Peter Boettke teaches economics at George Mason University. He writes that ongoing economic woes demand drastic reduction in state intervention into free markets:
The great expansion of trade and technology in the twentieth and twenty-first centuries has produced a level of material wealth that enabled the cost of government intervention to be offset, and remain largely hidden to many observers. This possibility is not a new phenomenon. Adam Smith pointed out long ago that the power of self-interest exercised in the market economy is so strong that it can overcome a ‘hundred impertinent obstructions with which the folly of human laws too often encumbers its operations.’ But it is important to stress that the great material progress realised over the past 100 years was not caused by the expansion of state invention into the economy but in spite of those interventions. And the tipping point is when the number of ‘impertinent obstructions’ grow from hundreds to thousands so that the market economy can no longer hide the costs of the folly of human laws.
It is important to distinguish between state intervention in the free market and state regulation of free markets. Regulation is essential for orderly functioning of the market place. Compare the early days of stock exchanges to the benefits of current regulation regarding insider trading, market manipulation and stock flotation. State intervention, on the other hand, is disruptive to the orderly functioning of markets — distorting price signals which can lead to massive imbalances. The most obvious recent example of state intervention is the Fed suppression of interest rates in the early 2000s which led to a massive property bubble and global financial crisis in 2008.
Read the entire article at IS STATE INTERVENTION IN THE ECONOMY INEVITABLE? | CIS.
This economist quotes Adam Smith when convenient but ignores the basics of classical economics which are that the 3 factors of production are
1) Land, or “economic rent” which is the value created by the community through its demand for land and natural resources.
2) Capital – man-made things, the result is profit or interest.
3) Labour – the result is wages.
Neoclassical economics, formed over 100 years ago moved Land into Capital. This distorts and since then we have had many minor booms and busts and 2 world-wide economic crashes which were both fuelled by rising Land prices as debt was poured into non-taxed land.
The only way to try to keep the neo-classical economic system stable is by touch control of interest rates, money supply etc.
General equilibrium theory rests on the assertion that price clears all markets. An analysis of how land markets operate shows that the absence of any significant collection of ground rent results in a supply curve for land that leans to the left. Why? Because as the price of land climbs speculation increases. Owners of land not pressed for cash withhold land from the market in anticipation of higher and higher prices. Investors acquire land not for development but purely for specualtive holding. Thus rising prices tend to reduce the supply of land brought to the market for economic use. When Labour and Capital are effectively priced out the system collapses.
Even at low points in the business (land) cycle landbanking holds us to ransom by limiting supply to drive up prices as the following article shows about land developers around Melbourne’s urban boundary.
http://www.prosper.org.au/2012/12/06/englobo-2/
“The only way to try to keep the neo-classical economic system stable is by touch control of interest rates, money supply etc.”
Alex, I believe that the above misstates the problem. Speculative bubbles occur most frequently in land but also in stocks and other assets. Rapidly expanding debt fuels these bubbles (Anna Schwartz said there is no such thing as an asset bubble — only a debt bubble). Restricting the growth of debt in the economy by curbing the fractional reserve banking system would eliminate speculative bubbles.
I do agree with you that land banking is a problem. What exacerbates the problem in Australia is an unholy alliance between state government and property developers. Both benefit from higher land prices — the states through property transfer taxes. Eliminate these taxes and the problem would diminish.
I agree that curbing fractional reserve banking would reduce asset bubbles. However it would not curtail the speculators or promote efficient land use, wipe out the use of tax havens, spur small business, lift wages and encourage younger generations to buy in on the market system as a land tax would. Land tax is the counterweight to mortgage debt.
Mainstream economics neglects a basic principle which should guide tax policy:- That natural resources are not made by human effort. They are gifts of nature/God/the universe and therefore the equal birthright of all people.
Ever since civilization began reconciling the individual’s necessity of private occupation and secure tenure of land with the recognition that the wealth of nature be equally available to us all has been a problem which if not resolved leads to the decline and fall of civilizations.
Truly fabulous wealth is always based on the privatisation of the economic rent of natural resources eg land (property billionaires), its minerals (mining magnates), electromagnetic spectrum, licenced monopolies eg human DNA.
The boom-bust business cycle is due to land speculation. Fred Harrison, recognized as one of the few who predicted the GFC, has published on this.
During the dot.com bubble the stream of resource rent income that would one day be generated by the radio spectrum was capitalised and sold to investors and before it had actually generated much rental income.
There are economists who understand the fundamental role land and natural resources play. The Henry Tax Review recommended abolishing more than 100 inefficient taxes on labour and industry by means of switching revenues towards land and mineral resource rents.
An open letter to Mikhail Gorbachev in 1990 advocating land rent as revenue was signed by 30 Americans, most of them professors of economics in American universities.
http://en.wikisource.org/wiki/Open_letter_to_Mikhail_Gorbachev_(1990)
A current advocate is Professor Michael Hudson http://michael-hudson.com/
Alex, Curbing debt growth would curtail speculation as cost of borrowing would rise rapidly in a bull market (whether housing or stocks). But it would not promote efficient land use, nor wipe out tax havens, etc.
As I mentioned before, I am not in favor of a land tax but find the concept of leasehold rather than freehold land conceptually appealing. Not sure if that is what you mean by land rent. The difference being that lease rentals can be tested in the market place via public tender or auction. For example if the lease-holder feels that the land rent being charged is too high, they can submit the property for tender/auction and bid in the open market. Land taxes, on the other hand, have to rely on an arbitrary valuation.
Colin, I am aware that this post is way past its use by date so please forgive me for replying anyway.
Re valuations:- Valuers separate the value of property improvements from the value of land parcels on every appraisal they prepare and presumably they are a competent profession. Annual valuations would be mandatory with provision for revaluation if unexpected events suddenly affected value.
Determining the economic rent value of a parcel of land is difficult because the selling price of land in cities and towns is based on a speculative rate of capitalization. That is why proponents of a land only property tax urge implementation over a period of time. First squeeze out the speculative incentives for buying and selling land then the true market-determined rental values would emerge. Where there is a significant lease-hold market that data could contribute.
“Economic rent” is a confusing term. Hobart City Council alderman, Leo Foley, has a website which explains “geonomics” as this system is called. http://leofoley.com/geonomics-in-a-nutshell.htm
The trouble with any reform, be it FRB or tax is that no-one has time for study of complex issues.
Thanks for the opportunity to comment and your replies.
Alex, One concern I have with land taxes is the potential for unintended consequences. Like the incentive for state governments to drive up house prices in order to collect more stamp duty from transfers.