P = R + W + I

The Depression: the importance of a formula

The formula P = R + W + I is more important to humanity than E = mc², but only a few people understand its ramifications. 

It shows that poverty is man-made, as are 'business cycles', economic recessions, and the economic depression that our political leaders dutifully repeat we are not about to experience. (They prefer to lie, "to maintain confidence", rather than to solve the economy's great structural weakness.)

The little equation mocks their efforts to ‘run’ the economy. It demonstrates the manner in which planet-friendly economic activity is currently suppressed in favour of the promotion of land monopoly, speculation, urban sprawl and environmental pollution.

It’s all in the formula, whose implications also remain undiscovered by modern economists.  Were they to make the effort to get their heads around it, it would be akin to the discovery of new continents. Monetary theorists, too, might well contemplate its import in respect of lending and interest.

It is economics' distributional formula: production (P) is distributed between the factor incomes 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 fail to capture the surplus that simply arises from the existence of community and public infrastructure, allowing it instead to be privately expropriated, and capitalised into increasingly unaffordable land prices, and mortgages that cannot be repaid. 

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

'Ought', 'should', but isn't. So?

Let’s transpose the formula, as Henry George did.*

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 naturally growing fund becomes available for education, health, social welfare and public infrastructure. We would rapidly 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 since 1972 the Australian economy has been suppressed to the tune of $1 trillion by the deadweight costs of taxation, including compliance costs, inflation and recessions, so that GDP should now be $2 trillion instead of $1 trillion. The technique and estimates given in the report's spreadsheet are conservative, insofar as they assume the capture of only one half of the annual value of Australia's land. Obviously, trading off an even greater level of taxation for a higher proportion of land value capture would assist further wealth creation. Moreover, the application of a higher charge on the use and abuse of land would help ensure that additional GDP growth is environmentally friendly.

The failure to act upon this critical formula not only escalates land prices, inflation and poverty, but also diminishes science, society and the environment. Of course, the formulation of any so-called bill of rights which lacks a preamble concerning the responsibility of all citizens to pay into the public purse the annual value of their land sets the current economic travesty in concrete.

As Treasury officials, the Reserve Bank, politicians, economic analysts and credit rating agencies wrestle ineffectually with their duties, the Land Values Research Group has developed a barometer over the last 20 years which would assist their decision making. It shows the total value of all Australian real estate sales divided by GDP for each year - and accurately forecasts the direction of the economy. Insofar as the rent that has not been collected for public revenue is represented by the land component of real estate sales, the index traces the misuse of rent by providing a surgical socio-economic picture of Australia's boom bust society.

It is now impossible to repay all the debt invested into inflating the recent massive residential real estate bubble. Therefore, Australia faces the first economic depression of the 21st century. The LVRG's expertise over 65 years has been studying the cause and cure of economic recessions and depressions, but most economists, blinded to the scientific rationale of P = R + W + I, believe that bailouts and interest rate reductions might offer some sort of solution to the unfolding financial collapse. They won't.

Our expert opinion? There is no solution other than urgently slashing taxes, and making up the difference in revenues from publicly-generated land values. 

In order to establish the credibility of the formula and to warn of the recessions that arise from this void 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: We experienced a worldwide recession in 1991.

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:  Asian real estate markets peak in 1994, followed by an Asian depression in 1996/7; worldwide share markets also decline in October 1997.

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: Whilst not strictly a technical recession in economic terms, Queensland nevertheless experienced a major slowdown in economic activity in 1996/97, following the bursting of its real real estate bubble.

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:  ?

If we take history as a guide, politicians and policymakers are more likely allow us to suffer the depredations of another economic depression rather than make this simple adjustment to revenue systems.  

*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"