Political Economy is a study of the natural laws governing the production and distribution of wealth. It refers to the "economy" of a community, a larger geographical unit, or a nation-state- in contrast to the "economy" of an individual or a household. Founded by the French Physiocrats; see Physiocrats and the Impot Unique; major contributors to classical political economy included Adam Smith, Ricardo, Malthus, Mill and Marx. The classical analysis was being subverted toward the latter part of the 19th Century by the marginal utility, historical and neo-classical approach represented by, among others; Jevons, Bohm-Bawerk, J B Clark, Marshall, , etc. By the 1930's, the Keynesian approach had pretty much swept the field. The abbreviated primer below explores the earlier tradition.
courtesy Duke University Economics Dept
Shown above is the 19th Century
political economist and social reformer, Henry George. His
work represented the culmination of classical political
economy which has been pretty generally obscured by a
conspiracy amongst the academics and "scholars" to downplay
his contributions to the discipline. His most important
writings include; SOCIAL
PROBLEMS, 1883 PROTECTION OR FREE TRADE, 1886 A PERPLEXED PHILOSOPHER, 1892 THE SCIENCE OF POLITICAL
ECONOMY, 1897 Although he continued in the
tradition of giants, the radical nature of Henry George's
remedy has earned him little more than a footnote in
contemporary economic literature. The synopsis below is
based upon the natural laws of the production and
distribution of wealth. Axioms of
Political Economy Understanding the laws of political economy begins
with a clear definition of terms. The simple table below will help. Factors of Production________Distributed as LAND----------------------------------------RENT LABOR--------------------------------------WAGES
CAPITAL------------------------------------INTEREST The terms used in political economy
are precise as well as functional.Some additional analysis of the above definitions. Labor is all human effort engaged in the
production of wealth. Whether employed, self-employed,
or not employed is irrelevant. Only the activity which
consists in adapting or transforming "natural materials" or making tangible products capable of satisfying human desires and having exchange value is
labor. Thus, the many useful "services" provided by
doctors, lawyers, teachers, entertainers, etc., should
be distinguished from labor. Capital and
Wealth are the least understood terms in political
economy. Labor produces, maintains and renews capital.
It's difficult to conceive of any production taking
place without the use of capital. Perhaps a simple
example of labor applied to land without the use of
capital would be picking wild berries off trees by hand
and immediately consuming them. The important thing to
remember is that capital is wealth in transition rather than its end use. Nothing can be capital which is not
in the category of wealth. Wealth is the key
term of political economy which deals with the laws of
its production and distribution. What might be considered wealth for an individual or family is not
necessarily part of the wealth of nations or communities. Consider money, stocks, bonds, promissory
notes, mortgages which are assets to an individual. They could all be burned without one iota of the real
wealth being reduced. In fact, this real wealth is
constantly depreciating (see note on value below).
Keeping in mind the precise and functional definitions
used here, wealth is a) tangible b) a product of human
effort c) directly satisfies a desire and d) has
exchange value. Land is not a product of human effort
and is therefore not wealth but the source of all
wealth. The assets mentioned above do not directly satisfy desires. They are claims on
wealth. Some specific examples in applying the definition of terms above follow; oil in the ground is included in land, oil at the refinery is wealth used as capital, oil in your car is just wealth fish in the ocean, wild animals, trees in a virgin forest are
alike part of land; fish in a seafood market, lumber in
a lumber yard, a farmer's crops or cattle readied for
market are capital fish or other food on your dinner table, wood in your personal residence or your furniture is wealth reaching the consumer wealth consists of everything from paper clips to skyscrapers;
homes, office buildings, shopping centers, food, clothing, automobiles, furniture, television sets, computers, books, instruments of every description are
included in the category of wealth Toward the end of
the 19th Century and continuing to the present, the neo-classical economists muddied the waters by either
failing to precisely define wealth or by abandoning the
effort. Additionally, they tended to equate land with capital. There is ample evidence that land is not capital.
THE MARGIN OF PRODUCTION
The Margin of Production is the least productive land in use. In the
above example, it would be the 8 unit land. This no-rent or zero rent land establishes the combined yield for labor and capital (wages + interest) as well
as the rent of land for each increment of more productive land. If all production had taken place on
10 unit land then rent would=0 and wages + interest=10.
In the #2 example, production is
assumed to have doubled on every increment of land in use. Thus, rent as well as wages plus interest have
increased as absolute quantities. But rent has increased as a proportion from one-ninth to one-quarter
of the wealth produced while the share to wages and interest declined from eight-ninth to three-quarters. Of course, these figures are arbitrary and are only to
demonstrate the fact that as societies become more productive there is a lowering of the margin of production and an increase in rent. As Adam Smith put
it in Chapter 1, the first paragraph of THE WEALTH OF NATIONS Chapter 3, Book I is an analysis of how the division of
labour is limited by the extent of the market. These markets necessarily imply a substantial population. Thus, both population and production are necessary for ground rent*. In the #3 example, production is
assumed to have tripled on the land in use further forcing down the margin of production. Anticipating the
expansion of production, a considerable portion of better or more desirable land is held out of use (shown as 0 production in the third and fourth cells above). This land speculation causes labor and capital to be employed less productively than it would have been with no land speculation forcing down wages and interest. In example #3, rent has increased to about 40% of total production while wages and interest have
remained the same total as in example #2 but declined
in proportion to the wealth produced. The intent of the above examples is to illustrate the natural laws; the law of rent, the law of wages and the law of capital. Actually, there are an almost infinite number of examples which could be used factoring in changes in
productivity, increases in population, amount of land speculation, etc. Rather than discrete grades of land, there is a gradual shading from more desirable to less
desirable land parcels. Generally, location of land is
the prime consideration as land in the heart of the
market is much more productive than land on the fringes
of a community. Many amenities go to make up either the
productivity or desirability of sites either for business or for living. But it is a universal truth that some sites will be favored over others meaning that there will always be ground rent or the economic
rent of land. *Rent, Ground
Rent, or Economic Rent are used here as synonymous terms. Preference is given to the term Ground Rent since it sets off the difference in the meaning of rent in the popular sense of payment for the
use of a house, office, automobile, furniture or other items of wealth. In the politico-economic sense, rent or ground rent is the return (or anticipated return) for the use of land exclusive of any or all improvements. Wages vs Interest. Labor and Capital are complementary in the production process. As defined
above, there is no necessary conflict between them. Market processes and competition determine the relative
portion of the wealth as wages or interest. But Ground Rent comes first (or off the top) as payment for the use of superior or more productive sites.
As emphasized above
, ground rent is a natural phenomenon existing wherever
there is a differential in two more sites as to productivity or desirability. In contemporary developed
societies, enormous ground rents can be observed at the
heart of the market; whether Tokyo, London, New York,
or commercial arteries in major cities throughout the
world. A few front feet strategically located in these
large population centers can literally be worth a king's ransom. Oil and mineral deposits discovered
underground can also yield large ground rents. The
spectrum is currently being pursued by ground rent
seekers. Ground rent is also involved in many other
efforts to monopolize natural opportunities.
Land value or the price of land is capitalized ground rent.The amount capitalized can be any combination of actual and speculative rent to an individual owner or title holder. Let's assume an actual annual ground rent for
a particular site of $1000. With a going interest rate of 5% (not to be confused with Interest as the
portion of wealth to Capital discussed above), the land
or site value would be $20000. If the state or a community were to siphon off say 40% or $400 of the annual ground rent, it would leave the individual owner
$600 and other things being equal would reduce the land
value to $12000. Hike the community collection of the
ground rent to 90% and under the same circumstances the
land value would drop to $2000. In contemporary societies considerable ground rent includes a speculative premium. An individual site owner, receiving little or no actual ground rent (vacant sites
as an example) speculating that the future potential is
perhaps $2000 annual rent might ask $40000 for his land
assuming the same 5% rate. Thus, land value or the price of land grows out of a rather complex set of factors including a) population growth b) the level of
production c) site specific aspects such as terrain,
roads and highways, proximity to markets, amenities and
infrastructure d) the going capitalization rate e) anticipation of taxes or levies in a particular area, etc. Multiply the figures above by 10 or even 100 and
you will have some idea of the magnitude of land value
all stemming from capitalized ground rent. In major cities, land selling for hundreds of thousands and
millions of dollars (translate to pounds, yen, marks,
francs, etc) is commonplace. In many jurisdictions
there is some state or community collection of ground
rent perhaps varying from 10 to 30% (often referred to
as land value taxation). Most of these jurisdictions
combine the assessment or levy on land with that on the
improvements to land whether houses, office buildings,
shopping centers- lumping both land and improvements
together as real estate. As emphasized above,
the levy on improvements is a levy on capital or wealth. Theoretically, full collection of ground
rent (100%) by a public or community organization
would result in no land value or selling price for
land. Practically, anything close such as 80 or 90%
collection would leave only nominal land values and be
the "death knell" of land speculation. Much less than
50% collection would make the state or public body
minority partners with individual landowners. Land
speculation would continue with its concomitants of
urban sprawl, less efficient production and a deduction
from the real earnings or yield of labor and capital. On Value, Exchange Value & Surplus Value In his comparison of water and
diamonds, Adam Smith remarked that water has considerable use value with slight exchange value while diamonds are just the reverse. The controversy
over the meaning of value has continued ever since.
Following is the significant passage from Para 2,
Chapter V, Book I of The Wealth of Nations
relating price or value to labor; The real price of everything, what every thing really costs
to the man who wants to acquire it, is the toil and
trouble of acquiring it. What every thing is really
worth to the man who has acquired it, and who wants to
dispose of it or exchange it for something else, is the
toil and trouble which it can save to himself, and which it can impose upon other people. What is bought
with money or with goods is purchased by labour, as
much as what we acquire by the toil of our own body.
That money or those goods indeed save us this toil.
They contain the value of a certain quantity of labour
which we exchange for what is supposed at the time to
contain the value of an equal quantity. Labour was the
first price, the original purchase-money that was paid
for all things. It was not by gold or by silver, but by
labour, that all the wealth of the world was originally
purchased; and its value, to those who possess it, and
who want to exchange it for some new productions, is
precisely equal to the quantity of labour which it can
enable them to purchase or command.
Marx, taking his cue from part of Ricardo's analysis,
developed his surplus value theory in which the
capitalist is alleged to exploit labor by extracting
surplus labor time from the body of workers. In its
finalized form, value for Marx is based upon the
socially necessary labor time involved in production. But Land, which is not produced
by labor and has no cost of production had considerable
value both in Marx's time as well as our own. And it
has value only because the individual landowner or title holder can capitalize the ground rent saving
"toil and trouble" (labor saved) and imposing it on
someone else. Toward the end of Capital, Vol. 3
Marx went into great detail on the various forms and
aspects of ground rent. But he will always be
remembered for his "capitalist exploitation of labor"
views. Henry George's Science of Political Economy
is worth the perusal of any serious student of political economy. Chapters IX thru XV contain, without
doubt, the most definitive analysis ever written on the
meaning, nature and sources of value. Going far beyond
the confusing and often contradictory statements of
Adam Smith, he demonstrated that "VALUE DOES NOT COME
FROM EXCHANGEABILITY, BUT EXCHANGEABILITY FROM VALUE,
WHICH IS AN EXPRESSION OF THE SAVING OF LABOR INVOLVED
IN POSSESSION." (subheading of Chapter XII) And, in
concluding Chapter XII; The value of a thing in any given time
and place is the largest amount of exertion that any
one will render in exchange for it. But as men always
seek to gratify their desires with the least exertion,
this is the lowest amount for which a thing can otherwise be obtained. But while value always means the same quality-that of dispensing with exertion in
the satisfaction of desire-yet there are various sources from which this quality originates. These may
be broadly divided into two-that which originates in
the toil and trouble involved in production, and that
which originates in obligation to undergo toil and
trouble for the benefit of another. The failure to note
this difference in the sources of value is the cause of
great perplexity. In Chapters XIV and
XV, Henry George brought out the crucial distinction
between value from production which is wealth in
political economy and value from obligation which is
not wealth and is generally much more long-lasting than
wealth which tends to depreciate over time. To sum
up this discussion of value, the real surplus value
, which was recognized by the illustrious Frenchmen
known as the Physiocrats more than two centuries ago,
is ground rent. At all times and places, ground
rent is a surplus value dependent upon population and
production which can be capitalized into land value
in societies with a system of land tenure which
encourage high selling prices for land.
ON LAND TITLES, PROPERTY & THE STATE Trace the
origin of land titles back through the centuries and you
will invariably find them based upon force or fraud. While
not able to articulate ground rent or the law of
rent, sovereigns and would-be rulers recognized ownership
of land as the source of wealth and power. As the German
sociologist, Franz Oppenheimer, put it so well in his opus
THE STATE, they were engaged in the political means for obtaining wealth rather than the economic
means. John Locke recognized the distinction between
property in land and property in the product of labor. In
the Second Treatise on Civil Government he wrote;
Locke was correct in recognizing a natural right of
property in the product of labor but fell into confusion
because he did not understand the genesis of ground rent.
The institution of private property in land (which includes land beneath improvements as well as
unused land) differs essentially from private property
in labor and capital. Or, in terms of the yield, private property in ground rent as distinguished from
private property in wages or interest. The sovereign or
ruler must provide some sort of title deed or recognition of ownership for the former. No such state authorization is needed for recognition
that the fruits of production belong to the producers. To the extent that the state levies or taxes labor or
capital or the wealth produced, to that extent it is
stealing just as surely as any private thief. Yes-TAXATION IS THEFT. Community collection of ground
rent, on the other hand, is merely a collection of that
value which is created by the community. It is just as
well as expedient. The desire for any particular item of wealth is generally motivated by wanting to
possess and use that item. (a possible trivial exception being collectables such as rare paintings,
coins, antiques, etc.) The desire for land has a two-fold motivation. First is possession and use. This
security of tenure is necessary so that producers can
enjoy the fruits of their production. Second is the
potential gain from merely holding title to
land. Land speculation may not always be profitable to
the individual but the net effects are always harmful
to the society. In Chapter 2, Book VI of Progress
and Poverty, following an exhaustive analysis of
the production and distribution of wealth, Henry George
spelled out the true remedy; We must
make land common property. We have reached this
conclusion by an examination in which every step has
been proved and secured. In the chain of reasoning no
link is wanting and no link is weak. Deduction and
induction have brought us to the same truth-that the
unequal ownership of land necessitates the unequal
distribution of wealth. And as in the nature of things
unequal ownership of land is inseparable from the
recognition of individual property in land, it
necessarily follows that the only remedy for the
unjust distribution of wealth is in making land common
property. Political economy is
not a set of dogmas but the relationship of a set of
facts. Unlike contemporary economics, which could well
be considered an arcane discipline, the laws of the
production and distribution of wealth are readily
understandable. Land, Labor and Capital are the factors
of production. Combined they produce all the Wealth of
the world with the primary avenue of distribution as
Rent, Wages and Interest respectively. Land is the
passive factor of production access to which is
essential if any production of Wealth is to take place.
An individual can wear one, two or all three hats-
landowner, laborer and capitalist. But the landowner
qua landowner is essentially a parasite on production.
It can be demonstrated that a tax on Capital can be
shifted and ultimately is a tax on Labor. Collection
of Ground Rent cannot be shifted and must be borne by
the landowner. In the final analysis necessary public
revenue must come from either Land or Labor.
PROGRESS AND POVERTY An Inquiry into the Cause of Industrial Depressions and of
Increase of Want with Increase of Wealth, 1879
I shall conclude this very long chapter with
observing that every improvement in the circumstances of the society tends either directly or indirectly to
raise the real rent of land, to increase the real wealth of the landlord, his power of purchasing the labour, or the produce of the labour of other people. from Book I, Chapter ll, Wealth of Nations, Adam Smith
Rent=2 Rent=1 Rent=0
10 units Wealth production 9 units Wealth production 8 units Wealth production Wages + Interest=8 Wages + Interest=8 Wages + Interest=8
Rent=8 Rent=6 Rent=4 Rent=2 Rent=0 20 units of Wealth production 18 units of Wealth production 16 units of Wealth production 14 units of Wealth production 12 units of Wealth production Wages + Interest=12 Wages + Interest=12 Wages + Interest=12 Wages + Interest=12 Wages + Interest=12 The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.
Rent=18 Rent=15 Rent=0 Rent=0 Rent=6 Rent=3 Rent=0 Units of Wealth Production=30 Units of Wealth Production=27 Units of Wealth Production=0 Units of Wealth Production=0 Units of Wealth Production=18 Units of Wealth Production=15 Units of Wealth Production=12 Wages + Interest=12 Wages + Interest=12 Wages + Interest=0 Wages + Interest=0 Wages + Interest=12 Wages + Interest=12 Wages + Interest=12
Value in
exchange, or value in the economic sense, is worth in
exertion. It is a quality attaching to the ownership
of things, of dispensing with the exertion necessary
to secure the satisfaction of desire, by inducing others to take it. Things are valuable in proportion
to the amount of exertion which they will command in
exchange, and will exchange with each other in that
proportion.
Though the earth and all inferior creatures be
common to all men, yet every man has property in his own
person; this nobody has any right to but himself. The labor
of his body and the work of his hands we may say are properly his. Whatsoever, then, he removes out of the state
that nature hath provided and left it in, he hath mixed his
labor with, and joined to it something which is his own,
and thereby makes it his property. It being by him removed
from the common state nature placed it in, it hath by this
labor something annexed to it that excludes the common
right of other men. For this labor being the unquestionable
property of the laborer, no man but he can have a right to
what that is once joined to, at least where there is enough, and as good left in common for others.
This,
then, is the remedy for the unjust and unequal distribution of wealth apparent in modern civilization,
and for all the evils which flow from it:
SUMMARY AND CONCLUSIONS