David R. Henderson  

Hooper on Henry George on Protection or Free Trade

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Protection or Free Trade is two books in one. The first part is a thorough dismantling of protectionist arguments and a defense of free markets, free trade, capitalism, specialization, economic progress, and freedom in general. The second part of the book compares the private ownership of land to slavery, calls for a steep tax on land, and accepts the "socialist" label. This might seem incongruent, but to George, these positions were integrated, based on a crucial and tenuous assumption: landowners and employers have a monopoly and won't compete with each other.
This is an excerpt from Charles L. Hooper, "Henry George's Protection or Free Trade: A Critical Review," one of the two Feature Articles for February.

I had known about the pro-free trade parts of the book. They are wonderful. I hadn't known, until Charley told me, about George's mistaken assumption that thousands, possibly hundreds of thousands, of landowners and employers don't compete among themselves. Our conversation about both parts of the book led to this article.

When you read the items on free trade, you might find yourself thinking, "Wow, this guy is addressing the mistaken thinking that still exists today--from Bernie Sanders to Donald Trump to the tens of millions of people who agree with them."


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COMMENTS (8 to date)
Silas Barta writes:

I was actually thinking about this claim recently, and I came up with a model under which it makes sense, in that landowners behave like monopolists, even when they're in competition with each other.

Assume people place their rental bids under the assumption, "I want some minimal standard of living, all else I'll use to bid for rents". In that case, any improvement in productivity makes that standard of living easier to achieve, so it also frees up more money to bid on rent.

Thus, rental prices will go up just as if they were monopolists, and all improvements are effectively taken by land owners.

Do I have the economics of that right?

Charley Hooper writes:

@Silas Barta,

We need to look at it from both the supply and demand sides. Your argument above is from the demand side. On the supply side, there will be some landowner who thinks he/she can get a better renter, or just a renter at all, by reducing the rent or providing some other services.

If occupancy rates are less than 100%, or if there is a range in quality among renters, there will be competition among landowners for those better renters.

Jim Glass writes:

Silas Barta wrote:

Assume people place their rental bids under the assumption, "I want some minimal standard of living, all else I'll use to bid for rents". In that case, any improvement in productivity makes that standard of living easier to achieve, so it also frees up more money to bid on rent. Thus, rental prices will go up just as if they were monopolists, and all improvements are effectively taken by land owners.

George used Ricardo's take on rent in his model of a steady state economy, and you are not far from it with the above.

The model assumes three factors of production: capital (not much circa 1800), labor that will bid its wage rate down to subsistence level, and land that matters uniquely for "the original and indestructible powers of the soil" existing in totally inelastic supply which effectively enables all landlords to collect monopoly rent.

Consider the case of two plots of land. The first is moderately productive, multiple farmers bid for it, the winner pays a rent that leaves him a subsistence income after the landlord takes a moderate rent. The second plot is extremely productive, the same bidding process leaves the winning farmer a subsistence income after paying an extremely high rent. So landlords take all the differences in land value, and tenants are all left at subsistence level.

Capital investment will increase incomes somewhat to offset this, but only for a while because diminishing returns eventually reduce investment to zero, so in the end the fixed supply of land rules and the landlords gobble up all the increase in income. The final steady state arrives with the landlords sitting on golden thrones via unearned rent that pushes everyone else down into subsistence poverty.

That was George's view of the world, why rent was to him so evil that either land should be nationalized or land rent should be taxed at confiscatory rates to replace all other taxes with the "single tax" on land.

Problem #1 with it was that Ricardo himself said technological innovation refutes the model -- land loses its nature as a unique, irreplaceable input to production. A farmer can instead buy a tractor, or a new kind of seed, etc, to get as much production from less land. A contractor can choose between buying a big lot of land to construct a low flat building or only a little land for a tall thin one.

So land becomes just one form of capital input in competition with and priced against all the others.

Thus, Georgism was out of date by decades when George first proposed it. In agricultural England circa 1800 that technology would ever matter much might not have been apparent. But in 1886 in NYC when George was running for mayor it was obvious to everybody. (That and marginal analysis had refuted George's labor theory of value too.)

The fact that Georgism influenced so many for so long (even until today), in spite of it being obsolete before its day one, is another example of how a good story well told can create believers long after the "sell by date" of its factual contents.

On the up side of Henry regarding Ricardo, yes, he was also greatly influenced by Ricardo's innovation of the analysis of free trade. And that is worth recalling, because that's not what he's primarily remembered for, but he was eloquent about that too.

Andrew_FL writes:

Five contemporary Democratic US Congressmen liked George's book so much they read it out loud, in full, into the Congressional Record.

Edward J. Dodson, M.L.A. writes:

Mr. Glass believes that Henry George's analysis is limited to a steady state Ricardian economy. Often ignored is that Henry George cautioned that the laws of wealth production and distribution he put forward were laws of tendency. He described in some detail all of the innovations that yielded increased output and slowed or even reversed the distribution of wealth to labor (e.g., the demand for individuals with specialized knowledge and/or technical skills). Equally important in is analysis is his recognition of changing land uses. With population increases, agricultural land is converted to residential subdivisions and other uses. Land rents increase not incrementally but double or triple in relatively short periods of time. Net imputed or actual rents are capitalized into credit-fueled and speculation-driven land prices. Only the public capture of a high percentage of the potential annual rental value of locations effectively brings land into production (i.e., to highest, best use). Henry George understood the externalities affecting market forces quite well. He deserves much more credit than he receives for developing a highly insightful analysis of business cycles.

I think I have figured out many of the psychological factors which support bias in one direction or the other, toward statism or libertarianism. But I am still baffled by examples like Henry George.

Careful people should see the pattern, right? Suppose a person knows for sure that government should not attempt X. Then the person thinks about it and extends the belief to X', X'', and maybe even Y. But the skepticism ends at some point: This person feels certain that government must do Z. Of course this person has not bothered to search out the data and arguments which probably exist and which show the wrong of government undertaking Z.

How could Henry George get as far as he did and then stop thinking? Is rational ignorance enough?

Silas Barta writes:

@Jim_Glass:

Problem #1 with it was that Ricardo himself said technological innovation refutes the model -- land loses its nature as a unique, irreplaceable input to production. A farmer can instead buy a tractor, or a new kind of seed, etc, to get as much product

But that's the core assumption my model was dropping -- to the extent that the demand is extreme, and for a very special subset of all land (nearly inelastic), then land does not substitute, and you can't "capital" it away. (How much capital equipment does it take to make up for not living in your home country anymore?)

@Charley_Hooper: I agree that happens, but that effect is independent of (and probably small relative to) the total rent payments -- it leaves unchallenged the core result that the landlord share scales linearly with the productivity (net of living costs).

Jim Glass writes:

"Problem #1 with it was that Ricardo himself said technological innovation refutes the model -- land loses its nature as a unique, irreplaceable input..."

But that's the core assumption my model was dropping -- to the extent that the demand is extreme, and for a very special subset of all land (nearly inelastic), then land does not substitute, and you can't "capital" it away.

Well, yes, you are right as to your model, that's why I said it is close to Ricardo's model. But as Ricardo pointed out, the model is not true to reality.

E.g., in the USA since the 1960s agricultural production has multiplied while the amount of land used in agriculture has fallen. (In fact, over the last 20 years that's become true for the world as a whole.) That's technology creating a plethora of newly available land. In the Eastern USA there is now more forest cover than there was in the late 1700s. Hardly any extreme demand for land seen in that.

Now for a few unique particular items of land what you say may be right, their price may be bid far up. But that is true for a few unique particular items of anything. Say, baseball cards in general versus 1951 Mickey Mantle rookie baseball cards.

But even so, the amount of land needed for near any use is going to be more elastic than the supply of Mickey Mantle baseball cards. If you want to increase forest cover by using less land in agriculture, use tech to intensify crop production. If you Want to use less land to support a given amount of housing or office space, use tech to build taller. Or the reverse. Land-tech substitution.

Land can even be created on a serious scale. A third of lower Manhattan is built on landfill into the rivers, and see Holland. Swamps are drained everywhere (well, wherever the federal wetlands laws allow). Capital creating land.

Land is just a capital input in competition with others. And note well that while its price may be bid up, this in no way indicates that the return on it is any kind of special super-market-rate amount above the rate on other capital inputs -- which was the fundamental Georgist/Ricardian model claim.

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