The Power In The Land. Fred Harrison
in the economy was he referring? He advanced evidence that capitalists and labourers earned their incomes, but was not able to offer any justification for the reapings of the land monopolists; nor could he. So he sought to justify the role of the landlords by claiming that their exactions were the normal psychological failings of all men. He was unwilling to admit that the unwarranted division of income — the result of the exercise of that monopoly power for which he condemned the mercantilists — would disrupt competition.
To maintain his position, he invoked metaphysics; a ‘principle of preservation’ would correct any malfunctioning in the system, as a result of which even poor, landless people would find jobs as country labourers or urban craftsmen. Unfortunately, that was precisely what the crippled hand could not accomplish for all men, at all times. When landless peasants resorted to the town for work, they joined a labour market which was conveniently placed at the disposal of the entrepreneurs who were then able to exploit the vulnerability of wage-seekers.18
Were the tools available to enable Smith to propose the means by which the frictions in the market system could be eliminated, so that the system could operate closer to its theoretical ideal ? Before defining an answer, we need to look at the dynamics of the land market.
Land as a factor of production has certain unique qualities. For practical purposes, its supply is fixed, at the local level. Ultimately, the world is a closed economy. To control land, therefore, is to wield total power. But there is a more fundamental characteristic which differentiates land from capital and labour: the life span of people and machines is finite; the life of a plot of land is infinite. This has an important consequence for an economy relying simultaneously on competition and co-operation. Land monopolists can — and do — refuse to play the game whenever they choose. If they are not satisfied with the price that they are offered for their land, they can withdraw it from use without fear. They know that the value of the land is constantly appreciating, and that the rental revenue they forego today will be recouped in a few years through an increase in the value of the land (which is the capitalisation of a given number of years’ revenue). People, on the other hand, cannot play the game for any length of time. If they withdraw their labour they starve; and there is no way in which their lost wages can be recovered. Similarly with capital. If the owners withdraw machines, these rot away; the rate of depreciation can be slowed down, but only at the expense of maintaining them while they are idle.
When it comes to a confrontation in the market, then, landowners win. They have time on their side.19 The system, consequently, malfunctions; and the usefulness of concepts like supply and demand, equilibrium analysis, optimum allocation of resources, efficient distribution of income — the analytical tools of the economist — are seriously restricted.
There is only one free market solution to the partial paralysis which is otherwise present in the industrial system: a fiscal obligation on the possession of land. A tax levied on the market value of all land would constitute a continuous pressure on the possessors, a cost analagous to that on the capitalist who must maintain his machines while they are idle. If the tax was levied at a high enough rate, the effect would be immediate. Either people would use the land to best effect, or, since they could not carry the tax liability for long while the land was not yielding an income, they would have to relinquish it to others. The tax on land values, then, would induce those who possessed land to play the game of competition and co-operation. They could not withdraw from participation and expect to take the land with them. Within this fiscal framework the ‘invisible hand’ would be restored to health and would be capable of handling, in an orderly way, the multiplicity of problems with which it is presented by a community of people with scarce resources, limitless wants and a diversity of tastes.
Adam Smith would not accept this solution. It is true that he regarded land values as ‘peculiarly’ suitable for taxation, since such a tax falls on an economic surplus and could not be passed on to consumers in the price of goods.20 The levied tax, furthermore, was in no way a disincentive to the enterprise and effort of workers or capitalists. Land, said Smith, was suited to taxation because its value was difficult to conceal, in contrast to the value of capital. A register of land values could easily be compiled, regular valuations carried out and the tax collected at moderate cost. But he, like the landlords who dominated the British Parliament, resisted the application of the tax on the value of all land. In fact, he explicitly opposed a tax on the rental income which could be imputed to idle land. His reasons for declaring this position illuminate his ideological orientation.
In his discussion on the ‘Taxes upon the Rent of Houses’, Smith twice stated that it would be wrong to levy a tax on unused land. ‘The ground-rents of uninhabited houses ought to pay no tax,’ he declared emphatically.21 In his review of the position in Holland, he claimed that taxes on uninhabited houses there posed problems for their owners. ‘There seems to be a hardship in obliging the proprietor to pay a tax for an untenanted house, for which he can derive no revenue, especially so very heavy a tax,’ he wrote.22 He failed to confront other problems associated with empty houses, such as the hardships of people living in slums and workhouses who would have preferred to live in the buildings which remained empty for durations longer than the normal time lapse between occupants on the move.23 What stopped the owners from off-loading the tax burden, either by selling the houses or letting them to tenants ?
Smith was careful to protect his theory of property with his four famous maxims on taxation, the first of which was that people ought to contribute to the exchequer a proportion of their ‘revenue which they respectively enjoy’.24 The ability to pay was viewed as conditional on income actually being received, rather than potential income that could be imputed to the possession of a revenue-yielding resource. So a person may own a thousand acres which the citizens of London or New York may wish to use for factories, homes or recreation; but because the owner chooses not to let others have access to them (i.e., he decides to forego the potential income), he ought to be free of tax liability. Such was Adam Smith’s fair play.
Thus it was that priority was accorded to land monopolists. Smith accurately recorded how people were denied access to marginal coal mines25 (which could only yield sufficient income to pay for the labour and capital inputs), and to unimproved agricultural land,26 until they were able to pay rent. This was not just a descriptive account, however. Adam Smith, the champion of mass production, the division of labour and competition as the means to achieving the lowest prices possible for industrial products, prescribed as sound policy the increase in the prices of food and raw materials to generate rent for the land monopolists. These price increases, ‘instead of being considered as a public calamity, ought to be regarded as a necessary forerunner and attendant of the greatest of all public advantages’.27
When Smith noted that ‘rent makes the first deduction from the produce of the labour which is employed upon land’,28 he was prescribing an order of priorities. Yet in a competitive system, economic rent is a surplus after the deduction of wages (for labour), and interest (for capital) from the value of output.
Smith could have altered the order in which income was distributed, by encouraging the establishment of a competitive system in which landlords were forced to compete through the introduction of a tax on the value of land. He refused to lend his weight to this fiscal reform, which had at the time been promoted by Newcastle schoolteacher Thomas