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So-called rising house prices mainly represent rising land prices. Note – ‘land prices‘, not land values! Land prices may not represent true value when they are pathological, especially in real estate bubbles such as are currently being experienced in China, Canada, New Zealand and Australia.

Rising land prices are always attributed to inadequate supply, as a result of inadequate subdivisional land release, zoning controls, or increasing population–or combinations of these–but supply is often not the main reason for rapidly rising prices. There can be, and often is, a surfeit of land supply, but prices may continue to escalate upwards. In fact, this is the situation in Australia at the moment.

How can this possibly be so?

Mainly because the predominant reason for an upward movement in land prices is the inadequate capture of land rent, by use of municipal rates, or land tax at the state level. When these are increased, that is to say, a greater amount of land rent is captured for revenue, land prices will stabilize or fall, because land prices represent the private capitalisation of the uncollected land rent, and, if less rent is being privately-capitalised, land prices will decline. This fact is often too difficult for us to get our heads around, even for economists, because we are used to all prices being analysed only in terms of supply and demand. Land is different from commodities, insofar as its income is in the nature of a rent which can’t be passed on in prices.

This vital information usually goes missing in considerations of housing affordability and tax reform because 99.5% of the community is ignorant of it.

However, some people–and banks particularly–might be quite uncomfortable to believe that land prices should decline rather than increase if the nation is to be more productive and not go down the gurgler.

As they say, “Ignorance is bliss!”

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Yt = rRt + wLt + iKt

National income (Y) consists of aggregating the returns to land (R), labour (L) and capital (K). For a given time period (t) the respective factor incomes are rent (r), wages (w) and interest (i).

Transposing the unearned profit rent from nature (land) to the left hand side of the equation we get:

Yt – rRt = wLt + iKt

That is to say, if we were to take the rent of land for revenue, it is unnecessary to tax the earned incomes of labour and capital.  Land rent (including mining, spectrum, fishing and forestry licence rents) is easy to collect and cannot be avoided.

What’s wrong with that? There must be something wrong, because inquiries into tax reform studiously endeavour to ignore this logic, temporising by alternating the emphasis between direct and indirect taxes on labour and capital, then calling these repetitive long-term swings “tax reform”, and barely troubling the increasing numbers of rent-seekers who compromise our national productivity.

Not enough rent, perhaps? Nope, there’s plenty. Karl Fitzgerald and Gavin Putland have independently demonstrated the point by assessing Australia’s rent here and here.

Private rent-seeking, as evidenced by the capitalisation of rent into land price bubbles (instead of its capture for public purposes), is clearly bringing world economies to a halt.  The FIRE sector has run amok – at the expense of the productivity of labour and capital.

Why don’t we remedy the morass into which we’ve sunk by capturing rents and abolishing taxes?

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sharesI’ve previously mentioned that you’ll know more than 99% of economists and 100% of politicians once you’ve understood the import of Henry George’s equation P – R = W + I.

It explains why the world of finance is currently falling apart, and has been increasingly under threat since the 1973 worldwide land price bubble which has virtually been written out of history.

So, what is it that’s “increasingly” happened since 1973?

It’s the rapidly-escalating share of the price of land in real estate sales. Australia is probably representative, if not a little worse, than most countries where, on average, the land component has increased from 25% to 75% over the period.  And it’s not simply a function of population increase or ‘demand’.  We need to remember that the price of land represents the private capitalisation of land rent (the ‘R’) in Henry George’s abovementioned formula that he said needs to be captured for public revenue.

George’s equation shows that if land rent were taken from production (‘P’) for necessary revenue, labour’s income (‘W’) and capital’s income (‘I’) wouldn’t have to be taxed at all!  (And there IS enough rent!)

So, by failing to capture sufficient land rent to the public purse, land prices–a private tax on purchasers–have increased massively over the last 40 years at the expense of  wages and business profits. In fact, the equation shows that wages and profits CANNOT increase in real terms on average if increasing amounts of ‘land’ rent (which includes incomes from land, minerals, fishing, forestry and spectrum) are being privatised instead of captured for public revenue.

Therefore, those baby-boomers who say “We had to work hard for our home, too!” are missing the point that younger people are doing it harder, not only because real wages have declined on average over the last forty years—recent increases may have arrested the rate of decline, but haven’t offset it—but the land component is now a much greater proportion of real estate prices.

The banks, of course, do exceptionally well out of land price-inflated mortgages which usually require two incomes to service now, when once a single income was sufficient.

So, these high land prices have led to more taxes on labour and capital (and lower wages and profits) and less demand in the economy. Meanwhile, there’s an awful lot of baby-boomers’ money sloshing about in share and property market ‘investment’ bubbles – and these are NOT the real economy, but part of the FIRE sector!

It looks like the share market bubble is bursting first.

Things will get REALLY grim in Australia when the real estate market bubble finally bursts. It is the latter that will formally announce the world financial depression to Australians – just as the October 1987 stock market collapse preceded the 1989 property bubble bursting, which in turn brought on the recession at the outset of the 1990s.

With P – R = W + I as your guide, you can write the script about this decline into financial depression. Until we capture more of the economic rent of our natural resources, these events are set in concrete.

Meanwhile, Treasurer Joe Hockey, and his similarly-irrelevant overseas confreres, will try to hold the fort by promoting “confidence” as they continue to disregard the structural flaw that faces world economies.

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See further on Fred Harrison’s video.

Posted in The GFC can be ended by capturing economic rents for revenue | Leave a comment




An acid test of a hypothesis is its success in forecasting. The “Real Assets Model of Economic Crises”, published in March, 2015, seems so far (up to August 21, 2015) to have passed the test, with respect to China. It is likely that “standard brand” economists and other forecasters, their visions narrowed by the same blinders that have kept them from foreseeing so many major downturns since at least (and probably before) 1720, will ignore this forecast and its rationale. Anticipating that response, I take the liberty of circulating this material.

– Mason Gaffney


“For a number of years, it seemed that the Chinese miracle of rapid economic growth based on massive public investment would somehow steer clear of the economic distress caused by land speculation and marginal investment in capital projects. Because of the backlog of latent demand in that economy for better housing, it was possible to construct thousands of projects in mid-size cities without exhausting the ability of China to make efficient use of those investments. By 2014, however, it became clear that China’s economy had reached a limit of productive investment in housing and other fixed investment and would be subject to the same constraints as other economies. There were voices in China that began warning of this fate as early as 2006, but they were ignored. It now seems likely that China will face several years of sluggish growth as land prices fall, defaults rise on marginal projects, and the loss of liquidity of the state-owned banks forces the central government to cut back on its investments. At the same time, as house prices fall in the major cities, the urban middle class will respond to its reduced nominal wealth by cutting back on consumption. The combination of these effects will reduce growth further and increase the rate of unemployment.

The one ray of hope in this otherwise gloomy picture is that some of the top leadership of China is at least aware that rising land prices need to be controlled by means of taxation. This is the first sign that any national government has recognized the use of land value taxation as an instrument of macroeconomic policy. Although that recognition came too late to prevent the present crisis in China, it could be used to prevent future repetitions of the present situation. If China can learn that lesson in its first experience with a boom-bust cycle in land values, it will be far ahead of Western governments that have ignored the signs for centuries.”

  • Mason Gaffney, American Journal of Economics and Sociology, March 2015, p.355


“Stocks tumbled worldwide Thursday (August 20 2015) … as investors fretted about China’s slowing growth … . … reasons to avoid stocks start… with ongoing concerns about the cooling of China’s huge economy. China devalued its currency, the yuan, last week, and its stock market has suffered a massive sell-off in the last two months despite government attempts to stem the drop. … The overarching concern for the (world) markets is just how much China’s economy is going to slow down.”

– James Peltz,, “Stocks sink globally on China fears”, L.A. Times 21 August 2015, p.C1

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