How our economy really works - Brian Hodgkinson

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forms of self-employment.

      Why is there this lack of opportunity for self-employment? There are four major reasons. The first is inability to buy or rent a suitable workplace. Workers cannot afford to pay for a site that has the right location, which is the principal determinant of the price or rent. This is true not just for individuals who could be self-employed, but even more so for those who need to work in close co-operation with others in some kind of partnership. Few groups of employees could afford to share the price or rent of a factory, office or large store.

      Secondly, there is the question of capital. Employees can rarely equip themselves with the kind of capital required by modern industries. Capital includes buildings and all the manufactured articles used in a business. Very small scale enterprises may be able to purchase hand tools. A window cleaner may afford a ladder and bucket. But what of large-scale capital, like manufacturing machinery, ships or aircraft?

      Even these problems of sites and capital could at least be eased for employees if credit were available on easy terms. The low level of wages makes this impossible. Banks do not offer credit on a sufficient scale for initiatives created by average wage earners. Security for credit advanced is inadequate. Banks demand security based upon assets, especially upon land. They provide short-term credit to workers only for consumer goods and long-term credit for those who can pay the deposit on a house. Otherwise their advances for productive activities are given almost exclusively to those who already possess adequate assets to provide security, in the form often of advances against land values.

      The final major reason for the difficulties of self-employment is a consequence of the other three over the course of time. Most workers today do not have the inclination or ability to cast off employment and to take to the open sea of self-employment, either alone or with others. Getting a job has become a kind of social imperative. School and universities are increasingly geared to training students for some kind of employment when they leave education. The school-leaver hopes for a job in a local firm. The graduate looks to the City of London or training as an executive in a multi-national. Employment has become the deeply entrenched norm. Those who have the will and initiative to work independently are rightly regarded as exceptional and sometimes as foolhardy.

      At the root of this chief feature of the modern economy lies the question of low wages. They are low because they are set by the pervasiveness of unemployment forcing them down to a minimum. But what would be the natural determinant of the wage level if unemployment were not a serious factor? The answer follows from the explanation of economic rent. The natural level of wages is the full value of what can be produced on a marginal site, where there is no economic rent. It may appear that the better sites yield higher wages. This is to ignore the proviso that work on all sites has the same degree of effort and skill, if the economic rent is to be correctly calculated. All the excess value created on better sites is rent. None is wages, except where actual differences of effort and skill are present.

      Another way of looking at this is to consider an employer of labour. He or she will not pay higher wages to one employee rather than another just because the former works on a superior site. They do the same work, so he pays the going wage. A shop assistant in Oxford Street in London does not earn significantly more than a shop assistant in a provincial town. Yet the value that one produces may be well in excess of the other’s. Indeed the employer might validly claim that he has to pay rent for the site that produces higher value, so why should he pay extra wages for the higher value in addition to the rent. Yet a further explanation of the relative uniformity of the wage level is that were excess wages paid on the better sites, workers would move to take advantage of them, until the wage rate was restored to the general level.

      The London allowance does not invalidate this, since it merely takes account of the higher living costs in the capital city, so that real wages there are more or less at the general level for the whole country.

      None of this means that differentials between wages in different occupations do not arise. They may be very large, but are caused by genuine variations in natural ability, training or character, not by the location of the work. There may also be irrational differentials regarding gender, race or age. Once more location is irrelevant. Location profoundly affects the value of the product of work on a particular site (though not usually the price of the product) but not differentials between wage levels arising from the nature of the worker. In fact, the differentials arising from location, which are economic rent, are far greater than worker differentials.

      That wages are low in today’s economy is not as obvious as it was in the days when children ran around without shoes and many families lacked the basic necessities of life. Poverty takes new forms, such as the necessity for two family members to earn wages in order to pay for a mortgage on a house. Nowadays the proliferation of technological devices obscures the poor quality of housing and the standardisation of cheap food and clothes. Moreover, whilst consumer goods and services have undoubtedly become more available, the relative living standard of workers compared with those with unearned wealth and income has fallen substantially. A mark of this excessive inequality is the widespread desire amongst the majority trapped by low wages to gain access to the degree of wealth of the minority by fortuitous means: gambling, speculation in paper assets, and especially by getting on to the ‘housing ladder’ whereby rises in land value offer benefits that in one year may even exceed annual take-home pay. Meanwhile the value placed upon work by workers themselves and their self-respect as the real producers of prosperity for their families and for society diminishes. ‘Something for nothing’ becomes the unspoken epigram of the economy.

      Capital

      THE AUSTRIAN ECONOMIST, Joseph Schumpeter, said that you cannot ride upon the claim to a horse. Modern economic thought and popular opinion share a similar mistake of believing that you can produce wealth with a claim to capital. All economies depend critically upon the use of capital – buildings, machinery, plant, roads, railways, ships, aeroplanes, computers and all the multifarious equipment of modern industry. Whether this is owned privately or publicly has no bearing upon this basic fact. The use of capital is one thing, its ownership quite another. Yet the belief is deeply embedded amongst all classes of society that money, shares, bonds and other financial instruments are capital. These, too, are necessary, some in the very nature of economic activity, some owing to the peculiar development of modern capitalist economies.

      As a result of this gross mistake in the meaning of a word, ideas, theories and policies become not only confused but quite wrong-headed. For example, investment, which means the creation of capital goods and their innovative use, comes to mean the provision of new claims upon production. Inward investment is widely encouraged in the form of investors from abroad buying shares in UK firms. No real capital enters the country. The firm becomes foreign owned, whilst its land, labour and capital remain as British as before. Similarly UK financial institutions invest in firms abroad and capital is said to leave the country.

      When investment refers to the purchase of land the error is multiplied. Land is not capital. It is not wealth used to produce further wealth, because it is not itself produced. It is a gift of nature and of the whole community. Whenever it is developed by work on improvements, such as drainage, these may be treated as capital, but in the long-run such improvements merge with the land and are best treated as part of it. When a country loses land, by ceding it to another or by sea erosion, for example, some productive power is totally lost. When capital is lost, by depreciation, obsolescence or warfare, new capital can be produced to replace it.

      Drawing a clear distinction between land and capital is vital to any understanding of Economics. It follows from this that the word ‘landlord’ also requires a precise meaning. At present it is used indiscriminately to refer to the owner of land or buildings, or often both. The landlord is said to offer for purchase or rent a house, a factory, an apartment or an office. Yet his or her ownership of the land is logically quite distinct from the ownership of the building. Henceforth in this book the term will be used strictly as the owner of land only, just as the very word implies. The owner of a building is the owner of a capital asset, which has been produced by work and other capital. As such its owner is entitled to be paid for its sale or use. Whether the landlord is so entitled is a central issue of what follows.

      The

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