William Petty

After his bloody victory in Ireland (1649-1652), one of the first things Oliver Cromwell did was to establish the annual worth of the lands of Ireland.  William (later Sir William) Petty won the tender to value the newly-conquered land by using cheap labour in the form of some of Cromwell's by then unemployed soldiers.  He trained them in valuation techniques, including how to chain-survey the whole of Ireland, and oversaw the professional completion of the valuation contract within thirteen months.

Petty was a larger than life character who some hold to be the father of modern economics and its first econometrician.  At one point he is said to have commented on the extent of the Irish holding which Sir Hierome Sankey, one of Cromwell's more formidable knights, had chosen for himself following the invasion of Ireland. Insulted, the brawny knight challenged the notoriously near-sighted Petty to a duel, offering Petty the choice of weapons and location. When the purblind Petty chose broad axes in a darkened cellar, Sir Hierome retreated gracefully after finding reason to reconsider the seriousness of Petty's offence.  

Both Cromwell and Petty saw the need to know the annual value of Ireland's natural resources, but the modern neo-classical economist is all but clueless on the quantum of resource rent within the economy, or for that matter to where it disappears. He is even heard to say that as we no longer exist predominantly in rural communities, land-based revenue systems are no longer appropriate; this, despite the fact that the greater part of land rent is now located within our large cities. 

Whereas it was accepted in Petty's day that the annual rent of land was a surplus that came about by the mere existence of community, and its collection and use was the cheapest and most equitable source of revenue, we are now educated to forget that as the annual value of our natural resources are privately expropriated it becomes necessary to levy a myriad of costly taxes on all sorts of productive activities.  In 2002, only $19.2 billion of Australia's $180 billion of publicly-created natural resource rents was captured for public purposes. The $160.8 billion foregone in resource revenues was gratefully received by Australia's property owners, but the chart below indicates that this bonanza came at enormous cost to the country. The graph provides evidence that the growing quantum of Australia's resource rents and taxes has been at the expense of the net incomes of labour and capital, especially since 1972 where, as a proportion of GDP, taxes have increased by 28%, the nation's rent has escalated 125% and net incomes have declined by 35%.  Accordingly, it is possible to argue that the real battle is not between capitalist and worker, but between most Australians and the relatively few rent-seekers who capture the greater part of our national resource rents. 

Nikolai Kondratieff

The Russian economist Nikolai Kondratieff did not have any explanation for the cause of the 50 to 60 year long wave cycles he discovered in his studies of 140 years of the economies of the US, UK, France and Germany.  However, cycles of boom and bust seem to be inextricably linked to the failure of economies to capture the national rent for their coffers, and to the consequent escalation in land prices and taxes levied on productive work. Where most modern economic analysts don't like to acknowledge the existence of the Kondratieff wave because it is suggestive of their impotence during its deflationary downslope, the following three graphs of raw GDP growth clearly show the inflationary, then deflationary, courses of the fourth Kondratieff wave within the economies of Australia, the USA and the UK.  It is grim to remark that the end of each of the three preceding longwaves was defined by economic depression.

Real Estate Bubbles 

The final chart displays the relationship of Australia's total real estate sales to GDP.  At the bursting of each property bubble (ie. those parts of the graph exceeding the empirical 19% ‘bubble line') the economy has declined into recession as the graph cut back below the 19% mark.  The period shown represents the second half of the fourth Kondratieff wave, and it is apparent that as property sales to GDP increased, GDP growth has tended to decline.  So, whereas low tax rates and deflated land prices had assisted post-war GDP recovery until the outset of the 1970s, increments in taxation, inflation and interest rates since that time have had the effect of taking Australians' eyes off the ball.  We began to follow the dictates of the tax regime to play another game altogether, namely, that of real estate speculation. We have now inflated the current residential bubble to voluminous proportions and economic growth is primed to tank into a major deflation.

Australia's Future 

In the week ended 3 June 2005, the Treasurer Mr Costello warned that the Reserve Bank of Australia should not increase interest rates.  Early the following week, the RBA seemed to have listened.  However, Costello's advice may have been redundant in the current deflationary environment, because the next adjustment of Australian interest rates would more properly be downward.  If we wish to arrest the decline into financial collapse, it may be time for analysts and policy makers to consider to what extent Petty's national rent offers potential to slash the taxation of productive activity.  Replacing taxes with resource rents could also help to keep the lid on skyrocketing land prices which have played such a destructive role in the Australian economy during the second half of the fourth Kondratieff wave.

Bryan Kavanagh, AAPI, is director of the Land Values Research Group, a privately funded think tank which has researched Australia's natural resource rents since 1943.  He is also a director of the Melbourne-based real estate valuation firm, Westlink Consulting.  Mr Kavanagh's Case for a Federal Charge on Land Values was published in the Australian Property Journal, in February 2005.
 

Telephone:  + 613 9803 5607
Facsimile:    + 613 9887 6287
E-mail:  bryan@earthsharing.org.au