Neither Capitalism Nor Socialism

Robert Schalkenbach Foundation staff

As the primary sponsor of “The End of Poverty?” we at the Robert Schalkenbach Foundation (RSF) hope it has inspired you to explore the roots of global poverty further.  The mission of RSF is, among other things, to fight poverty by offering a new way of understanding its primary cause.  Our analysis is based on the writings of Henry George, a late 19th century economist and social reformer.  His 1879 book, Progress and Poverty, sold at least 2 million copies by 1900 and remained the most influential critique of the liabilities of capitalism until World War I.   In our view, it remains as relevant today as when it was written.

“The End of Poverty?” opens with the same question Henry George asked in that book: Why does poverty become a deeper problem as a society becomes more prosperous?  Why does poverty (extreme inequality) grow worse with progress (economic growth)?

EXPLAINING THE PARADOX

Henry George’s analysis was deceptively simple.  He observed that the world is deeply divided between property owners and the people who work for them.  It was obvious that the former group had more money or capital than the latter.  But why?   Henry George reasoned that the hidden factor lying behind wealth differences is concentrated ownership of land and natural resources.  As long as a few people or corporations own most of the natural resources and real estate, the rest of society has to pay for the right to work and survive.  If everyone had access to their share of the earth’s wealth, they could support themselves in some fashion.  But as long as raw materials and good locations are monopolized by a few people or corporations, this path out of poverty is cut off.

Today, most economists believe economic growth is the solution to poverty.  If an economy grows, supposedly everyone will benefit.  This idea is sometimes disparaged as “trickle down economics,” because the benefits of growth are supposed to trickle down from the rich to the poor.  But Henry George showed why it did not work.  He pointed out that most of the benefits of economic growth go to the people who own land and resources.  Rising incomes cause the price of land and resources to rise, because they are in fixed supply.  So, economic growth causes resource owners to “grow rich in their sleep” as John Stuart Mill once put it.  The people who do not own land and resources grow relatively poorer, since they now pay more for the same quantity.  That is why progress causes poverty.

This idea is quite different from the socialist belief that private ownership of capital causes the exploitation of workers.  Socialists propose to equalize wages by seizing all productive property from owners and having the state manage it in the form of worker co-operatives.  Socialism changes the structure of ownership, but it also removes the incentive for work, politicizes investment decisions, and has historically produced a static and wasteful economy.

Henry George also differed from the cheerful belief of capitalist economists that a free-market system automatically benefits everyone.  As long as the benefit of owning land and natural resources is privatized, grotesque inequality would continually emerge and destroy the societies that did nothing to stop it.

George’s emphasis on land and resources also differs from several common sense ideas about wealth and poverty.  The first is that “greed” is responsible for imbalances in the economic system.  Greed is too general and too constant a factor to explain variations in the distribution of wealth over time.  It does not explain how super-fortunes come into being, which is the flip-side of how poverty is caused.  The second common belief is that having or not having “money” is the factor that separates rich and poor.  Money is just a marker of wealth, like a plastic chip in a casino.  The rich have more money, but it does not tell us how they got it.  To understand economic differences, we must understand the mechanisms by which they arise.  The third idea is that poverty alleviation must come from redistribution of income, usually through welfare programs. To re-distribute income means that the system first distributes income very unequally, then the government transfers money from rich to poor to compensate.  The aim should be to fix the system so the initial distribution of income is more even and more equitable.  Proper distribution would obviate the need for redistribution.

THE REMEDY

To overcome the tendency of a free market economy to distribute income unevenly, Henry George offered a radical solution—radical in the sense that it went to the root (Latin: radix) of the problem, even though his reform was quite modest.  Instead of taking from the rich and giving to the poor, he proposed instead to levy a fee on valuable locations and other natural resources and to remove taxes that interfere with economic activity.

On the face of it, levying a charge on the value of land and natural resources might seem trivial.  How can this simple expedient radically transform ownership in such a way that poverty would be largely abolished?  What follows is a brief and simplified explanation.

First, land and other natural resources are a gift of nature, supplied to everyone at no cost. If humans were just arriving on earth (or a new continent), how might we fairly divide what we found?  Since different locations and mineral deposits have different values, a simple division (such as 100 acres per person) would not work. The most elegant solution would be to auction the land and resources, but only for a limited period. With a renewed auction each year, the rise in value of land would be shared rather than privately captured as a windfall.  The proceeds of the auction would either pay for government or be shared equally by everyone.

Repeated payments to society for the right to own land or copper or gold or oil is really no different than paying a price for the water or electricity one consumes. Paying an annual fee to monopolize a part of the earth’s natural wealth should be considered a utility fee, not a true tax.  By paying these fees, owners would share the wealth that comes from nature but still be allowed to gain benefit from it by transforming natural resources into other goods.

The second consequence of imposing fees on titles to land and natural resources is economic growth.  By paying user fees for natural resources, a portion of taxes could be removed. (The exact amount of possible tax reduction is in dispute until we actually experience it, but based on measured land values in other countries, around 70-80% of all federal, state, and local taxes in the U.S. could be shifted onto resource fees.) With minimal taxation, enterprises and households would become more productive.  The proposed method of financing government is somewhat similar to the one employed by Hong Kong for many decades, so the resulting level of economic growth would also likely be comparable.  Nor would this economic growth be inequitable, since everyone would share in the rising value of land and natural resources.

To those who object that greater productivity will increase pollution, that can be controlled through other fees, based on the same principle as the annual resource auction.  In fact, one of the items auctioned in the initial entry into the new world or new continent might be rights to make use of the air or water in conjunction with manufacturing.  The limits set on those auctions could keep the air and water as clean as the majority of people wanted them to be.

THE POVERTY CONNECTION

Henry George’s analysis of the causes of poverty has several layers.  The first layer is simple dispossession.  Historically, the strong have taken land from the weak and forced them to pay for the right to use the land that was originally theirs.  The effects of that can still be seen today.  Railroads still own millions of acres land in the U.S., which they obtained almost 150 years ago through force, fraud, and political connections.  Many other great fortunes were built up the same way.  Those who were dispossessed by these land grabs were crammed into cities, barely able to survive.

The second level of George’s analysis examines the way in which land and resources are used once they are privately owned.  In the absence of high fees on ownership, many people buy land, leave it idle and make money by simply waiting for its price to rise.  An extreme case of this is Brazil.  Almost half the farmland is owned by just one percent of the population.  On those large estates, 89% is left uncultivated.  While around half the rural population lives below a meager poverty line, the wealthy can afford to leave an area the size of France, Germany, and Spain idle.

The same principle applies in cities.  As much as half of the best locations are left idle—vacant land, parking lots, abandoned buildings.  The misuse of centralized land forces economic activity onto land at the margins, land less suitable for commerce or production.  Since employers are less productive on these marginal sites, they pay their employees less than they would on better located sites.  The result is higher unemployment and lower wages, not only for the employees directly affected, but throughout the entire economy.

All that is necessary to free up the use of productive resources is to levy a fee on holding them.  The idle land and resources will then be put to use, more people will be employed, and wages will rise.  This is the essence of Henry George’s distributive method of solving problem by discouraging hoarding and encouraging productivity.

CONCLUSION

In the past century, tens of millions of people have died in conflicts fought over control of land and resources and over the ideology that will govern how they will be used.  In addition, billions of people have lived in abject poverty because they have been denied access to those resources. But regardless of who won each war, the poor were no better off.  Neither capitalism nor socialism has resolved the fundamental paradox of modern societies: how to achieve economic progress along with social equality.

Capitalism has sacrificed equality to achieve efficient production.  Socialism has sacrificed efficiency and productivity to achieve low-level equality.  Henry George proposed a way in which both efficiency and social equity could be achieved at the same time. Unfortunately, his alternative to both capitalism and socialism has only been tried in muted form in a handful of cities around the world.  Yet, for the poor of the world, it is a solution worth trying.  Shouldn’t it be given a chance to prove itself?  If you agree, we hope you will get involved by first learning more about Henry George’s principles and then by advocating them in relevant contexts.

For Further Reading and Involvement

Progress and Poverty (1879 and 2006)

If you find the ideas of Henry George intriguing, his book Progress and Poverty is the best place to start.  (The modernized (Drake) version contains the full text but is edited to simplify it.)

An MP3 of the modernized version is available from http://hgchicago.org/audio

The unabridged, original edition is available online at
http://www.schalkenbach.org/library/george.henry/ppcont.html

The modernized (Drake) edition is available online at
http://www.schalkenbach.org/drake-p-p/pcontents.htm

Read some of each (or listen) before deciding which one to buy.

Other works: By Henry George: http://www.schalkenbach.org/Works-by-Henry-George.html

Other books distributed by RSF that deal with global poverty:

Andelson and Dawsey, From Wasteland to Promised Land: Liberation Theology for a Post-Marxist World (used in online course at www.landreform.org/home.html)

Harrison, The Silver Bullet (online at http://www.theiu.org/tsb/TheSilverBullet.pdf) explains why George’s remedy is the “silver bullet” that can abolish global poverty.

Smiley, Crumbling Foundations discusses the failure of the IMF and World Bank to reduce poverty and why a new (Georgist) approach is needed.

Robert Schalkenbach Foundation – RSF – (www.schalkenbach.org) publishes and sells books by Henry George and about his ideas.  The bookstore is at http://www.schalkenbach.org/store.php?

The RSF companion site for “The End of Poverty?” is http://www.povertythinkagain.com

The RSF companion book for the film (Why Global Poverty?) is at http://www.whyglobalpoverty.com

Henry George Schools – If you want to learn about Henry George’s ideas in a classroom setting with other students (of all ages), contact one of these Henry George Schools:

New York –  http://www.henrygeorgeschool.org

Philadelphia – http://www.henrygeorgeschoolphila.org

Chicago – http://www.hgchicago.org

San Francisco – http://www.henrygeorgehistoricalsociety.org

Nicaragua – http://www.ceihg.org (Instituto Henry George)

The Earth Rights Institute (http://www.earthrights.net) brings a Georgist approach to global issues and policies. The Institute works in conjunction with UN agencies, particularly on habitat issues.

Henry George Institute (www.henrygeorge.org) offers correspondence courses to students in English and Spanish.  See http://www.henrygeorge.org/principles.htm.

In-depth reading – (www.masongaffney.org)  This website contains dozens of articles written by Mason Gaffney, professor of economics at the University of California, Riverside, and a leading authority on the implications of George’s thought for economic theory today.  The articles vary in difficulty.  Gaffney is author of two books: The Corruption of Economics and After the Crash.

In Australia – 1) http://www.hgfa.org.au 2) http://www.prosper.org.au

3) http://www.earthsharing.org.au 4) http://www.lvrg.org.au

In the UK –  1) http://www.henrygeorgefoundation.org 2) http://www.schooleconomicscience.org

Other countries: 1) http://www.cgocouncil.org/showcgo.php 2) http://www.theiu.org.uk

3 Responses to Neither Capitalism Nor Socialism

  1. Johnnie says:

    Socialism does not remove the incentive to work. To believe that is to imply that humans are not smart enough to realize the concept of interdependence. Humans have lived on earth for as many as 26 million years, almost all of which fell before the invention of capitalism. Even today, indigenous peoples, granted without modern technology or medical science, live well, using their resources efficiently. There’s no money in their societies to provide the incentive to work, yet they build huts, tools, gather or hunt for food. Capitalism is a joke and the demonization of socialism is a witch hunt lead by the rich.

  2. Trevane says:

    We have to somewhat blame the USA founding myth for Georgists, Libertarians and other tinkerers who have ingested the notion that a bunch of powdered wig wearing ponderers designed a system that is awesome; that takes a clean sheet of paper and, by using a lot of logic and shit, contrives a system that will deliver the good life for everybody. According to this myth It doesn’t matter what manner of men occupy the various parts of the mechanism. The poltical machine is so cleverly designed that even selfish fucktards who only seek their own gain will, by way of ingenious mechanisms, serve the common good while they thrash around trying to get rich. it’s a system of checks and balances!

    The USA was the first country that aspired to the pretense of being designed by smart guys. As if anybody could create a society out of their fucking imaginations. Hello. Society simply IS. It’s the way we’ve survived and had a good time since we were a species. We live in communities because we have to. Community meaning voluntary sacrifice for common good. In other words, Socialism.

    True Socialists see socialism as business as usual for the human race, the way things have been getting done for tens of thousands of years, just using modern tools like government, taxes, to make it work better and fit our time. Seeing all the other shit as anomolies, demented pipe dreams of greedy rich bitch wannabes, or power hungry stalinist puritan meglomanics.

    Socialists understand that the system of laws and organization of government must conform to man’s natural social makeup. that man is a interdependant social animal, who among all animals is the most helpless at birth and before adulthood. A being who must depend totally on care and protection from adults. And who, when grown, is natually charged with the responsiblity of caring and protecting for the young, whether or not they spring from his personal loins. The efficient performance of this responsibility requires modern organization that keeps pace with the modern technology. This means government of laws that prohibit bad behavior as well as government of cooperation that requires common service in the form of taxes. Yet the paying of taxes is understood to be only a tool not the limit of individual responsibility to the common good. In addition to paying taxes, the individual is required by a higher law to practice volunteering in numerous ways, not the least of which is common courtesy. This higher law is enforced by nonjudical social sanction. Those assholes who treat others discourtesly are themselves treated thusly by their neighbors. Everything goes is bullshit. Children are taught to balance self focused activities and attitudes with community focused activities and attitudes. Again, this is the way of all earlier communities and technology can never replace real human solidarity.

  3. Alex says:

    Hey guys, I’m really happy that you’re satisfied by socialism and think it’s the best way to go. But if it’s so great like you say, why not leave the United States alone and move on over to Europe? Or maybe just skip the the slow transition that socialism is, and just move straight to somewhere like North Korea. Please do yourselves and our country a favor, and go find your promised land of milk and honey for doctors and unemployed alike. Those of us who believe in economic freedom will continue to work for real futures controlled by ourselves, not an incompetent government.

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