29: Hayek: "almost persuaded"

American Journal of Economics and Sociology, The,  April, 2004  by Robert V. Andelson

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"It was a lay enthusiasm for Henry George which led me to economics." So wrote Friedrich August yon 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 that 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 understood, it seems at first blush compelling on its merits.

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 nongovernmental 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 usually 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 parts 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)

Peripheral Considerations

The first thing to be remarked about this passage is that Hayek's definition of "the 'single-tax plan'" is really not of the single-tax plan at all, but rather of George's "second best" alternative. Socializing land and leasing it while proportionately reducing or eliminating taxes on productive effort was described by George as "perfectly feasible," (8) and has, in fact, shown itself to be so in Hong Kong and Singapore. (9) But George's preferred approach, the single tax, would leave titles to land in private hands while socializing only its rent (whether realized or not). This error on Hayek's part is very curious in view of the decisive role played by Georgism in awakening his interest in economics, but it does not touch the hypothetical validity of his stricture since that stricture is logically applicable to both approaches. Another puzzling thing about the passage is this: Why should socializing all or most of either land or rent while concurrently reducing to the same degree the government's levy on other property or income be characterized as "a socialist scheme" any more than the usual, converse, practice? Any political system funded by compulsory payment is to that extent, by definition, socialistic. Yet from a libertarian standpoint, the Georgist system has the virtue of exacting payment only from those who opt "to receive from society a peculiar and valuable benefit, and ... [except for the occasional and usually comparatively slight surplus which is the object of the present theoretical discussion] in proportion to the benefit they receive." (10)