Sunday, April 08, 2007

Three Unproductive Drains of Value: Part 3


Le us imagine a few businesses, in which one party supplies the labor, another the capital, and a third access to land.

Imagine a farmer on someone else's land (a historically common enough phenomenon). He supplies the labor, both his own, and those of his laborers. The owner of the land supplies access to his land. The bank loans to the farmer every spring for capital expenses throughout the year (seed, tools, parts, wages for his laborers, etc). At the end of the year, the harvest occurs, is sold at market (or, in more primative economies, divided directly), and the proceeds are divided between the farmer, the banker, and the landowner.

Or imagine a shop run on someone else's lot (also a common enough phenomenon). The shopkeeper provides the labor. The bank supplies money for stocking, building repairs, advance wages, etc. The landowner supplies access to his land. The shopkeeper hopefully manages to make enough of a profit on his goods that he can afford to pay back the bank, pay the rent on the land, and hopefully still has enough left over to make it worth his while.

In both of these examples, I have clearly delineated the three components of an economy defined by classical economics: land, labor, and capital. The interaction of the three is how wealth is created. The posession of the three determines how wealth is distributed. To the landowner goes the rent. To the banker goes interest on any capital loans. Whatever is leftover is what goes into wages. If it isn't enough. the business fails.

Of course, each of those businesses could be configured differently, by combining roles. The farmer, for example, could have in past years saved enough that he now acts as his own banker, getting to keep that which would have otherwise gone into interest on loans (and possibly making interest on the money while it waits in the bank). Or, he could be the owner of the land, getting to keep that which would otherwise be paid in rent to another landowner. Or, the farmer could theoretically "own" the land, on the condition that he pays his mortgage--principal and interest; thus the bank can be thought of as the landowner (becoming such literally should the business fail). Or, we could be talking about a subsistance-farming agrarian society, in which all roles are contained in a single individual or family. If you (the reader) can think of any other combinations that introduce a fourth economic component (other than land, labor, and capital), please tell me about it.

The thing to examine is that the wealth resulting from economic activity can be thought of as being divided into three discrete streams: rent (for landowners), wages (for laborers), and interest (for bankers). The question I examine here is: do all three of these compensate individuals for productive activity, thus providing an incentive for productive activity? For the worker, the answer is obvious: yes, it does. The worker earns his wages, whether he be a blue-collar grunt on the factory floor, or the boss making all the hard decisions (and dying of a heart-attack by fifty-years of age?). What about the other two?

The thing to recognize about the banker (at least, the honest banker--today's government "banking system" is not honest) is that he, too, is a sort of laborer. People save money at his institution rather than under their floorboard (for example), and he can make that money available for others while the owner doesn't need it. He has to keep accurate accounts. He has to gather the information necessary to make decisions as to whom should be lent money, what rate to charge (to compensate him for his efforts, as well as to compensate his account holders for making their stored wages--and rent--available to others). He has to correctly discern the level of risk a borrower presents. All of this requires time and effort. Of course, his account holders profit from the labor of others (to a degree directly proportional to the size of their account), but by making funds available, production that would otherwise not occur does occur.

Thus, I conclude that interest does provide an incentive to behavior that increases productivity. In addition, as savings rise relative to productivity, the price of access to savings--the interest rate--drops. It's a simple matter of supply and demand: the greater the supply of money for borrowing, the lower the price of access is going to be. A high interest rate stimulates a greater rate of savings, which ultimately lowers the interest rate, which decreases the savings rate, increasing the rate of consumption, which creates new opporunities for investment (demand for products), which raises the interest rate...

Land is another matter. Leaving aside the matter of how the land was obtained (assuming, for example, it was inherited), the landowner contributes absolutely nothing to economic activities. If the farmer did not exist, obviously farming would not get done. The farmer could certainly survive without the banker (the one that provides capital only, and not land by mortgage), but access to capital enables him not only to survive, but to thrive. (Note that the plight of the farmer who spends his life in the pocket of the banker is the result either of bad decision-making on the part of the farmer (got greedy, took out an unwise loan, and thus deserves to fall), or the result of the banker also acting the part of landowner.) But not only would the farmer do just fine without the landowner (either he or the community owns the land), the farmer would do far better in that he could reinvest more of his proceeds, or just enjoy a higher standard of living.

The same goes for the shopkeeper--though capital is certainly more vital for him than for the farmer (his stock IS capital). If the shopkeeper did not have to pay rent, either he could keep more of his profits, or he could lower his prices--thus the customer is also better off without the landowner.

In fact, the only reason rent expenses even exist is because access to land, like everything else, is scarce, but necessary: everybody needs it, since no economic activity can occur without it. And unlike the market for capital, in which the price goes down as productivity rises, the price of land rises with productivity. For while capital increases with quantity as people save, land is a fixed quantity. As the number of people and dollars chasing land goes up (demand for land), the supply remains constant, and can never be increased. Technological developments can open up new frontiers, but this only opens land resources previously unexploited, or underexploited relative to the new technology. It does not create new land for new people to own; instead, barring conquest, the old owners own both the old potential and the new potential.

So what is land? Take a look at any wealth generating system. Separate first out the day-to-day efforts of the people involved: that is labor. Separate out anything created with human hands (or machines): that is capital. What is left is land: the uncreated, natural potential of the earth (and beyond). It includes the right of the farmer to plant and harvest where another cannot; it does not include the crops, fences, tractor, barn, etc. It includes the city lot a store or a house exists where another cannot; it does not include the building itself, the landscaping, the electrical system, the plumbing, or anything else of that nature. It includes the right-of-way where a road, a cable, or a track exists and another cannot; it does not include the asphault or the necessary maintenance, the cable, the tracks, the ties, or anything like that. It includes bandwidth in the electromagnetic spectrum in a given area where one can broadcast, but another cannot; it does not include the broadcast equipment or the content of the broadcast. It includes the potential of an aquatic system where one can fish but another cannot (the waters having already been fished); it does not include the boats or the actual fish. It includes the limited orbital space where one sattelite can exist and another cannot (to try would result in a collision); it does not include the satellite or the costs of launching it.

Another thing about land, unlike labor and capital, is that unlike the other two, exclusive personal ownership of land, always and everywhere, originates in conquest. Men are always and everywhere recognized as free agents where their own labor is concerned--slavery is required to make man into a commodity. A laborer who saves his wages (creating a store of capital) is naturally the owner of such, whether he be a hunter-gatherer who took the time to pick a rock off the ground and chip it into an arrowhead, a merchant who purchased something one place and took the time to transport it somewhere it was needed more, or an industrial laborer saving a nest egg he hopes to invest into a business of his own. However, land, always and everywhere, is owned either by nobody, or by the community, until such time as it is seized by force. Individual land ownership in Europe began with Roman conquests--land was seized from communities, and distributed individually among the victors. Individual land rights in Amerca was a Roman tradition brought across the sea, and established by conquest, as well.

Consider your dinner. Someone took the time to transform raw food into dinner. They bought that food from a grocery store, who had it shipped there and stored it until you needed it. The bought it from someone else, ultimately leading back to the farmer, who sowed, watered, weeded, and reaped.

However, your lot is different. You bought it from someone, who bought it from someone else, who bought it from someone else. Trace it back far enough, and if you be an American, the original owner probably bought it from the government. The government acquired it by declaration: "This land belongs to us, and anyone who disagrees will die." Things are a little more complicated in Europe, I'd imagine, though it all probably goes back either to some Roman senator who stole it from the original inhabitants, or some Germanic raider who settled down and worked out territorial arrangements with some other Germanic raiders (though it was many, many years--generations--before even that arrangement went from being a public defense committment under a king, to being a personal domain devoid of public responsibility).

Thus, rent is a nonproductive drain of wealth (where wages and interest are productive drains), that results from a dishonest practice. It is a drain that takes a larger slice of production the more economically developed a place is. And unlike theft and fraud, it is not something that could theoretically be done away with if everybody suddenly became honest: rent is the natural result of the simple fact that, to maximize productivity, you need some way to distribute land intelligently among people, and rent is the result. However, where the land is owned (and the rent collected) by the community, it is spent on public works in times of peace, on public defense in times of war. Where it is owned (and the rent collected) by individuals, it subsidizes a parasitic aristocracy, who typically spend it distorting the economy to their advantage, weakening society, until it either breaks from within (as the enslaved masses revolt) or from without (as enemies prey upon the weakened nation).

All of this might seem rather remote to the average person. After all, we no longer have highly visible landowners in our society (at least in America). The modern innovation that hides the phenomenon of Rent is the joint stock corporation. With the exception of homeowners who have finally paid off their mortgages, and the few sole proprietors who are lucky enough to own the land their business stand on, nobody owns land directly any more. People own stocks, or own mutual funds through which they own stocks, in corporations. It is the corporations that own the majority of the land. So instead of a clearly delineated set of classes defined by their ownership of land or the lack therof, we have a spectrum, with people who own enormous amounts of stock at the top, moving somewhat gradually down the line through people who own only that which is in their 401k, down to those who own no stock, whatsoever.

However, it is no less the case today than in the past that the rich get richer while the poor get poorer, and through the exact same phenomenon: rent. The businesses are bigger and more complex, but their revenue streams can still be conceptually categorized in terms of wages, interest, and rent. The corporation (particularly the bigger, older ones) typically owns its land. If it does not, it still has to pay rent to someone that does (typically, another corporation). If it does not have to pay rent, that money is pure profit, to be reinvested (increasing the value of the stock) or paid out as profits. It certainly is not paid out as wages, since the market value of labor takes into account the rent costs all businesses must take into account. A company that diverted rent costs to their workers rather than their investors would be vulnerable to a competitor that did pay to their investors.

And that is Part 3. The next part will discuss the way I think these drains could be dealt with, and even a method by which we could get to there from here!

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