The Truth About High Land Prices

1126th EDITION SUMMER 2018 The Truth About High Land Prices

1126th 1126th 1126th EDITION EDITION EDITION SUMMER 2018 SUMMER 2018 SUMMER 2018 The Truth About The TruthThe About Truth About High Land Prices High LandHigh Prices Land Prices Summer 2018 Progress is supported by a grant from the Number 1126 Henry George Foundation of Australia - www.hgfa.org.au First published 1904 Printed by The Print Press - (03) 9569 4412

Editor ABOUT Karl Fitzgerald Prosper Australia is a 127 year old advocacy group. It seeks to move the base of government revenues from taxing individuals Publisher and enterprise to capturing the economic rents of the natural Prosper Australia Inc endowment, notably through land tax and mining tax.

Send contributions to: [email protected] JOIN US PROGRESS is the journal of Please join our organisation, Prosper Australia. Membership Prosper Australia costs $30.00. This includes a subscription to Progress. Earthsharing Australia www.prosper.org.au/join Land Values Research Group Progress subscription only $15 – overseas subscriptions $35.00. Contact Prosper Australia ProsperAustraliaInc @Prosper_Oz 64 Harcourt Street, North Melbourne Vic 3051 Earthsharing @earthsharing Tel: +61 (0)3 9328 4792 - [email protected] Realestate4ransom @property4ransom

Contact Information Related Organisations: ACT TAS Association for Good Government Prosper Australia (Tas branch) www.associationforgoodgov.com.au [email protected] [email protected] 03 6228 6486 02 6254 1897 8 Rosina Court, Mt Stuart TAS 7000

NSW Useful Websites Association for Good Government www.prosper.org.au [email protected] www.earthsharing.org.au 02 9698 2436 www.lvrg.org.au 122 Little Everleigh Street, Redfern NSW 2016 www.thedepression.org.au PO Box 251 Ulladulla NSW 2539 www.realestate4ransom.com www.3cr.org.au/economists QLD www.youtube.com/earthsharing Site Revenue Society www.grputland.com [email protected] www.hgfa.org.au 07 5574 0755 www.henrygeorge.org PO Box 8115 www.theIU.org Gold Coast Mail Centre QLD 9726 www.savingcommunities.org www.cooperativeindividualism.org WA www.earthrights.net Georgist Education Association (Inc.) www.progress.org www.gea.org.au www.schalkenback.org [email protected] www.earthsharing.org 0497364124 www.lincolninst.edu PO Box 472 Bassendean WA 6934 www.sharetherents.org Contents

Editorial by Karl Fitzgerald ...... 4

The Truth About High Land Prices by Bryan Kavanagh...... 5

Geoists in History: Francois Quesnay by Karl Williams ...... 22

Common Sense Prosperity by Mark Hassed...... 26

“But even if we could learn to live without food, clothing, and shelter, we would still be dependent upon land for a place upon which to stand. And if we remember that air is also nature-produced, and is therefore land, it becomes clear that we would be unable to breathe without land. But even if man could live without breathing, man would still need the sun to keep him from freezing to death; and the sun, as well as its light, warmth and energy, is also included in the Poleco-ist’s meaning of land. Clearly, land is life itself!” Phil Grant, The Wonderful Wealth Machine

“…… let the historians write of wars, political struggles, and distress in social life. Let them write freely of the things that happened, and the suffering endured. But let them never mention land and the ownership of land as being the ultimate causes of these happenings.” Dr FWG Foat, The Silence of the Historians Editorial by Karl Fitzgerald This edition features a report by Bryan Kavanagh out the spending first’. Georgists may well choke on the implications of high land prices. It positions on such thinking, rightly critiquing that taxation is readers with a long-term perspective for how the not only to raise revenue, but to improve economic Australian economy will perform over the next behaviour. Respected economist Bob Gregory few years. But to look forward we must learn from (ANU) pointed out that the fall in indirect taxes the past and it is here that Bryan’s report excels. and company taxes post-2000 indicates that income taxes must increase in the future. The Wallis chart will be an eye-opener for many. It shows that property taxes in America at times With the pressures of climate change and the made up more than 40% of all revenues up until commodification of land driving inequality, we 1933, but have now been relegated to less than expect politics to become more radical. Taxes on 10% - as in Australia. monopoly rents will have to increase - rather than income taxes, Bob! Perhaps the most outstanding contribution in the piece is the socio-economic analysis provided in Philip Soos was featured on Renegade Econ- the Kavanagh-Putland Index (produced in con- omists episode 570 where he highlighted his junction with colleague Dr Gavin Putland). We favourite forecasting tools. Alongside annual all criticise politicians for doing this, or not doing real estate sales growth (the KPI index), Soos that; we occupy Wall Street; we riot in Paris. Can mentioned the importance of the debt acceler- Australia offer the conclusion that we are ulti- ator, auction clearance rates, and sales to new mately driven by how comfortable we are feeling listing ratios. The science of economic analysis about the level of mortgage debt we are carrying? is genuinely improving in the world of heterodox economics. And the mainstream? After 27 years of continuous growth and the Reserve Bank sitting on their hands for 28 con- Philip has kindly offered Prosper supporters free secutive meetings, many now understand that access to the 810 page Bubble Economics ebook interest rates are dead in the water as a count- that he co-authored with Paul Egan. Talk about er-cyclical measure. If interest rates increase, they summer reading - visit the prosper website! will crash the market. If they are further reduced, we may well see further property speculation. News regarding Renegade Economists radio is Have policy makers learnt? that after 573 shows over 11 years the show will scale back. It’s time to focus more on research My colleague Emily Sims and I recently visited and video production. December 19th will be the Parliament House, Canberra where we met with last weekly show. The show will go monthly from five MPs and their officers. This was based on February 2019. A recent comment from a show- the political expediency of the Unspoken Alter- highlighted the cry of humanity. natives to Expensive Housing report featured in the previous edition of Progress. We received All my life I have observed creative people a response from the office of the Opposition unable to create due to not owning land.. i Treasurer Chris Bowen within hours of sending yearn to grow food…to be able to be with the a meeting request. Liberal MP John Alexander soil…but how ? I live in a bus to avoid the rental was a standout, with his knowledge of Land Value costs but must always move on….i see large Capture and his wonk-like ability to reel numbers tracts of land owned by one old person….a few and policy strategies out one after the other. animals graze where i could create a garden of Some MPs really are thinking! Eden….creativity and the gifts of good people lie fallow because we cannot secure a place on We tied these meetings in Canberra to the Earth to grow ….what can we do ? I seek a way. Australia Institute’s Revenue Summit. There we heard Richard Denniss postulate how tax revenues don’t matter much - ‘you have to figure This edition is crafted for just such a pathway.

4 PROGRESS Summer 2018 PROGRESS Summer 2018 5 The Truth About High Land Prices by Bryan Kavanagh

come to reverse an old maxim, so that reward has What's up? become its own virtue: but predation and greed need to be called out, and banking deceit and cor- Led by the residential sector, Australia’s real estate ruption has been integral. Repetitive boom-busts markets have bubbled for the last 22 years. It’s not in land prices call for moderate sections of left and doom-saying in view of the data to suggest a crash right to join forces in belated tax reform. is inevitable, and declines in prices and turnover in Sydney and Melbourne during 2018 are highly On the proposition that the natural income for suggestive of economic recession in 2019-20. Aus- people is their wages and that the natural income tralians have a sensitive hip-pocket nerve and will for the community is its land rent, the bursting of the dismiss a federal government of any persuasion in Australian real estate bubble affords an excellent crushing fashion at the election following a bub- opportunity to begin to abolish the massive dead- ble-burst recession. weight applied to the economy by land prices and the taxing of labour and capital. We can have either Financial collapse in Australia will be exacerbated ongoing prosperity or escalating taxes and land when recession hits the US in 2026. prices: history shows we can’t have both.

The evidence is in. Division along left v. right lines is Reform is urgent. We need to know the truth about a vast distraction, serving the interests of banking land prices and other seekers of unearned income only. We’ve

4 PROGRESS Summer 2018 PROGRESS Summer 2018 5 phenomenon of declining wages and debt-laden Economics' black hole economies. Meanwhile, like light into a black hole, publicly-generated land rent is being sucked into Land isn’t a produced commodity like a car or private pockets, especially those of an elite 0.1%,1 refrigerator. It was just ‘there’, having no cost of as productivity is suppressed by taxation and production. Therefore, analyses which ascribe skyrocketing land prices. Although the process is high land prices to supply and demand—as extremely regressive, it has come to be accepted.

“The theory of valuation is a pragmatical exetension of economic theories relating to value and price, but it is remarkable to find that there is an almost complete dissociation between economic theory and the theory of valuation, although the latter from the materialistic viewpoint stands in the forefront of the social sciences.”

Principles and Practice of Valuation

J.F.N. Murray

if demand can “call forth supply” where land The business model of banking has become one supply is fixed—are wrong. These ghosts need of control fraud and lax risk management, banks to be laid to rest, because they are the wraiths having no compunction in offering easy credit to upon which real estate bubbles—and to a lesser inflate land booms, and their own super-profits, extent, bond and share market bubbles, and the at great cost to mortgagors. Through habit, the declining value of money—are built. combination of consumer ignorance and banking complicity has come to make these financial pa- Real estate valuers—appraisers in the USA, thologies invisible. chartered surveyors in the UK—study economics in gaining their qualification, but the reverse isn’t true: economists aren’t taught the theory of real estate valuation. If they were, they’d know Taxation's deadweight that population, zoning, size, shape, topography, location, supply and demand all affect a site’s US economist Martin Feldstein has calculated rent, but its price is determined by (a) how little income tax injects two dollars of excess burden the government taxes its rent, (b) to what extent (deadweight loss) into the economy for each dollar banks are prepared to advance credit against the levied. ("Tax Avoidance and the Deadweight Loss site’s price, and (c) to what level interest rates of the Income Tax",2 National Bureau of Economic are manipulated by central banks. It’s not widely Research, Working Paper No.5055, March 1995.) understood that the price of a site represents That means for every dollar of income tax raised, the private capitalisation of its net rent, i.e., net the community is two dollars poorer. This excess of public charges, as with the valuation of any burden, along with the deadweight of other taxes, developed piece of real estate. So, if site rents acts to halve potential real wealth creation. Accord- were captured instead of taxes, the ‘price’ of ingly, governments are called upon to treat the det- access to land would simply be the payment of its rimental social fallout from taxation and rising land land rent. There would be virtually no land prices. prices. These vicious effects include the tax-inflated On this basis land would be freely available. prices of goods and services, excessive household debt and burgeoning welfare costs. Policymakers are largely unaware that the capture of land rent offers an alternative to escalating 1 http://review.chicagobooth.edu/economics/2017/article/ land prices, taxation, private and public debt. They never-mind-1-percent-lets-talk-about-001-percent therefore can’t respond effectively to the current 2 https://www.nber.org/papers/w5055

6 PROGRESS Summer 2018 PROGRESS Summer 2018 7 pay their natural resource rent in the same way “Pure rent is in the nature of a ‘surplus’ the rental of any going concern is assessed: that which can be taxed without affecting is, a 50/50 split of net profit before interest, tax, production incentives.” depreciation and amortization. Trifling royalties don’t fill this bill. Whilst miners’ capital investment Paul A Samuelson is welcome, they should to pay their fair share for the right to extract the country’s natural resources, because they are the nation’s common wealth.

Policymakers, including the OECD and IMF, do Understanding the forces aligned against them, occasionally acknowledge the public capture and overlooking the inordinate deadweight loss of land rent differs significantly from taxation from income tax, economists and tax lawyers in that (a) it carries no deadweight loss (b) it is therefore do what they consider may be achiev- the most efficient revenue base and (c) land able without political interference; that is, invest can’t flee the country. Yet it’s not on their reform their time setting up international agreements to agenda because politicians lack vision, choosing obviate tax avoidance and evasion. This involves to pander to powerful rent-seeking interests massive invasion of privacy via banks, stockbro- including the banking and mining sectors, who kers, real estate agents and other sources, and fight to ensure its rejection. This proved to be the requires Australia to collect taxes for more than case with the mining and land tax recommenda- one hundred countries, including Russia and China tions of the 2010 ‘Henry Tax Review’.3 - rather than press the case to abolish income taxes altogether. Meanwhile, the 2:1 deadweight of These recommendations were proposed as trade- income tax continues to cascade crazily through- offs for the abolition of more than 100 counter- out the economy. productive taxes, but came to nothing when the mining lobby spent some $22 million in advertis- Capture of land rent only, as opposed to the ing to oppose the introduction of the resource su- taxation of labour and capital, is at odds with per-profits tax (RSPT). Mining CEOs threatened to the neoliberal rubric that (a) “A mix of taxes is cancel mining projects if the tax was introduced the revenue option to which we should aspire

“Rent is the secret tax the wealthy charge the poor”

Joseph Stiglitz

- and ‘mum and dad investors’ would lose their in the 21st century.” (b) “We already have land- money. The proposed mining tax was excellent based taxes at local government.” (c) “There’s tax reform, but it was poorly presented by the not enough land rent, anyway.” But this rhetoric Rudd Labor government. Details of the RSPT could is countered by Joseph Stiglitz’s "Henry George have been released as early as January 2010, and Theorem"4, and economic insights from John its merits discussed at length, but release of the Locke "Some Considerations of the Lowering of proposal just before the May budget provided op- Interest"5 in 1691, to Mason Gaffney "The Hidden portunity for the mining companies’ arguments to Taxable Capacity of Land: Enough and to Spare"6 add confusion to a truncated political time frame.

There’s no reason mining companies shouldn’t 4 https://en.wikipedia.org/wiki/Henry_George_theorem 5 http://la.utexas.edu/users/ hcleaver/368/368LockeSomeConsiderationsAlltable.pdf 3 http://taxreview.treasury.gov.au/Content/Content. 6 http://www.masongaffney.org/publications/G2009-Hidden_ aspx?doc=html/home.htm Taxable_Capacity_of_Land_2009.pdf

6 PROGRESS Summer 2018 PROGRESS Summer 2018 7 Distribution of GDP - Australia Tax Land (rent) Land (“capital gains”) Labour & “capital” 100% 0%

90% 10%

80% 20%

70% 30%

60% 40%

50% 50%

40% 60%

30% 70%

20% 80%

10% 90%

0% 100% 1910 1920 1930 1940 1950 1960 1970 1980 1990 1000 2010

Sources: ABS, Dwyer (2003) in 2009, to the effect that all taxation comes out if their vastly different effects upon the economy of rent (ATCOR) and excess burden comes out are to be properly understood. of rent (EBCOR) anyway; so why not collect it from land values in the first instance - without the Note: The studies have been conducted on a shoe- excess burden? string, and Prosper Australia appreciates financial support8 for this groundbreaking work. Contrary to modern economic textbooks underes- timating land rent to occupy between 1% and 4% of the economy only, former Australian Treasury tax expert Dr Terry Dwyer bothered to assess it Historical context in detail in "The Taxable Capacity of Australian Land and Resources"7 (Australian Tax Forum, In 15th century England, Lancelot the unskilled Volume 18 Number 1, 2003, pp.21-67). Dwyer's labourer had between 50% and 65% of his income paper provides extensive data demonstrating the left after providing food, clothing and accommo- use of "land-based revenues are sufficient to allow dation for his family of five. He might have said total abolition of company and personal income tax." something to the effect:”Me and my wyfe Alice have (p.40) more than enuff shillings to have Elinor, Rauf and Edmond educated at the abbey school and married Dr Gavin Putland’s chart from Prosper Australia’s offe welle. How goode is lyfe!” Of course Cuthbert “Trickle-Up Economics: Assessing the impact of pri- the skilled carpenter had even greater discretion- vatized land rent on economic growth” moreover ary spending or saving - from 66% to 73% of his demonstrates the squeeze being applied to wages wages. Not bad, eh? That would have been more and wealth-generating profits by the growth in than sufficient for Cuthbert and Lancelot to have land prices and taxes. Clearly, it would be advan- been able to buy a car, TV, computer, and then tageous to keep a lid on land prices and taxes, if some—for cash—had they been invented. not to abolish them. Higher wage levels resulting from the Black Death Prosper Australia is the only body to have were seen in the late 1300s, but that particular produced distributional studies showing the passage of the plague ended in 1350, and the counterproductive role played by land prices and effects had dissipated by 1415. Political events, taxes. These analyses make a worthy case for the including the War of the Roses, may have interrupt- national accounts to assess extractive ‘economic ed this ‘Merrie England’, but wages remained high rents’ separately from wealth-generating incomes throughout the century. Such levels were not to be

7 http://thedepression.org.au/wp-content/uploads/2016/11/ 8 https://www.prosper.org.au/ The-Taxable-Capacity-of-Australian-Land-and- newsletters/?page=CiviCRM&q=civicrm/contribute/ Resources-2003.pdf transact&reset=1&id=1

8 PROGRESS Summer 2018 PROGRESS Summer 2018 9 seen again, at least for the skilled carpenter, until “Attempts were constantly made to reduce the establishment of railways at the end of the these wages by Act of Parliament, the legis- 1820s, the increased role of municipal land value lature frequently insisting that the Statute of capture from the mid-nineteenth century, and the Labourers should be kept. But these efforts 1880s land boom. were futile; the rate keeps steadily high, and finally becomes customary, and was rec- So, how’re you travelling, dear reader? You’re ognised by parliament. It is possible, that as the saving between 50% and 73% of your income distribution of land for terms of years became after food, clothing and shelter, no doubt? You’re habitual, the phenomenon of which has often not! Why aren’t you better off than 15th century been noted of peasant proprietorship, a high Lancelot or Cuthbert then? Read on! rate of wages paid to the free labourer, may

English Wages to Cost of Living (Family of Five) 1260 to 1887)

15/- 15/-

skilled carpenter 10/- 10/-

labourer 5/- 5/-

cost of living - family of five

1200 1300 1400 1500 1600 1700 1800 1900

Based on Rev WPD Bliss’ abbreviated version of Thorold Rogers’ “Six Centuries of Work and Wages”, Nov 1890

Free land? have been exhibited in the period on which I am commenting.” - Thorold Rogers, Six Centuries During the feudal system, from William the of Work and Wages: The History of English Conqueror to Henry VIII, the nobility provided Labour, 1884. land for their underlings upon payment of the ground rent. There were also the rent-free So, for a rare period in the 15th century, the commons, available for anyone from the lower labourer had proven worthy of his hire. Today’s classes to work separately from their appointed workers, unions, business people and commen- lands. The ground rent collected for the running tators might like to consider whether free land of the kingdom was shared between the Crown, is indeed the mechanism to deliver inflation-free the Lords of the land, and the Church; one of the high wages, profits and prosperity? jobs of the latter being to help manage cases of human misfortune. Capture of the land rent and the existence of the commons had the effect of making land available to all who needed it, regard- "Have I got a deal for you!" less of their station in life. Real estate transfers ("To make you even more depended on the rental value of land, the value dependent!") of the improvements erected upon it and the number of serfs working the land. As there was Things changed. In the first half of the sixteenth no manufactured ‘shortage’ of land, land prices century, King Henry VIII spent beyond Crown as we know them today were unknown. No land income, as though money was going out of prices as such ……. amazing, is it not? style. His wars and extravagant lifestyle saddled England with such debt that he sought to recover The Lords had resented the 15th century’s regime his situation by (a) debasing the currency (b) of high wages: ‘rack-renting’, i.e. raising rents excessively (c)

8 PROGRESS Summer 2018 PROGRESS Summer 2018 9 levying additional taxes (d) capturing 50% of the Thankfully for their Lordships though, Henry VIII rent of common lands taken by his aristocracy in had resolved their unhappy plight by rediscov- ‘enclosures’ as Crown income, and (e) dissolving ering the ‘scarce land’ formula of Ancient Rome monastery lands and selling them off to the aris- - about which Pliny the Elder had warned: “Lati- tocracy. Feudalism had ended with the transition fundia perdidere Italiam” which broadly translates: from tenure of land as ‘common property’ to one “Listen, guys, we big landowners are doing Italy over, of contrived, scarce ‘private property’. This was and this won’t end well!” He was aware the spoils the first and worst “privatization”, forcing people from Rome’s expansionary wars wouldn’t repair to pay again for what was already theirs. the inequality at home.

Hard times set in as sections of the lower Pliny’s nephew, Pliny the Younger, actually classes were deprived of easy access to witnessed his uncle’s horrible death from a land, many coming to experience poverty distance at the eruption of Vesuvius in 79 AD. In and dispossession for the first time. a letter to his friend Calvisius Rufus providing a detailed description of an adjoining property, he Henry’s son, the precocious King Edward VI, had sought financial advice about buying the property, an idea to repair his father’s legacy, however. We obviously dismissing his uncle’s concerns about ought to pray for the poor in words he devised the Roman aristocracy laying field to field: must be read out at church each Sunday:-

Now let me tell you the price at which I think “We heartily pray Thee to send Thy Holy Spirit I can purchase the property. It is three million into the hearts of them that possess the pastures and grounds of the earth, that they, sesterces, though it has previously sold for remembering themselves to be Thy tenants, five million. But owing partly to the general may not rack or stretch out the rents of their hardness of the times, and partly to its being houses or lands, nor yet take unreasonable thus stripped of tenants, the income of the fines or moneys, after the manner of covetous estate is reduced, and consequently its value. worldlings: but so let them out that the inhab- Pliny the Younger, Letters, XXXVI.9 itants thereof may be able to pay the rents,

and to live and nourish their families, and Younger Pliny expressed his concerns about remember the poor. purchase of the parcel of real estate in a manner that might easily have been written by one of Give them grace, also, to consider that they today’s prospective investors, unaware, or in are but strangers and pilgrims in this world, denial perhaps, about real estate speculation having here no dwelling place, but seeking dispossessing the plebs and bringing an end to one to come; that they, remembering the short empires. continuance of this life, may be content with that which is sufficient, and not join house to house, and land to land, to the impoverishment of others; but to behave themselves in letting "We are not a highly-taxed their tenements, lands and pastures, that after people" is nonsense, says this life they may be received into everlasting habitations.” - Book of Private Prayer, 1553 Cobden! (the year Edward VI died, at 15 years of age.) In a parliamentary speech on the abolition of the Corn Laws in 1842, the English social reformer Prayer remains religion’s response to privat- Richard Cobden deplored the retrogression from ized land tenure: people must accept their lowly land held in common to a tenure which commod- position in life in comparison to the owners of ified land as 'private property': land, and God forbid that “The land shall not be sold, because you’re just passing through” should ever be taken literally!

9 https://www.bartleby.com/9/4/1036.html

10 PROGRESS Summer 2018 PROGRESS Summer 2018 11 Land rent as a % of public revenue

100% 1216

1366

1466

11% 1536 1660 4% 1714 1793 95% 90% 75% 50% 25% 20% 17% 1816 1842 1050 1150 1250 1350 1450 1550 1650 1750

It certainly was only when the power of the state was upon that valuation that the land-tax was had fallen into the hands of a landed oligarchy charged. that the people were taxed in order to exempt the landowners. At the time of the conquest, - Richard Cobden: Corn Bill, Burdens on Land and for the succeeding 150 years, the propor- (HC Deb 14 March 1842 vol 61 cc519-81) tion of tax contributed by the land amounted to nineteen-twentieths of the whole revenue Banks inflate and financialize land prices by of the kingdom. From that period down to the accepting them as mortgage security. Hence, reign of Richard the 3rd, the proportion con- we have today's mountainous levels of mortgage tributed by the land was nine-tenths; thence, debt. Therefore, those commentators inclined to to the time of Mary, it was three-fourths; to

“As soon as the land of any country has all become private property, the land-lords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce”

Adam Smith

sneer at the feudal system might contemplate the end of the Commonwealth it was one-half; whether the 15th century public capture of land to the time of Anne one-fourth; in the time of rent may have had something going for it, despotic George 1st one-fifth; of George 2nd one-sixth; kings notwithstanding? for the first thirty years of George 3rd one-sev- enth; from 1793 to 1816 one-ninth; and from that time to the present only one-twenty-fifth. The land-tax was a fraudulent evasion, for it was in reality a substitution for feudal tenure. Classical economists saw the The land was formerly held by right of feudal need to tax land rent away services. The honourable gentleman quoted a Classical economists, including Adam Smith, passage from Blackstone, describing the com- David Ricardo and John Stuart Mill wrote of the mutation of feudal services into a land-tax of need for public capture of the ground rent that 4 shillings in the pound on the real rental. Now measured locational advantage if monopoly was could anyone suppose that land would always to be avoided, and if labour and capital were to remain at the valuation of 1692? And yet it

10 PROGRESS Summer 2018 PROGRESS Summer 2018 11 receive their fair reward. It was the clear-sighted arguing they are complementary. The remedy analysis of 'The land question' in the American referred to in the subtitle of Progress and Poverty, Henry George's "Progress and Poverty"10 in 1879, “An inquiry into the cause of industrial depressions however, that came to pose the greatest threat to and of increase of want with increase of wealth … the established mindset. The Remedy”, was proposed only after George had carefully disposed of all the arguments that The heart of “Progress and Poverty” was that might be put against the public capture of land wages and capital’s net return were residuals, rent. i.e. the remainders, after rent had been extracted from the proceeds of production. As land rent The release of George’s “Progress and Poverty” in is generated by social demand and public in- 1879 proved timely, because from 1880 to 1890 vestment, rather than the contribution of any investors turned their attention to real estate individual, it’s owed equally to all, said George. deals and financial chicanery. Joblessness rose Therefore, land rent needs to be captured behind a façade of prosperity and busy work that publicly, because product less rent leaves Mark Twain had labelled “The Gilded Age”. wages and ‘interest’—the net profit of produced capital—untaxed and intact. The incomes of So when the bubble burst into the economic de- labour and capital are the true ‘private property’. pression of the 1890s, Henry George’s call for the public capture of the ‘economic rent’ of land Henry George further explained that the earned struck a resounding chord of public recognition. incomes of labour and capital rise and fall together, inversely to (privatized) land rent. Notable Australian conservatives were Although land prices may also rise when public impressed by Henry George’s thesis, but incredi- collection of land rent increases, this will be a bly by today’s standards, a book about economics function of productivity having also risen, i.e. became a special hit with working people. The of increased wages, profits and prosperity. The Australian Workers Union was founded in 1886

“As produce = Rent + Wages + Interest, therefore Produce - Rent = Wages + Interest.

Thus wages and interest do not depend upon the produce of labor and capital, but upon what is left after rent is taken out;...”

Henry George

case remains valid, however, that if all land rent with the principles of “Progress and Poverty” were to be captured to the public purse, there front and centre. The English translation of Karl remains nothing left to be privately capitalised Marx’s “Das Kapital” published the following year into a land price. But our current financial model commanded a substantial but lesser following. serves the interests of banking and rent-seekers at great cost to the wider community. Surely Although it’s ironic that Marx is today the better then, free land on payment of its rent—with no known figure, it’s understandable, because taxation at all—should be a happy prospect? George’s simple “fiscal adjustment” posed an existential threat to the privileged interests who Unlike his contemporary Karl Marx’s “Capital”, were feeding off land rent. The burial of George’s and at least implicitly in Thomas Piketty’s “Capital ideas was not accidental. in the Twenty-First Century”, George saw no irrec- oncilable conflict between labour and capital, Henry George’s three month tour of Australia from March to early June of 1890, just as the 1880s real estate bubble was ending, acted to confirm 10 http://www.henrygeorge.org/pcontents.htm

12 PROGRESS Summer 2018 PROGRESS Summer 2018 13 to workers that their declining position had been against George between 1886 and 1914. Professor a casualty of the boom. It made sense to them Mason Gaffney’s Neo-classical Economics as a that production and employment had suffered Stratagem against Henry George 11 in “The Cor- when investment had shifted into property spec- ruption of Economics” (Shepheard-Walwyn Ltd, ulation. [A thorough account of George’s ener- London, 1994) provides detail on the many efforts vating trip around New South Wales, Victoria, made within academia to subvert George’s case. Queensland and South Australia, in which he The income streams to land and capital became spoke to 56 receptive audiences in 38 towns and one. There was no moral difference between the cities, is given in John Pullen’s “Nature’s Gifts: two, and certainly no such thing as unearned The Australian Lectures of Henry George on the land income. Universities were founded with Ownership of Land & Other Natural Resources”. compliant chairs in economics, and by WWI an (Desert Pea Press, Sydney, 2014)] acquiescent study had disposed of intellectual rigour to conflate two of the three classical The onset of the 1890s depression fostered economic incomes; those of land and capital. the formation of further labour unions and the Here in all its glory was ‘neoclassical economics’, establishment of labour parties within the Aus- born into the world to underpin and endorse the tralian colonies. The national Australian Labor private capture of publicly-generated land rent. Party (ALP) was founded when the Australian The conservative academic Eugen Bohm-Bawerk colonies federated into a Commonwealth and and Alfred Marshall, the doyen of English econ- six State governments in 1901. Amongst other omists, saw through and roundly criticised John goals, the ALP would ensure there was to be no Bates Clark’s sleight of hand but were ignored by repetition of the land speculation and financial most academic economists. corruption of the 1880s. Fortunately, a marked contrast existed between Consequently, by 1911, Labor governments-in-co- economic academia and the practical politics alition and the 1910 Fisher Labor government of the time. The US was awash with Henry had (a) granted full suffrage to women (b) George-influenced mayors who included Tom L selected a site for the federal capital where Johnson,12 Newton D Baker,13 Hazen Pingree,14 land was to be held on the basis of leasehold Brand Whitlock,15 and Edward Robeson Taylor,16 tenure (c) introduced a federal land tax, and (d) all of whose cities prospered as they engaged set up the Commonwealth Bank of Australia against rent-seeking and corruption. as a public competitor to the private banks. In what has become known as the Progressive Era Meanwhile in England, the House of Lords (1890-1920), in which ‘Henry Georgists’ loomed rejected the land tax component of the Asquith large, Australia vied only with New Zealand in Liberal government's 1909 "People's Budget",17 leading the world with such major social reform. even though it meant breaking the longstanding tradition that the House of Lords wouldn’t reject budgetary measures. The Tories sought distraction from the reformatory zeal against rent-seek- The powers that be retaliate ers, so the Liberals became “treasonous” for wanting to reduce the number of proposed Dread- “Progress and Poverty” became so popular in America that self-interest impelled power and nought battleships from six to four, as argued by privilege to respond. Academia was to be the staging ground to carry the fight, but rather than challenge the classical economists who’d also 11 http://www.masongaffney.org/publications/K1Neo-classical_ Stratagem.CV.pdf advocated the taxing away of land rent, Henry George was to be appointed the bête noire against 12 https://en.wikipedia.org/wiki/Tom_L._Johnson whose ideas a new economics was to be founded. 13 https://en.wikipedia.org/wiki/Newton_D._Baker (“He’s an autodidact, for God’s sake!”) 14 https://en.wikipedia.org/wiki/Hazen_S._Pingree 15 https://en.wikipedia.org/wiki/Brand_Whitlock John Bates Clark became the willing leader of a 16 https://en.wikipedia.org/wiki/Edward_Robeson_Taylor counterattack in which he directed some 24 works 17 https://en.wikipedia.org/wiki/People%27s_Budget

12 PROGRESS Summer 2018 PROGRESS Summer 2018 13 Chancellor of the Exchequer, David Lloyd George. the name of the game in mid-1920s America, The conservatives’ cry “We want eight, and we highlighting a dive in land value capture at that won’t wait!” took hold within a wider population time. Proliferation of the attractive ‘Californian gripped by fear that war with Germany was indeed bungalow’ dwelling characterised an identical in the air. Therefore the government was forced bubble in Australian land prices. However, these to accede to the production of six Dreadnoughts. land bubbles have been almost written out of history in the wake of the stark and more-impres- In the event, the aristocracy proved more willing sive 1929 stock market crash. to send young men (including its own sons) off to the “war to end all wars” than to help foot the bill. Government intervention became necessary Whether inspired by Richard Cobden’s attack on during the Great Depression, but the US federal the low-level public capture of land rent, or simply government appeared precluded by law from as a matter of improved governance, land-based resorting to a land tax . (It wasn’t, actually. It could revenues had grown appreciably at local govern- have levied a tax on the State “privilege” of being ment in the latter half of 19th century England, a land holder.) As there was no restriction against and the upper class had had enough of it! taxing land income, the incomes taxes introduced

Property and Income Tax Shares (Including OASDI)of All Government Revenues 0.6

0.5

0.4 Income Tax Share

0.3

0.2 Property Tax Share

0.1

0 1900 1920 1940 1960 1980 2000

John Joseph Wallis, “American Government Finance in the Long Run: 1790 to 1990” Journal of Economic Perspectives, Volume 14, Number 1, Winter 2000, Fig. 1, p.71

Property taxes also grew at state and local gov- during the depression and WWII were allowed to ernment levels in the USA, capturing back to the settle in for the long term, coming to exceed 50% public purse some of the increases in property of all taxation, whilst property taxes tanked to values brought about by massive capital works 10%. programs, rising at times between 1900 and 1933 to more than 40% of all revenues. Despite the tag “progressive” attached to Those who claim taxing land rent to be ‘commu- income tax, the dead hand of the taxation nistic’ are faced with the first 25 years of the 20th of wages and earned profits arrived with a century being regarded as one of capitalism’s vengeance to work its deadweight losses upon most prosperous periods, notwithstanding WWI. productivity and prosperity, and to let real This was capitalism indeed, and it was progress- estate monopolists and speculators off the ing well until another bout of land speculation hook. struck in the mid-1920s.

Over the last six years, Australian income tax has ranged between 57.0% and 59.1% of all taxation, Eruption of income tax and property taxes from 8.6% to 10.8%. Had land incomes been taxed only, it would have been im- Commencing in Florida, real estate became possible to achieve current levels of worldwide

14 PROGRESS Summer 2018 PROGRESS Summer 2018 15 private debt - in which Australia now ranks at ers supporting growing numbers of asset-wealthy number one. retirees. History demonstrates that rent-seekers will try to support the status quo by crying During the progressive era, Australia had relied crocodile tears for “the poor widow” in the family even more heavily than the US on charges on home, but genuine cases may be managed ef- land—at all three levels of government—as the fectively in the change by deferment of payment. nation constructed its roads, railways, dams, and This is superior effectively to providing subsidies reticulated power and water supplies. Australians’ for children who will inherit mum’s home. If in- forebears just got on with the job, understanding troduced gradually to ease the transition, this that infrastructure creates necessary efficiencies, would act to zip-fasten the ever-widening gap generates wages, profits and national wealth, all between the mega-wealthy 0.1% and all others. It without today’s pusillanimous “Where’s the money would also support payment of a universal basic to come from?” income to everybody, instead of often inadequate pensions to some The switch from stamp duty to In disrespect to its predecessors who worked council rates in the Australian Capital Territory18 to provide national infrastructure, Australia has over a period of 20 years offers a useful template become captive of the false neoliberal argument for how graduated change might work. that power supplies, highways, ports, airports, &c. must all be privatized. Extreme price rises in these services demonstrate that rent-gouging has taken place, underlining the earlier wisdom Singapore of public control of essential services and of the rents they deliver the nation. Prosperous Singapore is an interesting study in this regard. Thomas Stamford Raffles brought the idea of capturing land rent with him from the Dutch East Indies to found modern Singapore in Abolish income tax? 1819. Although Singapore has since introduced income taxation and a goods and services tax, The Great Depression and WWII may have been more than 75 per cent of the island remains public- no time to argue with the exceptional growth ly-owned and leased. Land is administered by the in income tax, but the indebted nature of world Singapore Land Authority, which levies an annual economies, considered against a background value tax on both leasehold and freehold property. of privatized and monopolized land, mineral and ‘Top up’ premiums to the 99-year leaseholds also spectrum rents—all of which amount to unearned contribute to public revenue. Singaporeans ap- ‘super-profits’, or privately expropriated land rent preciate the income stream from a proactive land —offers enormous potential to rectify the dead- tenure that keeps income taxes low. weight effects of income tax (and, for that matter, of the regressive taxation of goods and services). [Land tenure in Hong Kong has some similarity – as a result of Lord Aberdeen insisting to Governor Sir“Where Henry landPottinger is enclosed, that merchants the price of and land other and the creation of credit upon it As the political class fiddles around the landholderswill eventually should far contribute, outstrip the as abilitybeneficiaries of wage of earners to pay for it. Hence we edges of concocted tax rorts and privileg- “Where land is enclosed, the price of land and the creation of credit upon it “The“Whereget Crown’s” the real land freestate is enclosed, port.] cycle - the the cyclical price of termination land and the of creation building of activity credit uponfollowed it es, wage-earners and small businesses are will“Where eventually land is farenclosed, outstrip the the price ability of land of wage and earnersthe creation to pay of for credit it. Hence upon weit willthen eventually by a disruptive far outstrip land price-led the ability slump. of wage About earners every to 18 pay years for so it. far,Hence since we the required to shoulder the ever-increasing burden getrental the enclosures real state cyclebegan - the after cyclical 1800.” termination of building activity followed of international tax avoidance. The need for thenget the by real a disruptive state cycle land - the price-led cyclical slump. termination About ofevery building 18 years activity so far, followed since the then by a disruptive land price-led slump. About every 18 years so far, since the a tax shift from earned to unearned incomes rentalPhilip Jenclosures Anderson began after 1800.” has become obvious, and the response from rental enclosures began after 1800.” the political class “It can’t be changed now!” is Philip J Anderson Philip J Anderson sorely misguided. Boom-bustbubbles and the devastating periods of financial collapse continue financialization of land price to be summarily dismissed by economists as “a In The Secret Life of Real Estate and Banking19 devastatingnatural part ofperiods the business of financial cycle” collapse. continue Switching emphasis from reliance on income tax bubbles devastating periods of financial collapse continue (Shepheard-Walwynbubbles Publishers Ltd, 2009) Philip to be summarily dismissed by economists as “a to the taxing of economic rents also addresses 19 to be summarily dismissed by economists as “a 18AndersonIn The https://grattan.edu.au/news/following-the-act-land-tax- Secret carefully Life ofdocuments Real Estate the andseries Banking of land19 Afternatural America part of thecame business off the cycle” gold standard. in 1971, the issue of a declining number of income-earn- In The Secret Life of Real Estate and Banking19 natural part of the business cycle”. bubbles(Shepheard-Walwynapproach-boosts-growth-and-state-budgets/ that have occurredPublishers in Ltd, the 2009) USA Philipsince effectively taking the wraps off bank lending, (Shepheard-Walwyn Publishers Ltd, 2009) Philip 1800Anderson - and carefully the recessions documents that the have series followed of land greaterAfter America debt has came been off sacrificed the gold standardat the altar in 1971,of in- Anderson carefully documents the series of land After America came off the gold standard in 1971, theirbubbles burstings. that have That occurred these inoccur the USAin 18-year since creasinglyeffectively largertaking real the estate wraps bubbles. off bank Correlation lending, bubbles that have occurred in the USA since effectively taking the wraps off bank lending, 1800cycles, - withand thethe exception recessions only that of WWIhave and followed WWII, greaterbetween debt household has been debt sacrificed and the atwinding the altar back of inof- 1800 - and the recessionsPROGRESS that Summer have 2018followed 15greater debt has been sacrificed at the altar of in- 14 PROGRESS Summer 2018 istheir indeed burstings. a well-kept That secret! these As occur the last in bursting18-year taxingcreasingly land largerrent has real become estate obvious.bubbles. By Correlation providing their burstings. That these occur in 18-year creasingly larger real estate bubbles. Correlation wascycles, in 2008,with the the exception next will be only 2026! of WWI and WWII, easybetween credit household to inflate debt land andprices, the bankswinding purposely back of cycles, with the exception only of WWI and WWII, between household debt and the winding back of is indeed a well-kept secret! As the last bursting disregardtaxing land the rent welfare has become of mortgagors obvious. Byin favourproviding of is indeed a well-kept secret! As the last bursting taxing land rent has become obvious. By providing Inwas The in 2008,Power the in next the willLand: be 2026!unemployment, the theireasy creditshareholders to inflate - landand prices,it of course banks purposelybecomes was in 2008, the next will be 2026! easy credit to inflate land prices, banks purposely profits crisis and the land speculator20 (Shep- necessarydisregard thefor welfarebanking’s of mortgagorsupper echelons in favour to deny of disregard the welfare of mortgagors in favour of heard-WalwynIn The Power inPublishers the Land: Ltd,unemployment, 1983) English the thetheir existenceshareholders of bubbles - and itif ofthe course cycle becomesis to be In The Power in the Land: unemployment, the their shareholders - and it of course becomes author-economistprofits crisis and theFred land Harrison speculator examined20 (Shep the- allowednecessary to playfor banking’s out once uppermore. echelonsIt’s also revealing to deny profits crisis and the land speculator20 (Shep- necessary for banking’s upper echelons to deny 18heard-Walwyn year land boom-bust Publishers cycle Ltd, and 1983) was Englishone of thatthe existencebanks, having of bubblestaken part if inthe setting cycle theis termsto be heard-Walwyn Publishers Ltd, 1983) English the existence of bubbles if the cycle is to be aauthor-economist handful of economists Fred Harrison to 'call' examinedthe 1990 andthe ofallowed reference to play for outthe once2018 more.Royal It’sCommission also revealing into author-economist Fred Harrison examined the allowed to play out once more. It’s also revealing 200818 year recessions. land boom-bust cycle and was one of Misconductthat banks, having in the takenBanking, part Superannuation in setting the terms and 18 year land boom-bust cycle and was one of that banks, having taken part in setting the terms a handful of economists to 'call' the 1990 and Financialof reference Services for the Industry2018 Royal,22 precluded Commission any into in- a handful of economists to 'call' the 1990 and of reference for the 2018 Royal Commission into As2008 the recessions. definition of a scientific explanation is its vestigationMisconduct ofin thethe Banking,macroeconomic Superannuation effects and of 2008 recessions. Misconduct in the Banking, Superannuation and ability to forecast a particular event accurately, bankFinancial lending. Services Industry,22 precluded any in- Financial Services Industry,22 precluded any in- mainstreamAs the definition media's of a capitulationscientific explanation to the mantra is its vestigation of the macroeconomic effects of As the definition of a scientific explanation is its vestigation of the macroeconomic effects of thatability "banks to forecast are too a big particular to fail!" isevent a pitiful accurately, call to Bybank implication, lending. they were fearful the financial ability to forecast a particular event accurately, bank lending. mainstreaminaction against media's fraud. capitulation It's also of to notethe mantrathat of curse of land price bubbles standing as ‘security’ mainstream media's capitulation to the mantra thatthe 12 "banks economists are too whobig toforecast fail!" is the a pitiful 2008 callglobal to forBy implication,impossible levelsthey wereof mortgage fearful the debt financial might that "banks are too big to fail!" is a pitiful call to By implication, they were fearful the financial financialinaction againstcrisis, thosefraud. whoIt's alsoweren't of notespecifically that of havecurse been of land exposed. price bubbles Banking standing has clearly as ‘security’ become inaction against fraud. It's also of note that of curse of land price bubbles standing as ‘security’ supportersthe 12 economists of the ideaswho forecast of Henry the George 2008 globalbroke masterfor impossible of the economy, levels of no mortgage longer its servant.debt might the 12 economists who forecast the 2008 global for impossible levels of mortgage debt might withfinancial neoclassical crisis, those economics' who weren't tradition specifically to ac- have been exposed. Banking has clearly become financial crisis, those who weren't specifically have been exposed. Banking has clearly become supportersknowledge ofthe the overarching ideas of Henry influence George of broke real Fortunately,master of the we’re economy, advised no the longer economic its servant. recovery supporters of the ideas of Henry George broke master of the economy, no longer its servant. withestate neoclassical debt on boom-bust economics' cycles. tradition (Dirk Bezemer, to ac- which always seemed to be “just around the with neoclassical economics' tradition to ac- "Noknowledge one saw the this overarching coming: understandinginfluence of realthe Fortunately,corner” with we’reeach advised“green shoot” the economic and “the recovery light at knowledge the overarching influence of real Fortunately, we’re advised the economic recovery financialestate debt crisis on throughboom-bust accounting cycles. (modelsDirk Bezemer,".21) whichthe end always of the tunnel”seemed has to arrived.be “just However, around lowthe estate debt on boom-bust cycles. (Dirk Bezemer, which always seemed to be “just around the "No one saw this coming: understanding the interestcorner” withrate eachpolicies “green and shoot” the cheap and “thefunding light ofat "No one saw this coming: understanding the corner” with each “green shoot” and “the light at Afinancial scientific crisis explanation through of accounting boom-bust models cycles ".shows21) share-buybacksthe“Debt end ofthat the can’t tunnel” disguise be repaid, has the arrived. other-worldlywon’t beHowever, repaid” reality low financial crisis through accounting models".21) the end of the tunnel” has arrived. However, low land prices to be the culprit, so it’s astounding that ofinterest Wall Streetrate policies and ‘The and City’, the as cheap compared funding to the of interest rate policies and the cheap funding of A scientific explanation of boom-bust cycles shows livesshare-buybacksMichael of ordinary Hudson disguise folk. Private the other-worldly debt levels reality have A scientific explanation of boom-bust cycles shows share-buybacks disguise the other-worldly reality land prices to be the culprit, so it’s astounding that overtakenof Wall Street those and that ‘The existedCity’, as whencompared the globalto the land prices to be the culprit, so it’s astounding that of Wall Street and ‘The City’, as compared to the 19 https://www.amazon.com/Secret-Life-Real-Estate-Banking/ financiallives of ordinarycrisis exploded folk. Private in 2008, debt and levels the havenew lives of ordinary folk. Private debt levels have dp/0856832634 gildedovertaken age lurchesthose that onward, existed towards when its the inevitably global overtaken those that existed when the global 1920 https://www.amazon.com/Secret-Life-Real-Estate-Banking/https://www.amazon.com/Power-Land-Inquiry- financial crisis exploded in 2008, and the new 19 Unemployment-Speculation/dp/0856831093dp/0856832634 https://www.amazon.com/Secret-Life-Real-Estate-Banking/ damningfinancial conclusion.crisis exploded in 2008, and the new prices dp/0856832634 gilded22 https://financialservices.royalcommission.gov.au/Documents/ age lurches onward, towards its inevitably dp/0856832634 gilded age lurches onward, towards its inevitably 2021 https://www.amazon.com/Power-Land-Inquiry-http://www.heterodoxnews.com/htnf/htn85/No%20one%20 Signed-Letters-Patent-Financial-Services-Royal-Commission. 20 https://www.amazon.com/Power-Land-Inquiry- Since 1984, Australia’s total land values have Unemployment-Speculation/dp/0856831093saw%20this%20coming.pdf pdf Unemployment-Speculation/dp/0856831093 22 https://financialservices.royalcommission.gov.au/Documents/ 22 https://financialservices.royalcommission.gov.au/Documents/ increased 23.5 times, averaging an increase of 21 http://www.heterodoxnews.com/htnf/htn85/No%20one%20 Signed-Letters-Patent-Financial-Services-Royal-Commission. 21 http://www.heterodoxnews.com/htnf/htn85/No%20one%20 Signed-Letters-Patent-Financial-Services-Royal-Commission. saw%20this%20coming.pdf It'spdf the PRIVATE debt, stupid! 10% per annum. Average seasonally-adjusted saw%20this%20coming.pdf pdf nominal GDP growth has tracked at just 6.6% per 16 PROGRESS Summer 2018 It’s no longer an open question that rent-seeking annum. This represents a great return for buyers PROGRESS Summer 2018 17 activity represents stolen productivity rather than and landholders (who produce nothing which 16 PROGRESS Summer 2018 ‘prudent savings for a secure future’. However, wasn’t there in the first place), but it’s extractive PROGRESS Summer 2018 17 16 PROGRESS Summer 2018 PROGRESS Summer 2018 17 16 in common with other western economies, and counter-productive in nature. An errant tax instead of erecting a ground rent barrier atop the system actually encourages such activity as ‘ineconomic cliff, Australia chooses to employ a vestment savings’. Banks are intimately involved, fleet of ambulances to carry away the casualties offering easy credit against escalated land prices, at the bottom. and inflating them further to generate ‘super-profits’. The ABS omission of land prices from the Each ambulance bears its own registration: CPI—in favour of including far less volatile rents— ACCC, AFCA, AHRC, APRA, ASIC, ATO, FWC, disguises their incredibly inflationary effect in PBO, PC, RBA, but fails in its mission because what’s said to be a low inflationary environment. it can be no replacement for a proactive fiscal policy which taxes away economic rent. From the outset of the 1970s the world has transi- Australia’s land values tioned deeper into rent-seeking in land and 6000 $bn $5765.3 bn “Nothing to

natural resources, the ills of which indigenous 5000 see here. There is no peoples always understood instinctively - but bubble!” ‘educated’ people know better. Although chattel 4000 slavery has been abolished, the modern slave is 3000

remain unrewarded as long as central banks and Total land prices to GDP: Australia If we 3.5 governments underwrite private banking’s confi- 3.28 dence trick of pushing up market land prices to 3.0 widen social fracture and increase poverty. Unfor- 2.5

2.0 tunately, far from economics being at a leading 1.79 1.56 edge in the twenty-first century it has regressed 1.5

into fraught mathematical models that ignore the 1.0

vast deadweight effects of taxes and land prices. 0.5 0.45 0.45 0.0 1911 1932 1953 1959 1989 2017

Based on Dwyer, T., “The Taxable Capacity of Australian Land and Resources”, and ABS 5204, Table 61 A forensic look at soaring land

16 PROGRESS Summer 2018 PROGRESS Summer 2018 17 “Debt that can’t be repaid, won’t be repaid”

Michael Hudson

damning conclusion. prices

Since 1984, Australia’s total land values have increased 23.5 times, averaging an increase of It's the PRIVATE debt, stupid! 10% per annum. Average seasonally-adjusted nominal GDP growth has tracked at just 6.6% per It’s no longer an open question that rent-seeking annum. This represents a great return for buyers activity represents stolen productivity rather than and landholders (who produce nothing which ‘prudent savings for a secure future’. However, wasn’t there in the first place), but it’s extractive in common with other western economies, and counter-productive in nature. An errant tax instead of erecting a ground rent barrier atop the system actually encourages such activity as ‘ineconomic cliff, Australia chooses to employ a vestment savings’. Banks are intimately involved, fleet of ambulances to carry away the casualties offering easy credit against escalated land prices, at the bottom. and inflating them further to generate ‘super-profits’. The ABS omission of land prices from the Each ambulance bears its own registration: CPI—in favour of including far less volatile rents— ACCC, AFCA, AHRC, APRA, ASIC, ATO, FWC, disguises their incredibly inflationary effect in PBO, PC, RBA, but fails in its mission because what’s said to be a low inflationary environment. it can be no replacement for a proactive fiscal policy which taxes away economic rent. From the outset of the 1970s the world has transi- Australia’s land values tioned deeper into rent-seeking in land and 6000 $bn $5765.3 bn “Nothing to

not in chains, but in debt, serfdom neoclassical 2000 economics has practised to make invisible. 1000 $245.1 Political parties, unions, monetary reformists, 0 1984 Commonwealth Grants Commission and ABS 5204 Table 61 2017 religions, human rights advocates, universal basic income supporters, and environmentalists will remain unrewarded as long as central banks and If we “Debt that can’t be repaid, won’t be repaid” Total land prices to GDP: Australia 3.5 governments underwrite private banking’s confi- 3.28 Michael Hudson dence trick of pushing up market land prices to 3.0 widen social fracture and increase poverty. Unfor- 2.5

2.0 “Debt that can’t be repaid, won’t be repaid” tunately, far from economics being at a leading 1.79 1.56 edge in the twenty-first century it has regressed 1.5

“DebtMichael that Hudson can’t be repaid, won’t be repaid” into fraught mathematical models that ignore the 1.0

damning conclusion. vastprices deadweight effects of taxes and land prices. 0.5 0.45 0.45 Michael Hudson 0.0 1911 1932 1953 1959 1989 2017

Since 1984, Australia’s total land values have Based on Dwyer, T., “The Taxable Capacity of Australian Land and Resources”, and ABS 5204, Table 61 damning conclusion. pricesincreased 23.5 times, averaging an increase of It's the PRIVATE debt, stupid! A10% forensic per annum. look Average at soaring seasonally-adjusted land nominal GDP growth has tracked at just 6.6% per damning conclusion. pricesSince 1984, Australia’s total land values have It’s no longer an open question that rent-seeking increasedannum. This 23.5 represents times, averaging a great return an increase for buyers of activity represents stolen productivity rather than and landholders (who produce nothing which It's the PRIVATE debt, stupid! Since10% per1984, annum. Australia’s Average total seasonally-adjusted land values have ‘prudent savings for a secure future’. However, wasn’t there in the first place), but it’s extractive 16 PROGRESS Summer 2018 increasednominal GDP 23.5 growth times, has averaging tracked atan just increase 6.6% per of PROGRESS Summer 2018 17 in common with other western economies, and counter-productive in nature. An errant tax It’s no longer an open question that rent-seeking 10%annum. per This annum. represents Average a great seasonally-adjusted return for buyers It'sinstead the of erectingPRIVATE a ground debt, rent barrierstupid! atop the system actually encourages such activity as ‘in- activity represents stolen productivity rather than nominaland landholders GDP growth (who has produce tracked atnothing just 6.6% which per economic cliff, Australia chooses to employ a vestment savings’. 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The easyABS creditomission against of escalatedland prices land from prices, the it can be no replacement for a proactive fiscal atEach the bottom.ambulance bears its own registration: andCPI—in inflating favour them of including further to far generate less volatile ‘super-prof rents—- policy which taxes away economic rent. From ACCC, AFCA, AHRC, APRA, ASIC, ATO, FWC, its’.disguises The ABS their omission incredibly of inflationaryland prices effectfrom the in the outset of the 1970s the world has transi- EachPBO, PC,ambulance RBA, but bearsfails inits its ownmission registration: because CPI—inwhat’s saidfavour to beofAustralia’s includinga low land inflationary values far less volatileenvironment. rents— tioned deeper into rent-seeking in land and 6000 ACCC,it can beAFCA, no replacement AHRC, APRA, for ASIC,a proactive ATO, fiscalFWC, disguises$bn their incredibly inflationary$5765.3 bn effect“Nothing toin natural resources, the ills of which indigenous 5000 see here. PBO,policy PC, which RBA, taxes but failsaway in economic its mission rent. because From what’s said to be a low inflationary environment.There is no peoples always understood instinctively - but bubble!” itthe can outset be no of replacement the 1970s thefor aworld proactive has transifiscal- 4000 ‘educated’ people know better. Although chattel Australia’s land values policytioned whichdeeper taxes into awayrent-seeking economic in rent.land Fromand 6000 slavery has been abolished, the modern slave is 3000$bn $5765.3 bn “Nothing to see here. thenatural outset resources, of the 1970sthe ills theof whichworld hasindigenous transi- 5000 Australia’s land values not in chains, but in debt, serfdom neoclassical 2000 There is no 6000 tionedpeoples deeper always intounderstood rent-seeking instinctively in land - andbut bubble!” economics has practised to make invisible. 4000$bn $5765.3 bn “Nothing to 1000 natural‘educated’ resources, people knowthe ills better. of which Although indigenous chattel 5000 see here. $245.1 slavery has been abolished, the modern slave is 3000 There is no peoples always understood instinctively - but 0 bubble!” Political parties, unions, monetary reformists, 4000 1984 Commonwealth Grants Commission and ABS 5204 Table 61 2017 ‘educated’not in chains, people but inknow debt, better. serfdom Although neoclassical chattel 2000 religions, human rights advocates, universal basic slaveryeconomics has hasbeen practised abolished, to makethe modern invisible. slave is 3000 income supporters, and environmentalists will 1000 $245.1 not in chains, but in debt, serfdom neoclassical 2000 remain unrewarded as long as central banks and 0 Total land prices to GDP: Australia If we Political parties, unions, monetary reformists, 1984 2017 economics has practised to make invisible. 3.5 Commonwealth Grants Commission and ABS 5204 Table 61 governments underwrite private banking’s confi- 1000 3.28 religions, human rights advocates, universal basic $245.1 3.0 dence trick of pushing up market land prices to 0 Politicalincome supporters,parties, unions, and environmentalistsmonetary reformists, will 1984 2017 widen social fracture and increase poverty. Unfor- 2.5 Commonwealth Grants Commission and ABS 5204 Table 61 religions,remain unrewarded human rights as advocates,long as central universal banks basic and Total land prices to GDP: Australia If we 2.0 tunately, far from economics being at a leading 3.5 1.79 incomegovernments supporters, underwrite and privateenvironmentalists banking’s confi will- 1.56 3.28 1.5 edge in the twenty-first century it has regressed 3.0 remaindence trickunrewarded of pushing as longup market as central land banks prices and to Total land prices to GDP: Australia If we into fraught mathematical models that ignore the 1.0 3.52.5 governmentswiden social fracture underwrite and privateincrease banking’s poverty. Unforconfi- 3.28 vast deadweight effects of taxes and land prices. 0.5 3.02.0 dencetunately, trick far offrom pushing economics up market being land at aprices leading to 0.45 0.45 1.79 0.0 1.56 widenedge in social the twenty-first fracture and century increase it poverty.has regressed Unfor- 1.52.51911 1932 1953 1959 1989 2017 Based on Dwyer, T., “The Taxable Capacity of Australian Land and Resources”, and ABS 5204, Table 61 1.02.0 tunately,into fraught far mathematicalfrom economics models being that at ignorea leading the 1.79 1.56 edgevast deadweight in the twenty-first effects centuryof taxes itand has land regressed prices. 1.50.5 A forensic look at soaring land 0.45 0.45 into fraught mathematical models that ignore the 1.00.0 1911 1932 1953 1959 1989 2017

vast deadweight effects of taxes and land prices. 0.5Based on Dwyer, T., “The Taxable Capacity of Australian Land and Resources”, and ABS 5204, Table 61 0.45 0.45 0.0 1911 1932 1953 1959 1989 2017 A forensic look at soaring land Based on Dwyer, T., “The Taxable Capacity of Australian Land and Resources”, and ABS 5204, Table 61 16 PROGRESS Summer 2018 PROGRESS Summer 2018 17 A forensic look at soaring land

16 PROGRESS Summer 2018 PROGRESS Summer 2018 17

16 PROGRESS Summer 2018 PROGRESS Summer 2018 17 Kavanagh-Putland Index, Australia, 1972-2017 Index (estimated ratio of property sales to GDP) Y/Y change in index

30% 2004 2008 2015 1989 25% mid peak 20% 1973 mid peak bubble 15%

10%

trend suggests productivity is losing out to real estate 5% prices, more than 75% of which are land prices

50%

25%

0% Keating Rudd Hewson defeated defeated Fraser Howard -25% loses the defeated defeated ‘unlosable’ Whitlam dismissed -50% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

2-year change, 1972-2018 75%

50%

25%

market -25% recession pumped to avoid recession recession recession -50% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Sources: OSR(NSW), VG(Vic,NT), DERM(Qld), SRO(Tas), ACTPLA, Residex(NSW,Tas,NT), RP Data (NSW,Vic,Qld,WA,Tas,NT,ACT), Land Titles SA, Landgate(WA), CoreLogic, ABS.

18 PROGRESS Summer 2018 “Debt“Debt that that can’t can’t be be repaid, repaid, won’t won’t be be repaid” repaid”

MichaelMichael Hudson Hudson

damningdamning conclusion. conclusion. pricesprices

SinceSince 1984,1984, Australia’sAustralia’s totaltotal landland valuesvalues havehave increasedincreased 23.523.5 times,times, averagingaveraging anan increaseincrease ofof It'sIt's the the PRIVATE PRIVATE debt, debt, stupid! stupid! 10%10% perper annum.annum. AverageAverage seasonally-adjustedseasonally-adjusted nominalnominal GDP GDP growth growth has has tracked tracked at at just just 6.6% 6.6% per per It’sIt’s no no longer longer an an open open question question that that rent-seeking rent-seeking annum.annum. This This represents represents a a great great return return for for buyers buyers activityactivity represents represents stolen stolen productivity productivity rather rather than than andand landholderslandholders (who(who produceproduce nothingnothing whichwhich ‘prudent‘prudent savingssavings forfor aa securesecure future’.future’. However,However, wasn’twasn’t there there in in the the first first place), place), but but it’s it’s extractive extractive inin commoncommon withwith otherother westernwestern economies,economies, andand counter-productivecounter-productive inin nature.nature. AnAn erranterrant taxtax insteadinstead of of erecting erecting a a ground ground rent rent barrier barrier atop atop the the systemsystem actually actually encourages encourages such such activity activity as as ‘in ‘in-- economiceconomic cliff,cliff, AustraliaAustralia chooseschooses toto employemploy aa vestmentvestment savings’. savings’. Banks Banks are are intimately intimately involved, involved, fleetfleet of of ambulances ambulances to to carry carry away away the the casualties casualties offeringoffering easy easy credit credit against against escalated escalated land land prices, prices, atat the the bottom. bottom. andand inflating inflating them them further further to to generate generate ‘super-prof ‘super-prof-- its’.its’. TheThe ABSABS omissionomission ofof landland pricesprices fromfrom thethe EachEach ambulanceambulance bearsbears itsits ownown registration:registration: CPI—inCPI—in favour favour of of including including far far less less volatile volatile rents— rents— ACCC,ACCC, AFCA,AFCA, AHRC,AHRC, APRA,APRA, ASIC,ASIC, ATO,ATO, FWC,FWC, disguisesdisguises theirtheir incrediblyincredibly inflationaryinflationary effecteffect inin PBO,PBO, PC,PC, RBA,RBA, butbut failsfails inin itsits missionmission becausebecause what’swhat’s said said to to be be a a low low inflationary inflationary environment. environment. itit cancan bebe nono replacementreplacement forfor aa proactiveproactive fiscalfiscal policypolicy whichwhich taxestaxes awayaway economiceconomic rent.rent. FromFrom thethe outsetoutset ofof thethe 1970s1970s thethe worldworld hashas transitransi-- Australia’sAustralia’s land land values values tionedtioned deeperdeeper intointo rent-seekingrent-seeking inin landland andand 60006000 $bn$bn $5765.3$5765.3 bn bn “Nothing“Nothing to to naturalnatural resources,resources, thethe illsills ofof whichwhich indigenousindigenous 50005000 seesee here. here. ThereThere is is no no peoplespeoples alwaysalways understoodunderstood instinctivelyinstinctively - - butbut bubble!” bubble!” ‘educated’‘educated’ people people know know better. better. Although Although chattel chattel 40004000 slaveryslavery has has been been abolished, abolished, the the modern modern slave slave is is 30003000 notnot in in chains, chains, but but in in debt, debt, serfdom serfdom neoclassical neoclassical 20002000 economicseconomics has has practised practised to to make make invisible. invisible. 10001000 $245.1$245.1 PoliticalPolitical parties,parties, unions,unions, monetarymonetary reformists,reformists, 0 0 19841984 CommonwealthCommonwealth Grants Grants Commission Commission and and ABS ABS 5204 5204 Table Table 61 61 20172017 religions,religions, human human rights rights advocates, advocates, universal universal basic basic incomeincome supporters,supporters, andand environmentalistsenvironmentalists willwill remainremain unrewarded unrewarded as as long long as as central central banks banks and and TotalTotal land land prices prices to to GDP: GDP: Australia Australia IfIfexamine wewe examine land landprices prices further further by dividing by dividing them them by byGDP, GDP, the the GDP GDP denominator denominator will will adjust adjust for for Australia’sAustralia’s 3.53.5 governmentsgovernments underwrite underwrite private private banking’s banking’s confi confi-- 3.283.28 increasingincreasing population. population. It may It may be seenbe seen that that whereas whereas land land prices prices to to GDP GDP achieved achieved a a ratio ratio of of 1.561.56 atat thethe dencedence trick trick of of pushing pushing up up market market land land prices prices to to 3.03.0 outsetoutset of the of 1930s the 1930s depression, depression, the thecurrent current ratio, ratio, at 3.28at 3.28 times times GDP, GDP, is isportentous portentous of of major major collapse. collapse. widenwiden social social fracture fracture and and increase increase poverty. poverty. Unfor Unfor-- 2.52.5

2.02.0 tunately,tunately, far far from from economics economics being being at at a a leading leading 1.791.79 An additionalAn additional measure, measure, total total real real estate estate sales sales turnover turnover to toGDP GDP paints paints a a more-tellingmore-telling picturepicture of 1.561.56 edgeedge in in the the twenty-first twenty-first century century it it has has regressed regressed 1.51.5 Australia’sAustralia’s land landbooms booms and andbusts busts since since 1970, 1970, and and of Australianof Australian electoral electoral outcomes. outcomes. intointo fraught fraught mathematical mathematical models models that that ignore ignore the the 1.01.0 vastvast deadweight deadweight effects effects of of taxes taxes and and land land prices. prices. 0.50.5 The trendThe trend of Prosper of Prosper Australia’s Australia’s Kavanagh-Putland Kavanagh-Putland Index Index (KPI) (KPI) confirms confirms total total real real estate estate sales sales turnoverturnover 0.450.45 0.45 0.45 0.00.0 has outstrippedhas outstripped GDP GDP growth. growth. In terms In terms of Henryof Henry George’s George’s P –P –R R= W= W + +I, I,this this assists assists to to explain explain thethe un- 19111911 19321932 19531953 1959 1959 19891989 20172017 BasedBased on onDwyer, Dwyer, T., “TheT., “The Taxable Taxable Capacity Capacity of Australianof Australian Land Land and and Resources”, Resources”, and and ABS ABS 5204, 5204, Table Table 61 61 der-performanceder-performance of wages of wages and andearned earned profits profits as theyas they lose lose out out to tothe the privatization privatization of of land land rents. rents.

AA forensic forensic look look at at soaring soaring land land RecessionsRecessions in 1974/75, in 1974/75, 1982/83 1982/83 and and 1991, 1991, when when the the 2-yearly 2-yearly change change in in the the index index dropped dropped byby 25%,25%, suggestssuggests that athat real a realestate estate bubble bubble exists exists when when the the KPI KPI ratio ratio rises rises to to exceed exceed 15%. 15%. Therefore, Therefore, aa salessales ratio inratio excess in excess of 15% of 15%of GDP of GDP may may be seen be seen as definingas defining a real a real estate estate bubble. bubble. On On this this definition, definition, Australian Australian real estatereal estate turnover turnover has hasbeen been in bubble in bubble territory territory since since 1996. 1996. Significant Significant declines declines in in real real estate estate salessales in 1616 PROGRESSPROGRESS Summer Summer 2018 2018 PROGRESSPROGRESS Summer Summer 2018 20182008 2008and1717 2012and 2012 failed failed to prick to prick the thebubble bubble because because of: of:(a) (a) booming booming iron iron ore ore sales sales to to China; China; (b) (b) thethe moremore than $50than billion$50 billion dollars dollars spent spent by the by theRudd Rudd government government to tokeep keep the the real real estate estate bubble bubble inflated, inflated, and;and; (c) unprecedentedunprecedented low RBAlow RBA cash cash rates rates that that have have created created lower lower borrowing borrowing rates rates than than in in the the depthsdepths ofof the GreatGreat Depression. Depression.

AustraliaAustralia hasn’t hasn’t experienced experienced economic economic recession recession for for 27 27 years, years, but but the the recent recent year-on-year year-on-year changechange in thein two-yearly the two-yearly KPI, KPI,though though not notdefinitive, definitive, suggests suggests the the turning turning point. point. Subsequent Subsequent declines declines inin salessales turnoverturnover and pricesand prices in Sydney in Sydney and and Melbourne Melbourne during during 2018 2018 support support the the conclusion conclusion that that governments, governments, banksbanks and theand RBA the RBAhave have run runout outof tricks of tricks to keepto keep the the bubble bubble inflated. inflated. Investors Investors deserting deserting thethe market,market, and theand rollover the rollover of some of some $360 $360 billion billion of interestof interest only only mortgage mortgage loans loans23 23—to —to payment payment of of principal principal andand interestinterest over theover next the next three three years—will years—will exacerbate exacerbate the the decline. decline. Although Although the the market market will will favour favour prospec prospective homeowners,tive homeowners, the debtthe debt crisis crisis will willoverwhelm overwhelm the the economy. economy. The The length length and and breadth breadth of of the the greatestgreatest ever bubbleever bubble in Australia’s in Australia’s land land prices prices is an is anindictment indictment on on the the economic economic relevance relevance of of our our politicians,politicians, presagingpresaging a financial a financial collapse collapse of epic of epic proportion. proportion.

23 http://www.abc.net.au/news/2018-06-19/fears-as-interest-only-loans-roll-into-principal-plus-interest/988643023 http://www.abc.net.au/news/2018-06-19/fears-as-interest-only-loans-roll-into-principal-plus-interest/9886430

18 PROGRESS18 SummerPROGRESS 2018 Summer 2018 PROGRESSPROGRESS Summer Summer 2018 2018 19 So, what happens if we capture land rent instead of taxes?

1. Capitalized upfront land prices decline and taxes disappear.

2. Private monopolies are curtailed.

3. The price of a parcel of real estate becomes the value of improvements erected upon the land. (i.e. Housing is affordable!)

4. Goods and services are much cheaper, because they’re no longer inflated by taxes on the labour and capital required to supply them.

5. Property (land) speculation—an extractive siphoning-away process—gives way to increased productivity and wealth-creation.

6. GDP quickly surges, because taxes carrying deadweight loss of more than twice the amount levied are gone (a land rent charge carrying no deadweight loss).

7. Wages and earned profits rise - without generating inflation.

8. Savings increase as debt reduces.

9. Banks no longer make ‘super-profits’: nor require bailouts!

10. A universal basic income may be able to replace pensions.

11. Financial crime and corruption declines.

12. Without over-exploitation, the environment is able to be better-managed.

13. Rent-capture, the glue that binds the community, also brings moderate sections of the political left and right together.

14. Farmers don’t have to wait until they’re about to die to become wealthy.

15. The world’s a much better place - for everyone. (Yes, even for rent-seekers!)

Bryan Kavanagh is a member of Prosper Australia. He is a retired real estate valuer, having worked in the Australian Taxation Office and the Commonwealth Bank of Australia before co-founding a Melbourne-based real estate valuation consultancy in 1997.

Mr Kavanagh gratefully acknowledges the assistance of Dr Gavin Putland, Karl Fitzgerald, James Webster, Dr Terry Dwyer and Richard Meredith in the preparation of this document.

20 PROGRESS Summer 2018 PROGRESS Summer 2018 21 Near the window by which I write, a great bull is tethered by a ring in his nose. Grazing round and round he has wound his rope about the stake until now he stands a close prisoner, tantalized by rich grass he cannot reach, unable even to toss his head to rid him of the flies that cluster on his shoulders. Now and again he struggles vainly, and then, after pitiful bellowings, relapses into silent misery.

This bull, a very type of massive strength, who, because he has not with enough to see how he might be free, suffers want in sight of plenty, and is helplessly preyed upon by weaker creatures, seems to me no unfit emblem of the working masses.

- Henry George, “Protection or Free Trade”, 1886

“Put to the vote; as many are of the opinion that a public tax upon the land ought to be raised to defray the public charge say ‘Yea’.

Carried in the affirmative, none dissenting.”

- Philadelphia’s first tax law, 30 January 1693

20 PROGRESS Summer 2018 PROGRESS Summer 2018 21 Geoists in History Francois Quesnay (1694 - 1774) by Karl Williams

The founder of the first systematic school of a master surgeon. His course in life looked like political economy was actually the consulting being unremarkably comfortable at this point, as physician to France’s King Louis XV at Versailles. he married a Parisian grocer’s daughter when he He had been orphaned as a low-born boy but was 24 and settled down to practice medicine in later taught himself to read and thereby made the small town of Mantes, 50 km. west of Paris. meteoric advances in pre-revolutionary France, the epitome of class structure. Rags to riches But mediocrity was never going to be Quesnay’s doesn’t come any more extreme than this. bag. In a country totally dominated by royalty and nobles, he began his climb up the ladder Francois Quesnay was born on a farm outside of influence by becoming qualified as a ‘royal Paris to a humble ploughman and merchant, surgeon’ in 1723 and entered into the service of without the advantages of scholastic education. the Duke of Villeroy in 1734. He began to write At 12 he began to master the ability to read, at 13 medical treatises and, as his skills became he was orphaned and at 17 he was able to enter widely recognised, he took on more important into training as a Parisian engraver. positions. Aided by his natural charm, his rapid rise continued until he reached the pinnacle of Escaping the limitations of village life opened his profession in 1744 when he became personal up a world of opportunities for an intelligent and physician to the absolute ruler of France, King ambitious lad such as Francois, and he never Louis XV, and was installed in the insanely-fes- hesitated to jump at every prospect. He landed tooned Versailles palace. With the procession of an apprenticeship to a surgeon after which he some of the greatest minds in the western world studied medicine in Paris where he qualified as coming into direct contact with Francois’s bril-

22 PROGRESS Summer 2018 PROGRESS Summer 2018 23 liance and spirit of enquiry, it was only a matter An amazing group of logical and systemat- of time before an intellectual upheaval took ic thinkers formed around Francois, and this place. It did. It was the creation and develop- assembly came to be known as the physio- ment of logical economic thought. crats (meaning ‘governors of nature’). They ra- tionalised medieval economic ideals, employing Having the king’s ear comes at the price of at- to that end the more modern philosophical and tracting many jealous enemies only too keen scientific methods. Hence in their writings to stab one in the back, but Francois played there was a strange blend of conservative and his cards masterfully and abstained from the revolutionary thought and, to the modern mind, intrigues of court. Soon he was one of the some inconsistencies. They asserted in a club, being made a noble by the king (with his general way that prices were determined by the own coat of arms, no less) and was assigned cost of production and by supply and demand. his own apartments at the palace. Becoming They assumed that there would be a constant recognised as the ‘King’s Thinker’, he would fair price that was obtained under a regime regularly gather around him groups of eminent of free trade (it was Quesnay who coined the men to talk through solutions to the greatest term ‘laissez-faire’). Some economic historians problems facing humanity. It’s hard to imagine believe that the most significant contribution that history has ever seen a more fertile setting of the physiocrats was their emphasis on pro- for cultivating lofty ideas and revolutionary ductive work as the source of national wealth. means of achieving human progress. This is in contrast to earlier schools, in particular ‘mercantilism’, which often focused on Let’s pause here for a few words about the the ruler’s wealth, accumulation of gold, or the bizarre interplay between kings and nobles and balance of trade. the activities at court that Francois witnessed. Historically France’s kings had a weak position In brief, the Physiocrats famously argued for vis-à-vis their barons. To increase his indepen- their ‘single tax’ on landed property this way. dence the king impoverished the high nobility Any tax levied throughout the economy would by forcing them to be present at the Court, to be passed from sector to sector until it falls outmatch each other in luxury and to neglect upon the net product. As land is the only source their properties. The Palace of Versailles was of wealth, then the burden of all taxes ultimate- built in this tradition. ly bears down on the landowner. So instead of levying a complicated collection of scattered The high nobility constituted only half a percent taxes (which are difficult to administer and can of the population but ‘owned’ virtually all of cause temporary distortions), it is most efficient the land, leaving the rest in various forms of to just go to the root and tax land rents directly. serfdom. Francois soon saw this as the root of injustice and economic inefficiency, but could not openly declare that the landed class were parasites. As he grappled with his own new science of political economy, he had to dance around certain realities of the day. Neverthe- “Thus the form of assessment which is less, his writings and diagrams demonstrated the most simple, the most regular, the how the landed classes (nobility and church most profitable to the state, and the least obtained agricultural and industrial services burdensome to the tax-payers, is that which but did not contribute anything itself, and were is made proportionate to and laid directly on the rightful target of taxation. Yet Francois could the source of continually regenerated wealth not go so far as to incite rebellion from a united (land).” nobility, and it is estimated that Francois was only recommending that about a third of the economic rent from land be collected from his proposed land tax (the impôt unique, or single tax).

22 PROGRESS Summer 2018 PROGRESS Summer 2018 23 Quesnay’s system of political economy was to sell their output to the highest bidder nor buy summed up in his Tableau économique (1758), their inputs from the cheapest source. An even which diagrammed the relationship between bigger obstacle were the internal tariffs on the the different economic classes and sectors of movement of grains between regions, which society and the flow of payments between them. seriously hampered agricultural commerce. In his Tableau Quesnay developed the notion Public works essential for the agricultural sector, of economic equilibrium, a concept frequent- such as roads and drainage, remained in an ly used as a point of departure for subsequent awful state. Restrictions on the migration of ag- economic analysis. Of explicit importance was ricultural laborers meant that a nation-wide labor his identification of capital as avances—that is, market could not take shape. Farmers in produc- as a stock of wealth that had to be accumulat- tive areas of the country faced labour shortages ed in advance of production. His classification of and inflated wage costs, thus forcing them to these avances distinguished between fixed and scale down their activities. In unproductive areas, circulating capital. in contrast, masses of unemployed workers wallowing in penury kept wages too low and thus French agriculture at the time was trapped in a local farmers were not encouraged to implement morass of medieval regulations which shackled any more productive agricultural techniques. enterprising farmers. The monopoly power of the merchant guilds in towns did not permit farmers Quesnay’s principles rested upon his philosophy

24 PROGRESS Summer 2018 PROGRESS Summer 2018 25 of social ethics, on the restoration of human sol- Henry George himself wrote in his magnum opus, idarity, on the negation of economic nationalism, Progress and Poverty, on the doctrine of equal exchanges and natural liberty, and on the combination of moral discipline “The French Economists of the last century, with economic freedom. headed by Quesnay and Turgot, proposed just what I have proposed, that all taxation should Those who had influenced Quesnay were many be abolished save a tax upon the value of land”. and varied. While his rooms at Versailles had become a meeting place of great minds, his economic ideas were coloured by his early studies Of course, George would greatly polish and of Aristotle and Thomas Aquinas. But perhaps develop Quesnay’s ideas. the deepest influence on Quesnay came from China whose standardized system of taxation The French Revolution exploded onto the world and universal education he openly advocated. only a few decades after Quesnay’s ideas were The concept of natural order originated in China gaining strength among the thinking classes. and the Chinese believed that there can be good While the Revolutionary Constituent Assembly government only when a perfect harmony exists did actually establish a degree of land taxation between the ‘Way of Man’ (governmental institu- in December 1789, it wasn’t long before such tions) and the ‘Way of Nature’. In fact, the concept reforms were overwhelmed and swept away by all of the natural order of physiocracy originated the chaos of the revolution that was to follow. from Chinese Taoism. Furthermore, it is thought that the name and doctrine of “laissez-faire” was Thomas Paine was undoubtedly influenced by inspired by the Chinese concept of wu wei. the “economists” since while residing in France he visited and had a close association with the So these were the major influences on Quesnay, physiocrat, Condorcet. In his tract, Agrarian but whom did Quesnay influence in turn? Adam Justice, Paine advocated using the rent of land for Smith studied the work of the physiocrats ex- public revenue. tensively while residing in France, and as Smith became a geoist himself it’s not hard to speculate Quesnay died on December 16, 1774, having lived that this was, at least in part, because of Quesnay. long enough to see his great pupil, Turgot, in office Smith wrote that Quesnay’s set of proposals were as minister of finance as well as having a grandson “perhaps the nearest approximation to the truth become a member of France’s first Legislative that has yet been published upon the subject Assembly. But today the founder of the science of of political economy, and is upon that account political economy is almost unknown. Meanwhile well worth the consideration of every man who we witness economic policies ignoring the col- wishes to examine with attention the principles of lection of rent from land and instead endorsing that very important science”. In particular, Smith negative gearing, capital gains discounts and praised Quesnay’s anti-mercantilism, his repu- endless taxes on honest work. Those comical diation of money as the essence of wealth, and figures clowning around in powdered wigs were his condemnation of interference with natural certainly a lot closer to economic sanity than economic processes. Crucially, we can see from nowdays. Smith’s writings that he was firmly in agreement with Quesnay on the state collecting the economic rent of land.

To secure the greatest amount of pleasure Next issue: No. 69 in our series: George Grey - with the least possible outlay should be the the British soldier, explorer, governor of South aim of all economic effort... when everyone Australia, twice governor of New Zealand, does this the natural order, instead of being governor of Cape Colony (South Africa) and endangeredl be all the better assured.” the 11th premier of New Zealand.

24 PROGRESS Summer 2018 PROGRESS Summer 2018 25 Common sense prosperity by Mark Hassed

Our economic system should generate opportu- annually of the value of the land and natural nity, encourage employment and reward indus- resources they controlled, then all other taxes triousness. It should deliver a good standard of would be unnecessary. living to everyone. Let’s say the value of your property (land only not Yet, over 2.9 million (13.3%) of Australians live in counting improvements) is $200,000. Your total poverty1 and over 50% of Australians need Gov- household tax bill would be $12,000. You would ernment provided income support.2 Why is this pay that one bill and then be finished with taxation so? for the year.

The problem is caused by our tax system. You would not have to pay income tax, GST, sales tax, rates, company tax, FBT, duties, tariffs, excise, In essence, there are two things that Government CGT, WET, payroll tax nor the myriad of others. can tax: With these dead-weight taxes removed, prices of 1. Productive activity (for example working, goods and services would fall significantly saving, making things, buying things, selling things, providing services, employing people and Who could complain about an annual tax bill of so on). $12,000 if they and their spouse/partner got to keep 100% of their wages and the prices of goods 2. Use of land and natural resources. and services were lower?

Our current taxation systems rests very heavily There are even more advantages of our proposal, on number one. and much more lightly on number such as: two. This encourages wealthy citizens (and foreigners too) to buy up our land and natural • Avoidance is impossible resources and then rent them back to us. At last multinational companies and wealthy indi- The effects of this are polarisation of wealth, viduals pay their share. reduced employment, lower wages and higher prices for goods and services. • Compliance is simple

Prosper Australia advocates getting rid of all No arduous record keeping an expensive account- taxes on productive activity and for government ing. Just one simple payment like the rates. to rely entirely on taxes on land and natural resources for revenue (including naturaL monop- • Environmental responsibility is rewarded olies). Because you only pay for the land and resources If government were to do this, a big majority of you use, there’s an incentive to use less. Australians would be more prosperous. • Privacy is restored If everybody (including companies) paid 6% You no longer need to send the tax man details of all your finances and business dealings. 1 https://www.acoss.org.au/poverty/ 2 https://theconversation.com/factcheck-is-half-to-two- It sounds simple and it is. thirds-of-the-australian-population-receiving-a-government- benefit-41027

26 PROGRESS Summer 2018 PROGRESS Summer 2018 27 26 PROGRESS Summer 2018 PROGRESS Summer 2018 27