Economies and National Resource Rents
- by Bryan Kavanagh
After his bloody victory in Ireland
(1649-1652), one of the first things Oliver Cromwell did was to establish
the annual worth of the lands of Ireland. William (later Sir William)
Petty won the tender to value the newly-conquered land by using cheap labour
in the form of some of Cromwell's by then unemployed soldiers. He
trained them in valuation techniques, including how to chain-survey the
whole of Ireland, and oversaw the professional completion of the valuation
contract within thirteen months.
Petty was a larger than life character
who some hold to be the father of modern economics and its first econometrician.
At one point he is said to have commented on the extent of the Irish holding
which Sir Hierome Sankey, one of Cromwell's more formidable knights, had
chosen for himself following the invasion of Ireland. Insulted, the brawny
knight challenged the notoriously near-sighted Petty to a duel, offering
Petty the choice of weapons and location. When the purblind Petty chose
broad axes in a darkened cellar, Sir Hierome retreated gracefully after
finding reason to reconsider the seriousness of Petty's offence.
Both Cromwell and Petty saw the need
to know the annual value of Ireland's natural resources, but the modern
neo-classical economist is all but clueless on the quantum of resource
rent within the economy, or for that matter to where it disappears. He
is even heard to say that as we no longer exist predominantly in rural
communities, land-based revenue systems are no longer appropriate; this,
despite the fact that the greater part of land rent is now located within
our large cities.
Whereas it was accepted in Petty's
day that the annual rent of land was a surplus that came about by the mere
existence of community, and its collection and use was the cheapest and
most equitable source of revenue, we are now educated to forget that as
the annual value of our natural resources are privately expropriated it
becomes necessary to levy a myriad of costly taxes on all sorts of productive
activities. In 2002, only $19.2 billion of Australia's $180 billion
of publicly-created natural resource rents was captured for public purposes.
The $160.8 billion foregone in resource revenues was gratefully received
by Australia's property owners, but the chart below indicates that this
bonanza came at enormous cost to the country. The graph provides evidence
that the growing quantum of Australia's resource rents and taxes has been
at the expense of the net incomes of labour and capital, especially since
1972 where, as a proportion of GDP, taxes have increased by 28%, the nation's
rent has escalated 125% and net incomes have declined by 35%. Accordingly,
it is possible to argue that the real battle is not between capitalist
and worker, but between most Australians and the relatively few rent-seekers
who capture the greater part of our national resource rents.
The Russian economist Nikolai Kondratieff
did not have any explanation for the cause of the 50 to 60 year long wave
cycles he discovered in his studies of 140 years of the economies of the
US, UK, France and Germany. However, cycles of boom and bust seem
to be inextricably linked to the failure of economies to capture the national
rent for their coffers, and to the consequent escalation in land prices
and taxes levied on productive work. Where most modern economic analysts
don't like to acknowledge the existence of the Kondratieff wave because
it is suggestive of their impotence during its deflationary downslope,
the following three graphs of raw GDP growth clearly show the inflationary,
then deflationary, courses of the fourth Kondratieff wave within the economies
of Australia, the USA and the UK. It is grim to remark that the end
of each of the three preceding longwaves was defined by economic depression.
The final chart displays the relationship
of Australia's total real estate sales to GDP. At the bursting of
each property bubble (ie. those parts of the graph exceeding the empirical
19% ‘bubble line') the economy has declined into recession as the graph
cut back below the 19% mark. The period shown represents the second
half of the fourth Kondratieff wave, and it is apparent that as property
sales to GDP increased, GDP growth has tended to decline. So, whereas
low tax rates and deflated land prices had assisted post-war GDP recovery
until the outset of the 1970s, increments in taxation, inflation and interest
rates since that time have had the effect of taking Australians' eyes off
the ball. We began to follow the dictates of the tax regime to play
another game altogether, namely, that of real estate speculation. We have
now inflated the current residential bubble to voluminous proportions and
economic growth is primed to tank into a major deflation.
In the week ended 3 June 2005, the
Treasurer Mr Costello warned that the Reserve Bank of Australia should
not increase interest rates. Early the following week, the RBA seemed
to have listened. However, Costello's advice may have been redundant
in the current deflationary environment, because the next adjustment of
Australian interest rates would more properly be downward. If we
wish to arrest the decline into financial collapse, it may be time for
analysts and policy makers to consider to what extent Petty's national
rent offers potential to slash the taxation of productive activity.
Replacing taxes with resource rents could also help to keep the lid on
skyrocketing land prices which have played such a destructive role in the
Australian economy during the second half of the fourth Kondratieff wave.
Bryan Kavanagh, AAPI, is
director of the Land Values Research Group, a privately funded think tank
which has researched Australia's natural resource rents since 1943.
He is also a director of the Melbourne-based real estate valuation firm,
Westlink Consulting. Mr Kavanagh's Case for a Federal Charge on Land
Values was published in the Australian Property Journal, in February 2005.
Telephone: + 613 9803 5607
Facsimile: + 613 9887 6287