Georgism 2.0

Henry George failed to generalize his idea

The most-signed open letter in the history of economics is an endorsement of Georgism.

Georgist environmental policy, to be exact. I’m referring, of course, to 2019’s Economists’ Statement on Carbon Dividends.¹

This should have surprised no one. The harms of pollution, including carbon pollution, are classic examples of negative externalities. And if you ask an economist, they might explain that “carbon tax and dividends” internalizes the externalities, which is a fancy way to say it solves the problem.²³

And if you ask me, then in a spasm of revisionist clarity, in an article titled “Georgism 2.0”, I’ll explain that Georgism IS the internalization of externalities.⁴

And I’ll show that this conclusion becomes obvious if you define your terms clearly. This is surprisingly difficult, because English wasn’t designed as a tool for political economists.

So. I’d better start piling the lemmas.

First of all, what are externalities? Wikipedia’s definition is our first lemma:

1. In economics, an externality is a cost or benefit to an uninvolved third party that arises as an effect of another party’s (or parties’) activity.

Negative externalities are costs to those third parties, whereas positive externalities are benefits to those third parties. And the harms of pollution - such as carbon pollution - are classic examples of negative externalities.

For example, say you burn some oil to heat your home. You enjoy the warmth, and the oil company enjoys your money. So far, so good.

But by burning that oil, you’ve released carbon dioxide, an invisible gas that is the most important type of carbon pollution. And carbon pollution traps heat in the atmosphere. This makes Earth’s climate hotter and leaves everyone worldwide with worsened droughts, wildfires, floods, hurricanes, and heatwaves, among other disasters.

In other words, the “uninvolved third party” here is everyone else on the planet⁵, and the main⁶ “cost” to us is damage to our climate, which we rely on to grow our food.

Then there are positive externalities, the kind that benefits uninvolved third parties. Sticking with our theme of carbon pollution, carbon-negative concrete provides a great example! Carbon-negative concrete uses carbon dioxide as an ingredient, sucking it out of the air and safely locking it away in built structures. If you manufacture some carbon-negative concrete, other people will benefit from an enhanced climate.

Our second lemma:

2. “The term land [economic land, known as nature on this blog] embraces, in short, all natural materials, forces, and opportunities, and, therefore, nothing that is freely supplied by nature can be properly classed as capital.” -Henry George, Progress & Poverty, Book I: Wages and Capital.

This is what the word “land” means when mainstream economists use it, and Henry George himself⁷ was no exception. The concept is also known as economic land.

But in everyday English, we call economic land “nature”. On this blog, I call economic land “nature” too, because I think technical language should not be needlessly confusing.

So when I say “land”, I mean physical space and the naturally-occurring terrain within it.⁸⁹

On to Lemma 3:

3. Rivalrous use of nature, e.g. holding land, removes its value from nature.

(Rivalrous uses of nature other than landholding include mineral extraction, pollution, and biodiversity loss.)

If you hold a plot of land, no one else can hold it at the same time until you sell or otherwise vacate it. You have removed its value from nature and used it for yourself.¹⁰

But how much value?

4. Ricardo’s Law of Land Rent: Land rent is land’s value above that of the least productive land in use.

Lemma 4 is my own rephrasing of Ricardo’s Law of Rent, which formulates how much money it is possible to charge to rent a plot of land¹¹. (Pre-existing phrasings didn’t harmonize with the rest of the vocabulary I’m laying out.)

The Law of Land Rent has been accepted for two hundred years, so I will not relitigate it here. But in short, it states:

You can’t charge any land rent for the worst land in use, because any potential tenant could go use equally-bad, unclaimed land for free instead. Land rent measures how much better a plot of land is compared to the worst land in use, because it’s what tenants are willing to pay to use the better land.

Note that on this blog, I use the phrase “land rent” to describe the rental value of land. Land rent is not the same as the “rent” we invoke in colloquial English, where we speak of “renting” cars and vacuum cleaners. Meanwhile, in mainstream economics, the word “rent” has too many contextual meanings to list.

But “land rent” is, in my opinion, a clear and precise term for the rental value of land.

What happens if we combine Lemmas 3 and 4?

5. Holding land removes its land rent from nature.

Hmmmm. Is that starting to sound like an externality?

My task is not done until it’s proven. Next lemma:

6. By default, nature is available to the public.

Until an agent claims it, uses it, or pollutes it, nature is freely available to be claimed, used, or polluted by anyone. Simple enough.

Combining Lemmas 5 and 6:

7. Holding land encloses land rent that was formerly available to the public.

Next, Lemma 1, the definition of “externality” as sourced from Wikipedia, didn’t use my vocabulary. To make the proof clear, let’s get it harmonized.

And to do that, I’ll need Lemma 8:

8. Benefits and costs are increases and decreases in value.

If you benefit from something, you gain value from it. If something costs you, you lose some value. (Conversely, if something is valuable to you, you would benefit from gaining it, and losing it would entail a cost.)

So. Combining Lemmas 1 and 8, and using my vocabulary:

9. An externality is an increase or decrease in value to an uninvolved agent, which arises as an effect of another agent’s (or agents’) activity.

Remember that as per Lemma 4 (Ricardo’s Law of Land Rent), land rent is a form of value.

And I’d say “the public” qualifies as many uninvolved agents.

And so, we combine Lemmas 4, 7, and 9, and…

10. THEREFORE: Holding land entails a negative externality equal to that land’s land rent.

!!! !!! !!!

Lemma 10 is a fundamental revision of the relationship between land and externalities.

Land and externalities are two rudiments of economics. It shouldn’t be possible to discover this as late as 2026.

For this to happen, the entire economics profession would have had to have been labouring under some kind of dogma preventing them from seeing clearly the entire time. Perhaps this Andrew Rose guy has good reasons for Not Shutting Up about defining terms clearly!!

And I’m not nearly done. Remember when this article was about carbon pollution? It still is, and Lemma 10 is a prerequisite to understanding Georgist environmental policy.

Lemma 11, meanwhile, is a one-line summary of Georgism 1.0.¹²

11. Georgism would capture all land rent and return it to the public through democratically-designed government services.

In its heyday, Georgism 1.0 named this the “Single Tax”. Henry George and company intended to abolish all pre-existing taxes and make the Single Tax the only source of government revenue. Modern Georgists, however, don’t agree with George that land rent returns alone are sufficient.

But Georgists of all eras agree that we should compensate the public for the exact value of the loss of all occupied land, and do so in a form the public has consented to through democracy.¹³ Thus, Georgism would return land rent from landholders to the public according to the public’s wishes. I refer to this as land rent returns.

Anyway, if we combine Lemmas 10 and 11, we get:

12. THEREFORE: Georgism would internalize the negative externality of landholding.

!!! !!! !!!

The miracle of Henry George’s signature policy, the Single Tax, his antidote to structural poverty¹⁴, land rent returns… is that land rent returns fund government by undoing a market failure instead of taxing the creation of wealth.

The phrase “the perfect tax” is, frankly, inadequate to describe it.

And, believe it or not, this article is still about carbon pollution.

So why did I spend over a thousand words talking about land instead? What makes carbon dividends Georgist? And what gave me the colossal nerve to title this article “Georgism 2.0”?

You see, there was a fatal flaw in Henry George’s logic: