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The world was at a crossroads when Henry George wrote Progress and Poverty. Nineteenth century capitalism had succeeded, but only partially: many people were not enriched by the new methods of mass production. Social pressures were dictating the need for structural changes in the economic order. Henry George showed that the fault lay not with the methods of mass production, or the operation of the free market, and he was therefore able to deny that socialism was the only alternative. He proposed qualitative changes that would have built equity and greater efficiency into the capitalist mode of production.

Karl Marx's model, however, achieved supremacy, and held sway until Deng Xiaoping signalled the end of the socialist system 100 years later. China acknowledged that the planned approach to economics had failed. The Soviet Union followed when Michail Gorbachev expressed discontent with the Marxist model in 1986. Henry George was right: Marxism could not stand the test of time.

The eclipse of socialism offers the opportunity to relearn the lessons taught by Henry George. For in socialising the means of production, the USSR and China have the chance to redefine property rights and establish both equity and efficiency from the opposite end of the spectrum from our imperfect system of capitalism. If properly exploited, the rent of land could serve as the "governor" for the engine of economic growth and social transformation. The possibility of success turns on how rent is distributed.

The social ownership of land means that Eastern bloc leaders merely have to rent out the resources of nature to individual producers in the urban and rural sectors to achieve an explosive growth in output. Collective use of land has failed, but individual use allied with collective ownership is a potent model for unleashing energy and building a just society. Unfortunately, we now know that the communists have still not learnt the wisdom contained in the books written by Henry George.

China has foiled to distribute land on a basis which ensures that rental value remains with the community. Fifty-year leases, which can be inherited, have been granted on terms so favourable to tillers that a class of rich peasants has been created. This has re-established class division in the countryside based on unearned wealth.

Russia is still (1989) trying to define new property relationships, but is likely to make mistakes similar to China's. Moscow's economists, having abandoned the Labour Theory of Value, have not retraced intellectual history to the classical economists. They have not grasped the nature of rent. What are the prospects for these societies?

Rent as a mover and shaker. Russia has been biased against consumer goods, favouring the development of the capital goods sector and the military space programmes. This has been allied with enormous-waste of resources; the absence of a pricing mechanism protected the inefficient producers. Result: workers were forced to save money -- shops have not been filled with the goods on which they could spend their wages! Can pent-up demand be satisfied? A consumer-oriented production policy can work only if there is a relatively free market within which people can express their preferences. Gorbachev's glasnost augurs well; the USSR's Communist Party appears willing to share a portion of its power; the most striking advances have been in Poland.

But can the Soviet Union adapt its economy fast enough to satisfy the material needs? There are strains; perhaps the major threat comes from the ethnic minorities and sovereign peoples, such as those who line the Baltic, who appear determined to reclaim their political - and economic - freedom. Latvia and Estonia not only want economic freedom; they appear to be demanding political freedom. If these frustrations are not quickly satisfied, will the Russian tanks roll? In China, the Community Party showed its hand with the massacre in Tiananmen Square. It may flirt with a liberalised economy, but not with a plural politics.

To progress, these nations need a balanced approach to their transformation. Time is short. Britain took a century to develop a relatively free, democratic society. Changes in the eastern bloc will have to materialise in a more concentrated time-horizon. Is there a model that can be emulated?

Japan should inspire Russia and China. The Meiji Restoration was designed to transform a peasant-based feudal society into an industrial system. This was achieved by taxing rural rents to finance infrastructure, and scientific and technological research institutes, that enabled entrepreneurs to exploit their talents and resources to compete on world markets. By contrast, in Stalin's Russia, socialist industrialisation was financed by bleeding rural incomes -- and people -- to death.

THE GEORGIST MODEL.

Henry George specified the democratic-market framework within which people could prosper. A necessary condition was the taxation of unearned (rental) incomes, to enable the State to finance socially-necessary services while freeing people to enjoy the maximum incentives to work and invest.

It is unlikely that the Communist regimes will alienate (sell) natural resources: ironically, this does not matter -- the alienation of rent, which is what matters, is proceeding covertly in China, by distributing land in exchange for rent below market levels. Charging users the full value requires a free and efficient market place, within which prospective users can compete for possessory rights. This competition dictates efficiency in production. In other words, by insisting on retaining the full economic benefits of natural resources as community revenue, former socialist regimes would encourage citizens to be efficient entrepreneurs. This would freely lead to the self-financing of capital investment, full employment and a capacity to trade in foreign markets. That is the painless route to the rapid transformation of economies into ones capable of satisfying the consumer needs of citizens and the capital requirements of what are still essentially agrarian societies.