Hi, HESers  
  
Apparently, I hold a minority position. Fortunately,  
scientific issues are not decided by majority vote.  
  
Regarding Roy�s points, my post aimed to avoid the  
dubious distinction between what George called �ground  
rent� and other rent. I am not persuaded that this  
distinction has theoretical significance or that it is  
practical. I am not speaking only for myself. I have  
learned a lot from studying Davenport, Wieser, Knight  
and Mises. My remarks reflect that learning, in  
retrospect, as Mark would put it.   
  
Roy accepts this distinction and says that it should  
not be too difficult to separate the two. Roger seems  
to concur. We (my dead economist colleagues and I)  
believe the distinction itself is vague and that it  
would be impossible to identify �ground rent.�  Of  
course, some �professional valuation officer� could  
attach a price to a parcel of land by doing a mental  
experiment. But we are not talking about some  
government bureaucrat attaching A price, we are  
talking about attaching THE price that reflects an  
UNEARNED INCREMENT and one that, if this increment was  
taxed, would not have adverse incentive effects on the  
production of consumers� surplus. As we see it, giving  
such a job to the kinds of �professionals� who are  
usually assigned such tasks would lead to just the  
opposite of what George thought could be achieved. It  
would not destroy the economy, but it would be no more  
justifiable from an economic or ethical point of view  
than any other kind of tax. Let me explain why we  
believe this.   
  
The majority cannot deny, we maintain, that if it were  
not for the competing entrepreneurial appraisals, no  
�ground rent� or any other kind of rent would exist.  
Indeed, no prices could exist without entrepreneurial  
appraisals. Prices do not establish themselves. Of  
course, there are past prices but these are  
continually being challenged and revised by current  
entrepreneur appraisers. Both an existing owner and  
all of the prospective owners of a parcel of land or  
site act as entrepreneurs and, consequently, make  
appraisals. The interaction of the appraising  
entrepreneurs determines ALL prices.  
  
The appraisals of entrepreneurs are based on expected  
uses. Each of the separate competing entrepreneurs  
brings his own distinct and private human capital and  
possibly that of his assistants and partners to bear  
on the matter. If he believes that he needs more  
knowledge to make a good decision, he may cause the  
human capital to be produced that he believes is  
needed to make the decision. In today�s high-tech  
world,  the ability to appraise is typically a  
resource that has been at least partly produced for  
the distinct purpose of making an appraisal that is  
superior to that of other entrepreneurs. (This is the  
deeper implication of Polly�s observations.) The  
ability to appraise is the consequence of an  
entrepreneurial venture in which a would-be appraiser  
has invested. If the venture is a success, the  
superior appraisal is made and the price of the  
appraised item rises. The item is more valuable in the  
eyes of the producing entrepreneur.   
  
Under pure market economy conditions, this implies  
that it benefits consumers. In other words, the effort  
that goes into producing the information that causes  
the market price to rise has the unintended effect of  
producing consumers� surplus. It is an example of  
Smith�s invisible hand.  
  
These ideas apply no less to land than to all of the  
other resources. The ideas are the backbone of the  
neoclassical revolution. They were produced mainly by  
Menger and Clark. They were taken for granted by  
economists like Wicksteed, Fetter, Davenport, Knight,  
and Mises. It is obvious that others who are called  
neoclassicals did not grasp or accept these ideas. And  
those who did accept (the above mentioned neoclassical  
economists) them did not express them in this way,  
partly no doubt because they were living and fighting  
for the revolution, and not reporting on it in  
retrospect.  
  
There are formal classes that help to train real  
estate agents how to make appraisals. But there is no  
set formula for deciding the present value of the  
future net revenue that can be earned from using a  
parcel of land in a particular place with particular  
characteristics with one of a practically infinite set  
of other resources for some demand-satisfying purpose.  
Entrepreneurship, almost by definition, cannot be  
learned from power point lectures.  
  
If the land tax bureaucrat makes a credible threat to  
take away a part of the expected profit from an  
increase in price, she also takes away part of the  
incentive to make the superior appraisal and the  
incentive of the owner to put himself in the position  
to benefit from someone else�s appraisal. �She  
squeezes the consumers� surplus out of the  
entrepreneurial tube.�  
  
Entrepreneurs attach a market price to a site in  
anticipation of the revenue they will earn if they own  
the site. Suppose that a site already has buildings on  
it. Then an entrepreneur may assign a revenue product  
that is greater than the same site if it had no  
buildings but less than a site that had buildings that  
he regards as suitable for the most profitable use.  
Or, he may assign a revenue product that is less than  
if there were no buildings. If the site is on  
potentially fertile land that can be farmed, an  
entrepreneur who is planning a shopping center or an  
apartment complex may have to compete with one who is  
planning to turn it into rice paddies. These are only  
two of the numerous potential entrepreneurs who may be  
appraising the site. The numerous potential uses of a  
site and the numerous individuals whose  
entrepreneurship may play a role in raising the site�s  
market value suggest that the �ground rent� is itself  
variable and dependent on entrepreneurial appraisals  
and entrepreneurial knowledge much of which is  
produced. Or, to put the issue in a way that is more  
consistent with my earlier post, it is not possible  
for a government agent or an economist to separate,  
for practical purposes, the unearned from the earned  
increment, if indeed there is an unearned increment.  
  
Let us suppose that �ground rent� exists. Then the  
payment received by the owner of a site must contain  
both this and other rent. Any realistic implementation  
of the �ground rent tax� would require a government  
agent to determine (1) what is in the minds of the  
many different entrepreneurs and (2) what the rent  
would be if, somehow, there were no current  
entrepreneurs. It is not credible to think that we  
could find someone to do this job, even if we did not  
have to worry about rent-seeking and other public  
choice issues. To think otherwise is tantamount to  
committing the central planning fallacy.  
  
  
This, in simple terms, expresses Davenport�s critique  
and, more generally, the (correctly understood)  
neoclassical critique of the single tax ideology. But  
the errors continue to be made. Let me try to give  
some reasons why people, including apparently our own  
society, continue to make errors.  
  
Some people think that a tax on land rentals will  
cause rich people to pay a greater share of the tax  
burden. This thinking is popular but fallacious. No  
one in her right mind advocates taxing gross ground  
rent, whatever that is. The reason is that in a pure  
market economy, the current owner of a parcel of land  
is most likely to have bought it with the proceeds of  
her productive work and entrepreneurial skill. To tax  
the future rent would be to punish someone from using  
her savings to buy ground or sites instead of condos,  
holiday trips, lazy-boy chairs, and HES subscriptions.  
  
The more advanced thinkers aim to tax APPRECIATION of  
land values. But they also make a mistake. They do not  
realize that such appreciation cannot occur without  
some entrepreneur believing that his appraisal is  
superior to someone who owns the land now. A tax on  
the appreciation in value would necessarily reduce the  
production of the information needed by entrepreneurs  
to make the superior appraisals.  
  
We say succinctly and anthropomorphically that land  
prices have appreciated. Then we reason fallaciously  
that we can tax the increase in market value because  
land cannot move. What we ought to say, in accord with  
the neoclassical revolution, is that competing  
entrepreneurs have bid higher prices. If we keep this  
in mind, we would understand immediately that to tax  
any appreciation in price, including that of land,  
amounts to taxing the activities of the entrepreneurs  
that cause the price to rise. It would have an effect  
that is comparable to the effect of taxing middleman  
activity. As Frank Knight pointed out, the  
entrepreneur is, in a grand sense, the agent of the  
consumer. He is the goose who lays the golden eggs. To  
tax the goose is to reduce the incentive to lay.  
  
  
Reference  
  
Gunning, J. Patrick (1997) "Herbert Davenport on the  
Single Tax." American Journal of Economics and  
Sociology. 56: (4): 565-574. (Pre-publication copy  
available on request.)  
  
Gunning, J. Patrick. (1998) "Herbert J. Davenport's  
Transformation of the Austrian Theory of Value and  
Cost." In Malcolm Rutherford (ed.). The Economic Mind  
in America: Essays in the History of American  
Economics: London: Routledge. (Pre-publication copy  
available on request.)  
  
  
Pat Gunning