Originally posted on Quora January 24, 2022
While top down bureaucratic management of the economy has not uplifted the poor or working class and in fact has only produced more poverty and misery wherever it has been attempted there is another paradigm of production and distribution in which the ends of “socialism” can be achieved that is compatible with market economies and independent of the defunct labor theory of value and class warfare, but to get there we have to understand why it is wrong and what currently prevents more widespread prosperity.
The first premise is false
The fatal conceit in postulating that the value of a product is based on labor inputs and thus profits are derived from the “surplus value” of labor are two-fold: 1) the value of any product is subjective 2) the surplus value of commerce and development (labor and capital inputs) is actually captured by landlords in the form of land rent and financiers in the form of interest and dividends on land appreciation
The Labor theory of value is the composition fallacy writ large; the sum of the parts are not always equal to the whole. The value of a product or service can change with time, place, and reputation even with the same labor inputs present; there are no more obvious examples of this than in the world of art and real estate. My own renditions of a famous Picasso or Salvador Dalí wouldn’t be anywhere near as valuable as an authentic piece nor would any art collector, museum or casual buyer be interested in buying them at any auction even if I put the same amount of time and effort as the original artists and replicated their work down to the molecule. Perhaps that would change if I too were a world renowned artist (or became one posthumously) and had a recognizable brand name as it is often the case that the same masterpieces become much more valuable after their artist is dead. The same is true of real estate. A villa on Malibu beach or a chalet in the Hamptons is far more valuable than the same building with the same labor and capital inputs in Bayou Lafourche or the Mississippi Delta. Just as reputation separates more valuable art from less valuable art when skill and effort are equal, location separates more valuable real estate from less valuable real estate when all labor and capital inputs are equal.
A theory is only as useful as it is parsimonious and predictive. The subjective theory of value or marginalism predicts time preferences, brand preferences, diminishing marginal utility, hedonic adaptation and specialization among other phenomena that are observable in everyday life and are the main drivers of innovation and progress. Under the LTV there would be no reason to set aside money and time for future consumption or production, to sacrifice current pleasure and comfort for future growth, to value each additional unit of nourishment or leisure less than the prior one, to choose one "socially necessary" occupation over another, even one that had not yet proven useful, or to live and work in any particular place if my labor is equally valuable everywhere, and certain products would not depreciate in value while others appreciate over the same duration. At the end of the day, modern science confirms we all have different neuro chemistry, brain anatomy, personality types and cultural and subcultural preferences that also change with time, place and reputation so the chances of us all agreeing on the value of any product or service (or even the same person agreeing on value at different ages) when we all have different needs and desires is inconceivable.
What is Profit?
Profits are not the “surplus value” of labor but the wages of superintendence, return on investment, and compensation for risk. If I plant an apple seed and through nurturing over several years grow an apple tree that yields 50 apples, the total fruit minus the rotten apples that were picked through by birds and worms is my compensation for risk, the fruit seeds that can grow new trees is my ROI and the apples I keep for my own consumption are my wages of superintendence. If I wanted to expand my operation beyond one tree I would need to invest the additional fruit seeds (ROI) in new trees so that one day my one tree might become an orchard. Labor inputs would have no bearing on the value of the apples. I could hire seasonal workers to harvest the apples or invent a machine to do the work. The value of the apples would not decline if I eliminated my labor inputs and replaced the seasonal workers with an automated apple harvester. The need for my apples in a specific place and time and my reputation as an apple grower is what would matter at the end of the day.
Interests rates, which illiterate Marxists denounce as theft, similarly fall under the category compensation for risk. If I lend $100 to 20 people and one person fails to pay me back I lose $5 and only have $95 to lend out again. If I charge 5% interest and one person fails to pay me back I recuperate my losses and still have $100. If two people fail to pay me back I would need to charge 10% interest to break even.
GDP vs. Wealth
The problem with using GDP growth as a direct Indicator of how wealthy a society is becoming is that much of it doesn't represent additional wealth created but additional maintenance costs imposed on society. As 19th century political economist Frederic Bastiat correctly conceived in the parable of the broken widow, the cost of hiring a glazier to replace the window is not the creation of additional wealth but only additional maintenance cost to the homeowner, as the money could’ve been spent on something that actually gave the homeowner pleasure or improved his quality of life and that destruction in general (e.g. war and natural disaster) never creates additional wealth in society but only additional maintenance costs (or rents). The same could be said of our healthcare sector (by far the largest sector of the U.S. economy), which albeit making scientific and technological breakthroughs that have extended human life and produced 20% of GDP, profits from the destruction of health in rising rates of chronic diseases such as obesity, diabetes, hypertension and cardiovascular disease, all of which were linked to 64% of COVID hospitalizations. Most of the impetus has come from the ubiquity of fructose and hydrogenated oils in our food supply, much of it a result of farm bill subsidies for commodity crops, particularly corn and soybean. The same could be said of our mental illness epidemic which has similarly been exacerbated by western diets and lifestyles. In fact, the CDC estimates that 90% of healthcare spending, or about $4 trillion, is spent treating people with chronic diseases and mental disorders which is the majority of Americans. By some estimates 48% of the congressional budget is either directly or indirectly spent on healthcare. So if GDP grows when more people get sick it is not a sign of people becoming wealthier or society more prosperous but of people spending more of their income, through taxes and insurance premiums, on damaged bodies and minds, much of it avoidable. This is not to diminish the brilliance of people who work in the healthcare industry, but if their labor wasn’t consumed with repairing damaged bodies and minds perhaps it could be used more productively elsewhere. The same general principle holds firm for the cost of fixing existing infrastructure, which by ASCE estimates, will cost $4.6 trillion by 2025, or of policing and prisons, which adds $200 billion in maintenance costs to American civilization annually. In both instances, the cost borne is not in creating new goods and services but in repairing, maintaining, and replacing old ones. It would be absurd to think that more wear and tear on the highways or higher arrest and incarceration rates will make society wealthier but that is partially what we are told by GDP growth.
What is rent?
The surplus value of commerce, development and public services (which is a social surplus unlike the labor surplus conceived under the LTV) is, in actuality, captured by landlords (and land owners in general) in the monopoly price of land and financiers in the monopoly price of money. Both are creatures of the state like intellectual property rights, charters, licenses, and permits that give certain persons, both natural and legal, unequal privileges they can leverage to exclude others from enjoying the same opportunities. The rent seeking monopolies and cartels imposed on markets by legislation, not the imagined "wage slavery" of workers, is what actually hinders more wide spread wealth. While the land monopoly is the greatest market barrier, Geonomics shouldn't preclude regulatory capture from scrutiny such as occupational licensing requirements that impose thousands of dollars in upfront costs and hundreds of credit hours to work in professions that give low income workers, with no college degree, an opportunity for upward mobility or competitor veto laws that achieve the same end directly. The same could be said of new cannabis licensing laws that make it impossible for anyone to start a dispensary or related business without a clean record and hundreds of thousands of dollars for required start-up capital, assessments and fees.
There are entire industries that profit from their monopolistic and cartelized positions, established by congress and state legislatures, that socialize the cost of their production. The most insidious ones create the greatest debt burdens on society under the guise of promoting the common good such as higher education or homeownership. The student loan industry, which took its current form under “the great society” programs Higher Education Act, lends tens of thousands of dollars and sometimes hundreds of thousands to kids with no employment history, no credit history, no collateral and no clue about any of the aforementioned. No lender would seriously consider giving teenagers with zero life experience or a penny to their name a similar loan for a car, business or house, but so long as repayment is guaranteed and much of the cost is socialized, no borrower is unworthy and the sky's the limit for tuition. As a result of this progressive ingenuity, 45 million Americans have a combined $1.7 trillion in student loan debt (an average of $38,000 each).
A similar set of programs was established during the New Deal era to promote more widespread homeownership and housing stability. Before then, 15 and 30 year mortgages were unheard of for residential property and suburban sprawl was much scarcer until when it was heavily subsidized (and racialized) by federal programs such as the HOLC, the FHA, the GI Bill and the interstate highway system. It continues to be heavily subsidized today through special income tax deductions (available only to homeowners), subprime lending (which created a new type of real estate speculation in MBS), FHA mortgage insurance, and interstate highway funding (of which excise taxes cover only half the cost). The inevitable result is that we massively overbuilt our metros, wrote off infrastructure as assets (when they are also liabilities) and now have $4.6 trillion in maintenance costs.
The biggest debts are still those racked up through war time spending, which is how we got the income tax in the first place. The failed two decade nation building experiment in Afghanistan came in at a cool $2.2 trillion which when combined with similar debacles in Iraq, Syria and Libya add an additional $6.4 trillion in debt. Like any other rent seeking racket, who profits? And who pays? Are very different and seldom discussed when any new initiative or program is proposed.
Solutions
Equitable Land Reform
Give a man a fish he eats for a day; give him water rights and a fishing net and he feeds his family for a lifetime. The difference between rich and poor is not that one has cash and the other is cashless. The difference is that the rich have property and assets that represent real resources (I.e land, labor & capital) which they can leverage to borrow money at low interest rates and open lines of credit while the poor only have cash if they have anything at all. The asinine insistence on using cash as a solution to alleviate poverty comes from a bleeding heart but simple minded and economically illiterate view of poverty as a lack of cash. Cash is useful only insofar as there are real resources (i.e. land, labor & capital) to exchange it for or use as collateral.
Real resources are readily available in the urban first world, but not so much in the rural third world where the majority live and work on land they don’t have legal ownership over. Only 14% of Hondurans live on land they legally own. Across Africa, only 10% of agricultural land is titled to the people that earn their livelihood from it. Around the globe, about 5 billion people live and work on land they have no legal ownership over. Land titling is not just a legal formality, it’s often the difference between keeping the product of your labor and being able to invest in future production or having it expropriated by your own government or a multinational like United Fruit Co. The first internationally recognized system of land tenure in the Americas was based on the discovery doctrine from which social distinctions in class and race were drawn. Although the legal caste systems are now defunct, land tenure has not deviated much from the original setup; those who live on the margins of cities in unplanned favelas have no legal recourse when their homes and businesses are threatened by criminals or corporate interests working in conjunction with greedy officials. Land reform that grants ownership on the basis of original occupation and use (aboriginal title) or the homestead principle (i.e. those who work the land own the land) is needed to guarantee land tenure to billions of people without it. This is not a silver bullet that will solve poverty immediately, but perhaps combined with the allowance of local currencies, peer-to-peer lending and mutual aid, it is a step towards giving poor people the resources to build their own wealth instead of subsisting on the charity of others.
Shift taxes from wages to rents
Privatizing profits while socializing costs (and losses) is the MO of neoliberalism. If taxes should serve any purpose other than revenue generation they should 1) impose user fees for public goods, services, and government granted privileges 2) curtail rent seeking enabled by monopolies that profit from public goods and services. Land Value capture is a tax on the subsidy acquired by landlords and mortgage lenders through improvements in commerce, public goods, and lower Fed fund rates. LVT breaks the land monopoly by making speculation unprofitable, forcing more sites open for optimal residential and commercial development thus fostering healthy competition among landlords for fewer tenants and more prime locations. We already have some forms of land value capture in the US, to a very limited extent, in hundreds of community land trusts and special assessment property taxes but thus far only a handful of East Asian countries (e.g. Hong Kong, Singapore, Taiwan, Thailand) and European countries (e.g. Estonia and Denmark) have implemented Land Value Capture at the municipal or national scale. Royalty income from patents and copyright should receive the same scrutiny. These monopolies are somewhat more insidious because they don’t just exclude people from specific sites but from multi-billion dollar industries. Extraction industry revenue from federal land leases (or use of other public resources) and land seized from other people should be similarly treated as subsidies that should at least partially return to public coffers in the form of severance taxes for land use and Pigouvian taxes on pollution and legal privileges like eminent domain. By taxing wages instead of rents we confer economic privileges on the few while externalizing their cost on the many.
The Presumption of liberty
Every community, at the bare minimum, needs the institutions of law enforcement, property rights, and fair criminal and civil courts to build any wealth, but beyond this the law should presume the innocence of the average person and only interfere in their transactions when it is evident that they impose a direct burden on the health or safety of the community. Externalities should be the subject of scrutiny but entrepreneurship and innovation should never be stifled just for threatening entrenched business and political interests. We will never know how many potential products, businesses, and industries would have existed if Hemp had not been blanket banned with cannabis sativa in 1937, under the Marihuana Tax Act, or how many people it could have lifted out of poverty. Henry Ford developed an entire farm to factory production model based on hemp, of which there are over one thousand potential uses. Crypto currencies and Kratom could suffer the same fate if the powers that be are allowed to propagandize the public into blacklisting them. If kerosene lamp and stagecoach producers had succeeded in regulatory capture it’s doubtful we would be as wealthy and modernized as we are today. Extending the same considerations to entrepreneurs and innovators today should give us pause for putting restrictions on competition.