Capitalism, democracy and land

By Catherine Cashmore, a market analyst, journalist, and policy thinker, with extensive industry experience in all aspects relating to property. Follow Catherine on Twitter or via her Blog.

Protests that continue to erupt across the country against the Federal budget consist of two sectors.

Those who are disadvantaged through cuts to government expenditure – young people, job seekers, groups on low-incomes, the home-less – against political parties who want to exploit the situation to swing the popular vote in their favour.

It comes at a time when many young Australians are growing increasingly disillusioned with what politics, in a neo liberal capitalist culture, is able to achieve.

The various groups opposing the current budget may not be aware of the full backdrop that sits behind the issues they dispute.

Separating the politics of envy, from the basic principles of equity is not an easy task, not only in the items we consider ‘wealth,’ but also in judging whether income is a true representation of skill and effort, or granted disproportionately at the expense of others.

Most, however, recognise a process that favours the rich – one where politicians subject themselves to the interests of lobbyists and promise what they need to gain a seat in power.

We’ve seen this most recently with the ICAC investigations. Tens of thousands of dollars pouring into the major party coffers from property developers all claiming to be ‘legitimate’ – yet, as we know, you don’t hand over cash without expecting special favours in return.

It would be nice to think that democracy alone could remedy this, but democracy unless underpinned by good policy, has a fatal flaw – that of short termism.

While voters will champion the environmental crisis of climate change and affordable accommodation, they will recoil at the thought of living near a wind-farm or high-rise block.

Public housing and commission homes are fine in theory, but not in the local neighbourhood, or indeed, anywhere in view.

We’ll welcome the stranger and rally in defence of the asylum seeker, but only on the condition they don’t take away our jobs or price the locals out of housing. In other words, you can come in, but just don’t join in.

No one cheers at the thought of saddling our younger population with student debt – however, when it comes to the cost of shelter, a different attitude arises. Generation Whine are instead told to shut up and save up.

While we desire a country built on the pillars of community, equity, and economic justice, it’s simply not possible in country that is pinned to the foundation of rising land values, as a necessity to fund retirement and most other lifestyle and business needs.

The social consequence that arises from this costs us millions in welfare payments throughout the year. Yet it is still advertised and promoted as the road to riches, creating a “FIRE” economy (finance, insurance and real estate) – disproportionally inflating land costs without due acknowledgement of the consequence.

Unfortunately, the web of confusion that surrounds the subject has put capitalist democracy, which has managed to free so many from the dominance of politically oppressive and controlling regimes, under attack.

Yet, capitalism, which in its truest form is simply a free market system of competing goods and services, is not what we have presently.

Today, faulty economic thinking has allowed items that are not made, or earned and by nature cannot compete; to be traded and profited from as if they were created capital. This has corrupted what should be a very good and fair system.

It’s important, therefore, to understand what wealth and capital is exactly.

Wealth is not the paper and numbers in our bank account. Money is simply a measurement of the resources we need, to produce the goods and services we consume (capital) for both business and pleasure.

In simplest terms – a person’s wealth is made through his/her own enterprise; whilst a country’s wealth consists of its land and natural resources.

When we earn money in exchange for our skills and labour it can’t be considered unjust or unfair.

However, when it comes though a government legislated process, of allowing some to profit at the expense of others, by trading items that are not capital or derived from any physical effort, this yields a special kind of unearned income, which in classical economics is termed “rent.”

Rent seeking can take on many forms – such as patents and government licences for example, which cripple competition from smaller industries and produce an unfair advantage.

The ‘Uber’ and ‘Lyft’ revolution is one such example.

It threatens to undermine the cartel of the Taxi industry’s ‘licencing’ monopoly, which gleans an economic rent from purposely-limiting the number granted.

‘Uber’ and ‘Lyft’ offer a cheap and reportedly safe ‘match-making’ alternative for consumers; however their progress has been repeatedly stifled by government intervention, determined to protect a monopoly and a culture of regulation evidently fearing a cut to revenue.

The most damaging of rent seeking behaviour, however, and the one that yields the most gains, is trading the economic rent of land.

An increase in the market price of land is an expected result when economies are improving along with capital investment in infrastructure. Therefore, of all rent seeking behaviour, owning a plot of land in path of this progress yields not only the greatest windfall of passive gains, but is also used as a significant source of territorial and political power.

This is not surprising when you consider all the goods we consume come from it. Our oil, natural gas, timber, coal, and water reserves are the product of it.

We travel on it, work on it, party on it, sleep on it, and bury our dead in it.
Wi-fi, airplanes, all forms of technology need it. We evolved from it and progress on it.

Try and think of an activity, or item, that does not include land, and you will come up short.

However, the flow of income that comes from owning land over and above the value of building on it, when capitalised into the price, leads to a monopolist culture that feeds speculation, attracting a cabal of banking and finance interests and concentrating the vast proportion of a country’s wealth in the hands of a few, above the very real needs of many.

Rupert Murdoch ironically coined it best when, in his 1994 John Bonython lecture “The Century of Networking” he said:

“Because capitalists are always trying to stab each other in the back, free markets do not lead to monopolies. Monopolies can only exist when governments protect them.”

This is in essence what the Arab Spring was all about.

Many mistook it as a grasp for democracy – however it wasn’t. It was a grasp for true capitalism – the freedom to prosper unimpeded by onerous regulation or rent seeking behaviour. At its essence was a desire for economic justice, equal access to opportunity – matters we look to Government to provide.

Since the early Australian settler Edward Gibbon Wakefield (1796-1862), devised his grand plan of “systematic colonisation” – making land just so ‘sufficiently’ unaffordable as to create a willing workforce of labourers. Economists and politicians have done everything possible to distract public attention from what is nothing more than a modern day game of feudalism.

They do this by allowing people to play a dangerous game of leverage, gambling on land price inflation by borrowing as much debt as possible to maximise their ‘capital gains,’ without acknowledging what is given with one hand, is taken with the other – or more accurately, from another.

This is clearly highlighted in the response to the budget.

Whilst rich land-‘lords’ and mining magnets grow wealthy, collecting their unearned windfall in economic rent – they ironically tell the young tenant saddled with student debt “so you think the world owes you a living?” while government stretches out its hand to the low waged worker commanding they “pull their weight.”

Ken Henry tax review “The current charging arrangements distort investment and production decisions….. they fail to collect a sufficient return for the community because they are unresponsive to changes in profits”

It is no coincidence that whilst far from a perfect system of equitable land reform, the greatest equaliser in Australia and the one that had the most profound social and economic effect on reducing inequality, was the Mabo Judgement over land rights for the Aboriginal people.

The monopolists in the mining industry stringently and shamefully lobbied against it, as they did most recently with at mention of a resource tax, turning it into a national crisis.

This is essentially why Clive Palmer entered politics.

Each year Ernst & Young produce a business report for the mining and metals industry, highlighting the top ten risks that can affect fat cat profits, along with tips on how to avoid them.

Featured prominently is “Resource nationalism” (sharing the gains) with the comment:

“Miners have had to become more politically savvy” “the most successful are building strong relationships with Government” to…”educate on tax reform”

It is against this backdrop, that the ‘loveable’ founder of “PUP,” which claims to “Unite All Australian’s” has bought himself a seat in power by promising ‘peace, prosperity and goodwill’ to all men, alongside a raft of economic ‘goodies.’

When Clive comes to town, Christmas does too: lower income tax, free education, higher pensions, you name it, Clive will promise it.

His policies are overwhelming ‘wishy-washy’ with no detailed assessment as to how they’ll be funded – but that doesn’t matter. Economic analysis is not the ‘PUP’ agenda.

Instead, it will act in the best interests of its leader ensuring the abolishment of any mining and carbon tax, whilst driving the cost of land higher with incentives for homebuyers.

However, the corruption of politics to favour the vested interests of leaders is nothing new.

It is no coincidence that just about every housing policy designed to increase affordability, results in the reverse.

This can be witnessed in any country that allows the economic rent of land to capitalise into the price, thereby becoming a tradable asset to gamble on.

All tax incentives, such as negative gearing for example, simply inflate costs rather than reduce them.

Zoning policies create false scarcity by protecting affluent neighbourhoods from ‘over development’, restricting the use of fringe land with urban boundaries and onerous regulation, and advantaging existing owners by pushing up the price of marginal land – which buttresses the price of all land.

The evidence shows, the richer vendors become, the more energetic they are to restrict development near their own land holdings – unless it acts to inflate values.

Many Melbournian’s will be familiar with the historical figure of Thomas Bent for example, who became the 22nd premier of Victoria.

His corrupt dealings are well documented, not least, using his political clout to extend the railway line from Caulfield to Cheltenham, thus enormously increasing the value of his own property developments, which just so happened to fall alongside the proposed route.

A more recent example is being alleged in New Zealand.

The country is undergoing a crisis of housing affordability and has been termed the world’s ‘most over priced.’

Policy makers are tying themselves in economic knots to uncover solutions, with the central bank employing strict lending regulations to prevent exuberant speculation, while ‘up-zoning’ to increase supply is underway.

However, these ‘up zonings’ miss Auckland mayor Len Brown’s spacious lifestyle block, which conveniently falls outside the Metropolitan Urban Limit (MUL).

Mayor Len Brown who has recently purchased an American V8, whilst sporting the public face of being very ‘pro public transport,’ has uncharacteristically ‘infuriated’ his council’s transport leader, by rallying in defence of significant road projects which are reputed to have a beneficial and value enhancing effect on his own estate.

There are numerous academic studies world wide, which outline housing affordability problems, yet fail to identify the root cause and therefore effective solutions.

Economist Michael Hudson points out in USA studies, how the magnitude of land-price gains are brushed under the carpet to hide the massive unearned profits reaped by those who hoard it.

The same phenomenon is happening in Australia, not only with the ‘soft closure’ of the Australian Valuation Office and ‘rubbing out’ of First Home Buyer statistics from the RBA chart pack, but through budgetary cuts to ABS funding, which threaten to end the official “House Price Index” (considered the most reliable market indicator) in favour of private unaudited data providers, whose transparency and reliability are consistently questioned.

When you appreciate how lucrative rent-seeking is to those in power, it is very easy to see how democracy fails us – working tirelessly to silence voices by politically reinforcing faulty economic theories, while strenuously working against efforts to liberalise them.