Wouldn’t It Be Nice? - August 6, 2022

2022 has been a most profitable year - for some. Those who generate income from our dependence on the fossil fuel infrastructure our economy has built up for a century and a half have earned dividends even far more lucrative that they have been to now. Exxon-Mobil, Vladimir Putin, and others dependent on our fixation with fossil fuels have earned windfall profits at our expense. 

Some argue that it is not fair for some to benefit so incredibly by the economic misery and inflation imposed on others. Economists are loath to decide what is fair. We will leave that up to philosophers and politicians. What we can say, though, is this income distribution inequality is incredibly inefficient. And that is always troubling to economists. 

The ultimate game of inequality and free enterprise is Monopoly. You may recall oil companies in that game we used to play as kids, as well as utilities, railroads, and landowners, all the entities that profited so much from our growing demand during the Gilded Age, and from the profits that accrue to fixed factors of production such as land and fossil fuels. These resources tend to be controlled by just a few then and now, and hence the name Monopoly for the game. 

Charles Darrow is traditionally given credit for the game of Monopoly, although it was actually invented by a schoolgirl named Elizabeth Magie. She had developed The Landlord’s Game after reading perhaps the most influential and best selling book in English but for the Bible in the late 1800s. A San Francisco journalist of economic issues named Henry George wrote Progress and Poverty in 1879. Its many reprints fomented a movement called The Georgists that had a simple proposition and an equally compelling prescription. 

The proposition is that, while we own the homes and factories and machines we build, and the human and entrepreneurial capital we invest in, we don’t own natural resources such as land and ore and oil that belong to everybody, now and in the future. No single generation has the right to these resources, but we can certainly lease them for our mutual enjoyment. 

A lease system for land is easy enough to imagine. Even ore can be used in a non-depletable way with optimal recycling once the machines we build are retired. With something so exhaustible as oil, though, we must make another arrangement because once oil is used, it is difficult to recover. There are technologies that can recreate hydrocarbons from the carbon dioxide they emit as a byproduct of combustion, but these technologies need a great deal of some other form of energy to do so. Maybe someday. 

Meanwhile, in place of lease payments, economists can devise a tax on the production of fossil fuels that compensates future generations for their sacrificed right to have access to these resources themselves. A number of governments have imposed such Permanent Funds to allow the windfalls of one generation to benefit subsequent generations. Even more nations have imposed carbon taxes to ensure that those who combust fossil fuels and contribute to global warming must pay for their detrimental effects on global warming. 

Note that these taxes are not to promote equity, although they have that effect. Instead, they are designed to promote efficiency. Economic decisions are inefficient if people do not pay the proper price for the resources they consume. Henry George argued that if monopolists consume resources that are rightly owned by all, including future generations, or are permitted to impose negative externalities such as pollution or global warming on the rest of us, then they are in effect subsidized by the rest of us. 

That implicit subsidy that also had the effect of making the wealthy richer was what offended many who read Progress and Poverty. It also influenced Elizabeth Magie to author her early version of the game that would be marketed by Darrow as Monopoly. 

While influential, the Georgists never really prevailed. We still have inadequate policies in place to remove the implicit subsidies so large resource extractors or landowners pay something for value that is ultimately created by the demand of a current or future generation. Indeed, fossil fuel firms receive even greater explicit subsidies often as well. 

George’s solution, while it sounds radical, is actually quite simple. He calculated that we could replace most other taxes with a single tax on land and fixed resources so that they are unable to extract any value from the privilege of using them today and excluding others from using them. 

Such a single tax does not take anything away from these owners in their investment in capital to improve their resources. It is, in effect, a 100% tax on increased land value, but no tax at all on the improvements we make to our land, in sustainable farming, in our enjoyment and value of our house, in converting oil to higher value products, etc. 

Economic theory shows that such a tax will be sufficient to create all the public infrastructure that makes land valuable. If I happen to own land in the heart of Manhattan, it gets more valuable not for anything I do, but because population grows and the public builds a city around my land. In economics, reward should flow to effort and ingenuity, not luck or happenstance or, worse, the work of others who give what I own more value. 

To the extent that modern entrepreneurs earn a living by inventing a better mousetrap, we should encourage such wealth creation. But, if people become rich by depriving others, now or tomorrow, of a resource, then this share of their wealth should be returned to us all, in George’s theory. 

While economists recognize and propose policy prescriptions to remedy these inefficiencies, citizens naturally gravitate to the inequities that occur when wealth begets more wealth. The social and political instability of severe income inequalities creates problems that some of the wealthiest, such as Bill Gates and Warren Buffett, also acknowledge and attempt to remedy through philanthropy and efforts to improve the world and our economies. 

Henry George fomented a movement, and even ran for Mayor of the City of New York, and was encouraged to run for even higher office. The opulence of the Roaring Twenties caused the movement to languish. But, now in Manhattan of New York City, the rent for an average apartment has risen to $5,000 per month, while homes in major cities now regularly sell for more than a million. 

In fact, real estate makes up more than two thirds of all non-financial assets, a category which includes factories, machinery, and intellectual property. Of that bulk of non-financial assets, land is the largest sector because, unlike buildings, intellectual property, and machines, we can’t make more land. It is one of the scarcest of all resources since only so much land is in locations made desirable because of the public investments and individual choices that spur urban growth. 

This diversion of wealth from the working class to the owners of land has other consequences beyond concentrating wealth among those who already have too much to spend, from those who don’t have enough to spend, and hence causing overall consumption and GDP to fall. It also diverts capital badly needed for business expansion to fund mortgages that worsen the inequality. There’s no such thing as free capital, and using it to heighten inequality further erodes economic efficiency. George’s policy prescription was a way to ensure progress does not beget poverty. It was also a way to improve the virtuous circular flow of income throughout the economy. 

Wouldn’t it be nice if we could also develop public policies, such as Permanent Funds and carbon taxes to redress economic inefficiencies and also the perceived inequities that destabilizes free enterprise? Henry George, schooled in the tactics of the railroads and the land barons in the West during the Gilded Age, certainly understood this. So did the movement he fomented, and Elizabeth Magie with her predecessor to Monopoly. Ironically enough, Magie was eventually awarded a paltry amount of $500 for her patented ingenuity, while Darrow made millions, and perhaps Parker Brothers made billions.