We Were Warned

All I hear about these days is the housing crisis and the resulting recession. I can only listen to this for so long before I have to speak up. The fact is that we were warned about this long ago. Not by Alan Greenspan or any number of top economists today. No, I’m talking 130 years ago, when an economist named Henry George wrote his magnum opus, Progress and Poverty. In it, he explained the crucial and underappreciated role that land plays in the economy. In a time when we have such a serious housing crisis, it would serve us to take heed.

So what is this land connection? To understand that, we must first understand what in economics is known as rent. This may prove somewhat difficult, as the economic definition is different from the way we commonly use the term. The difficulty is further compounded by the fact that neoclassical economists have expanded the meaning of the term from what it originally meant(largely in an attempt to obscure Henry George's ideas). As it was originally understood, rent meant the economic return of land to the landowner, just as wages were the return of labor, and interest the return of capital. What is unique about rent is that it requires no effort on the part of the landowner to increase in value, but rather is determined by activity of society as a whole. We all understand this, which is why homeownership is considered such a good investment. If a new park is built nearby, the land value goes up. If a new grocery store opens nearby, the land value goes up. Of course, if there is an increase in crime or pollution, the land value goes down. In fact, land value is a great economic indicator of just how prosperous and well-functioning a particular area is. Any money the government spends on public works mysteriously ends up in land values.

Solar Entrepreneurship

Here in America, we are rightfully proud of our free market system. We won out over the Communist menace that threatened the word, and free enterprise prevailed. The world recognized the justice and sanctity of private property, and we have upheld it everywhere, from land to natural resources to ideas. But an unspoken socialist threat still lingers beneath the surface. Or, should I say, up in the sky. Yes, the sun glares down upon our free soil, mocking us with collective ownership. How is it that in a society that recognizes that natural resources are best left in private hands that we could be so foolish as to leave such an important celestial object to the commons?

Well, enough of it! I intend to put this socialist nightmare to an abrupt end. I, Jonathan Cobb, intend to claim my personal ownership of the sun. Our brightest economists insist that it is best for society that all natural resources remain in private hands, to prevent a tragedy of the commons, and as a good capitalist American, I feel it is my civic duty to right this wrong. To seal the deal, I can assure you that a satellite carrying a flag with my name on it is headed straight for the sun, and as soon as it is planted on the sun(or is incinerated, which still counts), I will officially be the sun's owner.

The Law of Rent and You

Economics has always been rather esoteric for most people. Most people's knowledge of the subject is limited to the law of supply and demand, of which they have the most vague understanding. Any understanding beyond that is usually aligned with their political ideology. If they're conservative, they follow the supply side theory that lowering taxes create more jobs and helps the economy. If they're liberal, they follow the Keynesian idea that government spending projects can stimulate the economy. But there's one important economic principle that even economists today have long forgotten or ignored, at the expense of their discipline. That principle is the law of rent.

Before I lay out the law of rent, it bears mention that "rent" in the economic sense is not the same as what is meant in its common usage. We commonly apply the term to apartments, cars, videos, and various other commodities. In economics, its focus is more narrow. It is applied mostly to land, though it can also be applied to things like natural resources or the radio spectrum. Rent is the difference between what a factor of production is paid and what it would need to be paid to remain in current use. Applied to land, it essentially refers to the profit to be gained by virtue of its ownership. Essentially, land rent is equivalent to land value.

Poverty

We've all seen the scenes of bony-looking children in some desert surrounded by makeshift huts that we wouldn't dream of living in, accompanied by some announcer's appeal to our sense of guilt. "For just $1 a day you can sponsor a child like this," they say. While such philanthropy may give us peace of mind with the sense that we're doing something about the problem, such gestures of kindness do little to address the wider causes of poverty and hunger. This individual child you sponsor may gain a competitive advantage over his peers, but he will still live in a poverty-stricken area, and his peers will be no better off.

So what is the cause of poverty? In the conservative mindset, poverty is the fault of those living in it. Many a cynic has implored that these poor hungry people might have a chance for success if only they would stop having so many children. In our own country, they claim that they are "lazy" and simply don't want to work. Sometimes they will claim that our welfare system has made them dependent and given them a disincentive to work. Without completely discounting all of these explanations, suffice to say they do not explain sufficiently the extent of poverty that exists in the world, nor its distribution.