If you are so smart tell me how come, when I produce so much more today, my wages never rise, I work ever longer hours, even my wife now has to work and the cost of living always goes up. Who is getting the gain from my extra work and where will it all end. When will I be able to spend more than Sunday morning with my kids. When will I get a life. This is the 21st century isn't it ?
I sympathise. The graph below shows how as we produce more, earned incomes fall in proportion to unearned incomes. And over the past 100 years the power to produce wealth has nonetheless increased by nearly 20 times in real terms. There is plenty to go around, we are not running out of anything. Yet those doing all the work and developing business are receiving an ever decreasing fraction of the wealth they actually produce as earnings. These are bizarre but irrefutable facts.
So who is getting all your extra productivity? It is simply going to owners of land as an unearned income in rent. The data is from Australia and I now have further analysis from across the world indicating identical effects*. This rent accounts for the larger fraction of all types of income to all people. The production of wealth from most people's work, is now being appropriated by a few who do very little except sit on a piece of land. The wealth divide, huge concentrations of capital and high pay are its inevitable effects.
These observed facts are in complete harmony with David Ricardo's Law of Rent, further reconciled by Henry George who shows clearly how the knock on effects are predictable and recurring recessions and wages driven down to subsistence levels. It explains fully why our standard of living does not rise in line with an increasing power to produce wealth. And finally it shows why we are compelled to use resources so wastefully at ever increasing prices. If we can bring ourselves to accept these repelling facts, we can for the first time proceed with confidence on the perplexing questions of economic failure, poverty and destruction in a world that has long since been able to produce abundant wealth.
The Law of Rent
Let's take a closer look at what is going on here. As our power to produce wealth grows, a natural fund in economic rent inevitably tends to increase land values, rentals, house prices. This is a community created value, not landowner created. As a result of all people working together more effectively, they can produce more with less effort and waste. It follows that more people want to be there of course. Demand for that location. Wages in general also rise in total amount but fall in proportion to this rise in rent. Because all earnings above what are available in the least productive place MUST go to rent. There is nowhere else for them to go because wages do not get paid until the rent has first been taken out. Under free conditions this is a good thing, though it appears a paradox. It indicates society is in a state of economic advance because the value of land is rising and what can be produced on it is increasing with less effort. Wages will find their normal level at this point. Everyone will have a surplus to spend, save, reinvest in their business or give away. This is as much an economic law of nature as is gravity. The Law of Rent.
The Private State
As production rises AND the rent is collected privately as an unearned income by landowners, then wages must again fall in proportion to the rent. But today, because the rent is not used to fund government, your hard work must be taxed to pay for public services. Add this taxation to the rent you pay, either as tenants to a landlord or as mortgagees to a bank, you are paying double for the land you use. This requires higher wages before you are willing to start work or can remain in work at the normal rates. On the whole wages will fall until they have been competed down to the minimum people are prepared to work for before walking away into welfare. A welfare state emerges as an effect. Worse still the rent is spent quite wastefully on further mal-investment, nearly always to buy more land for obvious reason. All this is the effect of the primary social institution of private property in land. Monopoly power and control over the primary economic factor of production, the land. It is NOT the effect of capital, in itself a good thing, capital is wealth!** Yet it is exactly what causes the concentration of capital into unnatural and monstrous fortunes. This is why the so called 'free market' system has consistently failed to trickle down wealth and has failed to deliver equity to all people. I call this the Private State.
The Welfare State
As we have shown, most taxation is collected from people's hard work to pay for pubic services, plus they pay rent on top. But now an additional penalty must be paid by workers and producers to mitigate the chronic side effects of the Private State. These effects manifest themselves as benefits for involuntary unemployment and involuntary employment. Not to mention the further side effects of vice, addiction and life dissatisfaction. Modern day, virtual wage slavery. Production, wages and rent will now all be less than what could be. All this is the effect of monopoly socialism. Yet socialism has noble goals of fairness and equality. But by dreaming of perfect government and to fight the Private State, production of wealth suffers dramatically in a desperate attempt to collect the rent from taxes on your work. The cost of production rises, unemployment rises as employers try to minimise workers, less is produced, less efficiently and bureaucracy becomes unsustainable. This is why socialism has consistently failed to deliver equity to all people. I call this the Welfare State
Unsustainable Economics Today
The current economic paradigm operates forever unsustainably, within a dynamic overlapping mix of these Private and Welfare states, resulting in periodic economic paralyses, persistent poverty right next to enormous production of wealth. Finally as all land has been enclosed, we have run out of planet to exploit to pay for it all, the destruction of the ecosystem. I believe this is all a rather silly historical accident. Where we have failed to adapt our primary social institutions to our ever increasing ability to produce things more easily. We can master technology to fly to the moon, Surely we can master politics and feed the world too?
The Free State
There is a remedy for this social insanity. If the rent were collected for public revenue and taxes on work and production were abolished, a simple fiscal swap, then production, wages and even rent would rise, in the end. Wages would move up towards their truly natural level, at the margin of production. There would no longer be a penalty to pay for working. And it would be natural to use scarce natural resources to their highest efficiency. This is the effect of monopoly commonwealth. The entire wage fund would go to the free producer and all the economic rent would be collected from the "commons" for public purposes. I call this place The Free State.
The Undiscovered Country
There is great hope for our descendants. But the Free State is a condition that has never existed. Yet a simple change of the minds of people, as to what by natural right, is private and common property, is all that is required to find this place. The difference between earned and unearned incomes. It's a fundamental moral choice pure and simple, that we can make with courage and selflessness. The Free State is the only social structure that can deliver equal access to all natural opportunities, to all people. A new era of political economy would emerge, signalling an end to the great enigmas of our time: business depressions, poverty and destruction in the midst of such enormous power to produce wealth. Finally, we would all have the time to explore the higher things in life. We would have plenty of time for our children at last. Who can say how high we would go?
Standing as a parliamentary candidate, it is The Free State that I will be using all my strength to call for.
* Thanks to
New York Times - Real Wages Fail to Match a Rise in Productivity
Land Is Free - Tommas Graves: Bankers Seemed Bemused
Wikipedia - Standard of living and GDP
The Independent - Stewart Lansley: The unreported cause of the financial crisis is shrinking wages
Our irrational distribution of wealth (1908) - Byron Collins Matthews
** But capital is NOT money in any shape or form
4 comments:
This is bound to happen, it is simple maths. What compounds the effect is NIMBYism.
Let's assume that gross wages start at £100 and go up by 50% compound every ten years, and the amount that people spend on housing is fairly fixed at a third of incomes. As not a single penny is spent on building new houses, so the whole of that increase goes to land rents and hence land values.
If we start of with a situation where land rents are 0% out of gross wages of £100, after ten years, land rents are £17 out of £150; and after twenty years they are £42 out of £225; after thirty years they are £79 out of £338 and so on.
The equilibrium long run position is that rents will be [nearly] one third of gross wages, which is what we observe from Bryan's chart.
The effect is exactly the same with businesses and commercial land. So it's safe to say that land rents are nearly one third of GDP (assuming that taxes on production are collected from and redistributed to the same people, which is a rather optimistic assumption).
It would be useful to direct attention more to the rent of productive land rather than land just used for living on.
Business profits are reduced due to the taxation of labour ie labour costs are composed of about 45% tax, misleadingly labelled PAYE income tax and employees NI. This reduces profits which reduces rents which reduces commercial land values. If these taxes are phased out, it is possible to purchase labour at a lower gross cost, though take home is much the same.
The effect is that production takes place that would not otherwise have done. This lost production, the deadweight cost of the tax system, amounts to about 12% of GDP according to Harrison. That is about 6 years growth if the economy is in good shape. ie it results in a badly-filled pie.
As labour-related taxes are removed, commercial land values rise, and with them the tax base, therefore a switch from existing taxes to LVT sets in train a benign cycle.
It's an extremely thought-provoking graph. However one thing to note about it is that it is very much a picture of what happened in Australia which was relatively undeveloped at the end of the 19th century. I would be extremely surprised if the UK equivalent showed as much as 85% for the blue bit in 1911. I would have guessed it more likely that the blue bit was relatively flat during the century, just a gentle downward slope perhaps, while the grey bit would have been much larger to start with, shrank a bit mid-century as the pink bit grew until aggregate finally approached the same general propertions as Australia in the 2000s. Just a guess though. It would be interesting to see the graph for what actually happened.
I think your guess would be a good one. The proportions will vary a bit between countries. Depending on their state of civilised advance.
Taxation is the key probably. And that income tax etc did not really exist until after WWII because it was not needed as per the graph. Most incomes went to the the earners, not a great deal of welfare was required, even though most had a meagre living, a little above the amount required to have just about a liveable life. Much the same as today if you account for the globalised world in general. There is as much poverty as ever. Its just in different countries. Some of us are robbing them and are the aristocrats with the exclusive access to the natural monopolies
The main point being that as production increases, more goes to economic rent. Its a natural law and is good. But it is the distribution that screws everyone. When the system allows the rent to go into private unproductive pockets.
Collapse of all related systems must be inevitable. Economic and Ecologic
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