Capitalism and Rent-Seeking, Part II

1.Let us continue dismantling the bad reputation that “capital” has by examining another aspect of “capitalist profit” which is economic rent.

Economic rent is, as has been mentioned before, the surplus above the reward due to labour and capital.

Something which has been forgotten and ignored systematically in economic theory is that capital is an extension of labour. Capital has been defined as the wealth used to produce additional wealth (goods and services). It is easy to see how a shovel can become an extension of one’s arms. But so is a large bulldozer; they are only different in size. The same holds for a basket used to move things around or a piece of rope used to lift things; they too can be thought of as an extension of one’s arms. A crane is a huge extension of the rope and basket and, of course, of one’s arms. A bicycle is an extension of our legs, that allows us to move faster; so is a car. A truck combines the extension of both arms and legs as it allows for the faster transport of heavy loads. Similarly, a pair of binoculars or a microscope are an extension of one’s eyes in order to see further or observe very small objects. All kinds of hearing aids are an extension of our ears, while radio transmitters are an extension of our vocal cords. A computer is an extension of our brain and combines many functions, such as a complex calculation, storing information etc.

 
2.This is why in previous posts I have referred to the reward of labour without always mentioning capital. I was writing about the economic rent and how it is the surplus beyond the natural reward of labour (of which the cost of capital is a part of).

Economic rent exists everywhere. Ηowever, in marginal areas and production units, such as agricultural or animal farms in remote rural areas, where the advantages from public services are negligible, production is lower and economic rent negligible. In contrast, similar productive units in fertile lands close to cities and motorways have considerable economic rent.

Unfortunately, today, with the nonsensical “progressive” system of taxation, even marginal areas pay tax, direct and indirect, and are dragged down into poverty. But let us examine a different approach.

3.Everyone loves a holiday. Not just the respite from repetitive work, but also a change of scenery when visiting new places, the beach, the countryside, mountains and forests. Once an area becomes a tourist attraction, whether on the coast or on a mountain, the price of land immediately rises; so does the price of housing.

The land values are constantly increasing everywhere, since demand is increasing; it is so due to the rising population on one hand, and the withholding of lands by speculators on the other, who know how to play this game only too well. This increase is even more pronounced in popular island and coastal destinations, as well as areas near snow-topped mountainous regions suitable for winter sports.
The increase in tourism, of domestic and foreign origin, benefits hoteliers and those that own rooms or houses to let, restaurant owners, vehicle, bicycle and boat hiring firms, local producers (of honey, vegetables, wine, textiles) and all others that are engaged in these activities.

But above all, this increase benefits the landowners. Hotels, houses, restaurants, offices and shops will necessarily be built on land. Landowners enjoy the primary financial benefit.

 

4. But who, or what, drove the prices up, sometimes to ridiculous levels? One factor has to be the increase in demand.

There’s the Sun that shines for a few months, the fresh sea breeze, the beach, rocks and pebbles, and the emerald green waters. All provided by Nature.

There are hundreds of thousands of people that would love to own a beach house for their residence after retirement in such a location, or simply enjoy 10-15 carefree days sunbathing, swimming and doing water sports.

Then there are the businessmen: hoteliers, restauranteurs, banking representatives, nightclub and bar owners, shopkeepers providing food or clothing, gift shops, newsagents, pharmacists, etc. All of them will invest a little or a lot of capital, which they will earn back one day from the profits (or go bankrupt) and will be working very hard throughout the tourist season – in some cases the earnings from that season will be  their sole earnings for the entire year. Those capitalist businessmen provide the means with which tourists, pensioners and visitors can have their needs satisfied. Some of those businessmen will act shamelessly and demand extortionate rates from their customers. But this is another issue.
5. There are other factors that are necessary for the completion of the tourist resort. Those contributions are offered by society as a whole – the local community and the wider State. The forces of law and order, policemen, district attorneys, magistrates to set some wrong right (fraud, theft, violence etc.) form services provided by the state. There are many other such services: firstly, the road networks and motorways that connect the resort with the rest of the country through harbours, bus and train stations, perhaps even a small airport. Then there’s the refuse collection, water and power supply and sewage services.

Without such infrastructure in place, businesses could not set up shop, building contractors would not start construction and tourists would be nowhere to be found.

A well-maintained road network is the first element. In reality, as soon as it is planned and agreed by the government, even before works begin (!), the neighbouring lands will gain value.

 

6.Corfu, Mykonos, Santorini and many other places in Greece have wonderful beaches and exquisite natural beauty.

In what state would those places be without the airports, the harbours and the road networks? They would be desolate places which we would admire from afar – as they used to be in the 1900s. The arrival of electricity, water supply, refuse management etc, all those services allowed for growth and wealth to be created.

Who paid for all those advantages – the natural beauty and the public services?

The natural beauty is given for free by the Universe to mankind and is part of the country in question. Zero cost!

The public services are paid for by the State – either the central government from the capital, or from local authorities. And those authorities are funded by the taxes that citizens pay.

But the increase in the land values is reaped by the landlords, those that did not raise a finger in the whole endeavour. Without doing anything other than be recognised by society as the “owners” of the lands, they will sell or rent them and enjoy large profits. These profits are the economic rent.

The same applies to winter resorts, such as popular skiing destinations. In such cases, Nature’s blessing manifests in the form of snow and mountaintops. Without the desire of people for such activities, without the gifts of Nature and without the public services and the labour of other men, the landowners in areas such as these would be lords of desolate, snow-covered crags that perhaps nobody would ever wish to visit. It is due to these factors that land values near those areas experience a sharp increase, yet the landowners reap the surplus value, which is economic rent.
7.The stupidity of the situation is hard to fathom. Every citizen pays taxes so that public services in specific locations can be put in place, these locations rise in land values as a consequence, and the benefits are reaped by the local landowners without having lifted so much as a finger.

Sometimes, there is even a discrepancy between tax rates for rent and tax rates for labour; for example, in Greece (2013), income from rents was taxed at 10% for the first 12.000 euros and 33% thereafter. The workers and businessmen that labour in the same areas pay 22% and 42% income tax respectively!

This way, the landowners end up pocketing a sizeable amount of the wealth that was created by the public services, Nature with its generosity, as well as the labour of other men. The sharks are rewarded and those that do the work are punished.

Isn’t this very odd?

It is of paramount importance that the surplus, the economic rent, owes its existence from three factors, all of which are independent of and foreign to the landowners: a) Nature, which provides the desirable locations; b) public services, provided by the central and local authorities, regardless of how inefficient they sometimes appear to be; and c)  last but not least, the labour of architects and builders, hoteliers, restauranters and so many other businessmen, large and small, entrepreneurs and hard-working people that settle in the area and enrich its economic and cultural life.

All these people receive as their reward the smaller or larger income from their labour. Nature has no demands beyond the need to maintain cleanliness and the good condition of the locations. Thisleavesthepublicservices. These, at present, receive almost nothing apart from the low taxation imposed on the deserving and undeserving alike, where in fact they should be funded directly from the economic rent. The lion’s share of the profits is enjoyed by the rent-seekers, who contribute no labour whatsoever.
Adam Smith, the father of Political Economy, spent his life in Britain during the second half of the 18thcentury, at a time when the landowning class was the dominant one. He wrote:

“Both ground-rents, and the ordinary rent of land, are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own… Ground-rents, and the ordinary rent of land, are therefore, perhaps, the species of revenue which can best bear to have a peculiar tax imposed upon them… Nothing can be more reasonable, than that a fund, which owes its existence to the good government of the state, should be taxed peculiarly, or should contribute something more than the greater part of other funds, towards the support of that government.”  Excerpt from An Inquiry into the Nature and Causes of the Wealth of Nations, 1776.

It might be the case, dear reader, that you were previously unaware of these issues. But now, having read these articles, there is no longer any excuse; these ideas have been presented to you very simply; you are now aware. Adam Smith did write about Land Value Taxation.

 

Will you now ignore what has come to your attention?

 

-Nikodemos

 

Click here to read other posts on the Political Economy series.

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