1. In the previous post, we examined broadly how in a country wealth is produced from three primary factors: man’s Labour, the Land and the Conditions, under which the first two factors meet and interact (diagram 1). Those Conditions ultimately represent the community, society or State – its markets, services and culture.
A simple truth was mentioned: since wealth is produced by those three primary factors, it is those three that should primarily receive their natural reward – which would be the primary division of the wealth produced among them.
We underlined how the Land needs no reward, other than the necessary care of protecting it from toxic waste and maintaining it in good condition.
Two factors remain: Labour and the Conditions.
How is the reward to be distributed over those two factors? Is it to be decided by us arbitrarily, or is there some natural principle to be followed?
There is, in fact, a natural principle, just as in every economic phenomenon.
2. Diagram 2 demonstrates the entire production of a nation. The columns represent types of production and zones where like kinds of businesses are established.
Column A represents the head-offices of Banks and financial businesses in central locations (e.g. the City of London or Wall Street in New York). This is where people trade money, government bonds, stock, loans etc. Vast fortunes are made or lost here and the players in a very short time (hours, sometimes) can gain (or lose) in the billions.
Column B represents large companies trading in oil, food, precious stones and metals, chemicals and pharmaceuticals, electronics, IT and maritime trade. They too tend to flock in central locations.
Column C represents big tourist companies, hotel complexes, casinos and others, which tend to be located further from the centre.
Column D represents smaller industries and small mines.
Column E represents the primary agricultural production. As a whole, the diagram is demonstrating a general approximation to the real general situation. There are exceptions, of course, but the big picture holds as adumbrated.
3. Let us examine an agricultural community that lies near a port (D3), where everyone puts in the same amount of labour, capital and know-how. The level of production on each zone is now determined not just by the fertility of the land, but by its proximity to the market. The farmers at column A are closer to the port and have better access to the market, while the farmers at E are the furthest away. Any difference in the level of production above 30 is now due to location and fertility alone. If the farmers at A swap positions with those located at zone D or E, they too will produce 65 and 30 respectively, since all things other than location and fertility are considered to be equal. The differences in production are due to the conditions; the fertility which is a gift of Nature, and the proximity to the market, which is a social factor.
4. The dotted line divides the production in two shares: the natural reward of Labour lies below the line. It is what all farmers would produce, had they not enjoyed some benefit from their location; what they produce is due to their own labour, capital and know-how alone (ignoring the contribution of any Conditions). The natural reward of the Conditions lies above the line; There is, of course, some contribution of the Conditions in the production of column E also, but it is negligible in comparison to the other columns; it is therefore ignored.
What share exists above the dotted line is due to the presence of the community and is, therefore, its natural reward. It is this share that should be taxable and should constitute public revenue.
5. Since the differences in production are due to the location, it follows that the land value of each zone should be proportional to the production represented by each column. As was demonstrated on Political Economy 6, §4, the more central and productive a location happens to be, the more it is wanted by entrepreneurs and the greater its value becomes.
Therefore, it is not necessary to tax the whole of the production, but only the value of the location, which is, after all, created by the presence of the society. The least productive locations, the marginal ones, should pay no tax. In diagram 4, the marginal locations are in zone F as the least productive farmland and should pay no tax.
6. On the diagram above, the production of 40 is the natural reward of labour everywhere, since we have assumed identical amounts of labour, capital and know-how. The remaining 10, 25, 35, 50 and 60 in the other locations is the economic rent, which is an unearned increment (=the natural reward of the Conditions), and should be returned to society in the form of a tax. If the producers in zone A were to swap position with those in zone F, the values (production, earnings below the line, and rent above) would remain the same.
But here, a few clarifications are called for.