, and capital (which is actually one possible combination of land and labor). Wages, the price paid for labor, will always be unequal in a market economy. That is, natural wages are inherently unequal. Interest, the money paid to induce people to postpone spending all of their income immediately, also flows unequally to different individuals, since not all people have equal willingness or ability to postpone consumption. But the social dividend, by its nature, is absolutely equal for everybody. Neglecting inheritances, gifts, lottery winnings, etc., each individual's total income consists of some combination of wages, interest, and the equal social dividend. But adding an equality to an inequality reduces the inequality on the bottom line.
For a simplified illustration, let us ignore everything except wages and the dividend. Imagine that five individuals have wages that vary by ten to one:
Person: A B C D E Wages: 1 3 5 7 10
(The wages can be expressed in any desired units: thousands of dollars per month, rupees per week, rubles per day, etc. The numbers are not intended as statistics, but only by way of illustrating the principle.) Now add to these unequal wages a social dividend of 2 of the same units:
Person: A B C D E Wages: 1 3 5 7 10 Dividend: 2 2 2 2 2 _________________________________________________________ Total income:3 5 7 9 12
The result of adding the equal dividend to the unequal wages here is to reduce total inequality from ten to one to only four to one (12:3). Of course the actual reduction in inequality will depend on the ratio between the amount of money flowing through wages in the economy and the amount flowing into the trust fund from the leasing of natural resources and then out again via the social dividend. This ratio itself will of course be determined by the market (natural) prices of various kinds of labor and natural resources at a given point in time.
If the distribution of the social dividend were the only factor to be evaluated, then the proposed system would clearly work to reduce economic inequality. But there is another factor, the leasing of resources to the highest bidders. It might seem that this practice would be a force in the opposite direction, that is, towards greater economic inequality in society. After all, the resources over which rights are being leased are things of great value, and the rights to use them are going in each case to the highest bidder. It might seem that it is a case of "them that has, gets," and that it is just another formula for helping the rich to get richer and the poor to get poorer.
In fact, though, auctioning temporary rights to use particular natural resources to the highest bidder would not concentrate private wealth or increase inequality of incomes. The highest bidder would normally be the person or organization best able to put the resources to efficient productive use. If the lease period were for a number of years, as often would be appropriate, the rent need not and indeed should not have to be paid "up front." Rather, it could be paid in periodic installments from the cash flow generated by production. Thus those who already have a lot of money would have no particular advantage as participants in the bidding process. And the competitive bidding for the rights to use each parcel of natural resources guarantees that the payments would approximate the market price of the resources. Those getting rights to use the resources thus do not receive any windfall; they are paying their full natural price. They can therefore profit from the resources only to the extent that they add value to them by the application of labor and capital.
We must also reiterate that the resulting dividends flow out of the trust fund equally to everybody, which is definitely a force for greater economic equality in society.
Assuming a publicly owned nature and a social dividend, the ideal economy can be characterized in six words that would be outrageous in any other context: low wages and high priced oil! The universal assumption, both in capitalist and in socialist countries, has been the direct opposite of this. But this customary point of view has had very mischievous implications in practice.
Even in socialist countries, thinking about this issue has been heavily influenced by the private ownership of natural resources which characterizes capitalist societies. Private ownership is inherently unequal ownership, and as the following diagram shows, unequal ownership of nature results in greater economic inequality when the price of natural resources (such as oil) increases relative to the price of labor:
TABLE: Models of Income Distribution
Numbers illustrate relative amounts
of dollars; they are not statistics.
Nature Privately Owned Nature Owned By Public
Natural
Resources
Prices:
Lower Person A B C D E F Person A B C D E F
Wages 2 4 6 8 10 12 Wages 2 4 6 8 10 12
"Rents" 0 0 0 1 2 9 Soc.Div.2 2 2 2 2 2
____________________________________________
Total Total
income 2 4 6 9 12 21 income 4 6 8 10 12 14
Wage inequality 6:1 Wage inequality 6:1
Inequality in Inequality in
total income10.5:1 total income 10.5:1
Higher Person A B C D E F Person A B C D E F
Wages 2 4 6 8 10 12 Wages 2 4 6 8 10 12
"Rents" 0 0 0 2 4 18 Soc.Div.4 4 4 4 4 4
_____________________________________________
Total Total
income 2 4 6 10 14 30 income 6 8 10 12 14 16
Wage inequality 6:1 Wage inequality 6:1
Inequality in Inequality in
total income 15:1 total income 2.7:1
Highest Person A B C D E F Person A B C D E F
Wages 2 4 6 8 10 12 Wages 2 4 6 8 10 12
"Rents" 0 0 0 10 20 90 Soc.Dv.20 20 20 20 20 20
____________________________________________
Total Total
income 2 4 6 18 30 102 income 22 24 26 28 30 32
Wage inequality 6:1 Wage inequality 6:1
Inequality in Inequality in
total income 51:1 total income 1.5:1
The left column assumes a society where natural resources are privately, and therefore unequally, owned. It is a very small society consisting of only six people (named A,B,C,D,E,F) all of whom are employed. Their unequal wages range from 2 units (for person A) to 12 units (for person F), so the top wage earner is making six times as much as the bottom wage earner. Hence we state the wage inequality as 6:1. As will typically be the case, the table assumes that three of the individuals (A,B,C) own no natural resources at all, while the other three own very unequal amounts of such natural resources. The top row of the left column depicts a society in which the price of natural resources (including oil) is low relative to wages. The total net rental value of natural resources is only 12 units per whatever period of time we are assuming in the table. Because of their unequal ownership, these 12 units are distributed to owners D,E, and F very unequally. D gets 1 unit, E receives 2 units, and F's share is 9 units. When the inherently unequal wages are added to the unequal shares of net rents received, the total incomes received by members of this hypothetical society range from 2 units (for A) to 21 units (12 units of wages plus 9 of rents) for F. Bottom line inequality between the richest and poorest members of this society is 10.5 to 1.
The same society, with the same people, the same wage inequality, the same unequal ownership of natural resources, but where the price of oil and other natural resources has doubled relative to wages, is represented by the middle box in the left column. "Rents" now having doubled, each individual receives twice as much rent as before. For individuals A, B, and C there are still no rents, since doubling a zero still leaves zero. But for individuals D,E, and F rents are now respectively 2, 4, and 18. When added to unequal wages, the ratio between the total incomes of the richest and poorest members of the society has increased to 15:1, even though wage inequality of 6:1 has not changed. In this society, higher priced oil increases economic inequality.
A more extreme case is represented in the bottom box of the left hand column. It assumes that natural resource prices have increased tenfold compared to the society modeled in the top row of the table. Rents accordingly are ten times higher, and the resulting total economic inequality has increased to a ratio of 51:1.
The right hand column of the table represents the same three societies, with low, medium, and high prices for natural resources in the top, middle, and bottom boxes, and with the same wage inequalities of 6:1. But here we assume that nature is owned by the public, which is made up of individuals A,B,C,D,E,and F. (Remember, this is a simplified society and we are assuming these are the only people living in it.) Total prices of natural resources ("net rents") remain the same as in the three equivalent societies in the left hand column, but since there is a social dividend each person gets an equal share of the total net rents.
In the society with low priced oil, etc., for example, the 12 units of rent captured by the trust fund are distributed as a social dividend of 2 units to each of the six members of the public. Since adding an equality to an inequality produces a reduced inequality, the inequality of total incomes (3.5 to 1)is now actually less than the inequality in wages (as always in this table, 6 to 1). This was never the case in any of the societies where nature was privately owned, as depicted in the left hand column.
In the second box in the right hand column, the society in which total rents have doubled, inequality in total incomes (wages plus dividend) becomes even lower than it was when resources were cheap: 2.7 to 1. In other words, adding a larger equality to an inequality produces a greater decrease in the inequality. In the lower right hand box, in which natural resource rents become very appreciable compared to wages, the social dividend received by each member of the public is 20 units, and total inequality is reduced to 1.5 to 1.
It might be argued that the benefit of the social dividend will be negated by the higher prices people must pay for oil and other natural resources in the society characterized by "low wages and high priced oil" which I am arguing is ideal. However the dividend does not represent an increase in the natural price of oil and other resources. It is only a matter of who gets the money. The alternative is not a lower price for the oil, but an inequality in the distribution of the rents.
It is true that when nature is privately owned, the government may try to prevent the price of oil and other resources from rising. Since natural resource price increases in that kind of society increase economic inequality, there is strong pressure to do exactly that in a democracy. However as we have seen, price controls are illegitimate for political reasons, being incompatible with the rule of law, and they have predictable, and dreadful, economic consequences.
Indeed, the "antipoverty" strategy favored by bourgeois regimes like the United States is highly perverse. We have tried to force up the wages paid to the poorest parts of society, and to keep natural resource rents (e.g. the price of oil) artificially low.
Forcing the price of a natural resource below its natural level increases the demand for it, that is, it decreases the incentive to conserve. Forcing wages, the price of labor, above their natural level, decreases the amount of labor that is demanded. We have tried to reduce poverty using strategies that cause us to overuse nature and underuse labor! The most obvious result is the unemployment that persists in good as well as bad times.
Anybody who attacks minimum wage "laws" or the encouragement of unions as an indirect method of driving up wages risks being criticized as hard-hearted, anti-worker, a spokesman for reactionary and selfish capitalistic interests. It is probably harder to think and talk sense about the employment relationship, about "labor-management relations," than it is about any subject with the possible exceptions of religion and sex! Nevertheless it is exactly that subject to which we must now turn our attention.
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Footnotes
1. Robert Nozick, Anarchy, State, and Utopia (N.Y.: Basic Books, 1974), p. 178.
2. 6 Cranch 87 (1810).
3. John Locke, The Second Treatise of Government (Indianapolis: Bobbs-Merrill, 1952), p. 17.
4. Garrett Hardin and John Baden, Managing the Commons (SanFrancisco: W.H. Freeman and Co., 1977).
5. Henry George, Progress and Poverty (1955 edition, N.Y: Robert Schalkenbach Foundation), p. 38.