Social unrest may be expected in the wake of C19. Not because we were hit by a disaster not of our making; but because the wilful starvation of public services, leading to poor pandemic precautions, will be repeated if there is no root and branch change to the way in which public services are funded.
Our call for the functions of state to be funded out of the rents of land and natural resources (AGR/LVT) is criticised for being too radical. How could you possibly even think of replacing income taxes?
Question: What would it take for a country like Scotland to take seriously a change of revenue from taxes that repress wealth production and privilege a minority, to a levy which dismantles privilege, boosts prosperity and shares the country’s net income with all of its producers?
Events such as the Coronavirus pandemic may at last focus the minds of politicians. Or the looming avoidable depression of 2028? The UK and Scotland have been hit unexpectedly by a tragedy requiring state intervention on a massive scale. MMT suggests money be produced by governments to pay for it all. But what about when the limits of credibility in the currency are reached? Money production can only go as far as a country’s real potential production.
Today Scotland has taxes on wages and on trade. The tax rates are already set as high as they can be without repressing the tax base by an unacceptable level. Production is already repressed by at least £500bn/yr (UK). But more money is needed to make good the anticipated government Coronavirus spending.
Austerity will not be acceptable and if forced will produce social unrest. What is the way then for current unfortunate events to be faced up, challenged and pushed aside?
It is time for Holyrood to take seriously the SLRG proposals to start funding government functions with AGR/LVT and to cancel as much as possible of Scotland’s wage and enterprise imposts. This will collect a significantly larger sum into Scotland’s Public purse – all from UNEARNED income – and at the same time boost and share Scottish prosperity.
Everyone will be a winner except the parasites who expect to grow rich from by extracting wealth produced by the efforts of others. Yet even they will share the opportunities to invest in new productive enterprises germinating across the new Scotland. And they will also receive their full share of newly expanded and at last properly funded Scottish public services.
By Roger Sandilands, Emeritus Professor of Economics, Strathclyde.
How can the claim be justified that Rent, the product of society and nature, is about half of GDP, when the text books put it at about 5%?
The national income accountants (who are accountants rather than what we would define as economists) look only at the surface phenomena. They look at income and basically allocate it between only two very broad categories: wages and ‘profits’ (or ‘operating surplus’).
I gave some figures for 2011 in my 2015 SLRG conference paper, The Hidden Potential of Rents. I reproduce the Appendix below showing basic figures for 2011.
Rent is camouflaged
There you see that there is no explicit mention of ‘rent’. It is bundled up in an aggregate of gross operating profits, as also defined in the Appendix. “Rental income” is any money paid for buildings, including land. No separate figures are given for land rent except where rent is paid for bare land and this is a very small fraction of all ‘rental income’.
We know that much of what is income from ownership of buildings is actually land rent.
Accountancy approach problematic
But the more important problem with this accountancy approach to the distribution of income is that it takes no account of the way that the taxation of earned incomes (including income from man-made capital – buildings, machinery, equipment etc) ultimately falls on (squeezes) the rents that can be charged on land qua land. This again is the ATCOR principle: All Taxes Come Out of Rent.
Rent is half the national income
Once this is recognised and accepted then you can indeed justify the claim that rent is about half of national income. But otherwise people will scoff and refer you to the textbooks that state that rent in the modern urbanised economy is only about 5% or less of GDP, and hence totally insufficient to finance a modern state’s public spending (about 40% of GDP).
Remember that our aim is to replace taxes on earned incomes and trade. As those taxes fall, so the annual value of unearned land and natural resource rents increases. This large underlying annual ground rent (AGR/LVT) thus becomes transparent and available to finance the modern state. And in the process would breathe greater life, health and fairness into our sclerotic economy and society.
Table 8.2 of the UK National Income Accounts gives GDP in 2011 at market prices (£1,537bn) by category of income and by its percentage composition, thus:
Total gross operating surplus: £436bn (28.4%)
“Mixed” incomes (of the self-employed): £ 85bn (5.5%)
Employee compensation £820bn (53.4%)
Taxes less subsidies on products and imports: £190bn (12.5%)
Gross operating surplus is gross value added (GVA) minus labour costs paid by producers. It is the sum of (i) gross trading profits and (ii) “income earned through the ownership of buildings (rental income).” But separate figures are not easy to find for (i) and (ii); and nor is “rental income” calculated separately for land and buildings.
The opportunity for shared prosperity to be greatly boosted across Scotland is detailed in The Hidden Potential of Rents. Once the proportion of the national income composed of rent is understood, the question must be asked, who gets it?
The evolution of the science of economics featured the thinking of numerous philosophers, starting in the recent era with the French Physiocrats. These predecessors and teachers of Adam Smith knew that if the French Revolution was to be avoided there had to be a way to include all members of society in the fruits they all helped to produce.
Classical economics discovered that equality of opportunity could be achieved in societies where the net income is shared amongst the participants. Its thinkers realised that the rent of land and other natural resources had to be shared between its producers. Otherwise a two-tier society would emerge:
Tier 1: A privileged elite of site and resource owners. Tier 2: An underclass consisting of those who received none of the net income.
How did the sustainable single tier version of society work?
To the classical economists ‘justice’ dictated that wealth belonged to its producers. They observed that labour and capital produced wages and profits. And that land produced rent. The latter was gathered freely from nature or from amenities funded by society as a whole. It was no great leap from there to work out to whom the rent (the net income) belonged:
If a viable and sustainable society was to be maintained – as seems to have happened in the Indus Valley civilisation – the net income had to be shared out between all participants in the joint social project that was ‘society’. Thus, those who monopolised a part of the commons had to compensate the community accordingly – with Ground Rent.
How else to explain a society in which all homes were of a decent size and the absence of any evidence of violence or conflagration? A sustainable society can exist today too which does not find itself constantly in danger of implosion, or where privilege must be ‘protected’ by strong ‘policing’.
The Physiocrats lost the argument just prior to the French Revolution when Marie Antoinette’s advisers threw out Turgot and his ideas. The inevitable social implosion found heads a-rolling…
When the simple observation that rent belonged to everyone was expounded and amplified by Henry George at the end of the 19th century in his famous book ‘Progress and Poverty’, those in unjust receipt of the net income were roused to action.
‘Georgists’ today (such as the SLRG) continue to promote the concept that a society will thrive if taxes are removed from wages and trade and revenue collected instead from the rent of a country’s land and resources – the compensation that should logically and fairly be given to the community by those using any and all of its resources.
When farming first arrived in prehistory, the very first enclosed field was removed from the commons. How was society to be sustained? What if ALL the commons was eventually to be privately owned? Adam Smith’s Annual Ground Rent is the answer: the means by which a society is rendered sustainable, peaceful and prosperous. Like the Indus Valley society.
The evolution of the economic philosophy dominating our 21st century world is decidedly NOT like the justice-based philosophy of the Physiocrats or Adam Smith or the Indus Valley. ‘Neo-classical economics’ has no notion of economic justice. The history of its cynical founding by vested US landed interests in the early 20th century is documented in Professor Mason Gaffney’s ‘The Corruption of Economics’… a hair raising tale of mercenary academics in the employ of wolves.
In the new economics fiscal justice is replaced by something called ‘utility’. ‘Land’ as a separate factor of production is conveniently absent. Which renders the activities of rent extractors hidden. Result? A two-tier society in which the net income is first camouflaged and then extracted unseen, creating an unsustainable society composed of the haves and the have-nots. At the heart of the new economics is the desperate goal to sustain the unjust privileges of an elite – the owners of land. And to keep for that minority group as much as can be achieved of the net income that has been produced by everyone.
Neoclassical economics laughs at the social schisms threatening human existence. Schisms that are the product of Neo-classical economics. Instead, the mission is to guard the concept of private property in land – even with special ‘human rights’ declarations, to remove all levies on land entirely and replace them with taxes on productive workers and traders.
In this way the cream of the socially produced rent of land (the net income of each country) can be extracted by a privileged minority of social parasites for producing and doing nothing in return.
Because were the optimum and fair public revenue stream being collected, there would be no requirement for schemes to help governments struggling with deficits.
Economists Professor Roger Sandilands and Fred Harrison point out that Economic Rent (often disguised as interest/profit) accounts for about half the UK gross income.
Current taxes collect about one third. And non-contributing parasites extract one fifth (the yellow zone in our diagram).
This net income is the rent of land and natural resources which Adam Smith and the classical economists said was the optimum source of state revenue.
Collecting this stream of wealth would be both fair and efficient: At least £500 billion a year of UK deadweight losses (Scotland at least £38bn) would be avoided. This is the lower estimate of the production absent in the UK each year for as long as we continue to tax wages and trade.
As we can see from the diagram, the public purse would double in a very short time.
Apart from the obvious implications for public service funding and embedded UK inequality, the Westminster and Scottish governments would no longer require any scheme devised to help governments in deficit. Nor would the citizens of any country making the change require such schemes; all their needs would be met out of the collected funds they all help collectively to produce.
Rather, as Adam Smith pointed out, were the rents of land and natural resources to again be directed back to the community that generated them, they might be as well of after the levy as before.
What then for industry, investment and today’s fragile communities? Let Henry George himself answer:
South Korea 20,000+ tests/day at the start Scotland 1,370 tests/day at the peak
A country taking the threat of a pandemic seriously might have prepared for one. Like South Korea did after MERS.
Scotland and the UK were unprepared. The projected outcome? 100 times as many Scottish deaths (per capita) and vastly multiplied economic damage.
In the future it may be that money will be found to take the necessary precautions. But there is no doubt that starving public services in Scotland ensured proper precautions against a pandemic could not hitherto be funded despite the warnings of epidemiologists.
‘Maybe it will never happen’ proved to be wishful thinking on the part of our politicians.
Which is why Scotland needs to move immediately to AGR/LVT as state revenue. One of the numerous positive outcomes for Scots would be to find the contents of their public purse doubling in short order. After which any and all precautions against pandemics will be easily affordable …not to mention the rest of Scotland’s currently enfeebled publicly funded services.
Professor Sandilands: The vertical supply curve for Britney Spears is analogous to the fixed supply of Land (including natural resources). When considering a vertical supply curve for fixed Land, this is the normal concept of (land) rent. (And it’s not to be confused with the “rent” I pay when I rent someone’s house or shop or factory. Some of that is rent, the rest is payment for man-made capital and other services.)
Just to confuse us, there are two Britneys.
First there was Britney Speirs. The famous economist Alfred Marshall (who died in 1924 but knew Britney well from Cambridge music halls) referred to her exceptionally high earnings (compared to your average Jo) as “quasi-rent”.
Did she, or does Britney Spears deserve this quasi-rent? Certainly they do if they had to spend years training their voices and working all hours of the day and night to capitalise on their popularity and talent.
But what if they were born with this exceptional – even unique – talent that no-one else can replicate despite thousands paying £50 each to hear them at concerts? Well (a) you could impose an 80% marginal rate of tax and expect them still to perform as much as before and/or (b) you could say, well at least the talent is theirs; it inheres in them and why should we tax them for it, especially if they would then decide to do fewer concerts, or move to a tax haven.
But LAND is different. The rent it (or its owners) can command in the market is a social surplus, and the payments are known as ‘transfer payments’, from renters to owners. Land is fixed in total and in its locations, whether it is used or not. It is therefore passive. The production is done by workers and entrepreneurs and they get paid according to supply and demand that fixes their wages and profits. After they get their makrket wages and profit (interest on use of man-made capital) the residual is what Land can get thanks to its relative scarcity and immobility. If wages and profits (on capital) are taxed the relative cost of labour and capital increases and the residual available to pay rent and/or buy land is reduced.
This is the ATCOR principle. And ATCOR works both ways. Cut taxes and rents increase, and these rents will be captured by land owners – or by government on behalf of us all, under AGR/LVT.) The exceptional income Britney gets is an individual rather than a social surplus; a personal “quasi-rent” that other individuals cannot fully compete away.
SLRG: Is the evolution of Marshall’s ‘quasi-rent’ into ‘economic rent’ by Neo-classical economists documented then Roger? If the story follows the pattern revealed in The Corruption of Economics, then there will have been some academic who saw a way to press the idea into serving the interests of rent-seekers by ‘developing’ it in some 1930s paper or book?
Professor Sandilands: I’m afraid that I can’t improve on The Corruption of Economics for the literature on the evolution of the classical to the neo-classical view of rent, and its baneful influence. However, Britney Speirs wrote a long lost, unpublished manuscript on the subject in 1897 that I found in my attic last week!
My beef with the Marshallian neo-classical marginalist revolution is that it introduced the ‘opportunity cost’ notion to undermine the notion that rent is a surplus over the zero labour cost of production of land qua land.
In classical (Smith, Ricardo) economics, the price or rent of land is what the market will bear for an asset that is fixed in supply and location. Demand interacts with the site’s fixed supply. The price is effectively a monopoly price because supply cannot be increased to drive down the price to the zero cost of production. In this it almost unique (Britney Speirs excepted). Contrast the supply of face masks, or ventilators.
The amenities surrounding a site (transport links, schools, shops, cinemas, stadia, etc etc) had huge labour costs over time, but not the site itself. Those amenities (plus natural features, such as load-bearing capacity, climate, gradient etc) determine its attractiveness to potential buyers or tenants. But the site itself has always been there and always will be, no matter what is put on it or how it is used. To repeat, rent in the classical labour theory of value, is a pure surplus over the zero labour cost of the site itself. [Labour costs are both the direct and indirect labour costs of the man-made capital involved.]
Now consider the neoclassical approach to rent as an opportunity-cost theory of value.
To illustrate, suppose the Duke of Westminster rents out a block on Oxford Street for development as a cinema (its best potential use) and it fetches an annual rent of £2m.
But, say the Marshallians, its next best use would have been as a department store and the highest rent potential would then have been, say £1.9m a year. So its “transfer earnings”, based on opportunity cost, is only £100k. Classical rent has been spirited away by 90%.
To the individual, rent is indeed a cost, and the neo-classical approach is relevant. But socially, rent is not a real cost. It is just a transfer payment. Its real cost is zero, but its demand is what the market will bear, given surrounding amenities or natural advantages.
Annual Ground Rent as state revenue please!
SLRG: Anything to add, Fred Harrison?
Fred Harrison: What you need to bear in mind is this. The original theorists did not want people to focus on “land” as a special category. So the way to remove the unique qualities of the services provided by nature was to argue as they do in that video – namely, that Pavarotti’s “wage” is set by the wage that can be commanded by the barber of Seville; and the sum above that level is “economic rent”. The logic: Pavarotti would sing for his living, anyway, even if he was only paid the wage of the singing barber…so the rest could be taxed away without inhibiting him from singing in the opera theatre!
It’s intellectual dishonesty/gymnastics designed to befuzzle folk, and distract away from the optimum strategy for raising revenue (AGR).
Simple really. The long project by land owners to untax land and natural resources transforms these assets into financial instruments. Competing for control of these rent-yielding assets (land speculation) increases their price many times over.
But the wealth we see today in the land market is not produced within the ‘real estate’ sector. It is instead transferred out of people’s wages and legitimate profits. Those who actually produce the wealth by working and innovating end up being sucked dry.
The two-tier society thus engineered, whether by accident or design (site owner interests set against those of renters), is an unequal one. An unequal society produced by mis-governance!
The historic and continuing achievement of landlords is that free capital gains flow relentlessly into the coffers of the site owners (for doing nothing) OUT of the pockets of wealth producers. One unintended side effect is repressed UK production to the tune of £500bn+ a year [Harrison].
In Scotland today we witness renters rendered the effective slaves of parasite landlords. History shows that in such circumstances internal stresses build relentlessly over time to a point where societies implode.
Such is the course upon which Scotland and the UK are travelling today. Trouble looms for Scotland when the land market peaks in 2026 and collapses. But returning to funding the state from the rent of land and natural resources (Annual Ground Rent aka Land Value Tax) and untaxing wages and trade would replace the conflict with co-operation and the impending bust with stability.
Where will our two governments have taken Scotland by 2028?