Everyone’s mystified, even the unions. Whilst business seems satisfied with the situation, it might need to think a little further if it really wants the economy to recover.
What is it that’s suppressing wages?
Retail’s declining, and in most areas, business profits are declining.
People need money in their pockets for the wheels of commerce to keep turning, but they’ve become shackled to mortgage-induced debt which has got completely out of hand.
Long ago, the American economist Henry George had the explanation for this situation – and it has never been countered by argument. He said that the incomes from economic product (P) are distributed to three factors land (R), Labour (W) and Capital (I). So, P = R + W + I.
However, most importantly, he said that the community needs to capture land rent, a surplus in the production process, because it wasn’t created by individuals, but by the community. So his version of the distributional formula became P – R = W + I. This leaves wages and the return to capital untouched by taxation: they get their rightful reward for working, and the economic rent of land being a surplus is captured for the public good.
If we don’t capture the rent of land—if we allow it to be privatised—it will be capitalised into escalating land prices, and, as per George’s formula, the returns to labour and capital must diminish. If we were to capture all the rent of land to the public coffers, land prices must head towards zero, and wages and profits can only increase dramatically.
At first, this explanation—that there’s a reciprocal relationship between land prices and the returns to labour and capital—seems too simple, too pat, and it tends to blow people’s minds. It just couldn’t be correct.
But it is.
So this leaves those businesses with an interest in inflating land prices—such as those associated with banks and real estate—as the only ones making easy profits. They could be said to be unearned incomes, because they capture publicly generated land rent which is capitalised into land prices. Meanwhile, earned wages and profits have been squeezed and decline.
But most of us don’t want to pay the rent of our land into the public coffers because we’ve become attuned to the taxation of wages, profits and exchange: we have become blinded to the fact that land price and taxation is the enemy of prosperity.
Neoclassical economics had a hand in this situation. It was got up to put an end Henry George’s explanation that land rent had to be captured if labour and capital were to succeed by keeping a lid on land prices and arbitrary taxation. We’ve come to accept the idiocy of economists who have been trained to close their eyes to the 30% of the economy that is the economic rent of land. (Don’t you hear them saying “There are no simple solutions, no magic bullets!”) Since 1973, particularly, this has led to the 0.1% increasingly taking much of the nation’s land rent, created a widening gap between the haves and the have-nots and driven economies to the wall. The rent-seeking FIRE sector (finance, insurance and real estate), once the service sector, has become the economy and is doing very. [!]
If you get the point, you understand more than most economists. If you don’t, it may be you’re still in their thrall.
Even most heterodox economists—alert to many of the ills of neoclassical economics—fail to see the inverse relationship between land prices and the equitable return to labour and capital. It’s a shocking stain on our educational system that we’ve permitted urgers and touts for a rotten distributional system to have gained such credibility in pushing the rent-seekers’ case.
Some of the feudal system actually worked. During the XV century when land rent was collected in England, a labourer with a family of five was able to save most of his wages after allowing for food, clothing and shelter. Professor Thorold Rogers’ studies into six centuries of manor rolls showed that the skilled carpenter of course did even better.