In this article I wanted to talk about the 1879 book “Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth: The Remedy” which was very popular in its time and has influenced a lot of the great thinkers of the 19th and 20th century.
There is a fundamental problem with progress that people have noticed since the beginning of the industrial revolution. That is, in any given area where some amount of progress happens, it is often followed by a sharp rise in poverty within that area. These are the regular boom and bust cycles we know from history.
To explore how this thing works, let’s see the problem in stages.
Stage 1: Technological Advancement
In this stage, a society is introduced to a new technology or a set of new technologies that add a multiplier to that society’s ability to create new goods. One example of this would be farming. Instead of spending hours trying to gather food from a forest, we instead started cultivating crops and growing them purposefully in some prescribed land. This meant that people started getting more food by farming their food instead of gathering them. The same goes for raising livestock. Instead of going out and tracking and hunting animals, we instead domesticated and bred them so we could have them available to use whenever we want, without having to spend hours trying to hunt them down. There is also another obvious example of the industrial revolution and the rise of mechanization, which also created a huge surplus of goods just like agriculture.
The key thing about these technological advancements is not only that they allow us to do things faster, but the main thing is that they create surpluses. This means that without these kinds of technological advancements, a given good would have only been available to some small number of people, but when you have more, it means everyone will get a share. In the long term, this also creates competition and a fall in prices, which further ensures this effect.
Surpluses are not only good for consumers; they are also good for producers. More goods to sell to more people means more profits, and they also will have a diversified set of consumers, which further reduces uncertainty in operating the business.
Therefore, these surpluses create wealth for both producers and consumers.
Stage 2: Increase in Raw Material Value
In his original book, George describes this stage as the “increase in land value,” but he also then broadens the definition of land as “all natural materials, forces, and opportunities” and anything “that is freely supplied by nature.”
In this stage, as the society’s wealth grows and demand for participation in that society increases, the first thing that happens is the land that this progress is happening on explodes in value. Every landowner starts increasing the rent they collect from their land. Because, in the landowner’s mind, they are not just giving you access to the mere land, they are giving you access to the society and its wealth.
This effect also happens to other natural resources that the producer depends on. So, even though the reason why a given natural resource has any value is that the producer chose to use it to create its output, in this second stage, nearly all the surplus wealth created by the technological advancement starts being sucked out by the rent-collecting behavior of the owners of that natural resource.
The same happens with land: even though the reason a given neighborhood develops is due to the industriousness and labor of the people who do their economic activities in that area, as that neighborhood’s wealth starts growing, it will eventually be trapped by the landowners of that neighborhood. I’m sure most of us have experienced this: you move into some underdeveloped area due to it having lower rent, and as more people flow into that area seeking the low rent and start doing economic activities, the wealth of that area increases, and immediately the landowners start increasing their rents.
Stage 3: Stagnation
So, after the rent-collecting in stage 2 starts, there is no stopping it. All the progress that was being driven by the surpluses born of the technological advancements suddenly stops. All the surplus starts getting sapped away by the increased rents. This means that the producers have less profit and less value to distribute to their workers. If the workers don’t have money to spend, they start consuming less, which means all the producers they used to depend on start having even less profits.
These effects start a death march toward poverty. Since these kinds of effects take some time to become visible, the rent increases will also continue meanwhile, all this destruction is happening.
This stagnation starts accelerating the rate of poverty. With poverty come all the socio-economic problems I’m sure we are all very aware of. It is kind of like that golden goose story: by trying to milk out everything they can from the progress machine, they end up destroying it.
This framework for understanding the relationship between progress and poverty explains why times of tremendous progress are often quickly followed by a rise in rates of poverty. At the time of its publication, this framework was considered one of the seminal works of economics and was well supported by people from all sides of the political spectrum.
George, in his book, doesn’t only describe the problem; he also suggests a solution. George proposes a new tax, the Land Value Tax. The purpose of this tax is to tax away the increase in value of the land that is created due to progress and the economic activities happening on the land. Therefore, this tax eliminates the land-hoarding behavior of rent collectors who buy up huge swaths of land, preying on the potential progress that might happen on that land in order to capture it for themselves. This tax will bring an end to the speculative manipulation of landowners.
You can think of the Land Value Tax as a national rent. Instead of there being multiple landowners, there would only be one landowner: the government. The Land Value Tax can be thought of as a rent. If a person doesn’t use their land appropriately and come up with enough funds to cover their tax, that land will be taken away from them and given to someone else.
Also, the Land Value Tax wouldn’t be a global rate for the whole nation; it will depend on the purpose and the activities being performed on that land. For example, residential areas will have a lower rate than farmland.
Since the value of the land itself is being taxed away, it encourages more productive use of the land. Since the landowner can’t accumulate wealth from the land itself, they will have to build some kind of structure on top of it that will generate profits.
The other great thing about the LVT is that the tax collector is the government, so the government can then use that money to build better infrastructure and provide good social services to its citizens. In his book, George estimates that the revenue generated from this tax would be so great that it would eliminate the need for any other kind of tax. This would mean that consumers wouldn’t need to pay income tax or VAT or anything like that, giving them more money to spend back into the economy. This, paired with the increased funding in infrastructure, creates an effect of accelerating progress instead of limiting it.
George even suggests distributing the earnings of the revenue to everyone in the country as a citizen stipend. His argument is that the increase in land value only happened because of the work done by all the citizens of the country, so it is rightfully theirs.
Ever since I heard about this idea, I have been completely infatuated with it. It has greatly increased my interest in economics. I have tried to cover the ideas of Georgism here superficially, but there is a lot more I haven’t mentioned. I urge you to research this topic on your own.
See you tomorrow.