On Separating the Landowner's Earned and Unearned Increment: A Georgist Rejoinder to F. A. Hayek

American Journal of Economics and Sociology, The, Jan, 2000 by Robert V. Andelson

ROBERT V. ANDELSON [*]

ABSTRACT. On a given site, some increments of rent or land value may reflect improvements by the owner, either to it or to adjacent sites he or she also owns. Because these increments cannot always be distinguished with precision from the value arising from natural features and/or from improvements due to communal efforts, F. A. Hayek dismissed the Georgist paradigm as fatally flawed. This paper disputes Hayek's criticism on the following grounds: 1. As Professor Backhaus observed, the degree of certainty in measurement demanded by Hayek is more rigorous than that required in practice for enforceable tax assessment. 2. Under a Georgist-style system, landowners who improve their land would, in any case, get to keep much more of the fruits of their efforts than under any alternative public revenue system. 3. The distinction between value produced by the owner, on the one hand, and that produced by nature and society, on the other, remains authoritative as an ideal even if not perfectly realizable in practice; h ence, there is a sense in which even the theoretical elegance of Georgism is not undercut by Hayek's criticism.

I

Introduction

"IT WAS A LAY ENTHUSIASM FOR HENRY GEORGE which led me to economics." So wrote Friedrich August von Hayek in a letter to Peter K. Minton in 1962. [1] Elsewhere, he explained that this enthusiasm came about as the result of his having been "exposed to a group of single-taxers" as a first-year law student at the University of Vienna just after World War I. [2]

In time, however, Hayek came to reject the Georgist model because of an objection he set forth in his magnum opus, The Constitution of Liberty. This objection constitutes a superficially formidable argument which the defenders of Georgism seem almost wholly to have neglected. The reason for this neglect is probably threefold: First, the argument is readily overlooked, occupying, as it does, a single paragraph in a book of more than 500 pages. Second, it is easily confused with a different argument-- one that has been widely, and to the satisfaction of probably all Georgists, conclusively, refuted. Third, it is expressed following a technically inaccurate definition on Hayek's part of the model to which his objection is directed. However, the validity of his objection does not depend upon the accuracy of his definition, and his argument calls for a scholarly rejoinder, not merely in view of its author's towering prestige, but due to the fact that, once disentangled from its flawed context and correctly unders tood, it seems at first blush compelling on its merits.

II

The Issue of Separability

HAYEK'S ARGUMENT is important because, although presented in a discussion having to do with practical difficulties of town planning, it attacks the moral basis of Georgist theory, That basis is expressed by Nicolaus Tideman, who distinguishes three different sources of the rent of land: (1) the value attributable to nature; (2) the value attributable to public services; and (3) the value attributable to private activities. By "private activities," he means aggregate private improvements and other non-Governmental operations that positively impact a neighborhood. With respect to the last of these sources, Tideman asserts that "[t]hese increments of rent are not due to the actions of the landholders, so landholders cannot justly complain if the increments are collected publicly." [3] While this claim may be very largely true, since such increments frequently accrue to owners who have done little (or even nothing at all) to earn them, there are instances in which such increments of land value on a given site are the result of improvements by the owner of that site, either to it or to adjacent ones he also owns. A perceptive Australian writer, Philip Day, notes that "at least in some circumstances, some part of increased land value can be attributed to the quality of development constructed by individual landholders, rather than being wholly attributable to public planning decisions or to population growth and general community development." [4] An obvious example would be Disney World, [5] although in this instance, as in many others, "quality" should be understood to embrace more than architectural superiority. One might properly claim that it is in the Disney Corporation's capacity as developer and not as owner that the improvements have been made, and cite numerous examples to show that the incentive to improve a site need not depend on owning it. [6] However, this would not address the problem that Hayek regarded as insuperable--that of separating the increments of value created by the owner (or his predecessors in title) from those created by natural advantages, public services, or the private activities of others. Let us now, therefore, examine the passage in which he made this point:

There still exist some organized groups who contend that all these difficulties could be solved by the adoption of the "single-tax" plan, that is, by transferring the ownership of all land to the community and merely leasing it at rents determined by the market to private developers. This scheme for the socialization of land is, in its logic, probably the most seductive and plausible of all socialist schemes. If the factual assumptions on which it is based were correct, i.e., if it were possible to distinguish clearly between the value of "the permanent and indestructible powers of the soil," on the one hand, and, on the other, the value due to the two different kinds of improvements-- that due to communal efforts and that due to the efforts of the individual owner--the argument for its adoption would be very strong. Almost all the difficulties we have mentioned, however, stem from the fact that no such distinction can be drawn with any degree of certainty. [7]