(Bloomberg Opinion) -- The question of how to distribute the fruits of the economy’s production is central to economics. Many take a utilitarian approach: Let the private sector produce what it wants, and then tax the wealthy to help the poor. Utilitarians don’t spend much time worrying about who deserves what; the goal is simply to maximize human happiness. Marxists tend to take a more class-based view, believing that the fruits of production ought to belong to workers.
Then there’s Henry George. George was a 19th-century American economist who believed that land was the source of human inequality. As the population and the economy grow, he reasoned, land remains scarce, so rents go up. Landowners don’t actually produce anything that benefits the economy, but they capture much of the value created by workers and businesses that do use the land. Thus, land ownership is a vast engine of human poverty and concentration of undeserved wealth.
Modern history seems to bear out George’s assessment. In the 140 years since George wrote his magnum opus “Progress and Poverty,” land has been a remarkably good financial investment across a range of developed countries:
And much of the increasing wealth inequality documented by economist Thomas Piketty is due not to corporate profits, but to the increasing value of land.
George believed that it was government’s job to redistribute these unearned profits on land ownership to the public at large. His preferred policy for doing this was a land-value tax, which is like a property tax with an exemption for the value of useful structures or other improvements that are built on top of the land. A century later, economists began to realize that land-value taxes are a very efficient way of funding local government services like education.
The land-value tax is a simple, elegant policy on paper, but it tends to be tricky to implement. Some economists trained in the Georgist tradition have focused on more direct means of redistributing wealth earned from land. For example, Wolf Ladejinsky, who served as an adviser to the governments of Japan and Taiwan in the postwar years, engineered sweeping programs of agrarian land reform. Some credit these programs with jump-starting East Asian economic development, as well as creating a sense of fairness that diminished the appetite for communist revolutions.
In the modern day, neo-Georgist ideas tend to focus on urban land rather than farmland. As the knowledge economy becomes more important, high-earning workers are crowding into cities, sending rents soaring. Housing co-ops, public housing and programs to help lower-earning people buy houses are all ways to redistribute urban land.
But it’s unlikely that land reform and taxation, by itself, will be enough to make Americans feel like they’re living in a fair society. As spectacular profits accrue to the owners of a few dominant companies, it’s worth asking whether those companies have some advantages that, like land, allow them to make profits out of proportion to the value they create. Patents and ownership of online platforms might be two such assets.
Economists call unearned profits “rent,” drawing an explicit analogy with the income earned by a landlord. One source of rent is monopoly power: When a company doesn’t have to face the pressures of competition, it can jack up prices beyond the efficient level in order to earn extra profits. Industrial concentration has been rising in the U.S. as a few so-called superstar companies gobble up market share. And as concentration goes up, profits have taken a larger share of economic output:
Beefing up the antitrust system is a very good idea, but it won’t be sufficient to halt the rise of monopoly rents. Stronger unions and other pro-labor institutions can complement legal remedies.
But the age of knowledge industries brings new challenges that older policies are ill-equipped to address. In the digital age, a lot more companies have strong network effects, meaning that the more people use a product, the more valuable it is. Facebook is the classic example: People are on the site not because it has the best features, but because all of their friends are on it.
Network effects are a little like land, only in digital form. Because Facebook successfully occupied the social network space — kind of like claiming empty land — it’s difficult for later competitors to grow. It’s not impossible. More recent platforms such as Snap and Pinterest have carved out networks of their own, and eventually some newcomer may dethrone Facebook the way it dethroned MySpace. But the strength of network effects for first movers leads to market concentration and a few dominant companies.
The patent system is another source of rent extraction: The government allows companies a temporary monopoly in order to encourage innovation. But since new technologies tend to build off of older ones, patents can allow first movers to block out the possible competition and hog profits for a long time.
Modern-day Georgists should think about how to redistribute this digital land. Early ideas involve regulating online platforms to allow more competition, reforming the patent system and a progressive corporate tax that only kicks in when companies have very high margins.
Businesses, entrepreneurs and inventors certainly put in plenty of effort and take plenty of risks to create new platforms and patentable innovations. But the rewards may be out of proportion to the value created. Finding new ways to redistribute the rents from digital land may help to avert damaging class warfare.
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Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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