The ‘unearned increment’
British economist David Ricardo’s theory of rent led to the ‘single tax’ movement in the late 1800s. The value of land, which is in fixed supply, rises as economic growth increases assets which have a flexible supply, such as labour and capital.
Landowners benefited from increasing land values as settlement proceeded, not through their own efforts to make their land more productive, but through the increased availability of labour and capital. This increase – the ‘unearned increment’ – was seen as suitable for taxation. People felt that increased wealth should depend on worthy endeavour and not luck.
The idea of a single tax on the unearned increment of landowners was an international movement of the late 19th century, associated most with Henry George, an American thinker. The idea was prevalent in recently settled European colonies where examples of undeveloped land were visible.
It proved difficult to identify the unearned increment on land values. No tax on rising land values could have generated sufficient revenue on its own for the government. But the movement had more effect in New Zealand than most places. Local rate-setting methods link to the unearned increment. Local councils can still use ‘unimproved value’ as a basis for determining rates in the 2000s, though most councils use ‘land value’, which includes buildings and improvements on property.
Morality of wealth
Wakefield’s ‘sufficient price’ for labourers buying land had a moral quality. It ensured that only the deserving could progress from being labourers to landowners. The ‘unearned increment’ also drew on the notion that increased wealth should depend on worthy endeavour and not luck. The idea still persists – income from sources other than direct labour is often targeted for higher taxation.
Deeper economic analysis suggested that economic growth changed the relative value of assets according to their flexibility. Rather than viewing land as ‘fixed’ in supply, and labour and capital as being mobile, economists came to believe that assets varied along a spectrum of adaptability. The recognition of the ‘margin’, the point where development was worthwhile or possible, was the most significant development in economic thinking in the later 1800s. Key figures in this advance in thinking were William Jevons in England, Carl Menger in Austria and Léon Walras in France.
There was no major contribution to leading international economic thinking from 19th-century New Zealand. Economics was restricted to minor adaptations of imported ideas, such as the development of rating according to unimproved value.