Another Kind of Trickle Down

H. William Batt

[Reprinted from GroundSwell, September-October 2005]

When an economy generates product, some of it becomes cast as a surplus that is exchanged among individual and corporate parties, but much of it ultimately comes to settle on land sites, somewhere and somehow, in the form of economic rent. We ought really to be calling this a kind of “trickle down.”

I don’t fully understand how this passthrough the economy occurs. Tracing the flow of rent in the economy is a challenge I believe would strengthen understanding of Georgist economics. The effect of it all is to increase market value of these sites as it ultimately settles there. The classical economists, from Adam Smith on to Malthus, Ricardo, Mill and finally with George, seem to have understood this very well, and the concept of economic rent was central to their thinking for this reason. With the arrival of neoclassical thought, site prices are understood as the meeting of supply and demand curves, rent as such dropping out of the picture.

I think we need to better appreciate how economic rent circulates through the economy to settle upon what is classically called “land”. We accept the idea that economic rent is a function of the productivity of locations; the greater the strategic access and utility of a site, the greater the site rent to settle on those spots. We further understand that the greatest amount of rent flows to locations where people are, leading to higher market prices on urban sites than peripheral sites. (Today this may need to read “where people use,” due to the modern use of site resources such as airport timeslots, geosynchronous satellite orbits and spectrum bands.) Because these land sites have a fixed supply — i.e., are “inelastic” in economic terminology -- the rent settles at those points and stays there.

My favorite analogy for illustrating the creation and growth of economic rent is the placement of a grid of new roads on an open expanse of space. Given the design of a tic-tac-toe board with nine squares, suppose then someone builds on each spot. If every square is then improved -- say with a hotel, a grocery store, a pharmacy, a gas station, and so on -- and the owner of the center square declines to build, the land value of every plot rises, because each site adds value to every other. But the land site with the greatest market value is the center square on account of its strategic access -- even though its owner did nothing to “earn” that gain. The increase in value of the land alone on all the sites is economic rent, a product of the common social effort of every party but the “stand-patter” on the center square. The titleholder of the center square is a “free-rider.” John Stuart Mill knew this well: he wrote that “Landlords grow richer in their sleep without working, risking, or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title.”

There is an intrinsic morality to the argument that rent rightfully belongs to the community and not to individual holders of property titles. George thought any arrangements to the contrary amounted to nothing short of theft. If the increase in the land’s value is not recovered by the community in the form of taxes, it remains the windfall fortune of the titleholder. Thomas Gaskell Shearman, a promoter of Georgist ideas shortly after the master’s death, labeled its recapture “natural taxation.” Today we hear argued that people should “pay for what they take, not for what they make.” All this implies a respect for resources owned and held in common, where “ownership” of such means just the rights of use.

Our challenge as Georgists today is in spreading the idea that ownership has a different meaning with respect to natural resources than it does for items that people create. Our society has conflated the meaning of ownership to include both kinds. But it is from nature, and only the nature, that economic rent stems. Only in modern western (and westernized) societies has the distinction between leasehold and freehold -- or else the words usufruct and fee-simple -- ownership been lost. If one has opportunity to survey past histories and cultures, one discovers that license to use is widely distinguished from license to monopoly control, or to buy and sell. Native Americans, much as cultures the world over, were overwhelmed by emerging European notions of property titles in land, all to their disadvantage.

Can and should redress be made to aboriginal peoples? Likely not. Recompense is both technically and politically impossible. I would argue that it is not even warranted, because it posits links in generational justice that are problematic. But restoration and protection of that which is everyone’s rightful due can be facilitated by the collection and recovery of the economic rent that trickles down to land from the cooperative enterprise of communities. Among those alive today distributive justice would be much improved. Yet we are at the same time witnessing the ravenous capture of natural resources -- of air, water, land, mineral wealth, and many other elements of the commons -- by corporate interests and advantaged peoples, all of which is increasing the wealth disparity. The notion of the earth itself as a commons is in jeopardy of being made obsolete, much as is the idea of economic rent. Current enthusiasm for privatization of what is and ought to be the birthright of all humanity is most troublesome.

We Georgists argue that only through recognition and appreciation of our ideas about ownership and economic rent is it possible for the economy to function efficiently and sustainably. We can see this most clearly when looking at the design of our local communities and cities. There, even in small localities, we can observe differential land values in various locations resulting from the accretion of rent, value differences that are many multiples going from periphery to center. The skylines of cities reflect the differential market value of land sites, and taken in the aggregate the general proportion is roughly one-third land value and two-thirds improvement (building) value. Recent computer technologies permit the creation of what have come to be called “landvaluescapes” that quickly give a visual profile of the value of land sites throughout a city. Values per acre can increase as much as a hundredfold from edge to center. All this is reflective of the varying amount of economic rent that settles to land sites.

Recovering the economic rent that otherwise accretes to land fosters greater efficiency in the use of locational sites, enhances the feasibility of transit services by ensuring greater proximity of access points, and reduces the demand for infrastructure investment by more compact site use. On the other hand, present tendencies not to use high-value locations to their optimal advantage creates centrifugal economic forces that result in sprawl, with the resulting pressure on developers to choose sub-optimal and second-best sites. Yet the collection of economic rent ensures that landsites are fully responsive to market forces, leading to the greater vitality of cities and improved social and environmental ambience for both residential and commercial spaces.

Fortunately, the first-past-the-post greed that has characterized the monopoly capture of natural resources in both historical and contemporary America is not beyond remedy. By first recognizing the full dimensions of the earth’s commons, and then collecting the economic rent that accretes to such places, we can foster both greater economic efficiency and greater social justice. Titles for use need not be challenged and markets for site choice need not be disturbed. All that needs to be done is to gradually shift tax revenues off those elements of the economy that are burdened by their levy, and onto those parts of the economy that yield rent for the public to recover. Places that have demonstrated the ease of such shifts are increasingly known, their successes documented by the facile use of computer technology. Forecasting the impact of tax shifts elsewhere is equally feasible when financial data exists.

Recovery and distribution of the economic rent that otherwise falls upon locational sites offers a means by which to redress economic injustices, ones that stem largely from a distorted system of monopoly control of common natural resources. Roosevelt’s Secretary of Interior Harold Ickes once disparaged “trickle down” economics, observing that it was “feeding the horses to feed the flies.” But trickle down also describes the way by which the economic surplus settles to land, in present circumstances to benefit the privileged few. In a just economic system, it might describe finally how economic rent is collected for the benefit of all.