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Explaining Rent

Here are several versions of the same illustration, in the order I came across them.

Everett Gross's version:

Sometimes it's difficult for people to understand the meaning of "rent" as an economic concept. One way I have of explaining it doesn't use the word rent. I just use a little analogy.

I'm from Crete, Nebraska. It's a small town of 5,000 people.

Suppose a man comes to Crete, and he wants to start a business. He needs a building, but first he needs a piece of ground to build this new building on. So he looks up a real estate agent, describes what he wants, and the real estate agent shows him a parcel that's just right for his needs. The man asks the agent, "All right, now how much money do you want for this land?" The agent says, "It's worth $50,000." The man says, "Why is it worth $50,000?" And the real estate agent points out that "The school is good, the roads are good, the police department is good, the rescue crew is good and very fast, and business is good here."

So the man says "Yeah, I believe that $50,0000 is a fair price. I'll take it. How do I pay the $50,000 to the school people, and the road people, and the police department? To whom do I pay the $50,000?" And the real estate agent says, "Oh no. You don't pay it to them. You pay it to the person who owned the land before."

The man says, "But who supports the schools, and the roads, and the police, and the other good things?" And the real estate agent says, "If you build, then you'll pay for them again."

The buyer then asks, "And what will the previous owner do for me for my $50,000?"  The real estate man answers, "Nothing!  Nothing at all!"

Now I don't need to use the word "rent" in that explanation.

Everett Gross, in the Illinois Georgist, Summer, 2003. 

Everett also told this story at a CGO conference a few years ago. Dave Wetzel was inspired by it, and embellished it a bit. At the 2005 conference, he described at the how he presents it to audiences in the UK:

Generally what Gross said was that he lives in a small town with a population of about 10,000 people. A gentleman came to the town to build a factory and he chose a woman realtor. He described to the realtor the exact size of the piece of land he needs to build his factory.

She said, "Come with me; I have got exactly that size piece of land." They get into the automobile and drive down the freeway, and drive off the freeway onto a local road, drive off the local road onto a country road, drive off the country road onto a dirt track, and in the middle of nowhere they get out of the automobile, and walk for 10 minutes through marsh, bog, bushes, and eventually they get to this site. She said "here you are, this site is for sale, it is $10,000."

The factory builder looks around and asks, "Is that the only access, or is there a nice highway on the other side of the field?"

She said, "No, that's the only access."

He said "Have you got any energy coming to the site? Gas? Water? Sewage" Cable?"

She said, "No, there is none of that out here."

He said, "Are there any housing estates just beyond the horizon with a local bus service?"

She said, "No buses, no trains, no local housing estates." She said, "You don't look very happy."

He said, "I am not. I want to build a factory, but I have to bring raw materials in, bring in capital equipment, I have got to employ people, and I have to get my finished goods away from the factory. I even sell some of my products at the factory gate, so how are my workers and suppliers and my customers going to get here, and how do I get the finished goods away?"

She said, "Don't worry. I have got another site, so come with me." So they walk 10 minutes back to the automobile, and drive back towards the center of town and half way through in the suburbs they stop at this site, and she said, "Now this site here on the left is for sale. It is exactly the same size as the first site I showed you. It has got cable, it has got energy, it has water, it has sewage, it has good bus service, there is little crime because the police are up and down all the time, there is a train station, there is a big housing estate, there is a hospital and there is a school. The road is well made up and looked after by the local authority and it is well lit."

He said, "Yes, this is more like it, and I will pay $10,000 for this."

She said, "Hold on, this is a good area. The cost is $110,000."

He said, "but you told me it is the same size."

She said, "It is the same size, but look at all these wonderful services."

He scratched his head a bit and said, "Yeah, you are right, it is worth $110,000 to me. Who do I make the check payable to? The bus company, the police department, the fire brigade, housing authority, people that run the hospital, the school board?"

She said, "No, you don't pay any of those. You pay it to the gentleman who is selling you the land."

He thought a minute, and then he said, "I've got it, he keeps the $10,000 and the $100,000 goes to all these agencies."

She said, "No, not at all. The landowner is retiring to Florida, and your check is going to be his pension."

"So how do you pay for all these wonderful services?"

"Well, we wait until you build your factory and charge you a property tax and when you employ staff, you have to pay an employee tax, and when you sell your goods we charge a sales tax."

He said, "That is not fair. I am paying twice. I am paying once for this many to go to Florida, and again I am paying for all these agencies."

And that is Wetzel's complaint with what we do. We actually pay twice, once for the services to the person who has given us permission to use the land via rent or mortgage, and again when we have to pay taxes.

... For more of Dave Wetzel's writing, see "Land Wealth for the People."


and a Danish website, http://www.grundskyld.dk/71-twice.html, has this:

A 'settler' in England
Paying twice?

A story is told of an Australian, who returned to England from the backwoods to set up his home in the old country.

He selected a suitable site and approached the owner for information about the purchase price. The owner demanded £ 1.000, which amazed the newcomer and caused him to ask, "Why so much?"

"Well," said the agent, "the site is bounded by two main roads, has main drainage, water, gas and electricity laid on, is near to the public park and is close to the railway. These are grat benefits and I could easily get £ 1.000 for this half acre."

The Australian agreed and work began on his house. When it was nearing completion he found a stranger measuring it up and asked him what he was about.

The stranger replied that he was from the Valuation Department of the Borough Council.

The Australian said, "You may be, but that is my house. What are you doing here?"

The surveyor, a little surprised, explained that he was valuing the house for rates and explained what the rates were.

The Australian demanded to know what he had to pay the rates for.

"Why," said the surveyor, "for the main roads, the public park and the other amenities of the district.

Anyone who uses his eyes will observe how the expenditure of the authorities in making improvements is capitalized by the landowner who advertise these very improvements as reasons why they should be paid higher prizes for their land.

If this rent were taken by the public authority it would clearly pay for the public services. Taxes on income, consumption etc. could then be abolished.

From Maclaren: Nature of Society

and Nic Rosen has a good version, too, which he shares via Toastmasters:

What's A Georgist?

For over twenty years, I have been a Georgist. Most people will probably ask, "So what's a Georgist?" I could answer that a Georgist is a follower of the American economist Henry George (1839-1897), but that would be a pallid definition. Instead, I'll tell a little story.

A man planned to build a house, for which he needed land, so he went to a real estate agent, and described his wants to her.

"I know a lot that should be suitable," she said. "Shall we go take a look at it?"

He agreed, and they went. "Yes, I could build a house here," he said. "How much does it cost?"

"A hundred and twenty thousand dollars," answered the realtor.

"A hundred and twenty thousand dollars just for the land!" exclaimed the man. "For a hundred and twenty thousand dollars, I could buy many acres of the most fertile farmland in Iowa, or whole square miles of sand and sagebrush further west. What's so special about this land that makes it worth a hundred and twenty thousand dollars?"

"As we say in the real estate business, the three most important factors are location, location, and location. This land is located in a major metropolitan area, with plenty of opportunities to find well-paying jobs. All sorts of city amenities are available, from a variety of shops to museums, libraries, and theaters. You can commute to a job downtown, either driving or taking the subway; there's a subway station just three blocks away, which helps make land here more valuable than land just few blocks further away.

"What's more, this is a very pleasant suburb within the metropolitan area. We have a low crime rate, thanks in part to our fine police force. And just in case an emergency should arise, you can dial 911, and the dispatcher will have a squad car here within minutes, or an ambulance, or a couple of fire trucks, whatever you need. We have excellent public schools, so you can get your children a good education without having to pay private school tuition. That alone makes homes here worth thousands of dollars more than homes in the next town, where the school district isn't as good. We have good drinking water, public parks, a town library, and other civic benefits."

"In that case," said the man, "I guess the land is worth a hundred and twenty thousand dollars. Paying so much for the land will mean I'll need to build a smaller house than I had hoped for, get a larger mortgage, and tighten my belt here and there, but I'll buy it. How do I make the check payable."

"To John Smith."

"I take it, then, that Mr. Smith must be in charge of distributing funds to the police, the schools, the road crews, the subway authority, and so forth?"

"Why, no," answered the realtor. "He's a private investor. I believe he bought the land about twenty years ago, before the subway was built, when the population was much lower."

"In that case," asked the man, "how do you pay for all these public services that help make the land valuable?"

"Out of taxes, of course. We have state and local income tax, sales tax, property tax — part of that falls on the land, most of it on the buildings — profits tax, and various other taxes and fees."

So what is a Georgist? A Georgist is one who sees the problem here, and the solution as well. Henry George proposed a single tax on the value of land, and the abolition of all other taxes. The physical existence of land is due to God, or at least to whatever brought about the physical universe; the economic value of land is due to society in general, and often to government programs in particular. Therefore, let people pay a tax for the value of the land they occupy, and be at liberty to keep what they produce by their labor and capital. Let them work without paying an income tax, buy what they desire without paying sales tax, improve their property without paying building tax.

Or, as one of Henry George's followers put it, instead of paying rent to the landlord and tax to the state, why not pay rent to the state and no taxes?

And, finally, Louis M. Post's 1894 version:

Note 18. Take for illustration two towns, one of excellent government and the other of inefficient government, but in all other respects alike. Suppose you are hunting for a place of residence and find a suitable site in the town of good government. For simplicity of illustration let us suppose that the land there is not sold outright but is let upon ground rent. You meet the owner of the lot you have selected and ask him his terms. He replies:

"Two hundred and fifty dollars a year."

"Two hundred and fifty dollars a year!" you exclaim. "Why, I can get just as good a site in that other town for a hundred dollars a year."

"Certainly you can," he will say. "But if you build a house there and it catches fire it will burn down; they have no fire department. If you go out after dark you will be 'held up' and robbed; they have no police force. If you ride out in the spring, your carriage will stick in the mud up to the hubs, and if you walk you may break your legs and will be lucky if you don t break your neck; they have no street pavements and their sidewalks are dangerously out of repair. When the moon doesn't shine the streets are in darkness, for they have no street lights. The water you need for your house you must get from a well; there is no water supply there. Now in our town it is different. We have a splendid fire department, and the best police force in the world. Our streets are macadamized, and lighted with electricity; our sidewalks are always in first class repair; we have a water system that equals that of New York; and in every way the public benefits in this town are unsurpassed. It is the best governed town in all this region. Isn't it worth a hundred and fifty dollars a year more for a building site here than over in that poorly governed town?"

You recognize the advantages and agree to the terms. But when your house is built and the assessor visits you officially, what would be the conversation if your sense of the fitness of things were not warped by familiarity with false systems of taxation? Would it not be something like what follows?

"How much do you regard this house as worth? " asks the assessor.

"What is that to you?" you inquire.

"I am the town assessor and am about to appraise your property for taxation."

"Am I to be taxed by this town? What for?"

"What for?" echoes the assessor in surprise. "What for? Is not your house protected from fire by our magnificent fire department? Are not you protected from robbery by the best police force in the world? Do not you have the use of macadamized pavements, and good sidewalks, and electric street lights, and a first class water supply? Don't you suppose these things cost something? And don't you think you ought to pay your share?"

"Yes," you answer, with more or less calmness; "I do have the benefit of these things, and I do think that I ought to pay my share toward supporting them. But I have already paid my share for this year. I have paid it to the owner of this lot. He charges me two hundred and fifty dollars a year -- one hundred and fifty dollars more than I should pay or he could get but for those very benefits. He has collected my share of this year's expense of maintaining town improvements; you go and collect from him. If you do not, but insist upon collecting from me, I shall be paying twice for these things, once to him and once to you; and he won't be paying at all, but will be making money out of them, although he derives the same benefits from them in all other respects that I do."



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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper