CUCKOO ECONOMICS
(Abridged edition, 5
November 2005)
Gavin R. Putland
By deliberately confusing assets that can be produced with
assets that can only be acquired, modern economics laid the
ideological foundation for unemployment, poverty, inequality, and
the looming global depression.
Contents
1. Bird brains
2. Counterfeit "capital"
3. Bait and switch
4. The preferred enemy
5. "Natural" unemployment
6. All-devouring rent
7. "Free" trade
8. The cause of recessions
9. The U.S. dollar bubble
10. Rogue states
11. The Great Depression of 2006—?
12. Summary
Notes
Copyright
The history of life on earth is the history of gene wars: the
genes that survive longest are those that are best able to
propagate themselves. To call this survival of the fittest
is pointless because fitness has no meaning apart from
ability to survive.
The European cuckoo, for example, lays its eggs in the nests of
other birds and thereby enlists the labor of other species in the
propagation of its own genes. This behavior impedes the
continuation of those species whose nests are used, and does not
assist the continuation of the class of birds as a whole; but
it assists the propagation of the cuckoo's genes, and no other
consideration affects the measure of "fitness" of those genes or of
the behavior that they produce.
If birds were endowed with conscience and reason, they might
think it inequitable to use other birds' labor without
compensation. They might perceive that if such exploitation is
permitted, it reduces the incentive to build nests and feed
chicks. They might conclude that birds should serve their own
interests in ways that add to the total welfare of birds
instead of merely subtracting from the welfare of others.
So, if all birds were subject to one government, would not that
government make a law against laying eggs in the nests of other
birds? Not if the history of human government gives any
guidance!
The assets known as the "means of production" fall into two
categories:
- Assets that taxpayers can neither create nor destroy nor
move out of the taxing jurisdiction may be called
land-like assets or site-like assets (where a
site means a piece of ground or airspace, including any
attached rights to erect buildings on that ground or into
that airspace, but excluding any actual buildings).
- The rest — that is, assets that taxpayers can move and/or
destroy and/or refrain from creating — may be called
house-like assets.
By this terminology, house-like assets used as means of
production include not only buildings and other fixed structures,
but also industrial and commercial equipment of all kinds (fixed or
movable) and stock in trade. The great classical economists from
Adam Smith (1723–1790) to Max Hirsch (1853–1909) called such assets
capital. Because the production of house-like assets adds
to the total wealth of humanity, and because the profits from
such assets are an incentive to produce the assets,
capitalists advocate the private ownership of house-like assets and
the private appropriation of profits derived therefrom.
Land-like assets include not only sites, but other
natural resources (which cannot be created by human effort),
statutory monopolies and limited licenses (which can be created
only by governments), and the so-called natural monopolies
enjoyed by providers of networked services such as electricity,
gas, water, railways, and (at the time of writing)
telecommunications [1]. Returns on land-like
assets, net of the demands of labor and capital, are known as
economic rent [2]; owners of such
assets constitute the rentier class. The term "rentier"
should be understood as functional rather than personal,
because the same person may perform more than one economic role.
(For example, one man may be a worker and a capital owner
and a rentier — and, under present arrangements, may lose
more in the first two roles than he gains in the third.)
From the viewpoint of taxpayers, land-like assets cannot be
produced, but can only be acquired. Such acquisitions
do not add to the total assets of humanity. Furthermore,
while the returns on labor and capital applied to a land-like asset
are incentives to apply that labor and capital, the return on the
asset itself (net of the demands of labor and capital) is
not an incentive to do anything except acquire the asset;
indeed, the party acquiring the asset need not be the one applying
the labor or capital. Therefore the argument by which capitalists
rightly defend the private ownership of house-like assets and the
private appropriation of the returns on house-like assets is not
applicable to land-like assets. But they apply it anyway!
Because land-like assets by definition are protected from
competition, the returns thereon are high and increase in line with
economic growth, giving the owners both the motive and the means to
fight for the retention of "their" economic rents. In the late 19th
century, when economics was becoming established as a separate
academic discipline, rentiers were well represented on the trustee
boards of certain prestigious American universities, whose
endowments, moreover, consisted chiefly of land grants. And there
was no academic tenure: professors who did not do the bidding of
their paymasters could be fired without process or redress.
So the language of economics was corrupted so as to conflate
land with capital, economic rent with profit, and acquisition with
production, in order to obscure the advantages of a selective
tax on land-like assets [3]. As the unit of
heredity is the selfish gene, which is no less "fit" if it
propagates purely at the expense of other genes, so the unit of
economic analysis became the selfish entity (individual or
firm), which was no less praiseworthy if it prospered purely at the
expense of other entities. It was as if the cuckoos, being relieved
of the burden of building nests, had used their discretionary time
to convince other birds that any restriction on the laying of eggs
in other birds' nests would discourage the building of
nests!
By calling itself neo-classical economics, the new
pseudo-science masqueraded as the successor, though in fact it was
the usurper, of the classical tradition. Within a generation it
became the new orthodoxy.
The obvious winners under the neo-classical paradigm were the
rentiers; for if land-like assets were capital, then capitalism,
which demanded private ownership of capital and private enjoyment
of profit, implicitly also demanded private ownership of land-like
assets and private appropriation of economic rent.
The other winners, whether by accident or by design, were
communists! For if land was nothing but capital, then
communism, which began by demanding expropriation of land, was
obliged in the name of "consistency" to demand expropriation of
all forms of capital, enabling the revolutionaries to eschew
intellectual distinctions between categories of assets and stir up
the masses by appealing to crude envy.
The conflation of land with capital did not precede these
developments in capitalism and communism, but it offered a false
conceptual framework that was willingly adopted by both rentiers
and communists to entrench their respective positions and deny the
existence of any intermediate position. It was as if the cuckoos,
in order to protect their legal right to lay eggs in other birds'
nests, had colluded with a gang of avian revolutionaries who wanted
to expropriate all nests and raise all chicks in common!
As the rentiers and their economists have forbidden heavy
taxation of economic rent, governments are compelled by default to
impose punitive taxes on work, investment, employment, and the
consumption that sustains demand — in short, on everything that
capitalism professes to encourage. All these taxes socialize the
fruits of individual effort — as communists recommend. They also
increase the cost of hiring a worker at a given standard of living,
and consequently tend to increase inflation or unemployment or
both. Central banks fight the inflationary tendency by raising
interest rates (or otherwise restricting credit) to discourage
hiring and consumption, causing yet more unemployment, in order to
maintain unemployment at the so-called natural rate, which
the neo-classicists define as the minimum unemployment rate that
causes sufficient downward pressure on wages to yield stable
inflation.
Thus, for the neo-classicists, unemployment is not an
evil to be avoided, but the price of ensuring that rentiers can
enjoy their economic rents with minimal interference from the tax
authorities.
Obviously politicians cannot admit the "need" for a certain rate
of unemployment. They must always pretend to want full employment,
and will be judged on their success in reducing unemployment during
their terms of office. Given that the central bank will maintain
unemployment at the natural rate, the actual rate cannot be
reduced except by reducing the natural rate. And if, due to
opposition from the rentier class, the natural rate cannot be
reduced by shifting the tax burden onto economic rent, the only
remaining method is to make life more difficult for the unemployed,
increasing the desperation of the unemployed to get jobs and of the
employed to keep them, so that the same downward pressure on
wages can be obtained with a smaller number of unemployed.
Having a smaller number of more desperate unemployed does not
reduce the overall severity of the problem, but makes the
statistics look better. Hence we see "mutual obligation" policies
including one or more of the following:
- Idlers are compelled to seek jobs and consequently take jobs
from people who want to work.
- Job-seekers are compelled to submit certain quotas of job
applications per week. This keeps them busy, forces them to incur
expenses, and artificially intensifies the competition for
jobs — the implication being that the scarcity of jobs, by
itself, does not cause sufficiently cut-throat competition.
- Unemployed people are compelled to "work for the dole"
and submit quotas of job applications. They are not
hired as ordinary employees to do the same work for the same hours
at the same cost to the government — because if they were, they
would no longer have to apply for other jobs.
- The dole is cut off after a certain time.
To defend such policies, governments must cultivate the myth
that unemployment consists in unwillingness to work, whereas in
fact unemployment, by definition, is an oversupply of
willing workers relative to the available jobs. Here it may be
instructive to note that the closest human analog of the cuckoo is
the man whose illegitimate children are supported by the husband of
his mistress. Etymologically, "cuckoo" and "cuckold" ought to be
synonymous. Yet it is the husband of the adulteress, not her
partner in adultery, who is called the cuckold!
No worker can live, and no enterprise can trade, without
occupying space on the surface of the earth. Yet all the usable
space is owned. So the rents and prices of land are competed
upward, and the returns to labor and capital are consequently
competed downward, until the returns to labor (net of the cost of
access to residential land) are reduced to the minimum for which
workers will "consent" to acquire skills, work, and raise the next
generation of workers [4], while the returns
to capital (net of the cost of access to commercial land) are
reduced to the minimum for which the financiers will consent to
save and invest. Every direct improvement in the condition of
the working class or the employing class is competed away in the
land market, so that the ultimate benefit accrues not to the
nominal recipient, but to the cuckoo in the nest: the land-owning
class.
That is why the ever-increasing sums handed out in wages,
welfare, charity, and industry assistance never seem to be
enough. But because the real reason is not widely understood,
the rentiers and their economists can easily blame the nominal
recipients for allegedly squandering the assistance given to them.
It is as if the cuckoos, having laid their eggs in other birds'
nests and taxed all the birds to help feed the cuckoo chicks,
explained the host birds' lack of reproductive success by accusing
them of wasting the food!
The effective demand for land-like assets tends to increase due
to population growth (which increases competition for use or
acquisition of assets), economic growth (which increases capacity
to pay for the assets), and improvements in technological
infrastructure (which increases the amenity of certain types of
assets, especially sites). But, as the assets are land-like, this
additional demand cannot be offset by additional supply. So
land-like assets tend to appreciate in real terms. This
causes speculative demand for land-like assets as
individuals and corporations buy assets in the hope of reselling
them for higher prices, or try to save money by early acquisition
of assets that they intend to use later. The speculative motive
raises prices because all buyers must compete with the speculators.
Worse, assets held by speculators are likely to be unused or
underused because the owners are not yet ready to use them, or
because the owners wish to avoid commitments that would fetter
their ability to sell at the most opportune times. This effect
raises not only prices, but also rents, as not only buyers but also
renters must compete with the speculators.
A sufficiently heavy tax on the holding of land-like assets
requires the owners to use the assets efficiently in order to
generate sufficient income to cover the tax. That is enough to
eliminate the price and rent premiums caused by the non-use and
under-use of speculatively held assets. In this case — and only in
this case — the benefit to workers and owners of capital is
not competed away in the land market, because it arises from
reduced competition for land!
Rentiers and their economists agree that such a tax is a bad
idea, but disagree as to the reasons. Some, who seem never to have
looked out the window of a bus or train, flatly deny that the
culture of speculation leads to non-use or under-use of land.
Others pretend that such non-use or under-use is socially desirable
in that it prevents any initial use that would interfere with
conversion to a higher use at the optimal time, as if the initial
use were not desirable in itself, and as if the higher use would
not interfere with conversion to a still higher use at a still
later time — yea, as if the cuckoos were helping other birds by
giving them time to become better parents!
The neo-classicists claim that income tax is compatible with
"free" trade because it is "non-discriminatory" between domestic
and international transactions. Never mind that the tax on export
income raises export prices as if it were a tariff in every country
of destination of those exports. Similarly, they claim that a
value-added tax (VAT) or goods-and-services tax (GST) is compatible
with "free" trade because it is finally paid in the country of
consumption and is "non-discriminatory" as regards the country of
origin. Never mind that the VAT/GST on imports raises their prices
as if it were a tariff. Never mind that the same tax inflates
export prices through its compliance costs and its influence on the
cost of living, hence wages. Never mind that as long as taxation is
"non-discriminatory" by the neo-classicists' definition, trade can
be taxed to the point of prohibition and still be considered
free!
In fact, all taxes on house-like assets impede trade and
raise prices by discouraging the production of such assets, while
all transaction taxes impede trade and raise prices by
discouraging transactions.
The only taxes that do not impede trade or raise prices are
holding taxes on land-like assets. The economic rents of such
assets are not incentives to produce anything. So as long as
the holding taxes take no more than the annualized economic rents,
they cannot restrict the supply or raise the price (or hire or
rent) of any product or asset.
Hence, by collecting more of its public revenue from holding
taxes on land-like assets, and less from other taxes, a country can
make itself more competitive. This of course would compel other
countries to do likewise. So the rentier class and its economists
are constantly on guard to ensure that no country is the first to
take this step; they know that the price of freedom (from the need
to work for a living) is eternal vigilance [3, pp.237–260].
In a rational market, the capitalized (or
"lump-sum") value of a land-like asset is the discounted present
value of the future rent stream. (That is, the capitalized
value is the lump sum that would yield an interest stream equal to
the rent for the same risk, or the sum of the future rental
payments individually discounted for time and risk.) But the market
is not always rational. When assets of a certain type are
conspicuously appreciating, people want to buy them. In so doing,
they accelerate the rise in prices, inducing more people to buy the
assets, and so on, causing a speculative bubble — that is, a
state in which prices are decoupled from rents and are supported
solely by the circular argument that prices will continue to rise.
Eventually the illusion becomes unsustainable and the price rise
slows down, which takes away the alleged justification for current
prices, and so on, until prices dive back to earth: the bubble
"bursts". But eventually the natural appreciation of land-like
assets leads to a new bubble in the same asset class. So the market
for any land-like asset class is cyclic.
A bursting bubble in a particular asset market has two
counteracting effects. On the one hand, it drives investors away
from that asset class and, by default, towards some other asset
class that may also be susceptible to bubbles. On the other hand,
those who have invested heavily in the collapsed market have to
reduce their expenditure, and some become insolvent. As one agent's
expenditure is another's income, and as one agent's debt is
another's asset, a chain reaction ensues, reducing the funds
available for investment in other asset markets, possibly causing
them to collapse, and so on; these are the ingredients of a
recession. After an isolated bubble-burst, the former effect tends
to dominate; thus the stock-market crash of 1987 led to a land
bubble. But after a second burst in quick succession, the
cumulative belt-tightening and bad debt tend to cause a recession;
thus the land burst of 1989 led to the recession of 1990–91.
In short, a burst in one asset market interferes with the cycles
of other markets, sometimes pushing them out of synchronism by
encouraging bubbles, and sometimes drawing them into synchronism by
triggering further bursts (and a recession). This mutual
interference, complicated by external shocks, makes it difficult to
discern the autonomous cycles of some asset classes, and causes
irregularities in cycles that can be more easily discerned. The
clearest cycles are the residential land cycle (typically 9
years in duration) and the commercial land cycle (typically
18 years). A bursting land bubble is the most reliable
single predictor of a recession; in particular, the global
recessions of 1974–5, 1981–2, and 1990–91 were heralded by bursting
"property" bubbles, i.e. land bubbles [5].
A sufficiently heavy holding tax on land-like assets would
prevent recessions by preventing speculative bubbles. If the
tax were based on capitalized values or changes in capitalized
values, it would force speculators to consider the tax implications
before bidding up prices. If based on changes in annualized
values, it would directly reduce the changes in after-tax rents
that translate into speculative gains; in particular, if it were to
take all real increases in rental values, it would prevent
real increases in capitalized values and thereby entirely
eliminate the speculative motive.
The first years of the 21st century were marked by a
global property bubble. The inevitable burst began in
Australia in early 2004. It has spread to the British Isles and
Europe, and in due course must reach the United States. Although
this global bubble was confined to "housing" (i.e. residential
land), it was the biggest asset bubble in history in terms
of the combined GDPs of the affected countries [6] — and that measure fails to account for the number and
economic weight of the countries involved. The bigger the bubble,
the bigger the burst. The bigger the burst, the bigger the
recession.
But even that is understating the problem.
As the money supply is controlled directly or indirectly by
government, money is a land-like asset and a component of the
so-called interest of money is economic rent. This economic rent
accrues to those who merely possess money. What of those who
also create it?
For half a century the U.S. dollar has been the
de facto international currency. Importers need
reserves of dollars to pay their suppliers. Central banks need
reserves of dollars to protect their currencies. Poor countries
must borrow dollars to get capital, and must earn dollars to
service their debts. Hence the growth in international trade causes
growth in the global demand for U.S. dollars, allowing the U.S. to
export dollars — which cost nothing to produce — and receive real
goods and services in return. That is how the U.S. manages to
import 50 percent more goods and services than it exports.
When the exported dollars are invested, they can be invested only
in U.S. assets, creating a demand for U.S. Treasury Bills without
high interest rates, and inflating the price/earnings ratios of
U.S. property, stocks, and bonds. This inflow of investment creates
a surplus on the capital account, which balances the deficit
on the current account (including imports, exports,
interest, rent, and dividends).
The U.S. dollar is also the dominant currency — and until
November 2000 was the exclusive currency — for international
trading in oil. Therefore any increase in the global demand
for oil or the price of oil causes a corresponding increase
in global demand for the U.S. dollar and boosts its value,
protecting the U.S. economy against the inflationary effect of
higher global oil prices and allowing the U.S. to increase its
trade deficit. Hence the reinvestment of exported dollars in U.S.
assets is sometimes called recycling of petrodollars.
One consequence of this recycling of petrodollars is that the
value of the dollar is out of proportion to its earning capacity
(interest on dollars, or yields on other dollar-denominated
assets). That is one characteristic of a bubble.
After 1971, when the U.S. dollar ceased to be backed by gold,
the dollar's position as the world currency became increasingly
dependent on its use in the oil trade, so that the argument
supporting the dollar became circular: dollars would buy oil
because oil exporters would accept dollars because
dollars would buy other products because exporters of other
products would accept dollars because dollars would buy oil!
Valuation by circular argument is another characteristic of a
bubble.
One thing that could burst the bubble is a credible alternative
to the dollar — such as the euro.
Iraq began selling oil for euros instead of dollars in November
2000. When Iraqi oil exports resumed after the U.S.-led invasion,
payments were again in dollars [7].
Iran expressed interest in the euro from 1999, and had converted
most of its currency reserves to euros by late 2002. In 2003, Iran
began accepting payment in euros for oil exports to Europe and
Asia. In mid 2004, Iran announced that it would establish a
euro-denominated international oil bourse (exchange), which is now
due to start trading by March 2006 [8,9]. George W. Bush named Iran in his "axis of evil"
in January 2002. If Bush's speech was designed to revive the
flagging fortunes of extremist candidates in Iranian elections, it
could hardly have been more successful: on October 26, 2005, Iran's
newly elected President Mahmoud Ahmadinejad, quoting the late
Ayatollah Ruhollah Khomeini, declared that "Israel must be wiped
off the map."
Since September 2000, Venezuela and 13 other Latin-American
countries have entered into barter agreements whereby Venezuela
sells oil for goods and services instead of dollars. In April 2002,
editorials in the U.S. media welcomed news of a coup against
Venezuela's elected President Hugo Chavez; but the coup collapsed
after two days [10,11].
In mid 2005, Venezuela decided to move its currency reserves out of
U.S. banks and liquidate its investments in U.S. Treasury
securities. By early October, about 60 percent of its reserves
had been converted to euros [12].
The U.S. may threaten Iran and Venezuela; but if Russia and
Norway start selling their oil for euros, the U.S. will have to
take it on the chin.
Given that the value of the U.S. dollar must fall, nobody wants
to be the last sucker holding dollars. Therefore any perception
that the crash is imminent will trigger selling of dollars in an
effort to pre-empt the crash. That selling will amplify the
perception, causing more selling, and so on; so the perception will
become reality. Moreover, the rush to sell dollars will extend
to dollar-denominated assets, including U.S. property, stocks,
bonds, and bills. So the burst of the dollar bubble may be the
trigger for the expected burst of the U.S. property bubble — among
other things.
If, on the contrary, the U.S. property bubble bursts of its own
accord, the falling value of this class of dollar-denominated
assets will reduce the attractiveness of holding dollars. Worse,
the recession precipitated by the property burst will bring down
other dollar-denominated asset markets. If the initial collapse of
the U.S. property market is not enough to prick the dollar bubble,
the ensuing collapse of other dollar-denominated asset markets will
certainly be enough, and the dollar crash in turn will drive
further selling of dollar-denominated assets.
In either case, there will be a multiple burst involving not
only the global property bubble, which is already deflating
outside the U.S., but also the U.S. dollar bubble and every
other asset bubble that has been pumped up by recycled
petrodollars. The bigger the burst, the bigger the
recession.
In short, the neo-classical economy works like this. The
supplies of certain assets, including land, are not within the
control of taxpayers. The returns on such assets (economic rent)
are not due to any activity of the owners (rentiers) and therefore
could be taken for public revenue, by means of holding
taxes, with no ill effects. But this option is rejected. Instead,
governments impose taxes penalizing everything that the
neo-classicists profess to encourage. These taxes deter employment
and feed inflation. Central banks fight the inflation by raising
interest rates, causing more unemployment, for which the
politicians' remedy is not to create more jobs (which would defeat
the efforts of the central banks) but to intensify the competition
for the few jobs that are available. Meanwhile, the opportunity to
speculate on land-like assets creates a permanent artificial demand
for those assets, causing permanent price premiums and rent
premiums exacerbated by periodic speculative bubbles, which burst
causing periodic recessions. One of these overpriced land-like
asset classes is residential land, for which working people must
pay out of wages that have been depressed by the deliberately
engineered scarcity of jobs, eroded by income tax, and devalued by
indirect taxes. Unemployment, poverty, and housing stress are the
price that must be paid so that rentiers can continue to enjoy the
economic rent that they do not produce. This is the prize for which
the Cold War was fought, the End of History, the capitalist
Nirvana.
[1] A networked service is a monopoly in the
sense that any new competitor wishing to serve its first customer
must either replicate the whole network, which is prohibitively
expensive, or connect to the existing network on terms dictated by
the owner or governed by regulation; none of these options admits
free and fair competition.
[2] The so-called "rent" of real property
comprises the rent of the land plus the hire of any building(s)
attached to the land; only the former is economic rent. The
so-called "rent" of a vehicle is not economic rent, but a return on
capital.
[3] M. Gaffney, F. Harrison, and
K. Feder, The Corruption of Economics (London: Shepheard-Walwyn, 1994;
271pp.).
[4] Of course workers can hardly refuse to
acquire skills and to work. But nowadays they can easily refuse to
raise the next generation of workers if the future for workers
looks bleak. That is their biggest bargaining chip.
[5] Concerning the theory that recessions are
due to high oil prices, suffice it to say that (i) there were
recessions before there were oil shocks; (ii) the recession of
1990–91 started before the oil shock that allegedly caused it; and
(iii) in the words of Alan Greenspan, "we create these
elaborate models for policy responses and we put in oil prices
[but] they don't create a recession in the models" [answer to a
question from the International Monetary Conference (London,
June 8, 2004), transcribed by Ashley Seager and quoted in Fred
Harrison, Boom Bust (London: Shepheard-Walwyn, 2005),
p.65].
[6] The
Economist, June 16, 2005; http://economist.com/opinion/displayStory.cfm?story_id=4079458,
http://economist.com/opinion/displaystory.cfm?story_id=4079027.
[7] William Clark et al., "U.S. Dollar vs. the
Euro: Another Reason for the Invasion of Iraq", Project Censored, #19 for
2002–3, http://projectcensored.org/publications/2004/19.html;
5 refs.
[8] William Clark et al., "Iran's New Oil Trade
System Challenges U.S. Currency ", Project Censored, #9 for
2004–5, http://projectcensored.org/censored_2006/index.htm#9;
5 refs.
[9] Cóilín Nunan, "Petrodollar or Petroeuro? A
new source of global conflict", Feasta
Review, No.2, www.feasta.org/documents/review2/nunan.htm;
32 refs.
[10] Hazel Henderson, "Globocop v. Venezuela's
Chavez: Oil, Globalization and Competing Visions of Development",
April 2002, http://hazelhenderson.com/editorials/globoCop04-02.html.
[11] Duncan Campbell et al., "Bush
Administration Behind Failed Military Coup in Venezuela", Project Censored, #12 for
2002–3, http://projectcensored.org/publications/2004/12.html.
[12] Gregory Wilpert, "Venezuela's Central
Bank Confirms it Deposited $20 Billion in Swiss Bank", Venezuelanalysis.com, Oct.5,
2005, http://venezuelanalysis.com/news.php?newsno=1777.
Copyright © 2005 Prosper Australia (http://prosper.org.au, http://earthsharing.org.au).
Author: Gavin R. Putland (http://grputland.com). Permission is
given to forward, copy, translate, and otherwise publish this work
for non-commercial purposes provided that the work remains intact
and includes this copyright notice. |
