Income, Earned Versus Unearned
Some years ago, I asked myself a question: What is an investment, and how does it differ from an act of speculation? I'm getting closer to an answer, especially after hearing Seth and Justin interview two authors on the topic of a man who has become largely myth, and about whom we know almost nothing: Henry George.
Mr. George might have been one of the most influential economists in our nation's history, yet few studying the field have heard of him. Like Karl Marx in Europe, George was a Classical economist. Unlike Marx, George envisioned economic activity as the interaction between three forces: capital, labor, and land. This compares to the pre-classical economic thought of the Physiocrats, "who believed that the wealth of nations was derived solely from the value of 'land agriculture' or 'land development'. . . ." Their influence over economic thought was challenged by oft-quoted (and far-more-oft-misunderstood) Adam Smith, the first Classical economic thinker.
In 1979, George published Progress and Poverty, wherein he claimed that
[t]he tendency of speculators to increase the price of land faster than wealth can be produced to pay has the result of lowering the amount of wealth left over for labor to claim in wages, and finally leads to the collapse of enterprises at the margin, with a ripple effect that becomes a serious business depression entailing widespread unemployment, foreclosures, etc.
The solution: a land value tax, one that did not fluctuate with the level of development on that land. The logic: "Because the supply of land is inelastic, market land rents depend on what tenants are prepared to pay, rather than on the expenses of landlords, and so LVT cannot be directly passed on to tenants." Further, since the tax is a fixed cost and somewhat significant-high enough to eliminate many other taxes, including on income earned from wages-speculation would no longer be nearly as profitable, meaning empty or vacant properties would not be purchased and left undeveloped in the hopes that they will escalate dramatically in value. The tax burden would greatly diminish the profit speculators could achieve.
George's book sold 3 million copies, a wild success. Then came the aftermath. . . .
As I hinted in the introduction, I've long heard rumor that someone had come up with a popular theory that effectively challenged wealth accumulation. That person seems to have been Mr. George. The fact that I heard this rumor about ten years ago and only just seemed to have found him suggests that the forces suppressing George's theories are mighty indeed.
Let's remember that Progress and Poverty was published in 1879. John D. Rockefeller was a man who benefited greatly from properties his companies owned, some of which were developed, others (it was revealed in later anti-trust investigations) sat under-developed in order to restrict the supply of his company's products (oil and coal). Too much supply, after all, causes gluts, which further leads to the cheapening of the glutted commodity no matter what it is. Were George's land value tax to catch on and achieve some kind of legislative implementation, under-developed lands would have to be sold, perhaps to competitors, or developed to pay the tax, either of which option would greatly weaken Rockefeller's energy monopoly and thus reduce his profits.
Rockefeller's solution-and it came quickly indeed-was to found alternate economic theories and promulgate them. Rockefeller endowed the University of Chicago in 1880, just one year after George's book was released. The University was the first to house a school of Economics, as opposed to a school of Political Economics, and was a hot house for a new branch of economic theory called Neo-Classical, one which challenged the Classical theories espoused not just by George but also by Marx (with whom George absolutely did not agree). "Rockefeller described the donation as 'the best investment I ever made.'"
Let's finally get to the title of this entry. What is the difference between earned and unearned income? According to George, speculation. Those with a surplus of money to "invest" park that money in low-value properties and commodities that are expected to appreciate. The more money one can consider "surplus", the more of that money can be turned to speculation; the lower the cost of that ownership, the longer speculators can sit and prevent a perhaps needed commodity (like land) to go un- and underdeveloped.
And this gets us to today. After the financial crash caused largely by speculation in real estate, more than one country is faced with a glut of empty housing and people living on the streets. Why? Despite the political theater and hand waving, those that engaged in the speculation-largely banks, now deeded "too big to fail"-are allowed to skirt the law, to keep vacant properties off the market, thus increasing the value of what few marketed properties do go on sale. Those deemed in this process too small to succeed-young people already carrying heavy tuition debt, folks whose jobs are disappearing thanks to technological progress-get the long end of the shaft, forced to compete in a wage market that is very quickly shrinking and try to live in a land of over-valued properties they can therefore not afford.
In a nutshell, George's dystopia from the late 1880s is once again a reality. Those with unearned income are taking from those who only have income earned from hard wage work, all because our system has been skewed by theoretical machinations that reward those with unearned income . . . theories funded and continually popularized by that same unearned income.
Don't believe me? Check out the movie, if you have some time to spare. He's not mentioned directly much, but you can see George's name here and there spread throughout the flick most subtly.
Mr. George might have been one of the most influential economists in our nation's history, yet few studying the field have heard of him. Like Karl Marx in Europe, George was a Classical economist. Unlike Marx, George envisioned economic activity as the interaction between three forces: capital, labor, and land. This compares to the pre-classical economic thought of the Physiocrats, "who believed that the wealth of nations was derived solely from the value of 'land agriculture' or 'land development'. . . ." Their influence over economic thought was challenged by oft-quoted (and far-more-oft-misunderstood) Adam Smith, the first Classical economic thinker.
In 1979, George published Progress and Poverty, wherein he claimed that
[t]he tendency of speculators to increase the price of land faster than wealth can be produced to pay has the result of lowering the amount of wealth left over for labor to claim in wages, and finally leads to the collapse of enterprises at the margin, with a ripple effect that becomes a serious business depression entailing widespread unemployment, foreclosures, etc.
The solution: a land value tax, one that did not fluctuate with the level of development on that land. The logic: "Because the supply of land is inelastic, market land rents depend on what tenants are prepared to pay, rather than on the expenses of landlords, and so LVT cannot be directly passed on to tenants." Further, since the tax is a fixed cost and somewhat significant-high enough to eliminate many other taxes, including on income earned from wages-speculation would no longer be nearly as profitable, meaning empty or vacant properties would not be purchased and left undeveloped in the hopes that they will escalate dramatically in value. The tax burden would greatly diminish the profit speculators could achieve.
George's book sold 3 million copies, a wild success. Then came the aftermath. . . .
As I hinted in the introduction, I've long heard rumor that someone had come up with a popular theory that effectively challenged wealth accumulation. That person seems to have been Mr. George. The fact that I heard this rumor about ten years ago and only just seemed to have found him suggests that the forces suppressing George's theories are mighty indeed.
Let's remember that Progress and Poverty was published in 1879. John D. Rockefeller was a man who benefited greatly from properties his companies owned, some of which were developed, others (it was revealed in later anti-trust investigations) sat under-developed in order to restrict the supply of his company's products (oil and coal). Too much supply, after all, causes gluts, which further leads to the cheapening of the glutted commodity no matter what it is. Were George's land value tax to catch on and achieve some kind of legislative implementation, under-developed lands would have to be sold, perhaps to competitors, or developed to pay the tax, either of which option would greatly weaken Rockefeller's energy monopoly and thus reduce his profits.
Rockefeller's solution-and it came quickly indeed-was to found alternate economic theories and promulgate them. Rockefeller endowed the University of Chicago in 1880, just one year after George's book was released. The University was the first to house a school of Economics, as opposed to a school of Political Economics, and was a hot house for a new branch of economic theory called Neo-Classical, one which challenged the Classical theories espoused not just by George but also by Marx (with whom George absolutely did not agree). "Rockefeller described the donation as 'the best investment I ever made.'"
Let's finally get to the title of this entry. What is the difference between earned and unearned income? According to George, speculation. Those with a surplus of money to "invest" park that money in low-value properties and commodities that are expected to appreciate. The more money one can consider "surplus", the more of that money can be turned to speculation; the lower the cost of that ownership, the longer speculators can sit and prevent a perhaps needed commodity (like land) to go un- and underdeveloped.
And this gets us to today. After the financial crash caused largely by speculation in real estate, more than one country is faced with a glut of empty housing and people living on the streets. Why? Despite the political theater and hand waving, those that engaged in the speculation-largely banks, now deeded "too big to fail"-are allowed to skirt the law, to keep vacant properties off the market, thus increasing the value of what few marketed properties do go on sale. Those deemed in this process too small to succeed-young people already carrying heavy tuition debt, folks whose jobs are disappearing thanks to technological progress-get the long end of the shaft, forced to compete in a wage market that is very quickly shrinking and try to live in a land of over-valued properties they can therefore not afford.
In a nutshell, George's dystopia from the late 1880s is once again a reality. Those with unearned income are taking from those who only have income earned from hard wage work, all because our system has been skewed by theoretical machinations that reward those with unearned income . . . theories funded and continually popularized by that same unearned income.
Don't believe me? Check out the movie, if you have some time to spare. He's not mentioned directly much, but you can see George's name here and there spread throughout the flick most subtly.