Thursday, 10 June 2010

The Free State - And Why Your Wages Never Rise

I'm going to cover this once again because I was asked in the curry house tonight:  

If you are so smart tell me how come, when I produce so much more today, my wages never rise, I work ever longer hours, even my wife now has to work and the cost of living always goes up. Who is getting the gain from my extra work and where will it all end. When will I be able to spend more than Sunday morning with my kids. When will I get a life. This is the 21st century isn't it ?

I sympathise. The graph below shows how as we produce more, earned incomes fall in proportion to unearned incomes. And over the past 100 years the power to produce wealth has nonetheless increased by nearly 20 times in real terms. There is plenty to go around, we are not running out of anything. Yet those doing all the work and developing business are receiving an ever decreasing fraction of the wealth they actually produce as earnings. These are bizarre but irrefutable facts.

So who is getting all your extra productivity? It is simply going to owners of land as an unearned income in rent. The data is from Australia and I now have further analysis from across the world indicating identical effects*. This rent accounts for the larger fraction of all types of income to all people. The production of wealth from most people's work, is now being appropriated by a few who do very little except sit on a piece of land. The wealth divide, huge concentrations of capital and high pay are its inevitable effects.

These observed facts are in complete harmony with David Ricardo's Law of Rent, further reconciled by Henry George who shows clearly how the knock on effects are predictable and recurring recessions and wages driven down to subsistence levels. It explains fully why our standard of living does not rise in line with an increasing power to produce wealth. And finally it shows why we are compelled to use resources so wastefully at ever increasing prices. If we can bring ourselves to accept these repelling facts, we can for the first time proceed with confidence on the perplexing questions of economic failure, poverty and destruction in a world that has long since been able to produce abundant wealth.

The Law of Rent
Let's take a closer look at what is going on here. As our power to produce wealth grows, a natural fund in economic rent inevitably tends to increase land values, rentals, house prices. This is a community created value, not landowner created. As a result of all people working together more effectively, they can produce more with less effort and waste. It follows that more people want to be there of course. Demand for that location. Wages in general also rise in total amount but fall in proportion to this rise in rent. Because all earnings above what are available in the least productive place MUST go to rent. There is nowhere else for them to go because wages do not get paid until the rent has first been taken out. Under free conditions this is a good thing, though it appears a paradox. It indicates society is in a state of economic advance because the value of land is rising and what can be produced on it is increasing with less effort. Wages will find their normal level at this point. Everyone will have a surplus to spend, save, reinvest in their business or give away. This is as much an economic law of nature as is gravity. The Law of Rent.

The Private State
As production rises AND the rent is collected privately as an unearned income by landowners, then wages must again fall in proportion to the rent. But today, because the rent is not used to fund government, your hard work must be taxed to pay for public services. Add this taxation to the rent you pay, either as tenants to a landlord or as mortgagees to a bank, you are paying double for the land you use. This requires higher wages before you are willing to start work or can remain in work at the normal rates. On the whole wages will fall until they have been competed down to the minimum people are prepared to work for before walking away into welfare. A welfare state emerges as an effect. Worse still the rent is spent quite wastefully on further mal-investment, nearly always to buy more land for obvious reason. All this is the effect of the primary social institution of private property in land. Monopoly power and control over the primary economic factor of production, the land. It is NOT the effect of capital, in itself a good thing, capital is wealth!** Yet it is exactly what causes the concentration of capital into unnatural and monstrous fortunes. This is why the so called 'free market' system has consistently failed to trickle down wealth and has failed to deliver equity to all people. I call this the Private State.

The Welfare State
As we have shown, most taxation is collected from people's hard work to pay for pubic services, plus they pay rent on top. But now an additional penalty must be paid by workers and producers to mitigate the chronic side effects of the Private State. These effects manifest themselves as benefits for involuntary unemployment and involuntary employment. Not to mention the further side effects of vice, addiction and life dissatisfaction. Modern day, virtual wage slavery. Production, wages and rent will now all  be less than what could be. All this is the effect of monopoly socialism. Yet socialism has noble goals of fairness and equality. But by  dreaming of perfect government and to fight the Private State, production of wealth suffers dramatically in a desperate attempt to collect the rent from taxes on your work. The cost of production rises, unemployment rises as employers try to minimise workers, less is produced, less efficiently and bureaucracy becomes unsustainable. This is why socialism has consistently failed to deliver equity to all people. I call this the Welfare State

Unsustainable Economics Today
The current economic paradigm operates forever unsustainably, within a dynamic overlapping mix of these Private and Welfare states, resulting in periodic economic paralyses, persistent poverty right next to enormous production of wealth. Finally as all land has been enclosed, we have run out of planet to exploit to pay for it all, the destruction of the ecosystem. I believe this is all a rather silly historical accident. Where we have failed to adapt our primary social institutions to our ever increasing ability to produce things more easily. We can master technology to fly to the moon, Surely we can master politics and feed the world too?

The Free State
There is a remedy for this social insanity. If the rent were collected for public revenue and taxes on work and production were abolished, a simple fiscal swap, then production, wages and even rent would rise, in the end. Wages would move up towards their truly natural level, at the margin of production. There would no longer be a penalty to pay for working. And it would be natural to use scarce natural resources to their highest efficiency. This is the effect of monopoly commonwealth. The entire wage fund would go to the free producer and all the economic rent would be collected from the "commons" for public purposes. I call this place The Free State.

The Undiscovered Country
There is great hope for our descendants. But the Free State is a condition that has never existed. Yet a simple change of the minds of people, as to what by natural right, is private and common property, is all that is required to find this place. The difference between earned and unearned incomes. It's a fundamental moral choice pure and simple, that we can make with courage and selflessness. The Free State is the only social structure that can deliver equal access to all natural opportunities, to all people. A new era of political economy would emerge, signalling an end to the great enigmas of our time: business depressions, poverty and destruction in the midst of such enormous power to produce wealth. Finally, we would all have the time to explore the higher things in life. We would have plenty of time for our children at last. Who can say how high we would go?

Standing as a parliamentary candidate, it is The Free State that I will be using all my strength to call for.

Real Reform - A new politics for the 21st century
The Free State - A future for our descendents
* Thanks to
New York Times  - Real Wages Fail to Match a Rise in Productivity
Land Is Free - Tommas Graves: Bankers Seemed Bemused
Wikipedia  - Standard of living and GDP
The Independent - Stewart Lansley: The unreported cause of the financial crisis is shrinking wages
Our irrational distribution of wealth (1908) - Byron Collins Matthews
** But capital is NOT money in any shape or form