Externalities All the Way Down: A Response to Huemer on Land Rent

Mike Huemer sympathizes ith the core moral claim of Georgism, but he doubts that a Georgist Land Value Tax (LVT) would generate sufficient revenue to fund a BIG. His main concern is that “most of the economic value of land is due to the benefits of living or working in a high-population-density area.” A piece of land in New York City is valuable primarily because there are a lot of other people around with whom the owner can engage in mutually beneficial exchanges. Without those other people around, the land would not be nearly as valuable. But this means that there is a sense in which the main source of land’s value is the productive activity of human beings. And if Georgist moral principles only license the taxation of the unimproved value of land, then most of land’s actual value would appear to be off limits.

I think Mike’s empirical claim about the source of land’s value is correct. And I think it demonstrates an important point about the importance of trade and the division of labor in the development of human prosperity – a point most famously expressed by Adam Smith and beautifully developed by Matt Ridley in his magnificent book The Rational Optimist. However, I don’t think Mike’s point undermines the Georgist defense of a LVT, or my claim that a LVT might suffice to finance a reasonable BIG.

Mike brings up the issue of population density to show that a large part of land’s value depends on the productive activity of other people. But, really, all of land’s economic value depends on the productive activity of other people. Land only has economic value, after all, to the extent that other people are willing and able to pay for it. And the only way other people can put themselves in a position to be willing and able to pay is by producing something themselves.

The same point can be made in a different way with respect to particular aspects of land’s value. Land with subterranean crude oil deposits is valuable primarily because other people have figured out how to put crude oil to productive use. Before that discovery was made, oil was a pollutant, not a resource. The value of a landowner’s oil is thus largely a positive externality created by others’ labor.

So Mike’s point applies more broadly than he gave it credit for. Still, the key question is whether landowners are entitled to the external benefits created by others’ labor, or whether such benefits are the legitimate object of a LVT. The argument I’ve given above shows that the stakes of this question are higher than Mike supposed, but it doesn’t tell us how to answer it.

I think the correct answer must be that, on Georgist principles, the landowner is not entitled to this external benefit. Her ability to capture that benefit depends on putting a fence around a piece of land in order to keep others out. And this, ex hypothesi, is something she has no moral right to do. It’s not benefitting from the positive externalities of others’ labor that’s the problem. It’s the forcibly excluding others from doing so.

This explains why, contra Huemer, people in low-population-density areas are entitled to compensation from people in high-population-density areas. High-population-density land is, ceteris paribus, more valuable than low-population-density land. So when you put a fence around a piece of land in Manhattan, you’re depriving other people of a more valuable resource than you do when you put a fence around a piece of land in West Virginia. Because you have deprived others of a more valuable natural resource, you owe them more in compensation.

But Mike has one more argument up his sleeve. Almost all current landowners purchased their land from someone else. And that purchase price reflected the discounted future value of the then-current land rent. If we instituted a LVT tomorrow, we would wind up taxing landowners on rents that they had already paid for. This seems wrong to Mike. It would only be fair, he suggests, to tax them on the rents that accrue to their property after their purchase. For it is only those rents that constitute a real windfall to the owner.

Mike has identified a real problem here. But it is not by any means a problem that is unique to Georgism. It is a problem that besets any theory that specifies an ideal of justice in conflict with the status quo. Suppose you think, like I do, that the medallion system that cartelizes the taxi industry is unjust. What should be done about it? Taxi drivers did, after all, pay for their medallions. So if we abolish the system, we’ll be depriving them of a resource into which they invested real time and labor. On the other hand, they had no right to that benefit in the first place. So I am more inclined to think that the correct answer is – abolish the cartel as soon as we can. And to those who are harmed by the loss of their monopoly status, we say, “Be grateful you were able to reap monopoly rents for as long as you did. But from now on you can compete for your income like everybody else.”

On Georgist principles, isn’t that the correct response to the landowner, too?

Also from This Issue

Lead Essay

  • The Pragmatic Libertarian Case for a Basic Income Guarantee by Matt Zwolinski

    Matt Zwolinski argues that a basic income guarantee (BIG) could very easily do better than our current welfare state by many different criteria. It would be far more efficient. It would be less subject to rent-seeking. It would be easily accessible by the poor, and its benefits would flow to them rather than to the middle class. Although there are many libertarian objections to a BIG, Zwolinski nonetheless argues that when faced with a choice between a BIG and the status quo, libertarians should be open to making the change.

Response Essays

  • Is a Basic Income Permissible? by Michael Huemer

    Michael Huemer argues that while a basic income guarantee might be better than the status quo, this amounts to some rather faint praise. A basic income guarantee would necessarily violate some people’s rights, while a fully legitimate government must never violate anyone’s rights. The problem of political authority will likely remain a barrier to all similar proposals, even if we may happen to find this problem’s full implications troubling.

  • When the Basic Income Guarantee Meets the Political Process by Jim Manzi

    Jim Manzi doubts that a basic income guarantee would emerge from our political process while still bearing its purportedly beneficial features. Compromises would proliferate, as would paternalistic controls. The interests of the bureaucracy would assert themselves, and the temptation to make exceptions would prove overwhelming to the electorate. Moreover, when a basic income guarantee has been tried in practice, the result has consistently been a withdrawal of participants’ labor. Scaled to an entire society, the result of such a withdrawal may be dire.

  • Let’s Try a Basic Income and Public Work by Robert H. Frank

    Robert H. Frank agrees with Matt Zwolinski that a basic income guarantee would achieve the welfare state’s goals more effectively than our current patchwork of programs. But he argues that a basic income guarantee sufficient to end poverty would spawn massive taxpayer resentment. Incentives to work would be undermined both for recipients and for those whose tax dollars funded them. Frank recommends a combination program that would include a significantly smaller cash grant and a standing offer of public employment for any who desired it. Frank defends taxation against libertarian objections and offers several additional taxes that he believes should be implemented. He argues that these should help pay for the expensive programs here being considered.

The Conversation

Letters to the Editor

  • The Basic Income Guarantee: Simplicity, but at What Cost? by Michael D. Tanner

    The Cato Institute’s Michael D. Tanner examines the Basic Income Guarantee and finds that its simplicity wouldn’t survive the political process. Difficulties abound, arising both from practical politics and from the realities of our current welfare expenditures. Tanner recommends consolidating our welfare system and simplifying it, but he does not endorse a Basic Income Guarantee.

  • Libertarianism and the Pragmatic Case for a Universal Basic Income by Ed Dolan

    Economist Ed Dolan shares some of his findings on the Basic Income Guarantee. He finds that work disincentives will indeed exist under a BIG, and yet these may be smaller than the work disincentives we already experience owing to the welfare state as it now exists. Libertarians should not be tempted by the so-called “gospel of work,” he says; libertarianism, rather, is about the gospel of freedom of choice.