Henry George’s formula P – R = W + I tells us that the incomes of workers and business should not be taxed, because they are earned incomes, whereas the economic rents from natural resources such as land, forestry, fishing, spectrum, &c., are more proper revenue bases – because these are unearned by companies and individuals, being created by society at large. [See here and here for earlier notes on the importance of George’s largely undiscovered formula.]
As we currently fail to capture these natural resource rents to the public purse instead of taxes, the economic health of society is sorely compromised, not only to the extent that taxation erodes wages and profits, but also by its deadweight effects that adversely cascade into costs and prices. It is these effects that price Australia out of markets – not wages or profits.
Let’s now look at the formula’s primacy in understanding debt:
When governments fail to capture sufficient land rent (in its broader sense, viz, all natural resource rents and government-granted privileges), it is privately capitalised into higher and higher land and other prices, into booms, then bubbles, and the eventual financial collapse when the bubble bursts. Business profits and workers’ wages are meanwhile diminished by increasing taxation as land prices and commitments to concomitant impossible mortgage debt levels rise.
The formula demonstrates an inverse relationship between privatised rent and wages and profits. i.e. Wages and company profits will fall as capitalised rent (land prices) increase, and rise when land prices diminish. In this sense, increasing land prices may be seen as the deep pathology integral to any understanding of impossible debt levels. Yet banks continue to lend money against escalating land prices and expect to be bailed out when land price bubbles burst! Being clearly remiss in their risk analyses, banks believe they deserve a pat on the back for putting the financial system at risk!
Incredibly, the modern economist is only prepared to deal with the ailment of excessive debt without tracing it back to its origins, as cleverly demonstrated by George’s P – R = W + I. Why is this? Are rentiers so terribly important that their scam in capturing as much publicly-generated economic rent as possible at the expense of wider society must not be exposed and challenged? The questions must be asked: What collateral is required by banks? Is it not real estate values? Is not a large proportion of real estate value simply these pathological land prices which history shows collapse every eighteen years or so?
As big rentier banks continue to ‘game’ the system by encouraging small rent-seekers to play their relatively tiny role so they, too, will baulk at the kind of tax reform essential for any healthy society, world economies continue to fester and worsen for want of understanding this most important equation.