.

Simon Patten coined the term "economy of abundance." He was the first professor of economics at the nation's first business school, the Wharton School of Business at the University of Pennsylvania.[1] Like the other founders of the American Economic Association, he was trained in Germany, where he described economic teaching as culminating with the writings of John Stuart Mill. But as Patten later observed, Mill became more reformist and even socialist after revolutions swept through Europe in 1848. His liberal philosophy was "not a goal but a half-way house" between classical laissez faire and more activist schools of economic reform fueled by class conflict in the face of the Industrial Revolution's squalid urban poverty. "The Nineteenth Century epoch ends not with the theories of Mill but with the more logical systems of Karl Marx and Henry George."[2]

George opened Progress and Poverty by posing the question of why there still was so much poverty in the face of the Industrial Revolution's remarkable explosion of productive power. Today, many economists are asking a similar question: How can GNP be rising at about 4 percent a year in America while real wages have been drifting downward since 1979? Where are the fruits of productivity going?

Suppose someone at the end of World War II in 1945 had been informed of the remarkable technological breakthroughs that have occurred over the past 60 years - the advances in medicine and pharmaceuticals, genetics, air and even space travel, communications, computers and information processing, atomic power, and a better ecological understanding of how our planet works. The expectation would have been for a leisure economy in which citizens could devote themselves to better educational and cultural pursuits. At least, this was what futurists promised, decade after decade as they looked at the great potential of technological progress.

The question is, why haven't these rosy pictures materialized? Why are employees working longer than ever before, with many couples holding three jobs between them?

George's answer was that rent - and rising land prices - was diverting the economic surplus away from capital formation and consumption, exploiting both capital and labor. But the problem does not stem only from of land-rent. The most notable examples of prices and incomes without corresponding (necessary) costs of production are finance and insurance, whose interest, commission and policy charges are set independently of costs. And much of what passes for industrial profits actually consists of monopoly rent and "intellectual property rights." These rents are highest in areas where productivity and technological breakthroughs since World War II have been largest and were expected to bring society the greatest benefits.

Analyzing growth in labor and capital productivity, William Baumol he has calculated that innovation carried out since 1870 accounts for nearly 90 percent of today's GDP, including even the "steam engine, the railroad, and many other inventions of an earlier era."[3] But the Forbes lists of the world's wealthiest people shows the degree to which most wealth today consists of rent-yielding property. The Federal Reserve's reports on "Balance Sheet of the U.S. Economy" (Table Z of its quarterly flow-of-funds statistics) show that real estate remains the economy's largest asset, and further analysis makes it clear that land accounts for most of the gains in real estate valuation. Most of the remaining U.S. wealth consists of other monopolies - fuels and minerals, the broadcasting spectrum, Microsoft and kindred intellectual property rights.

Technology has become an intellectual property right, permitting its owners to charge economic rent. The pharmaceuticals industry has been among the greatest abusers. The DNA code and even long-known Chinese herbal cures are being patented into "intellectual property." And no companies are more notorious than the HMOs - "health management organizations" that have interjected themselves as a skimming operation between patient and doctor. Broadcasting companies have privatized the electromagnetic spectrum rights originally and "naturally" in the public domain. Meanwhile, the phone and cable companies are trying to create tollbooths for the Internet, much as Microsoft has become the major rent collector for information processors. The stock market's major "industrial" growth areas turn out to be examples of economic rent, although these "super-profits" take the form of profits and dividends ostensibly produced by capital.

Stock-market speculation today is largely a rent-seeking activity as companies are raided for their land or other property income. Retail food stores in particular have become land plays. Earlier this year, corporate raiders wanted McDonald's to mortgage the land value of its restaurants and pay out the loan proceeds as dividends. This raid illustrates how today's real estate bubble itself is largely a financial phenomenon. The upshot is that on the mortgage banker ends up with most of the net groundrent. Since World War II, interest charges have absorbed the increase in real-estate rent as a proportion of U.S. national income, just as interest is absorbing a rising share of industrial cash flow and consumer income.

Rentier income - economic rent and interest or other financial charges - are the major factor polarizing the U.S. and other economies. This polarization of wealth and income is just the opposite from what the classical economists and Progressive Era reformers hoped to bring about. A study for the Congressional Budget Office recently showed how sharply the maldistribution of rentier income has increased in recent years, largely as a result of lowering tax rates on capital income and capital gains. "In 2003, the top one percent of the population received 57.5 percent of all capital income." This was the highest proportion since the CBO began collecting data in 1979 - which also happened to be the year in which real wage levels peaked. At that time the top one percent of the population received "only" 37.8 percent of capital income, and the top ten percent two-thirds (66.7 percent), compared to nearly four-fifths (79.4 percent) in 2003. The Center on Budget and Policy Priorities concludes: "Extending lower tax rates on capital gains and dividend income would exacerbate the long-term trend toward growing income inequality."[4] So the concentration of rentier income is largely the result of regressive tax policies replacing the progressive taxes that existed prior to the 1970s.

The wealth created by the past century's technology and basic means of production thus is not accruing to society as a whole, but to the topmost 1 percent of an economy that is polarizing increasingly, thanks to today's asset-price inflation. Prof. Baumol provides part of the explanation in an article contrasting productive with unproductive ways of gaining wealth.[5] Expanding Joseph Schumpeter's categorization of innovations in terms of new modes of manufacture, marketing or economic organization, this article adds "acts of 'unproductive entrepreneurship'" such as "innovations in rent-seeking procedures, for example, discovery of a previously unused legal gambit that is effective in diverting rents to those who are first in exploiting it," e.g., the creation of monopolies and means of acquiring them or increasing their ability to extract economic rent from the economy. Other examples might include property speculation, corporate raiding, greenmail and leveraged buyouts.

The bulk of this rentier income is not being spent on expanding the means of production or raising living standards. It is plowed back into the purchase of property and financial securities already in place - legal rights and claims for payment extracted from the economy at large. Most rental income and interest is channeled back into the property and stock market to buy more rent-yielding real estate or ownership rights. This inflates prices for these assets, making property and financial speculation more attractive than new capital formation. The economy shrinks, in much the way that Ricardo warned would occur as a result of groundrent diverting revenue from industry to landlords. Except in this case, revenue ends up being diverted into the financial sector.

To see how great a sea change has occurred, we must return to the Progressive era and ask what happened to its ideals. Like the great classical liberals, the Progressive Era sought to regulate monopolies and other would-be rent grabbers so as to prevent price gouging, and to tax away land rent and "super-profit." Progressive muckrakers also emphasized the role of finance, especially Wall Street's role in squeezing out economic rent to pay bondholders and stockholders while insiders "watered the stock" with financial skimming and other rent-grabbing activities organized by financial manipulators, railroad barons and other privatizers.

The foundation of classical economics was the doctrine of economic rent, a "free lunch" defined as the excess of market price over the necessary costs of production ("value," which ultimately could be resolved into labor costs, including the cost of labor embodied in the capital equipment and other materials used up in production). Rent was unearned, because it was revenue with no corresponding cost of production to justify it morally or economically. What is economic rent and rentier income, and why is it deemed to be "unearned"?

It is now nearly two centuries since David Ricardo defined economic rent as the margin of market price over cost-value, a free lunch flowing most conspicuously from land ownership. In Chapter 2 of his 1817 Principles of Political Economy and Taxation, Ricardo extended the concept of economic rent to other natural monopolies. He cited mining as the most obvious, but the phenomenon extends to legal giveaways such as the broadcasting spectrum, and to artificial monopolies granted by patents and "intellectual property rights" ranging from Walt Disney cartoon characters to pharmaceuticals and computer software programs.

Ricardo developed the concept of economic rent to urge Britain to import low-priced food from abroad. The alternative, he warned, was for landlords to siphon off the fruits of the Industrial Revolution's productivity gains. In the absence of free grain imports, population growth would force resort to less fertile soils, forcing up British food prices and hence the basic living wage. Owners of the most fertile lands would benefit from rising crop prices, while employers would be faced with rising labor costs, pricing them out of world markets. High rents would squeeze industrial profits and deter capital investment, making society poorer. But free trade would prevent the emergence of a widening margin of economic rent - the difference between high-cost and low-cost food producers. More radical followers - the "Ricardian socialists" and "philosophic radicals" - saw economic rent as a property right that was itself exploitative, a right obtained originally by military conquest and what Marx called "primitive accumulation."

In today's family budgets, housing charges have grown to exceed spending on food. In June 2006, the Bureau of Labor Statistics released a century-long profile of New York City family budgets. In 1900 food, drink and tobacco dominated family spending, absorbing some 43 percent of family budgets. Today, that proportion is down to 13 percent. In 1900, housing accounted for only about 15 percent of family budgets - just one sixth of family income. Today, that proportion has risen to 38 percent. Urban landlords thus have replaced the agricultural landowners whom Ricardo depicted as the major rent recipients, while the gamut of economic rents has broadened to include transportation, communications and other natural monopolies, patents and related property rights. These rents create prices "empty" of actual cost-value. They are a margin over necessary production costs, siphoning off income otherwise available for spending on goods and services.

Finance has become a growing part of the problem. Absentee owners buy property rights on credit, pledging the rental income to pay the mortgage interest, in accordance with the motto "Rent is for paying interest." Equilibrium is reached when the winning bidder for a property pledges to pay all the free rental income (after costs) to carry the mortgage. The banker gets the rental cash flow, while the real estate owner is willing to settle for a chance to get a capital gain.

The real estate game thus becomes an exercise in borrowing money to ride the wave of asset-price inflation - "capital" gains that John Stuart Mill called the "unearned increment." The same has become true for other rent-extracting enterprises, including pharmaceutical and broadcasting companies with special monopoly, patent or "intellectual property rights.

In search of asset-price gains, corporate raiders and other empire builders issue high-interest "junk" bonds, pledging corporate earnings to cover the interest charges. Our tax system encourages this debt pyramiding by permitting interest charges to be tax-deductible. The effect of buying property on credit is thus to shield rental income exempt from taxation. Instead of accounting for the bulk of taxation as advocated by the classical liberals and Progressive Era reformers, taxes on rental income and land-price "capital" gains are declining. The growing political power of rentiers enables them to shift the tax burden onto labor and industry.

This is not how the classical economists expected matters to work out. Their ideal was an economy in which public revenues would come from rental charges in the character of user fees for land sites, subsoil mineral resources, transportation and communications infrastructure and other parts of the public domain that were natural monopolies - not from taxes on wages, profits or sales. These were the policies that went under the label of Progressive - a land tax to collect economic rents, anti-monopoly regulation, and a credit system to finance industrial capital formation rather than to operate parasitically. The reforms they envisioned a society in which incomes would be earned mainly by productive work and enterprise to earn profits and wages, not rent and interest. Prices would reflect the necessary costs of producing goods and services, free of economic rent - that is, free of rentiers siphoning off income simply from property rights and monopoly rights. The harder one worked, the richer one could become.

Democratic political reform was intended to create a fiscal and regulatory system to check the rentier power of property and finance. The failure to achieve the classical and Progressive Era's economic reforms is thus as much political as it is economic. Much of the explanation is that the financial and real estate interests have promoted a self-serving economic ideology and body of theory. Bankers in Ricardo's day, for instance, threw their support behind industry rather than protectionist landlords because they viewed free trade as enhancing what had been their major business since early medieval times: financing international trade and investment. But they later shifted their allegiance to the landlords and monopolists who became their major customers.

Economic dystopia vs. the Economy of Abundance

Today's economies are evolving on a diametrically opposite path from that mapped by liberal reformers from Adam Smith through Mill and his successors. The post-classical counter-revolution pretends to stand in the classical tradition by calling themselves neoliberals. But almost without anyone noticing, it has turned the meaning of liberal reform inside out. Rather than taxing rentier wealth and its income, it has promoted real estate and financial interests.

The classical reformers defined their politics as liberal because they wanted to free the economy from "empty" rentier charges, price without value. Their objective was an economy in which everyone's income would reflect the productive contribution they made. Their opponents - who misleadingly call themselves neoclassical - have promoted a myth that this will happen automatically, if only governments will refrain from "intruding" into the economy. An over-simplified, ostensibly free-market image depicts "market forces" as steering savings into areas that best serve the needs of consumers and promote economic growth. The reality is that the failure to regulate markets has led to debt-financed property speculation and a travesty of "wealth creation."

In the post-classical view, all income and wealth is earned. Economic rent is conflated with profit, which is supposed to fairly reward innovation and enterprise - and the willingness of businessmen to take risks. The logic is much the same as that which underlay the Churchmen of the 13th century, justifying the banker's interest and the tradesman's profit by the cost of their own labor time plus an adjustment for the risk of losing their money. Nothing is said about unearned income - the economic rent that classical liberals defined as that element of price that could not be resolved into costs of production, costs that ultimately were resolvable into labor (including the labor embodied in the machinery and other capital goods used up in production).

The classical reformers viewed less inequality as a precondition for sustained prosperity. They expected democratic reforms to promote greater equality and prosperity, by leading to land taxation and regulation of monopolies as populations voted their enlightened economic self-interest. But the vested rentier interests mounted an economic and political counter-reformation, claiming that "the market" will enable everyone to earn what they deserve - that is, the "service" they contribute to production, without any need for progressive tax reform or public regulation.

The assumption underlying this value-free doctrine is that no income or wealth is unearned. Property distribution and rentier claims are "externalities," that is, extraneous to the production of goods and services. This narrow approach exiles Thorstein Veblen and other "institutionalists" to the academic basement discipline of sociology - at the price of unseating classical political economy from its position as queen of the social sciences to become merely "economics," focusing on supply and demand without paying much attention to how rent and interest claims enter into the costs of doing business and divert income away from being spent on goods and services.

In many ways we are living in what the classical economists would have deemed to be a dystopia. Fewer people are able to earn enough to own their homes free and clear, or save enough to retire or pay for medical care - except for the miniscule number who lucky enough to win lotteries. A reported 68 percent of U.S. workers say they are confident that they will be able to live comfortably after retirement; but 53 percent have saved less than $25,000.[6] An equally unrealistic number of people imagine that through hard work they have a chance to become millionaires, a postmodern illusion that will doom most people to a life of frustration.

The reality is that the economy is tilted to favor property owners, monopolists and creditors at the expense of those who produce goods and services. A widening share of national income is going to landlords, creditors and other rentiers at the top of the income and wealth pyramid, increasingly free of taxes. The wealth that produces these rentier incomes is not real capital investment, nor is it technological. It is created by law, often by stealth and insider dealing.

Much as the Ricardian free traders opposed Britain's protectionist landowners, so the Progressive Era's reforms aimed at preventing railroad barons, Standard Oil and the mining trusts from charging extortionate prices that had no counterpart in necessary costs of production. The alternative was to let rentiers maximize economic rent, that is, "empty" pricing without cost value. The Progressive response to such price gouging was threefold: progressive taxation of wealth, anti-monopoly regulation to ensure fair competition, and public investment in infrastructure monopolies to provide their services at cost. The aim was for public regulation and taxation to bring prices into line with necessary costs of production, keeping basic prices low and hence making domestic labor and capital internationally competitive. Economic liberalism - opposition to rent as a free lunch - thus went hand in hand with an advocacy of national competitive power.

The largest capital expenditures for the leading industrial economies are natural monopolies - transport systems, mineral-bearing land, gas and electric power, communications and the radio spectrum. These are areas where competition cannot be relied upon to bring market prices down to costs, because it does not make economic sense to invest in competing railway or streetcar lines, in canals, power transmission lines and so forth. For this reason most European countries kept these natural monopolies in the public domain, and the United States organized them as regulated public utilities. Yet most economic textbooks depict industrial capitalism primarily as consisting primarily of manufacturing - steel, autos, consumer goods and other sectors in which technological innovation has steadily cut costs, reducing prices accordingly.

For the past century a guiding principle of public regulation has been to limit economic rent by bringing market prices into line with actual production costs. But privatizing natural monopolies and creating new property rights brings into being a constituency to "create wealth" by gouging rent from the economy at large. The way to successfully oppose this policy is to spread an awareness that an enormous part of the nation's wealth - and the income it siphons off - is not actually earned but is a free lunch - income that landlords collect "in their sleep" as Mill put it, without any effort of their own.

The classical economists recognized that economic rent will exist as long as production costs and the desirability of sites vary. Increasingly, they focused on what Heinrich von Thünen called the rent of location. Well-situated land is more valuable than properties situated further away from the economic centers, requiring more time and transport costs of access. This shifts the focus of property rent away from agriculture to urban real estate, the largest element in today's national balance sheet of assets - and of the mortgage debts attached to them. But most important is the fact that economic rent occurs increasingly in the sphere created by privatizing monopolies hitherto in the public domain, and granting monopoly rights to technology itself.

Economic rent in industry

Whereas Ricardo based his concept of rent on diminishing returns, the American School of economists emphasized increasing returns. They saw low-cost producers obtaining super-profits - economic rent - by technological innovation. In much the same spirit, Joseph Schumpeter based his theory of business cycles on innovators and emulators. In his optimistic view, the advantages of rising productivity would be merely temporary as knowledge spread and competition ironed out what Alfred Marshall had termed the "quasi-rents" that early leaders achieved.

This free-market logic did not apply to monopolies, or to the financial sector adding its own debt overhead. The late 19th century coined the term "watered costs," referring to technologically unnecessary charges for interest and dividends, often paid to corporate insiders who watered the stock by issuing bonds to themselves and their political cronies. But nobody a century ago anticipated anything like the recent attempts to use the patent laws to create rent opportunities in information technology, communications and pharmaceuticals. The traditional feeling has been that technology should be universal, so that competition would be in production and distribution, not in establishing property rights as the basis for access fees.

The claim often is made that at least economic rents in industry are earned. The objective of advertising, for instance, is to create "consumer loyalty" to limit choice to specific brand names. Rather than just "giving the public what they want," advertising creates wants, e.g. on Saturday morning TV pushing sugared cereals to children.

Despite the fact that much of what is reported as "profit" is more technically a rental or "access" fee, no statistics are reported on economic rent as such. But it is obvious that drug company and tobacco profits represent economic rent far in excess of production costs, which are mainly legal and political, not technological. Broadcasting profits result largely from early free appropriations of the airwaves from the public domain. For Internet sites, one might cite E-Bay, Amazon.com, Expedia and Orbitz for air travel. Their revenue stems largely from the head start they achieved by heavy investment in the information-rent economy's early years.

As Patten, explained, the appropriate measure of success for public infrastructure investment in natural monopolies was its ability to lower the economy's cost structure. The Erie Canal, for instance, brought grain from the Western states to upstate New York, minimizing local farm rents and hence lowering the economy's basic costs of doing business. To seek as high a profit as the market would bear, as in the case of private investment seeking to maximize profit, would make the rent-burdened economy uncompetitive. Even in the private sector, as Schumpeter showed, great business booms tended to result from cost-cutting industrial innovations.

By freeing industry from having to pay rents to monopolists, public infrastructure investment increased industrial profits for the economy at large. This is why the Interstate Commerce Commission put an end to the watered financial charges imposed by the railroad barons, and why the Sherman Anti-Trust Act of 1890 was used to break up Standard Oil. But finance managed to become the great sponsor of rent-seeking activities, and ends up with the rent in the form of interest charges.

The 19th century did not anticipate this practice of using rent to pay interest. The property-and-rent system now is wrapped in the financial system. This reflects Patten's principle that if societies close only one kind of rent-yielding activity, the revenue that is freed will be grabbed by other monopolies or rent-seekers, or their financial backers. The idea is to erect barriers around knowledge, then to charge for access, and then to "financialize" the idea by issuing stocks and taking out loans, that result in paying out the rent in the form of interest payments to the bankers and bondholders.

This turns the post-industrial "service" society into a neo-rentier economy. Euphemized as a post-industrial "knowledge economy," it is based on "intellectual property," one of the most pernicious examples of rent seeking. The recent 2006 court case against Blackberry's maker, Research in Motion, implied that one can patent an idea as vague as getting e-mail on cell phones. A company obtained a patent on this idea, without any specific way how to implement it, and then sued Research in Motion for patent infringement. The effect of such patents is to impose rake-off fees that make technology more costly, thereby undoing its productivity benefits. The next logical step along this path, economists warned, would be for some company to patent the idea of peanut butter and jelly sandwiches and start charging everyone who made them.

Walt Disney is credited with lobbying hardest to extend the lifetime of copyright protection. The consequence has been to block publishers from reprinting books (and CD companies from republishing musical performances) hitherto in the public domain. Critics of such rent-grabbing follow the classical economists in urging bioengineering and the genetic code, along with similar "intellectual property," to be in the public domain so as to minimize the cost of economic progress and innovation. But phone and cable companies presently are seeking to erect toll booths throughout the Internet, prompting one journalist to write: "The nation's largest telephone and cable companies are crafting an alarming set of strategies that would transform the free, open and nondiscriminatory Internet of today to a privately run and branded service that would charge a fee for virtually everything we do online."[7]

The classical response is to tax away all economic rent, so that it cannot be paid out to creditors or taken by rival rent-seekers. The objective is to minimize prices, not raise them. However, the financial sector has gained control of public policy and cut taxes on wealth, capital gains and the higher income brackets, knowing that what the tax collector relinquishes is available to be pledged as interest payments on larger loans to buy rent-yielding properties. Rent seeking thus finds its counterpart in asset-price inflation.

To deny the distinction between rent and profit, and between property rights and tangible capital, is a travesty of what 19th-century liberalism was all about as a political program. Today's self-proclaimed neoliberalism leads to economic polarization counterpoising property owners and their financiers to industry and labor. The danger is that as rent generates more revenue than does profit, rentiers will be able to convert their economic power into political power. This already has happened in the international sphere, where the World Bank and IMF have imposed the Washington Consensus, directing debtor governments to sell off public monopolies, on terms that do not tax or regulate their economic rent but leave this in private hands, including those of foreign creditors.

Conclusion

How do we achieve the Economy of Abundance that seemed to inevitable a century ago, and so within reach as recently as the 1950s? Why have people not obtained the leisure promised by the technology that recent generations have achieved?

The problem is not technological, given the scientific breakthroughs achieved since World War II in medicine and biology, transportation and communications, atomic power and computers. Rather, the problem is that rent and debt charges have absorbed the surplus, siphoning off income from the production-and-consumption economy and steering this revenue - and new credit creation - to inflate prices for rent-yielding property and financial securities.

As legal property rights, rent-yielding assets are not means of production. They do not add to output, but intrude into the economy, by siphoning off income for rights-holders. This extraction of income is in the character of economic rent. And matters have been complicated by the fact that these rights and their rental income streams are bought increasingly on credit. In fact, most credit today is created to finance the purchase of these rent-yielding assets, not to buy goods and services. Yet monetarists relate the money supply only to consumer and wholesale prices, not to the property and financial transactions that absorb more than 99 percent of payments. This is the essence of what Thorstein Veblen described as absentee ownership a century ago, when the financial and real estate sectors were merging.

To counter this anti-progressive dynamic, it is necessary to draw peoples' attention to the rent problem by showing its order of magnitude. This requires quantifying economic rent, and demonstrating that not all income and wealth are earned. "Wealth creation" that takes the form of rising prices for rent-yielding property is not the same thing as tangible capital formation. Indeed, a rentier economy's "free lunch" dynamics are antithetical to rising productivity and living standards. The basic principle is that rent is unearned. Income and wealth obtained at other peoples' expense should be the basic source of taxes, not the labor and capital needed to produce goods and services.

This economic doctrine was widely accepted a century ago. It led Thorstein Veblen to extend the Progressive era's critique of rent-extraction into the broader sphere of absentee ownership - which became the title for his 1923 book, Absentee Ownership and Business Enterprise in Recent Times. Already from the 1890s, in fact, the Progressive Reformers focused on Wall Street and other financial centers for loading down prices with "fictitious" costs (what George called "fictitious" capital, whose income he classified as "value of obligations" as opposed to "value in production" in his posthumous Science of Political Economy).

Value of the one kind - the value which constitutes an addition to the common stock - involves an addition to the wealth of the community or aggregate, and thus is wealth in the politico-economic sense. Value of the other kind - the value which consists merely of the power of one individual to demand exertion from another individual - adds nothing to the common stock, all it effects is a new distribution of what already exists in the common stock, and in the politico-economic sense, is not wealth at all. . . .

Value arising in the first mode may be distinguished as 'value from production,' and value arising in the second mode may be distinguished as 'value from obligation' - for the word obligation is the best word I can think of to express everything which may require the rendering of exertion without the return of exertion.[8]

In other words, "value from obligation" was that element of price that could not be resolved into labor costs of production (including the labor embodied in capital goods used up in production).

When Teddy Roosevelt ran to regain the presidency on the Bull Moose ticket, he announced at his 1910 "New Nationalism" speech at Ossowatomie, Kansas: "At many stages in the advance of humanity, this conflict between the men who possess more than they have earned and the men who have earned more than they possess is the central condition of progress." To understand this conflict, it is necessary to distinguish between earned and unearned income, and to restore the classical distinctions between productive and unproductive investment and debt.

A few modern economists have pursued this line of thought. Examining the course of economic history for examples of destructive wealth seeking, Baumol (cited in fn. 5) finds Rome to represent the most egregious example of unproductive entrepreneurship. "Persons of honorable status had three primary and acceptable sources of income: landholding (not infrequently as absentee landlords), 'usury,' and what may be described as 'political payments,'" that is, the power to extort that went with political office in Rome and its colonies. Turning to modern times, he concludes: "Today, unproductive entrepreneurship takes many forms. Rent seeking, often via activities such as litigation and takeovers, and tax evasion and avoidance efforts seem now to constitute the prime threat to productive entrepreneurship." Examples include "the spectacular fortunes amassed by the 'arbitrageurs' revealed by the scandals of the mid-1980s." But fortunately, "tax rules can be used to rechannel entrepreneurial effort."

Creditors were the bane of Rome's economy, reducing over a quarter of the population to debt bondage. The financial sector has a similar complicity in today's economic polarization, burdening the economy not only with its own interest-bearing debt but also supplying the credit to bid up property prices. Rising property rents, monopoly rents and other rents - and asset prices for these rent-yielding property rights - increase living costs and make economies less competitive. This has not deterred the financial sector from backing them, as long as it ends up with rents in the form of interest charges on the credit advanced to finance their purchase.

It also is necessary to demonstrate the "Patten principle": If only one monopoly is regulated or ended, others will take the economy's available surplus as rent, unless the rental margin is taxed. This requires a multi-front taxation of economic rent in all it forms. It is futile just to tax landlords while leaving a surplus for better-entrenched monopolists to siphon off.

Most important, it is necessary to understand the financial system's role in making our economy more dysfunctional. Rather than evolving to serve the needs of industrial growth, banks and other financial institutions now create credit mainly to inflate the price of property already in place - especially monopolies - while loading the economy down with debt charges. The latter problem was recognized already in Ricardo's day by the followers of Comte Henri de St.-Simon in France, and subsequently by other continental European and even some British bank reformers. By contrast, Anglo-American monetarist philosophy exemplified by Alan Greenspan and other financial "free market" advocates treats asset-price inflation as "wealth creation" on a par with tangible capital investment. This deliberate confusion supports a lobbying campaign to obtain tax breaks for real estate, monopolies and other major bank clients.

The antidote is to restore the classical economic doctrine, and to inform the public of the counter-revolution mounted by rentiers - the financial interests as well as real estate and monopolies. A basic distinction needs to be drawn between market price and underlying cost-value - a margin that includes "watered costs." The word "rentier" needs to be re-introduced to public policy discussion, along with a vocabulary expanded to include "economic rent," "unearned income," "windfall gains." These terms were well understood a century ago. Their disappearance from public discourse is the result of a public-relations campaign mounted by the vested interests to replace classical political economy with "junk economics."

Ultimately at issue is the direction in which economic evolution will take. Victory is not assured, because as Ecclesiastes put matters, the race is not always to the wise or the swift. The fall of Rome as a result of monopolization of the land by an aggressive but self-destructive creditor class stands as a warning that there is no guarantee that society will elect to prevent economic polarization in which rent-takers appropriate the surplus and bring growth to a halt.

This was the economic doomsday scenario against which Ricardo warned. But his own blind spot was his own banking class and its financial rake-off. He wrote nothing about how interest and other financial charges were like groundrent in adding to price without adding to value. Today, we are in a position to draw a more comprehensive picture.

There are two kinds of future. One is a rent-seeking society whose tendency is to maximize gouging by turning everything (even peanut-butter-and-jelly sandwiches) into a monopoly and charge people the maximum, namely, all the income they have over and above bare subsistence levels.

This is what happened in Rome, and we all know what happened to it. Similar dynamics are beginning to occur in today's world. The post-modern twist is that rent-gouging activities now are pledged as collateral for loans for buyers to acquire on credit, in exchange for turning rent into interest. As the financial sector has become the ultimate recipient of rent, it has transformed its economic power into political power demanding that rent-yielding assets remaining in the public domain must be privatized, that is, sold to absentee owners on credit.

Opponents of classical liberalism promise that free financial markets ensure that people "earn what they deserve" even without progressive tax reform. This is supposed to be automatic. By contrast, the classical economists saw that truly non-exploitative, productive markets needed careful regulation to prevent special interests and monopolies from distorting prices and incomes. The 19th century's economic liberals thus produced the ideals of progressive taxation and a fiscal focus on economic rent and other unproductive income.

The scenario outlined by classical economic liberals and the generation of Progressive Era reformers who followed in their train was for natural monopolies (implicitly including pharmaceuticals and health care, the internet and computer programming, and other intellectual property) to be retained in the public domain or, at the very least to be regulated and taxed as public utilities so that prices reflect costs. Otherwise, what is not paid to the tax collector simply will be paid to the bankers and bondholders advancing the credit to buy these property rights.

So we are brought back to the classical theory of economic rent and its taxation. Just as it formed the policy core of classical economics, it needs to be applied and quantified today as the foundation for policy reform designed to channel society's economic surplus into increasing the means of production and living standards rather than stifling social prosperity.

NOTES AND REFERENCES

1. I discuss Patten and other theorists of increasing returns in Economics and Technology in 19th-Century American Thought: The Neglected American Economists (New York: Garland Press, 1975). For more biographical details see Daniel M. Fox, The Discovery of Abundance: Simon N. Patten and the Transformation of Social Theory (Ithaca, 1967).
   
2. Simon Patten, "The Reconstruction of Economic Theory," reprinted in Simon Patten, Essays in Economic Theory ed. Rexford Guy Tugwell (New York: 1924, Knopf): 274, 278f. See also Patten's Development of English Thought (New York: Macmillan's 1899):339.
   
3. William J. Baumol, "Rapid Economic Growth, Equitable Income Distribution, and the Optimal Range of Innovation Spillovers," in George L. Perry and James Tobin, eds., Economic Events, Ideas, and Policies: the 1960s and After (Washington, D.C.: The Brookings Institution, 2000):27f.
   
4. The statistics, based on C.B.O., Historical Effective Federal Tax Rates: 1979 to 2003 (December 2005), are summarized in Isaac Shapiro and Joel Friedman, "New Unnoticed CBO Data Show Capital Income has Become Much More Concentrated at the Top," Center on Budget and Policy Priorities, January 29, 2006. The CBO study defines "capital income" as "interest, dividends,, rents, and capital gains."
   
5. Baumol, "Entrepreneurship: Productive, Unproductive, and Destructive," Journal of Political Economy 98 (1990):893-921.
   
6. Employee Benefit Research Institute (Washington), as of May 2006.
   
7. Jeff Chester, "The End of the Internet?" http://www.thenation.com/doc/20060213/chester [posted online on February 1, 2006]. He adds that FCC chairman Michael "Powell and his GOP majority eliminated longstanding regulatory safeguards requiring phone companies to operate as nondiscriminatory networks (technically known as "common carriers"). He refused to require that cable companies, when providing Internet access, also operate in a similar nondiscriminatory manner."
   
8. Henry George, The Science of Political Economy [1894, posthumous] (New York: 1992). Book II, Ch. 14: The Two Sources of Value (259-261).