P = R + W + I *

The importance of a formula

The formula P = R + W + I is more important to humanity than E = mc², but only a handful of people know or understand it.

It shows that poverty is man-made, as are 'business cycles', economic recessions and depressions.

The formula mocks our efforts to ‘run’ the economy. It demonstrates the manner in which we currently suppress planet-friendly economic activity and promote land monopoly, speculation, urban sprawl and environmental pollution.

It’s all there in the formula.

Ignorantly discarded by neo-classical economists, it is classical economics' distributional formula: that is, production (P) is distributed between rent (R), wages (W) and interest (I) as the respective returns to land, labour and capital. Whereas wages and interest are both costs of production, rent is a community-generated surplus in the production process. But we have failed to act upon the fact that rent is the annual value given to land and other natural resources by the existence of community and public infrastructure, allowing it instead to be privately expropriated and capitalised into unaffordable land prices. 

'The labourer is worthy of his hire', of course, so wages ought to be be the full return to labour (which combines with natural resources to create wealth), and interest should be the full return to capital (employed by labour to create wealth more efficiently).

'Ought', 'should', but isn't - so what?

Let’s transpose the formula.

P – R = W + I

That is, production less the annual value of our natural resources for public revenue leaves wages and interest: intact. They are not residual after taxes, superannuation and a Medibank levy have all been summarily deducted. Labour and capital are left to retain their full reward.

Once we understand and act upon the ramifications of P = R + W + I by paying into the public coffer the annual value of the land and natural resources over which we have been granted exclusive use, an ample and growing natural fund becomes available for education, health, social welfare and public infrastructure. We would reduce household debt, close the widening poverty gap, slash fraud and crime rates and come to experience real personal and financial freedom.

Taxation destroys. The Land Values Research Group's report, Unlocking the Riches of Oz: a case study of the social and economic costs of real estate bubbles (1972 to 2006), shows that the $1 trillion Australian economy has been suppressed at least to the extent of a further $1 trillion by the inflationary and recession-inducing deadweight costs of taxation since 1972. Estimates provided in the report's spreadsheet were assessed conservatively, on the basis of collecting only one half of the annual value of Australia's land. Obviously, trading off taxes for a greater proportion of land value capture would permit the creation of even greater national wealth.

Failure to act upon this little known but critical formula not only escalates prices, inflation and poverty, but diminishes science, society and religion. Worse, formulation of so-called bill of rights lacking a preamble concerning the responsibility of all citizens to combine to pay the annual value of their land into the public purse, so that taxes may be replaced, sets the current economic travesty in concrete.

Whilst economic analysts, credit rating agencies, Treasury officials and politicians have wrestled ineffectually with their duties, The Land Values Research Group has developed a barometer of the economy which makes it possible to forecast its direction. It shows the total value of all real estate sales in Australia divided by GDP. Insofar as a significant part of the public rent revenue foregone is represented by the privately capitalised land component of real estate sale prices, the index traces the misuse of rent and provides a surgical picture of a boom and bust economy.

There is a growing realisation that it is now impossible to repay much of the debt invested into inflating the current residential real estate bubble, so it seems we have been delivered to the door of the first economic depression of the 21st century. Meanwhile, economists, blind to the scientific rationale of P = R + W + I, create superficial and impotent mathematical models, or simplistically reduce unfolding financial collapse to issues of supply and demand.

To establish the formula's credibility and to warn of the yawning chasm in the study of economics, The Land Values Research Group has employed its predictive capacity at least four times since 1987:-

Forecast 1:

 “That is, as land prices rise sharply across the board, it can be accepted that the productive side of the economy will wilt – that unemployment will increase and the return on capital will wane.  It is empirical study of this law which allows Georgists to predict the recession which will follow the peak of the next worldwide land boom in 1991/92.”  Getting it Right at Local Government, Bryan Kavanagh, The Valuer, July 1987, p.561.

Outcome: Worldwide recession was experienced in 1991/92

Forecast 2:

“1995/96: (Projected) Share markets fail, creating financial and social disaster.” The Recovery Myth: A Positive Response, Bryan Kavanagh, Land Values Research Group, 1994, p.9.

Outcome:  South-East Asia experienced a depression in 1996/97

Forecast 3:

“Closer study on a state by state basis (Chart 7) shows Queensland to be still experiencing a strong real estate boom – its sales surpassing those of Victoria, and very nearly equalling those of New South Wales for the first time on record.  This is partly explicable in terms of the recent northern drift of tens of thousands of stunned Victorians seeking economic refuge over the Queensland border. But as real estate activity far outstrips production in that State, a sharp economic decline appears to be also in store for Queenslanders.”  The Recovery Myth: A Positive Response, Bryan Kavanagh, Land Values Research Group, 1994, p.15.

Outcome: Queensland experienced economic recession in 1996/97.

Forecast 4:

“The volume of debt contained within the height and breadth of the recent residential bubble offers a strong degree of confidence to suggest that Australia will experience a severe economic recession within two years of the graph retreating back below the 19% bubble line.”  Unlocking the Riches of Oz: A case study of the social and economic costs of real estate bubbles (1972-2006), Bryan Kavanagh, Land Values Research Group, 2007, p.15.

Outcome:  ???  

* See Henry George, Book III / The Laws of Distribution, Chapter 2 Progress and Poverty: An inquiry into the cause of industrial depressions and of increase of want with increase of wealth … The Remedy