Prosper Australia

By Nadia Weiner, Director, Adam Smith Club, Sydney, Australia

Although Adam Smith is often quoted, the so-called “Father of Economics” has rarely been read, either by his detractors or his admirers. Consequently he is often misunderstood.

Smith, who made such a strong stand against the protectionist mercantile system of trade of his day, devoted over one third of his masterpiece An Inquiry into the Nature and Causes of the Wealth of Nations, to discussing the subject of government revenue and the methods by which it may be best collected, including new taxes. This is not generally known.

When examining the different forms of taxation, Smith adheres to four maxims which a good tax should conform to:

• “The subject of every State ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State.”
• “The tax each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, and the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.”
• “Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it.”
• “Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the State.”

Bearing all these things in mind, there are two types of taxation which obtain Smith’s recommendations: a tax on luxury consumables and a tax on ground-rents (the annual value of holding a piece of land).

On the subject of luxury consumables, he is adamant about the definition of ‘luxury’ and of ‘necessary.’ By his definition, a ‘necessary’ may vary from place to place and from time to time. At the time of his writing, linen shirts, leather shoes and a minimum of food and shelter were definitely to be regarded as essential to a minimum decent standard of living. Taxes on salt, soap, etc., he harshly criticised as inequitably taking from the poorest elements of society. Taxes on luxuries, which were to include tobacco, he considered excellent in that no one is obliged to contribute to the tax: “Taxes upon luxuries have no tendency to raise the price of any other commodities except that of the commodities taxed… Taxes upon luxuries are finally paid by the consumers of the commodities taxed, without any retribution.”

More deserving of praise is the tax on ground-rents: “Both ground-rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents, and the ordinary rent of land are, therefore, perhaps the species of revenue which can best bear to have a peculiar tax imposed upon them.”

Excise, customs, taxes on profits, were, according to Smith, either expensive to collect, as in the case of excise, or disincentives to produce, as in the tax on profits. He reserves harsh words for taxes which occasion the invasion of privacy, and on the subject of excise he says: “To subject every private family to the odious visits and examination of the tax-gatherers… would be altogether inconsistent with liberty.”

The harshest condemnation of all, however, was for taxes upon labour: “In all cases, a direct tax upon the wages of labour must, in the long run, occasion both a greater reduction in the rent of land, and a greater rise in the price of manufactured goods, than would have followed from a proper assessment of a sum equal to the produce of the tax, [levied] partly upon the rent of land, and partly upon consumable commodities.”

Mason Gaffney, Professor of Economics, University of California, Riverside

The following is the introduction to Professor Gaffney’s paper Neo-classical Economics as a Stratagem against Henry George, 5 July 1994.

This paper formed the basis of a book: The Corruption of Economics, Mason Gaffney and Fred Harrison, Shepheard-Walwyn (Publishers) Ltd, London, 1994. Buy the book

Introduction: The power of neo-classical economics

Neoclassical economics is the idiom of most economic discourse today. It is the paradigm that bends the twigs of young minds. Then it confines the fluorescence of older ones, like chicken-wire shaping a topiary. It took form about a hundred years ago, when Henry George and his reform proposals were a clear and present political danger and challenge to the landed and intellectual establishments of the world. Few people realise to what a degree the founders of Neoclassical economics changed the discipline for the express purpose of deflecting George, discomfiting his followers, and frustrating future students seeking to follow his arguments. The stratagem was semantic: to destroy the very words in which he expressed himself. Simon Patten expounded it succinctly. “Nothing pleases a… single taxer better than… to use the well-known economic theories… [therefore] economic doctrine must be recast” (Patten 1908, p.219; Collier, 1979, p.270).

George believed economists were recasting the discipline to refute him. He states so, as though in the third person, in his last book, The Science of Political Economy (George, 1898, pp.200-209). George’s self-importance was immodest, it is true. However, immodesty may be objectivity, as many great talents from Frank Lloyd Wright to Mohamed Ali and Frank Sinatra have displayed. George had good reasons, which we are to demonstrate. George’s view may even strike some as paranoid. That was this writer’s first impression, many years ago. I have changed my view, however, after learning more about the period, the literature, and later events.

Having taken shape in the 1880-1890s, Neo-Classical Economics (henceforth NCE) remained remarkably static. Major texts by Marshall, Seligman, and Richard T. Ely, written in the 1890s, went through many reprintings each over a period of 40 years with few if any changes. “It was for the Chautauqua Literary and Scientific Circle (1884) that I wrote the first edition of my Outlines, under the title Introduction to Political Economy. In this first edition of the Outlines there is to be found the general philosophy and principles that have shaped all future editions, including that of 1937″ (Ely, 1938, p.81).

Not until 1936 was there another major “revolution,” and that was hived off into a separate compartment, macro-economics, and contained there so as not to disturb basic tenets of NCE. Compartmentalisation, we will see in several instances, is the common NCE defense against discordant data and reasoning. After that came another 40 years of Samuelson’s “neoclassical synthesis.” J.B. Clark’s treatment of rent, dating originally from his obvious efforts to refute Henry George (see below), “has been followed by an admiring Paul Samuelson in all of the many editions of his Economics” (Dewey, p.430).

Clark’s capital theory “… gives the appearance of being specially tailored to lead to arguments for use against George” (Collier, 1979, p.270). “The probable source from which immediate stimulation came to Clark was the contemporary single tax discussion” (Fetter, 1927, p.142). “To date, capital theory in the Clark tradition has provided the basis for virtually all empirical work on wealth and income” (Dewey, 1987, p.429; cf. Tobin, 1985). Later writers have added fretworks, curlicues and arabesques beyond counting, and achieved more isolation from history, and from the ground under their feet, than in Patten’s dreams, but all without disturbing the basic strategy arrived at by 1899, tailored to lead to arguments against Henry George.

To most modern readers, probably George seems too minor a figure to have warranted such an extreme reaction. This impression is a measure of the neo-classicals’ success: it is what they sought to make of him. It took a generation, but by 1930 they had succeeded in reducing him in the public mind. In the process of succeeding, however, they emasculated the discipline, impoverished economic thought, muddled the minds of countless students, rationalised free-riding by landowners, took dignity from labour, rationalised chronic unemployment, hobbled us with today’s counterproductive tax tangle, marginalised the obvious alternative system of public finance, shattered our sense of community, subverted a rising economic democracy for the benefit of rent-takers, and led us into becoming an increasingly nasty and dangerously divided plutocracy.

The present paper purports to identify the elements of Neo-Classical Economics (NCE) that were planted there to sap and confound George, and show how they continue to warp, debase and vitiate much of the discipline called economics. Once a paradigm is well-ensconced it becomes a power in itself, a set of reflexes to sort the true and false. Any exception spoils the web of interpretation through which art seeks to make human experience intelligible. Only the young, the brave, the energetic, the sincere and the sceptical can break off such fetters. This work is addressed and dedicated to them.

By Fred E. Foldvary

Fred received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He has taught economics at the Latvian University of Agriculture, Virginia Tech, John F. Kennedy University, California State University at Hayward, the University of California at Berkeley Extension, and Santa Clara University.

Fred is also a researcher and author on public finance, governance, ethical philosophy, and land economics. He may be contacted by foldvary@pobox.com.

For the past hundred years, economics has been dominated by the neoclassical school of thought. Neoclassical guys have constructed a big mansion of economic theory, and some of the rooms look very elegant, but there are some parts of the house of neo-econ which are shoddy, badly constructed, incomplete, and designed from faulty blueprints. It needs a make-over.

Henry George, the late-19th-century economist and social philosopher, was good at juicing up and fixing drab, dull, clumsy economic doctrines. His followers, Georgists or geoists, can take a worn out economic theory and spruce it up into a shining object of utility and beauty. So let’s apply a Georgist eye to the broken doctrines of the neoclassical guy for an economic make-over.

Neoclassical guys like to talk about trade-offs. Resources are scarce while human desires are unlimited, so if you want more of one thing, you have to give up getting something else. This is true for goods, but the neos apply this also to the two outcomes we want from an economy, efficiency and equity. An efficient economy maximizes the output we can get from input resources. Equity means economic justice, how fair and equitable is the distribution of wealth.

The neoclassical guy says that if we want more equity, the cost is less efficiency, and if we want more efficiency, we have to sacrifice equity. That’s because in neo thought, a more equal distribution of income requires redistribution from the rich to the poor, and higher taxes on the rich reduce investment and production.

The problem here is that neoclassical guys suffer from economic amnesia. They know about land and rent, but they forget this when they think about anything else. One big reason for the inequality of wealth is the highly unequal income from land rent. If society shares this rent equally, there is no reduction in efficiency, and indeed there is greater efficiency.

Neoclassicals also forget to factor in the capitalization of public services into land rent. Public works pump up land rent, and if the landowners don’t pay for the works from that rent, their land value jumps up and this creates incentives for speculators to buy land to get that rent, driving land prices up even higher. Speculatively high land values then stop folks from getting land for current use. Tapping that rent eliminates the subsidy, and so land gets used more productively.

The Georgist eye can see that a shift from today’s punitive taxes towards public revenue from land rent would increase both efficiency and equity.

The neoclassical guy knows that land has a fixed supply, so tapping the rent creates no excess burden or deadweight loss for the economy. But this knowledge gets boxed in, compartmentalized. It’s stuck in the attic of the economic mansion and forgotten about in the other rooms. In contrast, the Georgist eye always keeps the whole mansion in mind. The neoclassical guy needs a theory make-over to tear down the walls he has constructed and get an economic blueprint that is whole and integrated. The Georgist will also take land theory from the attic and place it prominently in the living room.

Another faulty area of neoclassical thought is the producer surplus, the difference between the price of a good and the cost of production. The neoclassical guy draws a supply curve sloping up as some producers have higher costs and so need a higher price to be profitable. But the neoclassical guy also says that in a competitive industry, in the long-run, the firms only make normal profits, the usual returns to labor and assets. If profits are higher than that, firms will enter the industry to get those extra profits, driving the price down and squeezing out the profit.

But there is a contradiction here. If there is a producer surplus, a gain above costs and normal returns, how can there also be no economic profits? Neos don’t think about this, or else they get bewildered and end up relaxing the assumption of no economic profit. The Georgist eye can clear this up. In competitive markets, the owners don’t get the producer surplus; it goes to the input providers, but not to labor or capital goods. It goes to the factor which cannot move or expand, land. The producer surplus is land rent!

Neoclassical guys like to point out that price controls, such as minimum wages and rent controls, create problems such as more unemployment and a housing shortage. But they are perplexed about poverty. They say some controls and welfare programs may be required because in the market, some folks just end up poor. Again, the Georgist eye sees more clearly. Henry George explained why poverty persists in the midst of progress. The free market will eliminate poverty, but only if it is truly free of all trade barriers, including all taxes on production and exchange, and only if the rent is shared or tapped for public revenue.

The neoclassical guy is puzzled because he sees a grin but no body, while the Georgist eye can see it is the Cheshire cat. The fat cat is grinning, because he reaps what others sow, and the public can’t see the cat because their neoclassical economists don’t even know it’s there.

To do a complete make-over on the neoclassical guy, the Georgist needs to teach him the law of rent and the law of wages. This was in classical theory, but the neoclassicals threw it out when they tucked land in the attic. It’s simply a model with grades of land of decreasing productivity.

The least productive land in use is called the ‘margin of production,’ which is where the general wage level is set. After paying for wages and capital goods, the rest is a surplus that goes to rent.

If Georgists and geoists could do a make-over on all the neoclassical guys, what a difference it would make. Economists would put land rent at the center of economic policy, and soon the public would understand it, and policy makers could no longer ignore it. Poverty would be extirpated, the welfare state eliminated, and conflicts over land would diminish.

But to do this, the Georgist eye must see 20-20. The geoist eye needs a clear vision, not clouded by the astigmatism of statist monetary doctrines and the myopia of blaming corporations. The clear eye needs the ethical understanding that the only evil is coercive harm to others. The Georgist eye needs to understand the problem of mass democracy and its remedy, small-group voting. Only with this complete understanding, going a bit beyond classical thought, will the Georgist eye be able to turn the bumbling, stumbling neoclassical guy into a cool economics dude who is hip to the cause and cure of our economic woes.

Karl Williams, former President, Prosper Australia Inc.

200 Word Overview

Geonomics (’law of the Earth’) represents a completely different way of looking at The Earth. Starting from the self-evident (but ignored!) principle that The Earth (land and natural resources) should be the equal and common birthright of all humanity, a radically different set of economic and social principles emerge. However, the means to implement these principles is relatively simple - essentially, taxing land values rather than production.

That unemployment is inevitable in modern industrialised economies is not true. In economic terms, land has the unique qualities which gives landholders unique monopolist powers and the ability to make massive speculative profits while their land lies idle or under used while its value is rising.

At once we turn economic relations on their head by the collection of the land rent which will force landholders to put their land to full use (employing others and not wasting surrounding amenities) or passing the land titles on to those who can use it themselves. The flip side is that this massive source of government revenue allows us to phase out unfair, punitive taxes on production.

Many unique and urgently-needed environmental benefits flow from Geonomics - halting urban sprawl, encouraging sustainable agriculture and allowing us to put a true value on the intangible benefits of natural resources.

Geonomics encompasses a set of sweeping changes to the present economic systems based on a relatively simple adjustment to our tax system. It is based on a timeless philosophy that was elaborated upon to the greatest degree by the 19th century social philosopher and reformer, Henry George. The underlying philosophy is undeniably self-evident, but how far have we strayed from these noble ideals today?! It is that the Earth (land and natural resources) should be every person’s natural birthright - i.e. should be our equal and common inheritance - as it was not created by any person, but is rather the gift of Nature/God/The Universe. This should be the first listing in the UN Declaration of Human Rights, but it doesn’t even get a mention!

Universal land rights are central to Geonomics for not only indigenous peoples have been dispossessed, but nearly all of us find that we’re born on to a planet where “all the seats are taken” with the result that, effectively, we have to pay someone else for permission to live.

Land is not just a piece of dirt, but is the necessary “living space” integral with human existence - at least as long as the Law of Gravity holds! In economic terms, the nature of land also has unique qualities, including:

1. Being relatively fixed in supply (you can’t make any more of it)
2. Having a constant demand (we all need at least enough on which to stand)
3. It’s value is not built up by the landholder, but by the community (the all-important locational value of land would be nothing if not for the presence of population and tax-funded infrastructure).

Previous attempts to achieve land justice have all been flawed because they have clung to the sense of wanting to “own” the Earth like another mere commodity. Many indigenous peoples have reiterated that we belong to the Earth, rather than the Earth belonging to us. But in more economic terms, so called “land reform” that relies on outright land ownership in perpetuity is doomed to failure, in terms of social justice, because to “divvy up” land equitably is impossible for the following reasons:

1. Land has vastly different values. How can one divide up amongst the population central business district land, suburban land, rural & agricultural land, and wilderness?
2. Even if (1) could be overcome, land values change constantly. Sooner or later all would have unequal landholdings, depending on such circumstances as population movements and the siting of infrastructure such as roads, schools, electricity supply, the provision of irrigation etc.
3. Even if (1) & (2) could be overcome, what about next year? And the year after that, and after that ……? In other words, the newborn have missed out on the impossibly-fair divvy-up, not to mention immigrants and other newcomers who will constitute the new class of landless who happened to arrive too late.

Land is not confiscated

It should be stressed that Geonomics does not propose the confiscation of land in order to have some shared Commons, as to own a permanent home is an almost universal human need. The actual solution is elegantly simple, but with profound effects. It is this:-

In return for each individual’s exclusive use of Our One Earth, it is only fair that society be reimbursed for the loss of that resource. Therefore, each landholder should repay society a land rent (not at all an arbitrary tax) in precisely-calculated accordance with the value of the land holdings. That is, those who use more valuable land should pay more rent back to society based on the land value. Importantly, land titles and security of tenure remain as before.

This rent represents a potentially huge source of community/government revenue. But there is a flip-side to this revenue-raising equation.

A more just tax system

By collecting the land rent and thereby dispensing land justice based on our differing needs for Our One Earth, we can start to phase out taxes on production. These taxes are robbery! - why should someone be treated as a social nuisance and effectively fined every week through the imposition of, say, income taxes just because they work and support themselves and perhaps even provide employment for someone else? Therefore we have TWO forms of robbery which Geonomics eliminates:

• The economic rent (the technical term for rent based on land values) misappropriated by landowners. This rightly belongs to society.
• The taxes on production (income tax, sales tax, payroll tax etc.) which rob people for no justifiable reason at all.

The rationale for this type of reform could be summarised as:

• “What society does for you, you should return to society.”
• “What you do for yourself is rightfully yours.”

It should be noted that this principle certainly does not stand for any loony right-wing individualism - Geonomics only applies to the means of government revenue raising. So far as government expenditure is concerned, there is every means by which social welfare for the underprivileged can be made as before.

Unemployment

Arguably, the most serious problem in the world today is that of unemployment. All the think-tanks, political policy makers, social commentators and ordinary people will NEVER solve this absurdly-unnecessary problem unless the land problem is addressed first and foremost. Why call it “absurd”? - because on the one hand there are millions of people out of work who want to work and, on the other hand, there are endless needs for more work to be done (more teachers, carers for the elderly, builders of better housing & infrastructure etc.). Something is screwed up here! The key to this absurdity is the fact that we’ve made it profitable to make speculative profits through holding land idle or grossly under-used. The right land can be held until its value is built up by the community, then sold back to the community (who effectively pay for it twice, the first time through their taxes). Not only are there truly “unearned” forms of income here (and there are losers for each speculative winner), but essential land is kept idle or under used. And idle land equates to idle hands.

How can Geonomics encourage the full and efficient use of land? Essentially, it is because the land rent financially encourages the landholder either to use the land to its full potential (thereby creating a need to employ others to work on that land) or else to pass on the land to someone else who will do so. This is because the land rent remains fixed - so whether the landholder uses the land or not, that same rent is payable. One cannot keep land idle for long, for the land must be productively used in order to cover the rental dues belonging to society.

Taxes on pollution

Some taxes are necessary, such as carbon taxes and pollution taxes which discourage the abuse of natural resources. Similarly, taxes on alcohol and tobacco (forcing users, in effect, to pay for their future health costs) should remain. Other social undesirables, such as violent pornography, could also be discouraged through the tax system. However, the vast majority of taxes are those which fall on production - income, sales, company, payroll taxes etc., - and these not only rob people for no good reason (remembering that we are now collecting the land rent), but discourage real wealth creation. Encouraging truly productive activities will be as simple as ending the confiscation of part of their earnings! In other words, the private sector is given every incentive to create wealth and jobs because earnings will be retained rather than being taxed.

Historically, there have been huge campaigns mounted by a very few wealthy, vested interests to oppose this simple but fundamental change to our tax system. The traditional land barons and property developers have, more than anyone else, much to lose - what they will, in fact, lose are their privileges! Large landholders under the present system can simply sit on their land and wait for the community to build up its value as population grows and tax-funded infrastructure expands. The land can be kept unused, without penalty, until the community is prepared to bid what the landholder is prepared to accept. However, when the community is collecting the rent, the boot will be on the other foot. Labour will be in demand, as land is used as it should be.

If you were running an enterprise and arranged for the purchase of a large and expensive item of capital equipment (say, a printing press or a network of computers), how long would you wait to use it after it had been delivered? Paying millions of dollars for your purchase, no businessman in his right mind would let the shrink-wrap remain for a single day before immediately putting the item to full use? Have you then, ever wondered about multi-million-dollar blocks of land that are used as single-storey car parks in the city for years or, in the suburbs, as market gardens or simply as land which grows nothing but thistles? And all around live thousands who need that land in order to work - not to farm it, but to use its valuable location (why it’s so expensive in the first place) in order to produce goods and services. Collect the rent and there’ll be lots of busy hands and no more thistles!

But it’s not just in the private sector that there will be employment-producing, wealth-creating activity magically spring into being with the simple adjustment of taxing land values rather than production. Have you not also wondered why governments cannot afford to keep investing in badly-needed infrastructure such as roads, schools and public meeting places? It’s because the governments’ funds (OUR taxes) disappear into the “Black Hole” of land values!!! If we collect the rent this could never happen.

Rejuvenating public transport and community

To illustrate the point, let us look at something that’s long been neglected because of its expense - public transport. Rail networks are efficient and environmentally-friendly people-movers, but governments can’t afford to invest the hundreds of millions that are needed for a proper system because the investment goes, like all infrastructure spending, into improving land values. In order to recover part of its outlay, governments must set prohibitively-high fare structures which often, in the end, yield less revenue because people are so discouraged by the expense. But if we switched from the false principle of “user pays” to “beneficiary pays” and required the landholder to pay for the benefits conferred of a railway line being opened up, then such infrastructure could be self-funding. Here we would have a completely different ball game - with any infrastructure spending there would be increased land values and, importantly, more land rent to collect. With rent to collect, fares could be reduced. As fares are reduced, adjacent land becomes more desirable - hence there is more rent to collect. More rent means less fares means more rent means ……. until, in the end, the only question to answer is whether public transport should be free or whether some nominal charge should be imposed to make it appreciated and prevent unnecessary overuse.

Why not have magnificent botanical gardens in every single suburb? Because we’re not collecting the rent to pay for such quality of living and to encourage truly productive labour. Why not more public plazas, community facilities, sports grounds, public libraries? Because up until now the funds which paid for these facilities disappeared into the Black Hole. And besides the beautification of our surroundings, the improved quality of life for all and the boost to employment, isn’t it simply nicer to live as a community? We’ll still have our own houses and back-yards, but we’ll bring back the “village feel” to living, as we have common access to attractive shared facilities with our neighbours. Compare this to so-called Economic Rationalism which would have the “winners” in society living in private fortresses, like millionaires in Beirut! There is much more to say on these ideals, which address many social problems concerning urban alienation and anonymity - nut it out for yourself!

Open and just tax collection

In our truly civil society, massive resources will not be wasted on the tax system as they are now. We shall have professionally-qualified land valuers make an annual assessment on all land, taking into account access to all community-created amenities such as distance to schools and public transport, clarity of water and TV reception etc. and discounting for things such as noise and pollution from roads and factories. Everyone’s assessment will be supported by the factors taken into account, made more objective by computer-assisted comparisons between similar sites. Importantly, you’ll also be able to scrutinise your neighbour’s assessment and that of Kerry Packer. The system is virtually corruption-proof! And what about this: this tax cannot be evaded! No-one can shift it offshore or bury it in convoluted accounting transactions! Of all things on this planet, land is the one thing which cannot be hidden.

Furthermore, this will enable us to scrap the massive waste of having an army of Tax Department officials chasing an army of smart lawyers and creative accountants. This expensive absurdity produces ZERO wealth and, in any case, makes tax virtually optional for the rich. Moreover, it intrudes for no good reason into our private lives - why on earth should we be accountable for the income we earn or the goods we sell? And the compliance costs of filling in returns and forwarding remittances and keeping records and dodging taxes where possible through the black economy - isn’t this not only an unproductive way of spending our valuable time, but also a financial burden?

What’s the other barrier to employment - probably so accepted within our present paradigm that we can’t see it for what it is? It’s simply the price of land. Before anyone can undertake any work, unless they’re squatters, they need some land on which to stand. If they want to work more productively, that land will have passing traffic and surrounding amenities, and will be accessible to customers. But the big up-front barrier to self-employment (whether individually or collectively) is the vast amount (often representing decades of life savings) required to purchase land or the constant drain of loan repayments and interest. So what will change with Geonomics? Simply this - land will have no price!!! At the point where we’re eventually collecting the full site rent, the value of the surrounding amenities will be exactly offset by the rental dues to society. Here the zero (approximately) price of land (buildings and other improvements, of course, have retained their purchase price) will be asserted rather than fully explained, but it should be noted that when one is to purchase a property, one will be effectively bidding for the improvements and ensuring that one can make suitable use of the surrounding amenities which will be paid for through rental dues.

Globalisation - Glocalisation

The breathtaking changes brought about by this simple switch in the tax system go on and on. Urban sprawl will be greatly curbed - unused or under-used sprawling land will give way to a natural urban landscape. Cities will be much more compact, further encouraging public transport networks, cyclists and even pedestrians. Other great urban environmental problems will be dramatically curbed - cities sprawling over farmland and natural reserves, wastage of resources as pipelines and roads “leapfrog” over idle land, and time and fossil fuels being wasted because of daily commuting from distant suburbs.

Agricultural/rural problems? By basing the rental calculations on what is termed the “maximum sustainable yield”, farmers will be positively encouraged to farm sustainably as they will be saddled with the same fixed annual rent in perpetuity based on what the land is capable of producing in the long term. They will have to plan long-term in order to cover their rent. Again, technicalities won’t be discussed here.

Wilderness, natural reserves and other natural resources?

Today, they too often go to the person who makes the highest cash bid, with little accounting for externalities (detrimental effects impacting elsewhere). Furthermore, intangible benefits (ecological, aesthetic, recreational, spiritual and inherent worth) are rarely taken into account in determining land use as they are not traded on the market place and are not accorded a $ value. But the focus on land assessment (rather than the scrutinising of individual activities) positions Geonomics to factor all these items into a “good guess equation” to determine whether, say, the $ returns to the community through the rental collection will outweigh the benefits that society (non-human as well, if we like) would otherwise derive from preserving such an area. A good guess at the true value of land and natural resources is better than a wild guess, and a wild guess is better than no guess at all. This is the absurd state of things today with respect to “natural capital” - not even a guess is made of its value, and it can be depleted without affecting our Gross National Product at all.

This we also assert, (and debate it rather than laugh at it if you disagree) that Geonomics encompasses a set of “natural laws” that promote prosperity and social justice. These laws cannot be ignored without dire consequences - witness our endless economic problems despite every best effort as well as the advances of science. Geonomics is not a panacea for all economic and social problems, but without it there can be no solution to such problems. Many other problems would be addressed, directly and indirectly, by conforming to The Law of the Earth, such as inflation, high interest rates, foreign control and, if not already self-evident to you, the reader, great disparities of wealth.

Rewarding creativity

There will still be some lesser disparities of wealth, but not because of lack of opportunity. Some will prefer to live a life of voluntary simplicity, perhaps, and society requires little in return from those who reside on land with few surrounding amenities. On the other hand, some great inventors, sports persons, actors and authors, for instance, will earn much more than others if, in a free and fair market, people are prepared to pay for what those individuals demand for their services. But, mostly, all the great forms of privilege will be abolished, for the simple rule of not reaping what one has not sown will be our society’s guiding light. Other speculative forms of wealth can be discouraged through the tax system - for example, a 1% tax on foreign currency transactions and share market trading will discourage frenetic speculative activities but not those of genuine long-term investors. These speculative activities are just legalised forms of robbery - the massive profits that can be literally made in hours are taking wealth out of someone else’s pockets.

The good and inspiring society

The EarthSharing network truly represents The Good Society, and we want all to understand how we could simply bring about social justice and economic prosperity for all. Your willingness to understand and pass on the true laws of economics will be your personal contribution to achieving this noble ideal.

Written 1990/1991

Four of the West’s top economists – Nobel prize-winners Franco Modigliani, James Tobin, Robert Solow and William Vickery – were among the signatories to an open letter to Mikhail Gorbachev in 1990/1991. The economists urged the Soviet President to retain land in public ownership, and to raise government revenue by charging rent for the use of land.

Had he acted upon their advice Gorbachev may have strengthened his hand, but was unceremoniously dumped in favour of Boris Yeltsin. The Russian people have an especially deep feeling for their motherland, and socialising land rents for revenue and slashing all other taxes may well have struck a sympathethic chord. Yeltsin too, however, has been told by western powerbrokers that he must sell Russia’s patrimony – ‘freehold’ her land – as a pre-condition for western assistance.

The proposal to raise the greater part of government revenue from the rent of land – is a policy most clearly associated with Henry George, the American economist whose Progress and Poverty (1879) continues to claim the attention of social reformers. Leo Tolstoy was the most ardent Russian advocate of Georgist economics.

The letter:

Mikhail Gorbachev
President
Union of Soviet Socialist Republics

Dear Mr. Gorbachev,

The movement of the Soviet Union to a market economy will greatly enhance the prosperity of your citizens. Your economists have learned much from the experience of nations with economies based in varying degrees on free markets. Your plans for freely convertible currency, free trade, and enterprises undertaken and managed by individuals who receive the profit or bear the losses that result from their decisions are all highly commendable. But there is a danger that you will adopt features of our economies that keep us from being as prosperous as we might be. In particular, there is a danger that you may follow us in allowing most of the rent of land to be collected privately.

It is important that the rent of land be retained as a source of government revenue. While the governments of developed nations with market economies collect some of the rent of land in taxes, they do not collect nearly as much as they could, and they therefore make unnecessarily great use of taxes that impede their economies – taxes on such things as incomes, sales and the value of capital.

Social collection of the rent of land and natural resources serves three purposes:

1. First, it guarantees that no one dispossesses fellow citizens by obtaining a disproportionate share of what nature provides for humanity.
2. Second, it provides revenue with which governments can pay for socially valuable activities without discouraging capital formation or work effort, or interfering in other ways with the efficient allocation of resources.
3. Third, the resulting revenue permits utility and other services that have marked economies of scale or density to be priced at levels conducive to their efficient use.

The rental value of land arises from three sources. The first is the inherent natural productivity of land, combined with the fact that land is limited. The second source of land value is the growth of communities; the third is the provision of public services. All citizens have equal claims on the component of land value that arises from nature. The component of land value that arises from community growth and provision of services is the most sensible source of revenue for financing public services that raise the rental value of surrounding land. These services include roads, urban transit networks, parks, and public utility networks for such services as electricity, telephones, water and sewers. A public revenue system should strive to collect as much of the rent of land as possible, allocating the part of rent derived from nature to all citizens equally, and the part derived from public services to the governmental units that provide those services. When governments collect the increase in land value that results from the provision of services, they are able to offer services at prices that represent the marginal social cost of these services, promoting efficient use of the services and enhancing the rental value of the land where the services are available. Government agencies that use land should be charged the same rentals as others for the land they use, or services will not be adequately financed and agencies will not have adequate incentive or guidance for economizing on their use of land.

Some economists might be tempted to suggest that the rent can be collected publicly simply by selling land outright at auction. There are a number of reasons why this is not a good idea.

• First, there is so much land to be turned over to private management that any effort to dispose of all of it in a short period would result in an extreme depression in prices offered.
• Second, some persons who could make excellent use of land would be unable to raise money for the purchase price. Collecting rent annually provides access to land for persons with limited access to credit.
• Third, subsequent resale of land would enable speculators to make large profits unrelated to any productive services they offer, resulting in needless inequity and dissatisfaction.
• Fourth, concern about future political conditions would tend to depress offers. Collecting rent annually permits the citizens of future years to capture the benefits of good future public policies.
• Fifth, because investors tend to be averse to risk, general uncertainty about the future will tend to depress offers. This risk aversion is sidestepped by allowing future rental payments to be determined by future conditions.
• Finally, the future rent of land can more justly be claimed by future generations than by today’s citizens. Requiring annual payments from the users of land allows each year’s population to claim that year’s rent. While the proceeds of sales could be invested for the benefit of future generations, not collecting the money in advance guarantees the heritage of the future against political excesses.

The attached Appendix provides a brief technical discussion of issues of the duration of rights to use land, the transfer of land, the assessment of land, social protection against the abuse and subsequent abandonment of run-down property, and redistribution among localities to adjust for differences in natural per capita endowments. While these issues need to be addressed, none of them present any insoluble problems.

A balance should be kept between allowing the managers of property to retain value derived from their own efforts to maintain and improve property, and securing for public use the naturally inherent and socially created value of land. Users of land should not be allowed to acquire rights of indefinite duration for single payments. For efficiency, for adequate revenue and for justice, every user of land should be required to make an annual payment to the local government, equal to the current rental value of the land that he or she prevents others from using.

Sincerely,

• Nicolaus Tideman, Professor of Economics, Virginia Polytechnic Institute and State University.
• William Vickrey, President for 1992, American Economic Association.
• Mason Gaffney, Professor of Economics, University of California, Riverside.
• Lowell Harris, Professor Emeritus of Economics, Columbia University.
• Jacques Thisse, Professor of Economics, Centre for Operations Research and Econometrics, Universite Catholique de Louvain, Belgium.
• Charles Goetz, Joseph M. Hartfield Professor of Law, University of Virginia School of Law.
• Gene Wunderlich, Senior Agricultural Economist, Economic Research Service, U.S. Department of Agriculture.
• Daniel R Fusfeld, Professor Emeritus of Economics, University of Michigan.
• Carl Kaysen, Professor of Economics, Massachusetts Institute of Technology.
• Elizabeth Clayton, Professor of Economics, University of Missouri at St. Louis.
• Robert Dorfman, Professor Emeritus of Political Economy, Harvard University.
• Tibor Scitovsky, Emeritus Eberle Professor of Economics, Stanford University.
• Richard Goode, Washington, D.C.
• Susan Rose-Ackerman, Eli Professor of Law and Political Economy, Yale Law School.
• James Tobin, Sterling Professor Emeritus of Economics, Yale University.
• Richard Musgrave, Professor Emeritus of Political Economy, Harvard University.
• Franco Modigliani, Professor Emeritus of Economics, Massachusetts Institute of Technology.
• Warren J Samuels, Professor of Economics, Michigan State University.
• Guy Orcutt, Professor Emeritus of Economics, Yale University.
• Eugene Smolensky, Dean of the School of Public Policy, University of California, Berkeley.
• Ted Gwartney, Real Estate Appraiser and Assessor, Anaheim, California.
• Oliver Oldman, Learned Hand Professor of Law, Harvard University.
• Zvi Griliches, Professor of Economics, Harvard University.
• William Baumol, Professor of Economics, Princeton University.
• Gustav Ranis, Frank Altschul Professor of International Economics, Yale University.
• John Helliwell, Professor of Economics, University of British Columbia.
• Giulio Pontecorvo, Professor of Economics and Banking, Graduate School of Business, Columbia University.
• Robert Solow, Institute Professor of Economics, Massachusetts Institute of Technology.
• Alfred Kahn, Ithaca, New York.
• Harvey Levin, Augustus B Weller Professor of Economics, Hofstra University.

The real issue forcing land prices up are the huge economic rents available to land speculators. With Jeff Kennett’s move away from Site Value rating to Capital Improved Value (CIV) rating, land speculators can purchase land, sit on it and wait for the property to grow in value. The constant attack on State Land Taxes ensures a continuing trend for them to be weakened, sending the signal to the marketplace that hoarding land is appropriate.

On a Local level, the combination of these 2 factors has seen a growth of vacant land in inner urban areas in Melbourne. We believe the reduced supply of land from this speculative trend has applied greater pressure on land prices than Melbourne’s 2030 boundary. The huge upward trend in land prices happened well before the 2002 announcement of 2030.

The problem with land supply therefore comes from the private supply of land, dominated by speculators, rather than the public supply of land.

A decade on from Jeff Kennett’s reforms and the results are mounting. The practical evidence abounds us. Cycle through Richmond (Melbourne) and rafts of vacant land can be seen. One 700m stretch of Elizabeth St sees 9 blocks of vacant land and another 4 vacancies in commercial property. However, the official REIV vacancy rates continuously quote at or about 2.1%. Efforts to find a qualitative definition on what constitutes a ‘vacancy’ have so far been fruitless.

At the State level, the recent Bracks Govt reforms to State Land Tax have reduced the rates for upper to medium valued houses. Whilst cuts to stamp duties are appreciated, the overall message gives the go-ahead to speculators to invest in property. Is this why prices in wealthy suburbs such as Hawthorn have increased by 42% in a single year? How long will it be until housing prices in suburbs such as Preston, currently growing at 12%, take them into these top brackets?

On a Federal level, the upward trend in land prices was assisted by the 1996 Negative Gearing reforms. This was enhanced by the halving of Capital Gains (2000) and the raft of loopholes the fine print revealed.ie holding a property for 12 months as your ‘primary residence’ exempts one from any capital gains. This leads to the weekend warrior effect of part time renovators being rewarded. In the meantime the extra supply of land and housing this removes from the market helps their fellow land speculators manufacture higher capital gains. Great for those in the know!

A recent report by the UN Special Rapporteur on Adequate Housing, Miloon Kothari, said

“According to official figures, out of the 943,877 low-income persons receiving rent assistance, 35% (330,360) were spending more than 30% of their income on rent, and 9% (85,000 peoples) more than 50%.

With Australia’s negative gearing policy, perhaps the most generous of all developed countries (emphasis added), and the tax benefit from capital gains, a subsidy of $21 billion is given to the high end market.” (Aug 06)

As we can see, a combination of these policy changes have given speculators free reign around Australia. A decent holding charge on land is needed, as Julian Disney commented on Lateline (21st August, 2006).

Why should investors be encouraged to make ‘unearned’ speculative gains rather than profits from productive activity? A recent ANU paper by Atkinson & Leigh entitled The Distribution of Top Incomes in Australia revealed that just 20% of the income earnt by the top 0.01% of the population comes from productive activity.

Do we really want to continue this trend?

Share the rent with all and remove the unnecessary burdens of taxation, we say! Then local land supply will be used efficiently, reducing the need for urban sprawl through the encouragement of infill development. This has a cascading effect that soon reduces the cost of housing. It should be remembered that high housing prices are dominated by the cost of land. Land now represents about 70% of property sales prices, rather than the 30% it was in the 70’s when the tax system encouraged production over speculation.

Further understanding

Recent economic policies hindering Affordability