Campaigners for social justice often win the moral argument but generally fail to offer coherent proposals for changes in economic structures which would promote greater social inclusion. Current arrangements, which assume free markets are vital if the benefits of economic advance are to be spread more widely, only seem to exacerbate inequality and deepen poverty. But the only apparent alternative to a market-driven economy - state intervention in the market with a social safety net funded through redistributive taxation - whilst ameliorating the worst suffering, fails to address the root causes of inequity or create viable economic opportunities for more people. Both approaches fail to promote social justice because they are based on a false understanding of economics.
The eighteenth century economist Adam Smith is often held culpable by progressives for the failure of the economy in respect of social justice. His advocacy of free markets has been taken up by today's neo-classical economics, according to which the market, if left to its own devices, will automatically deliver a gradual spread of wealth. Smith certainly made a similar claim, but he understood the wider picture: that only under specific conditions can the market promote equity. Just as those conditions did not pertain in Smith's time, so they do not pertain today. The results are the same: a steadily widening gap between rich and poor, both within nations and between them.
The market mechanism itself is value neutral: it simply allocates economic resources, opportunities and finished goods according to the strength of the preferences presented to it. The strength of these competing preferences is determined by the distribution of wealth among the population. The outcome will be more or less equitable depending on how equal or otherwise that distribution is. Where there is great polarisation in wealth and access to resources, the market will automatically distribute the bulk of any new wealth created to the already wealthy. But there is nothing inherent in the market mechanism which makes this outcome inevitable, its failure is a result of the conditions in which it operates.
By erroneously concluding that the market itself is the problem, proponents of economic reform are necessarily led to argue for its partial replacement as the mechanism through which economic goods are allocated. But it is quite impossible for bureaucrats and planners to reconcile the competing preferences of entire populations without reference to the market, and interference with its free working tends tp place constraints on individual freedom. State intervention and redistribution through taxation certainly ease the suffering of the poor, but they often undermine efficiency and do little to widen economic opportunity. The free market is the only way to achieve these objectives, but it can only succeed if certain conditions are met.
Simply put: if access to economic resources is grossly unequal, then the market will not promote equity. We need, therefore, to make access more equal, but how? The answer lies in the teachings of the great economist-philosophers of the Enlightenment. In classical economic theory there are three types of economic resource: land, labour and capital. Land includes everything that is found in nature, everything that is not man-made. Labour comprises the work effort of human beings. Capital includes all the equipment, machinery, buildings and the like which are the product of earlier labour but which, rather than being consumed as finished goods, are applied to new economic endeavour with the aim of generating further wealth. Of these three factors - land --and the natural resources it contains - is different from the others in that its supply is limited by nature.
David Ricardo's law of rent explains how, as populations grow, and society becomes more complex, an increasing proportion of the wealth generated by economic activity is allocated by the market to the owners of land, at the expense of the rightful earnings of the providers of capital and labour. Where the ownership of land is very unequal - and currently 95 per cent of land in the United States is owned by the richest 3 per cent of Americans, and 74 per cent of land in the United Kingdom, by the richest 2 per cent of Britons - a grossly disproportionate share of new wealth ends up in the pockets of those who are already most wealthy. This unjust return to landowners, which is known as economic rent, is principally reflected through rising land values. If you doubt the validity of Ricardo's law, think about what happens when the economy is doing well: The returns enjoyed by landowners, property speculators, and indeed homeowners, considerably outstrip any increase in the profits enjoyed by capital or the wages earned by labour.
Under such conditions, capital and labour are left to compete for what wealth remains after the landowner has taken his unearned share. But because the majority of the population own no capital, and are denied access to land and natural resources, they are left with no option but to labour for whatever wages they can obtain. The owner of capital, whilst not as well placed as the landowner, draws considerable benefit as landless labourers are forced to compete for work, and wages are forced down.
This is a simplified example, but it accurately describes what happens in a complex modern industrial economy, as well a more traditional agricultural one. The small minority of landowners enjoy vast unearned income simply as a consequence of their ownership of land, even if they do nothing with it. The owners of capital are able to exploit market conditions by paying the minimum necessary wages, and are thus able to keep a disproportionate share of the wealth created by their enterprise for themselves. The vast majority, who own neither land nor capital, have to settle for wages which represent less than the full value of their economic contribution.
Instead of capital enhancing the productive efficiency of labour, and increasing the income enjoyed by capitalist and labourer alike, labour has become the servant of capital, working primarily to generate disproportionate and inequitable profits for its employer. Further, the poor wage labourer sees a part of her earnings siphoned off as economic rent, into increasing land values and on to the balance sheets of the tiny land-owning minority.
The market mechanism is not the cause of poverty and growing inequality, and neither, rather surprisingly, are the activities of capitalists - although they exacerbate the problem by taking advantage of the conditions. Ultimately, the cause of poverty and inequality is the vastly unequal distribution of land ownership and access to natural resources.
Now this raises a fundamental moral issue: If the distribution of land ownership determines the allocation of economic goods and well-being in society, then there is no possibility of the poor pulling themselves out of poverty until this inequitable distribution is rectified. What right do a tiny minority have to own and control access to the natural resources on which we all depend for survival?
We have a choice: we can continue to allow the inequitable distribution of land, and let the market deny viable economic opportunities to millions of people, and then try to relieve the worst effects through tax-funded welfare schemes and development aid which do little to empower the poor. Or, we can find a means to address the underlying inequity so that all people have access to economic opportunities, and can take responsibility for providing for their needs and those of their dependents through their own effort.
This choice was first articulated more than a century ago by an American named Henry George, whose 1879 book Progress and Poverty had, by 1901, sold two million copies worldwide, making it, at the time, the best-selling book in history after The Bible. But George was not satisfied with explaining the ongoing failure to tackle poverty and injustice; he proposed a solution.
Like Adam Smith, George believed the market mechanism was vital to productive efficiency and wealth generation, but having recognised the importance of the law of rent, he came up with a solution which would also allow the market to promote the equitable distribution of wealth. For George, if the market was to work its 'magic', the factors of production had to be subject to market forces, which meant land could not come under state ownership. The periodic redistribution of land would not help either, because different plots of land have different wealth earning potential, and the arbitrary redistribution of land would give some an unfair advantage which would lead, once again, to conditions of unequal land ownership. George therefore proposed that the economic rent enjoyed by landowners be taxed at its full annual value. The revenue earned by land, argued George, was common wealth to be enjoyed by all who contributed to its creation. Further, the confiscation of economic rent, unlike traditional forms of taxation, would have no disincentive effect on enterprise, and would, over time, lead to a wider distribution of land ownership. This, in turn, would favour smaller scale enterprise, encourage individual initiative, protect individual freedom, and avoid the costly bureaucracy which weighs down excessively large enterprises.
George argued that a tax on economic rent should replace all other forms of taxation, and that it would provide a natural and equitable way of funding public services and infrastructure projects, ultimately creating a self-financing income stream from which everyone would benefit. His remedy, as he called it, also contained the seed of a solution to the environmental problems we face today. By extending the principal of taxing economic rent to charge for all resource use, the market mechanism would ensure that finite natural resources were only used when there was no alternative. The focus of taxation would shift from the wealth we create, on to the resources we consume and the pollution we create, and would target the unearned, and unjust, income of the landowner.
This revised understanding of economics gives the struggle for global justice added intellectual impetus. In Henry George's remedy we have the basis for a solution to poverty which would encourage individual initiative, protect the environment for future generations, and ensure everyone was justly rewarded for their economic contribution. It is an understanding which promises to reverse growing inequality and bring an end to poverty, and it would be most easily applied in the less complex agricultural economies of the southern hemisphere, where poverty is greatest.
Whether this revised understanding can be converted into a new and effective political movement for change depends on how many people can be persuaded of its merits. Those of us passionately committed to social justice must spread the message that there is a solution to poverty which requires neither revolution nor the suppression of individual liberties. Coupled with a moral belief in the imperative for social justice, an accurate understanding of the economic laws which govern the distribution of well-being in society gives us an effective new weapon in struggle for progressive change.
So radical a plan will, of course, meet widespread opposition. The treatment of land and economic rent as private property has been a feature of all economies since the emergence of agriculture ten thousand years ago. But the fact of it being a long-established norm does not make it moral or just, and certainly does not mean it cannot be overturned. Relieving landowners of their unearned income is far less of an attack on individual freedom than current impositions whereby individuals and enterprises have to give up part of their rightful earnings to the various taxes imposed on incomes, purchases and profits. Nonetheless, landowners and others among the moneyed capitalist elite have immense political influence, and there is bound to be a fierce reaction to any challenge to the status quo, however well argued and however strong the moral case.
These ideas are not new, but they have been subject to a sustained campaign of misinformation which has involved the hijacking of the discipline of economics in the service of minority wealth and privilege. In a democracy, however, ordinary people have the chance to override the power of minority vested interests. This revised understanding of economic realities can only help in the struggle for social justice.
